The Fiscal Year 2023 National Defense Authorization Act ("NDAA") precludes acquisition of products or services that include certain semiconductors originating in
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"procur[ing], obtain[ing], or extend[ing] or renew[ing] a contract to procure or obtain, any electronic parts or products, or services that include covered semiconductor products or services," (Section 5949(a)(1)(A)); and
- entering into a contract "with an entity to procure or obtain electronic parts or products that use any electronic parts or products that include covered semiconductor products or services" (Section 5949(a)(1)(B)). Under the applicable rule of construction (Section 5949(a)(2)(B)), this use prohibition applies when the covered semiconductor products or services are in "critical systems," which are defined as "national security systems," i.e., telecommunication or information systems operated by the federal government, which involves intelligence and cryptologic activities, command and control of military forces, equipment that is an integral part of a weapon or weapons system, or any other system identified by the
Federal Acquisition Security Council or theDepartment of Defense ("DoD "). - And, second, the head of an agency must determine, in consultation with either the Secretary of Defense or Director of National Intelligence, that a waiver will not "compromise the critical national security interests of
the United States ." - Although Section 5949 is being implemented during the next five years, prime contractors, subcontractors and their suppliers must begin thoroughly analyzing and identifying products sold to the Government that contain covered semiconductor products or services—particularly those products that are or may be used in "critical systems."
Although the prohibitions have five years to take effect, contractors (and their subcontractors and suppliers) must start now to thoroughly analyze their supply chains and identify any products sold to the federal government that contain covered semiconductor products or services. Contractors will then need to take steps to source Section 5949-compliant semiconductor products and services.
What Is a "Covered Semiconductor Product or Service"?
Section 5949 broadly defines "covered semiconductor product or service[]" to mean a semiconductor, a semiconductor product, a product that incorporates a semiconductor product, or a service that uses such a product that is designed, produced or provided by,
The definition also includes any product or service that the Secretary of Defense or Secretary of Commerce determines was produced or provided by an entity "owned or controlled by, or otherwise connected to . . . a foreign country of concern." The provision focuses on entities from
What Does It Mean to "Use" a Prohibited Semiconductor?
Although the intent of
Section 5949(a)(1)(B) appears to allow contractors to use covered semiconductor products or services in electronic parts or products for other than "critical systems." To the extent that an entity provides a commercial product that is not used in a "critical system," the product would not be covered (i.e., the prohibition does not apply). However, commercial products and technologies are sometimes used in "critical systems," e.g., command and control of military forces or in the direct fulfillment of military or intelligence missions. Companies selling electronic parts or products should thoroughly review solicitations to determine whether these products will be used in a "critical system" and inquire as appropriate.
Effective Date and Applicability
Section 5949(c) requires the prohibitions to take effect five years after enactment. Under Section 5949(a)(2), the statute's Rule of Construction makes clear that the prohibitions will not be retroactively applied and will not require entities to remove or replace any covered semiconductor products or services that are "resident in equipment, systems, or services before the effective date ['Existing Equipment']." Moreover, entities can continue to use Existing Equipment throughout that equipment's lifecycle even if it overlaps with the effective date of the prohibitions.1
Implementation of Section 5949
Section 5949(c) requires the
The prescribed regulations will impose additional requirements on "covered entities," which are entities that "develop[] a design[] of a semiconductor that is the direct product of
The prescribed regulations also include a notification requirement. A contractor, subcontractor, or covered entity must notify federal authorities, within 60 days of "becom[ing] aware, or ha[ving] reason to suspect, that any end item, component, or part of a critical system purchased by the Federal Government, or purchased by a Federal contractor or subcontractor for delivery to the Federal Government for any critical system, contains covered semiconductor products or services." Agencies, in turn, must report to
Section 5949's Liability Protections for Government Contractors
Under Section 5949(h)(5), contractors can "reasonably rely" on certificates of compliance from subcontractors and covered entities. Moreover, contractors have no obligation to conduct third-party audits to verify the accuracy of the certifications. However if the circumstances are such that the prime (or higher-level) contractor should have reasonably known about problems with the certification, a "see/hear/speak no evil" approach is unlikely to provide a robust shield.
If contractors and subcontractors provide the required notifications described above, Sections 5949(h)(6) and (h)(7) protect them from both civil liability and debarment—which could occur under FAR Part 9.4 if the agency's suspending and debarring official finds that the contractor or subcontractor is not "presently responsible." When a notification involves electronic parts or products manufactured or assembled by the contractor or subcontractor making the notification, section 5949(h)(7) further requires the contractor or subcontractor to make "a comprehensive and documentable effort to identify and remove covered semiconductor products or services from the Federal supply."
Waiver Authorities Applicable to Section 5949's Prohibitions
Section 5949 entrusts the authority to waive the restrictions set forth in Section 5949 to the Secretary of Defense, Director of National Intelligence, Secretary of Commerce, Secretary of Homeland Security, and Secretary of Energy in the event any one of those officials determines that the waiver is in the "critical national security interests of the
Section 5949 also provides the heads of executive agencies with a renewable, two-year waiver authority when both of these determinations are made:
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First, in consultation with the Secretary of Commerce, the head of an agency must determine that "no compliant product or service is available . . . at
Requirements for Analysis, Assessment, and Developing Strategies
Section 5949(e) requires the executive branch to provide various reports to
First, within 270 days of enactment, the
Second, within 180 days of enactment, the Secretary of Commerce, in coordination with the Secretary of Defense, the Secretary of Energy, the Secretary of Homeland Security, and the Director of National Intelligence must (i) conduct analyses of the domestic design and production capacity of semiconductors (with "domestic" including allied or partner countries); (ii) conduct assessments on the risks presented by covered semiconductor products or services; and (iii) develop strategies to improve domestic semiconductor design and production capacity and to improve supply traceability to enforce the prohibitions described above. The Secretary of Commerce must then provide a report to the
Third, within two years of enactment, the Secretary of Commerce, in coordination with the Secretary of Homeland Security, the Secretary of Defense, the Director of National Intelligence, the Director of the
TAKEWAYS:
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The Section 5949 prohibitions make clear the vital importance
Footnotes
1. Under the Rule of Construction set forth in Section 5949, the
2 .Section 5949(h)(5) is unclear concerning whether the federal agency must report to
3.
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