United States: Contracting (Or Subcontracting) With DLA? Check For Counterfeit Parts Clauses

Last Updated: June 1 2017
Article by Daniel E. Chudd and Anna Sturgis

In the past several years, there has been an on-going focus on avoiding and detecting counterfeit parts, culminating in the issuance of new DFARS sections and contract clauses in May 2014 concerning Contractors' Counterfeit Electronic Part Detection and Avoidance Systems.  Although the DFARS clause focuses on electronic parts, any company contracting or subcontracting with the Defense Logistics Agency (DLA) may be subject to far broader agency clauses concerning the traceability of products and components.  For example, DLAD 52.211-9014 requires contractors to maintain information that, at a minimum, provides evidence "sufficient to establish the identity of the item, its manufacturing source, and conformance to the item description."  Another clause requires contractors to have evidence to show that supplies "were produced by the manufacturer" if the contractor is not the original manufacturer of the supplies.  DLAD 52.246-9008.

Although these DLA clauses might not be attracting the attention of companies' contract and purchasing organizations to the same degree as the DFARS clauses, despite the volume of acquisitions from DLA (over $40 billion of supplies and services annually), failure by a contractor to consider the DLA clauses can have comparable adverse consequences.  This is reflected in the ASBCA's recent decision in Appeal of Military Aircraft Parts, ASBCA No. 60904, 2017 BCA ¶_______(March 27, 2017).

In Military Aircraft Parts, DLA issued a Request for Quotations for air duct assemblies.  The solicitation incorporated the terms and conditions in DLA's Master Solicitation for EProcurement Automated Simplified Acquisitions Revision 8.  This Master Solicitation included a number of provisions traceability requirements, including those described above.

DLA awarded the contractor a unilateral Purchase Order for eight air duct assemblies, which required the contractor to provide duct assemblies using a specific lock bolt.  The contractor, however, was not able to deliver the air duct assemblies by the due date.  The contractor did, however, submit four assemblies for inspection, but those units used the wrong lock bolts and contained surplus lock bolts and flanges that did not meet the DLAD clauses' traceability requirements.  The contractor had also agreed to use new material in the assemblies, but instead incorporated used lock bolts and rivets that were incorrectly certified as "used, reconditioned, remanufactured, or new/unused Government surplus."  After finding these defects, DLA canceled the purchase order and the contractor appealed, alleging that the government acted in bad faith.

The Board disagreed, first restating the long-settled principle that the government has the right to require strict compliance with its specifications and then concluding that the government in cancelling the PO "simply and properly enforced its rights under the solicitation."

The Board also pointed out the deficiencies in the contractor's items as well as their non-conformance with the various DLA clauses.  With respect to the traceability provisions, in particular, the Board concluded (despite the contractor's argument to the contrary) that the provisions are not "merely 'paperwork' exercises, but were designed to insure in part that counterfeit items were not being provided."  The contractor also attempted to argue the traceability clauses applied only to the end item (i.e., the air duct) and not its components, but the ASBCA again disagreed, finding instead that the items and supplies covered by the clauses include components of a system.

This case serves as a clear warning to any DLA contractors.  Contractors should scrutinize DLA solicitations and contracts for the specific DLAD requirements, and purchasing organizations should be prepared to flow down the clauses to ensure components as well as end items are covered.  In addition, in performing contracts containing these clauses, contractors should ensure that they maintain records as to the origin of end items and components for all covered products, not just the electronic parts covered by the DFARS provisions.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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