Changes To Safety Act Regulations Are Imminent: Industry Looks Forward To Less Burdensome Liability Protection Process

Officials from the Department of Homeland Security (DHS) told industry representatives last week that the agency plans to soon issue final regulations for implementing the SAFETY Act. Based on DHS statements, it appears the final regulations will include substantial changes to the application and approval process by which Homeland Security contractors obtain the SAFETY Act's broad liability protections for anti-terrorism technologies. See Homeland Security Client Alert, "Analysis of the SAFETY Act and DHS Proposed Rules," August 2003. Industry representatives are hopeful the final regulations will alleviate the burdensome requests for sensitive information now required under the SAFETY Act and its interim regulations.

On May 15, 2004, the DHS Directorate for Science and Technology (S&T) hosted a SAFETY Act Industry Day in Washington, D.C. Invitations to the program were extended to representatives of professional trade associations that had submitted comments to DHS/ S&T regarding the SAFETY Act's interim regulations during the public comment period. Piper Rudnick assisted two trade associations in preparing and submitting comments to DHS. Approximately 25 trade association representatives attended the program, which lasted two hours.

A panel of four DHS officials conducted the program: Dr. Penrose Albright (assistant secretary, S&T), John Mitnick (associate general counsel, S&T), Wendy Howe (acting director, Office of SAFETY Act Implementation), and Alfonso Martinez-Fonts (special assistant to the Private Section). After Dr. Albright's overview of the SAFETY Act Office and the SAFETY Act application process, Mr. Mitnick described the status of the existing interim rule and the pending final rule for SAFETY Act implementation. Thereafter, Dr. Albright, Mr. Mitnick, and Ms. Howe discussed operational issues and fielded questions from attendees. Mr. Martinez-Fonts moderated the discussion.

The highlights of the SAFETY Act presentation and the question-and- answer session are described below.

• To date, DHS/S&T has received 83 Pre- Applications and 17 Designation/Certification Applications for SAFETY Act approval. Approximately 180 entities have registered at the SAFETY Act website. It is widely believed contractors are reluctant to apply for SAFETY Act protection because of the substantial time and effort necessary to complete the applications and the sensitive nature of many of the application questions (for instance, estimates of potential mass casualties and damages in the event of a terrorist act, related liability exposure, insurance information, and cost and pricing information).

• The SAFETY Act Office has issued a written response to every Pre-Application submitted to date. Responses provide the applicants with an indication of the general likelihood of receiving SAFETY Act approval (promising, uncertain, or doubtful); the responses also discuss the adequacy of the Pre- Application under each of the SAFETY Act criteria. According to DHS/S&T, many of the entities who completed Pre-Applications learned that their approval was "uncertain." Only a handful appeared to be "promising." Industry representatives have complained that the pre-application process does not provide constructive feedback to contractors considering submission of the more rigorous Designation/Certification Application for SAFETY Act approval.

• While the SAFETY Act Office has yet to approve or deny a single Designation/Certification Application, the first round of official determinations is imminent. These determinations will be issued ahead of the time deadlines set forth in the interim regulations.

• Although restrained from revealing the deliberative process involved in developing the final rule for SAFETY Act implementation, the DHS/S&T officials are considering revisions to the Pre- Application. These revisions would solicit information that would more effectively advise applicants of their prospects for receiving SAFETY Act approval.

• In response to public comments, and as a result of learning during the SAFETY Act application process, DHS/S&T is considering revisions to the Designation/Certification Application. These could include reduction or elimination of the following requested information:

• Potential mass casualties and damages and related liability exposure in the event of a terrorist act. From the contractor perspective, this information is both highly speculative and vulnerable to misuse in product liability litigation. It constitutes a dubious basis for determining SAFETY Act eligibility.

• Availability and cost of commercial insurance in the absence of SAFETY Act coverage. Instead, DHS/S&T might request information regarding the availability and cost of commercial insurance in the event of SAFETY Act approval. At least one major insurance carrier already has developed a special SAFETY Act policy for this purpose.

• Product and service cost information. Instead, DHS/S&T might request commercial pricing data, where applicable, and thereby allow applicants to avoid submitting highly sensitive proprietary information.

• The DHS/S&T officials responded to a number of comments and questions regarding the eligibility of commercially available products and services for SAFETY Act coverage. In particular, this discussion focused on the fourth criteria for liability protection under the statute: "Substantial likelihood that such anti-terrorism technology will not be deployed unless protections under the system of risk management provided under this subtitle are extended." 6 U.S.C. § 441(b)(4). According to Dr. Albright, if a product or service is currently available for commercial sale and deployment, it generally indicates that Criterion No. 4 is not satisfied, and SAFETY Act protection is neither necessary nor appropriate. The reason for this interpretation is that such a seller very likely already has adequate insurance coverage for perceived risks in the event of a terrorist act. However, Dr. Albright commented, SAFETY Act coverage might be appropriate if it will facilitate broader deployment of the particular anti-terrorism technology.

• Various industry representatives objected to Dr. Albright's characterization of Criterion No. 4 as an absolute criterion, arguing that the SAFETY Act requires a balancing of the various criteria. See 6 U.S.C. § 441(b). Moreover, an all-or-nothing approach to Criterion No. 4 bestows a significant competitive advantage upon certain contractors over others. Two contractors may offer a product or service with technical similarities, but the one whose product is currently available in the marketplace - that is, who already has commercial insurance coverage - will be handicapped. Given that the availability of umbrella insurance coverage often depends on a contractor's mix of products and services and its financial resources (and given that insurance coverage is subject to unilateral change by the carrier), it is contrary to Congressional intent to deny SAFETY Act protection solely on this basis.

• In response to these industry arguments, Mr. Mitnick stated that one solution could be for the SAFETY Act Office to issue block Designations/Certifications for appropriate categories of anti-terrorism technology covering all sellers, regardless of deployment or insurance status.

The SAFETY Act Office will give priority to SAFETY Act applications related to federal, state, and local government procurements. While DHS/S&T is coordinating such priority applications with the Office of Procurement at DHS, as well as other agencies, the SAFETY Act Office still requires sufficient time to process applications.

In accordance with Executive Order 13286 (February 28, 2003), DHS regularly responds to inquiries from other agencies regarding the appropriateness of government indemnification under Public Law 85-804 for unusually hazardous risks, given the potential availability of SAFETY Act coverage. Ultimately, the indemnification decision is made by the procuring agency, after consultation with DHS. It does not appear that DHS/S&T is considering special guidance in the final SAFETY Act rule regarding Public Law 85-804 indemnification.

Dr. Albright closed the program by stating that DHS/S&T will issue the final SAFETY Act rule very soon. A revised SAFETY Act application kit will be released shortly thereafter. DHS/S&T might solicit industry comments and suggestions regarding the revised application kit before its formal release. DHS/S&T likely will conduct a series of presentations to industry in major cites after issuance of the final rule and revised Application Kit.

Piper Rudnick will continue to closely monitor developments concerning the SAFETY Act and its implementing regulations, which will determine the liability landscape for clients selling Homeland Security products and services.

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