The recently enacted National Defense Authorization Act
("NDAA") of 2012 establishes a host of new requirements
for government contractors regarding detection and avoidance of
counterfeit electronic parts. These new requirements will apply to
any contractor who is subject to cost accounting standards and
supplies products or weapons systems with electronic parts to the
Department of Defense ("DoD"). Contractors who fail to
follow these new requirements risk suspension, debarment and
potential civil and criminal liability.
The NDAA 2012 requires the Secretary of Defense to first assess DoD
acquisition policies and systems for how they detect and avoid
counterfeit electronic parts. Then, no later than June 28, 2012,
the Secretary is to implement a risk-based policy to minimize the
impact of counterfeit electronic parts, which includes ensuring the
traceability of parts, inspecting and testing of parts, and taking
corrective action to recover costs for replacing counterfeit
electronic parts from contractors. At that time, the Secretary is
also to issue guidance on remedial actions for DoD to take
– including consideration of suspension and debarment
– against contractors who have failed to detect or avoid
counterfeit electronic parts or who have "failed to exercise
due diligence in the detection and avoidance" of counterfeit
electronic parts.
The NDAA 2012 also requires the Secretary, no later than September
26, 2012, to revise the DFARS to address the detection and
avoidance of counterfeit electronic parts. These regulations will
shift the burden of detecting counterfeit electronic parts to the
contractors. In particular, the new regulations will make
contractors responsible for detecting and avoiding the use of
counterfeit electronic parts, as well as for any rework or
corrective action that may be required to remedy the use or
inclusion of such parts. The cost for detecting and avoiding
counterfeit electronic parts and the cost of any rework or
corrective action required because of counterfeit electronic parts
will not be an allowable cost.
The revised DFARS will also establish requirements for the
inspection, testing and authentication of electronic parts that a
contractor or subcontractor obtains from sources other than the
original manufacturers of the parts or their authorized dealers.
The DFARS will also be revised to establish a written reporting
system, under which a contractor or subcontractor who becomes
aware, or has reason to suspect, that a component, part or material
supplied to the DoD contains counterfeit electronic parts has 60
days to report it to the Government. There is a safe harbor from
civil liability if a contractor complies with this written
reporting requirement, but that safe harbor is only available if
the contractor made a "reasonable effort" to determine
whether the items supplied contained counterfeit electronic
parts.
The NDAA 2012 further requires the Secretary to implement a program
of contractor detection and avoidance of counterfeit electronic
parts. Contractors that supply electronic parts or systems that
contain electronic parts will be required to establish policies and
procedures to eliminate counterfeit electronic parts from the
defense supply chain. Those policies and procedures will cover the
inspection and testing of electronic parts, mechanisms for the
traceability of parts, use of trusted suppliers, the reporting and
quarantining of counterfeit electronic parts, methodologies for
identifying counterfeit electronic parts, and the flow down of
requirements to subcontractors.
Finally, the NDAA 2012 creates new criminal liability for
trafficking in counterfeit goods or services with fines of
$2,000,000 for individuals and $5,000,000 for companies and up to
ten years in prison for first offenses. Those fines and prison
terms significantly increase for repeat offenders or for
counterfeit military goods or services or in cases where the
counterfeit parts lead to bodily injury.
Given that a counterfeit electronic part may have entered the
supply chain with a manufacturer of a single component four or five
steps removed from the end product supplied to DoD, the difficulty
for government contractors to ensure these counterfeit electronic
parts are detected cannot be overstated. Not only will contractors
now have to engage in additional inspection and testing, they will
also face unrecoverable costs of replacing counterfeit parts that
go undetected, as well as risk possible suspension or debarment. In
addition, contractors risk criminal liability and the ever-present
threat that an employee will rush to file a qui tam action
under the civil False Claims Act based on the presence of
unreported counterfeit parts. In short, the NDAA creates an onerous
inspection and reporting regime which government contractors will
struggle to comply with in the future. Contractors must begin to
plan now for how they will address this serious risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
