Proposed Reporting Rule On Counterfeit Items Adds Burden to Contractors

After recent reports documented a significant increase in counterfeit parts across the supply chain, the Defense Department and the Federal Acquisition Regulatory Council have issued a number of rules to mitigate the threat that such items pose.

In actuality, however, the proposed rules expand obligations for defense and other government contracting manufacturers and suppliers well beyond mere counterfeit issues.

As discussed in Robert Metzger’s October National Defense article “New Rule Addresses Supply Chain Assurance,” the Defense Department final rule only applies to Defense Department contracts and solely concerns counterfeit issues with electronic parts.

In contrast, the Federal Acquisition Regulatory Council’s proposed rule would cover all federal supply contracts and concerns both counterfeit and nonconformance issues related to any type of end item.

On May 6, Defense published its first final rule amending the Defense Federal Acquisition Regulation Supplement in partial implementation of Section 818 of the National Defense Authorization Act for Fiscal Year 2012.

On June 10, the Federal Acquisition Regulatory Council issued a proposed rule seeking to amend the Federal Acquisition Regulation in partial implementation of Section 818 of the National Defense Authorization Act for Fiscal Year 2012.

While these two rules are linked in some respects, the Federal Acquisition Regulatory Council’s proposed rule is much broader in scope and application than Defense’s final rule.

In short, the proposed rule seeks to reduce the risk of counterfeit and nonconforming items by building on the existing contractor inspection system requirements. It adds a requirement for contractors to report to the government-industry data exchange program (GIDEP) database a “counterfeit item,” a “suspect counterfeit item,” or an item that contains a “major nonconformance” or “critical nonconformance” that is a common item and constitutes a quality escape that has resulted in the release of like nonconforming items to more than one customer.
The rule also requires contractors and subcontractors to screen reports in the GIDEP database to avoid the use and delivery of reported items.

The proposed rule broadly applies to any Federal Acquisition Regulation-covered agency and all contractors and subcontractors at any tier providing supplies to the government, including commercial items and small business vendors.

The proposed rule provides definitions for the following five key terms.

Common item: an item that has multiple applications versus a single or peculiar application. Common items include, for example, raw or processed materials, parts, components, subassemblies and finished assemblies that are commonly available products such as non-developmental items, off-the-shelf items, National Stock Number items or commercial catalog items.

Counterfeit item: an unlawful or unauthorized reproduction, substitution or alteration that has been knowingly mismarked, misidentified or otherwise misrepresented to be an authentic, unmodified item from the original manufacturer or a source with the express written authority of the original manufacturer or design activity, including an authorized aftermarket manufacturer. Unlawful or unauthorized substitution includes used items represented as new or the false identification of grade, serial number, lot number, date code or performance characteristics.

Design activity: an organization, government or contractor that has responsibility for the design and configuration of an item, including the preparation or maintenance of design documents. Design activity could be the original organization or an organization to which design responsibility has been transferred.

Quality escape: a situation in which a supplier’s internal quality control system fails to identify and contain a nonconforming condition.

Suspect counterfeit item: an item for which credible evidence — including but not limited to visual inspection or testing — provides reasonable doubt that the item is authentic.

The proposed rule does not suggest any changes to the definitions of “critical nonconformance” or “major nonconformance” currently provided under FAR Section 46.101.

Under the proposed rule, a contractor would be subject to two broad reporting requirements.
First, contractors would have to provide a written report to GIDEP within 60 days of becoming aware that a common item purchased by or for the contractor for delivery to or for the government is counterfeit, is suspected to be counterfeit or contains a major or critical nonconformance and constitutes a quality escape that has resulted in the release of like nonconforming items to more than one customer.

Second, contractors would have to provide a written report to the contracting officer within 30 days of becoming aware of any end item, component, subassembly, part or material contained in supplies purchased by the contractor for delivery to or for the government is counterfeit or is suspected to be counterfeit.

In addition to these two reporting requirements, contractors would be required to screen reports in the GIDEP database to avoid the use and delivery of items that are counterfeit, suspected to be counterfeit or contain a major or critical nonconformance. Contractors would also be required to retain all counterfeit or suspect counterfeit items until the contracting officer provides disposition instructions.

The public comment period for the proposed rule ended Sept. 10. Given the breadth and significant impact of the proposed rule, the Federal Acquisition Regulatory Council will likely spend some time reviewing the comments and considering revisions to it. Of particular concern is that the proposed rule, unlike the Defense Department final rule, does not protect contractors and subcontractors from civil liability that may arise from good-faith compliance with the mandatory reporting requirements.

Further, the proposed rule fails to address how manufacturers, vendors and suppliers can challenge an incorrect report and what minimal steps contractors and subcontractors must take in order to properly incorporate the GIDEP screen into their procurement process.

However the council ultimately addresses these issues, the newly expanded reporting and screening requirements will have a significant impact on the government contracting community as a whole.

Moreover, how the council ultimately implements this rule will be a good indicator of what Defense will likely do in terms of interpreting and expanding its rules concerning counterfeit and nonconforming parts. And if you think lawyers will be monitoring GIDEP for opportunities to file product liability lawsuits or False Claims Act fraud claims, you are probably correct.

Steven R. Campbell is a senior associate in the construction and government contracts group at Alston & Bird LLP. Jeffrey A. Belkin is a former Department of Justice trial lawyer and leads the government contracts practice at Alston & Bird.

Topics: Defense Contracting, Procurement, Acquisition Reform