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(This article was originally published in Law360 and has been modified for this blog.)

Companies in a range of industries that contract with the U.S. Government—including aerospace, defense, healthcare, technology, and energy—are actively working to assess whether or not their information technology systems comply with significant new restrictions that will take effect on August 13, 2020.  These new restrictions prohibit the use of certain Chinese telecommunications equipment and services, and a failure to comply can have dramatic consequences for these companies.  The new restrictions also will have an immediate impact on mergers and acquisitions involving a company that does—or hopes to do—business with the Federal government.  In this article, we highlight some key considerations for M&A practitioners relating to these restrictions.

Background

On July 14, 2020, the U.S. Government’s Federal Acquisition Regulatory Council (“FAR Council”) published an interim rule to implement Section 889(a)(1)(B) of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (“FY19 NDAA”).[1]  When the new rule takes effect on August 13, it will prohibit the Department of Defense and all other executive branch agencies from contracting—or extending or renewing a contract—with an “entity” that “uses” “covered telecommunications equipment or services as a substantial or essential part of any system.”  The restrictions cover broad categories of equipment and services produced and provided by certain Chinese companies—namely Huawei, ZTE, Hytera, Hangzhou Hikvision, Dahua, and their affiliates.[2]

The new rule will be applicable to all contracts with the U.S. Government, including those for commercial item services and commercially available-off-the-shelf products.[3]  Companies with a single one of these contracts will soon have an ongoing obligation to report any new discovery of its internal “use” of certain covered telecommunications equipment and services to the Government within one business day with a report of how the use will be mitigated ten business days later.[4]  Further, although companies can seek to obtain a waiver on a contract-by-contract basis from agencies, these waivers must be granted by the head of the agency, and may only extend until August 13, 2022 at the latest.[5]

The new rule is the second part of a two-stage implementation of Section 889’s restrictions on covered telecommunications equipment and services in Government contracting.  It builds on an earlier rule that implemented Section 889(a)(1)(A) of the FY19 NDAA on August 13, 2019 by prohibiting an executive branch agency from acquiring certain covered telecommunications equipment or services that is a substantial or essential part of any system.[6]

The new rule is expansive in scope, and its effects will be felt far beyond the traditional defense industrial base.  Thus, mergers and acquisitions practitioners are well advised to become familiar with the rule and consider how it might impact any future transaction where an acquisition target does at least some business with the Government or has aspirations to do so in the future.Continue Reading M&A and Section 889: Due Diligence and Integration Considerations

On November 6, 2019, the Department of Labor’s Office of Federal Contract Compliance Programs (“OFCCP”) issued a Notice of Proposed Rulemaking (“NPRM”) aimed at resolving what OFCCP describes as a “decade of confusion.”[1] At issue is a long-standing question concerning the scope of OFCCP’s enforcement authority over health care providers participating in TRICARE, a federal health care program covering millions of military personnel, veterans, and their families. In particular, the NPRM requests comments on proposed regulations that would amend OFCCP’s definition of “subcontractor” and thereby remove TRICARE providers–and potentially other categories of providers–from OFCCP’s regulatory authority entirely. The deadline for filing comments is December 6, 2019.
Continue Reading OFCCP Proposes Rule Removing TRICARE Health Care Providers from Its Regulatory Authority

The FAR Council released an Interim Rule in August implementing part of Section 889 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019.  In this briefing, we highlight points where the Interim Rule provides clarity; definitional issues that remain unresolved; and new procedural requirements that government contractors should track.

The Interim Rule covers the portion of Section 889, subsection (a)(1)(A), that prohibits the federal government from acquiring certain telecommunications equipment/services from Huawei, ZTE, and other Chinese companies.  Specifically: “The head of an executive agency may not … procure or obtain or extend or renew a contract to procure or obtain any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.”

Section (a)(1)(A) took effect on August 13, 2019, although a 60-day window remains open for stakeholders to submit comments to be considered in the development of a final rule.  Comments on the (a)(1)(A) Interim Rule are due by October 15, 2019.

The second part of Section 889 implementation, sections (a)(1)(B) and (b)(1), go into effect on August 13, 2020. Regulations for those sections remain pending within the government, but the definitions and waiver process established by (a)(1)(A) will be instructive for those regulations as well.
Continue Reading Section 889 Update: First Wave of Acquisition Prohibitions Take Effect

Federal contractors usually think of two bid protest forums: the Government Accountability Office and the Court of Federal Claims.  But there is another protest forum that often flies under the radar: the Federal Aviation Administration’s Office of Dispute Resolution for Acquisition — aka the ODRA.

The ODRA has exclusive jurisdiction over bid protests of FAA procurements.  ODRA protests are reviewed under the Administrative Procedure Act, adjudicated by one of the ODRA’s Administrative Judges, and subject to direct appeal to a federal circuit court.  While many of the fundamental principles of bid protest practice at GAO and the Court of Federal Claims apply equally at the ODRA, there are several unique features.
Continue Reading Flying in Friendly Skies: The Federal Aviation Administration’s Unique Bid Protest Forum

This week, the Department of Justice (“DOJ”) released formal guidelines (“the Guidelines”) for awarding credit to entities that cooperate in False Claims Act (“FCA”) investigations. Frequently hinted at by DOJ officials in recent speeches and public statements, the Guidelines have been eagerly anticipated by practitioners in the FCA space.

Despite the build-up, the Guidelines are hardly revolutionary in many respects, as they largely memorialize existing discretionary practices for awarding cooperation credit that are well familiar to practitioners in the area. Nonetheless, the codification of the Guidelines in the Justice Manual may prove to be a significant development, especially if this more formal policy statement results in greater transparency and consistency in settlement discussions with DOJ. Unfortunately, the Guidelines leave unresolved certain key questions, and whether DOJ ultimately achieves its objective of promoting increased disclosure and cooperation will depend substantially on the manner in which the Guidelines are implemented.
Continue Reading New DOJ Cooperation Credit Guidelines a Welcome Sign, but Key Questions Remain Unresolved

The Section 809 Panel recently concluded its monumental analysis of defense acquisition law and regulations and released its third volume of recommended changes.  As we have written previously, the Panel’s work stands out from previous acquisition reform efforts with the appendices of detailed legislative and regulatory changes that accompany the commissioners’ analysis and recommendations.

Given the scope of the Panel’s work, few believe that Congress or the Department of Defense (“DoD”) will — or even could — simply adopt the recommendations in full.  Legislative bandwidth for additional acquisition reform is finite, and some of the Panel’s recommendations will prompt robust debate.  In this post, we analyze some of the recommendations that government contractors should follow most closely.  We highlight key issues and address the political dynamics involved in enacting them.
Continue Reading After the Final Report: Expectations Following the Section 809 Panel’s Third Volume of Acquisition Policy Reforms

Last month, GAO released a report analyzing federal agency implementation of the Buy American Act (“BAA”), 41 U.S.C. §§ 8301-8305.  As we have previously reported, BAA enforcement is an area of focus for the Trump Administration, which has repeatedly emphasized the need to “Buy American and Hire American,” including in an April 2017 executive order.  And for government contractors, compliance with the BAA and other domestic sourcing regimes also has been an increasingly common subject of litigation, particularly under the civil False Claims Act, as we have detailed in this space.

In keeping with this Buy American focus, GAO was commissioned to report on (A) the extent to which federal agencies procure non-domestic end products through the use of BAA exceptions and waivers, and (B) the ways in which the government’s largest buyers provide training and guidance to implement BAA requirements.  Although GAO found that only a relatively small percentage of goods purchased were foreign end products, GAO also found that this number could have been misstated due to reporting errors and system limitations.  Moreover, GAO found that the level of BAA training varied significantly among the agencies it canvassed.  GAO’s findings, which are discussed in greater detail below, offer a window into the government’s view of its own compliance with the BAA’s complex and often confusing regulatory scheme.Continue Reading GAO Report Shows That Agencies Buy Only A Small Percentage of Non-American Goods, But Buy American Act Implementation Remains A Challenge

Last month, the Federal Circuit weighed in on a largely-overlooked provision in the Federal Acquisition Streamlining Act (“FASA”) that requires federal agencies, to the maximum extent practicable, to procure commercially available goods and services to meet their needs.  In the case — Palantir USG v. United States — the court affirmed the decision by the Court of Federal Claims (“COFC”) enjoining the Army from proceeding with its Distributed Common Ground System – Army Increment 2 (“DCGS-A2”) procurement until it complies with the FASA provision.  This bid protest decision has potentially significant implications for commercial item contractors.
Continue Reading Federal Circuit Charts New Terrain in Commercial Item Contracting

[This article was originally published in Law360.]

On July 21, 2017 – and during “Made in America Week” – President Trump issued Executive Order 13806 on “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States” (the “Manufacturing EO”).  The Manufacturing EO sets forth a policy stressing the importance of having a “healthy” domestic “manufacturing and defense industrial base and resilient supply chains” to meet “national security” needs.  This policy comes on the heels of President Trump’s April 2017 “Buy American and Hire American” Executive Order (the “Buy American EO”), which announced a policy and action plan to increase U.S. manufacturing capabilities by “maximiz[ing]” the Federal Government’s procurement of “goods, products, and materials produced in the United States.”

The Manufacturing EO calls for a sweeping review and assessment of the strengths and weaknesses of the defense industrial base (“DIB”) and supply chains, and cites the need for the United States “to surge in response to an emergency.”  This review stems from the Administration’s stated conclusion that the “manufacturing capacity and defense industrial base of the United States have been weakened by the loss of factories and manufacturing jobs.”  Although a report on this review is not due until April 2018, the Manufacturing EO’s underlying policies and reporting requirements offer contractors an important glimpse into the Trump Administration “America First” vision and potential impacts on federal procurement.Continue Reading Six Takeaways from President Trump’s Executive Order on Assessing Manufacturing and the Defense Industrial Base