FAR "Fake" News! FAR Amended to Require Reporting of Counterfeit Items

On November 22, 2019, the DOD, GSA and NASA jointly issued a final FAR rule, effective December 23, 2019, amending the FAR to require contractors and subcontractors to report to the “Government – Industry Data Exchange Program” (GIDEP) certain counterfeit or suspected counterfeit parts as well as certain major or critical nonconformances. This final rule implemented–and broadened — the requirements of sections 818(c)4 and (c)5 of the FY 2012 NDAA that required DOD contractors to report counterfeit or suspect counterfeit electronic parts to the GIDEP.

The Need

Counterfeit items are not produced to meet the higher-level quality standards required in mission critical applications and may cause failures to systems vital to our national defense and to an agency’s mission. By reporting to GIDEP, contractors will be able to share knowledge of counterfeit items and of critical and major nonconformances which will reduce the risk of such items entering the supply chain.

The Coverage

Generally, the new FAR rule applies to the following: (1) contracts and subcontracts of all agencies that acquire items that are subject to higher-level quality standards per FAR 52.246-11; (2) other items that the CO determines to be “critical items”; and (3) electronic parts or items containing electronic parts acquired for the DOD. The new rule does not apply to the acquisition of commercial items, including COTS items; DOD contracts and subcontracts below the simplified acquisition threshold; and to medical devices that are subject to FDA reporting requirements. The rule also exempts a contractor that is a foreign entity that does not have an office, place of business or fiscal paying agent in the U.S.

The New FAR Clause

The following is a brief overview of the new FAR clause, “FAR 52.246-26 Reporting Nonconforming Items (Dec 2019).” Subsection (a) provides pertinent Definitions (i.e., counterfeit item, critical item, critical nonconformance, major nonconformance, suspect counterfeit item). Subsection (b) lists the contractor’s obligations under the clause: To screen and to submit GIDEP reports; to provide written notification to the CO of counterfeit or suspect counterfeit items; and to retain the items pending disposition instructions from the CO. Subsection (c) lists the exceptions to the reporting requirement. Subsection (d) precludes the disclosure of information in violation of the Trade Secrets Act or otherwise prohibited by law. Subsection (e) provides additional guidance on the use of the GIDEP. Subsection (f) provides that a DOD contractor (only!) shall not be subject to civil liability based on its reporting, provided that the contractor made a reasonable effort to determine that the report was factual (the “safe harbor” provision). Subsection (g) provides flowdown requirements for subcontracts. For the complete contract clause and all related FAR amendments, see 84 Federal Register 64680.

How Will It Work?

New FAR clauses inevitably raise confusion, uncertainty and legal questions, and this one will raise more than its share. Will a contractor’s failure to submit a GIDEP report and to provide CO notification be a material violation of the contract to support a default termination? Will the submissions of nondefense contractors protect them from civil liability in a manner similar to the “safe harbor” provision for defense contractors? Will the costs of reporting outweigh the benefits, and will these costs be particularly burdensome on small business? Stay tuned!