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The FAR Council Adopts a New Rule on Reporting Counterfeit Parts and Major or Critical Nonconforming Common Items in the Supply Chain

By on January 6, 2020 | Posted in Legislative and Regulatory Developments

After more than five years in the making, DoD, GSA, and NASA recently issued a final rule amending the Federal Acquisition Regulation (FAR) to require contractors and subcontractors to report to the Government-Industry Data Exchange Program (GIDEP) certain counterfeit or suspect counterfeit parts and “common items” with major or critical nonconformances.  See 84 F.R. 64680 (Nov. 22, 2019).  The final rule implements sections 818(c)(4) and (c)(5) of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2012 (Pub. L. 112-81, 10 U.S.C. § 2302 note), which required DoD contractors and subcontractors to report counterfeit or suspect counterfeit electronic parts purchased by or for DoD to the GIDEP.  To do so, the final rule adds a new section at FAR 46.317 and a new clause at FAR 52.246-26.

Notably, this final rule narrows or “descopes” the changes originally included in the proposed rule in June 2014.  See 79 F.R. 33164 (Jun. 10, 2014).  For example, the proposed rule would have required a contractor or subcontractor to report any counterfeit, or suspected counterfeit, “end item, component, subassembly, part or material.”

The version of FAR 52.246-26 created by the final rule, however, applies only in specified circumstances, and contains certain exclusions and exemptions.  The clause applies to acquisitions of the following:

  • Items that are subject to higher-level quality standards in accordance with the clause at FAR 52.246-11, Higher-Level Contract Quality Requirement. Such quality standards are inserted into the prime contract when the Contracting Officer determines they are necessary pursuant to FAR 46.202-4.
  • Items that the contracting officer, in consultation with the requiring activity, determines to be critical items for which use of the clause is appropriate. The clause defines “critical item” to mean “an item, the failure of which is likely to result in hazardous or unsafe conditions for individuals using, maintaining, or depending upon the item; or is likely to prevent performance of a vital agency mission.”
  • Electronic parts or end items, components, parts, or assemblies containing electronic parts, if the issue arises in an acquisition by, or for, the Department of Defense, as provided in section 818(c)(4) of the NDAA for FY 2012, that exceeds the simplified acquisition threshold (SAT).
  • Services, if the contractor will furnish, as part of the service, any items that meet the above-specified criteria.

The new clause at FAR 52.246-26 must be flowed down to all subcontracts fitting the scope of the clause (i.e., any of these categories).  The contractor is prohibited from altering the clause other than to identify the appropriate parties.

However, the clause is not required (nor must be flowed down) for contracts and subcontracts for the acquisition of commercial items, including commercially available off-the-shelf (COTS) items; or medical devices that are subject to the Food and Drug Administration reporting requirements at 21 C.F.R. § 803.  The exclusion of commercial items in particular is a considerable concession to industry, because there is a high likelihood such products could otherwise frequently fit within the categories to which the clause applies.

Even if the clause is included in the contract, the contractor or subcontractor is not required to submit a report to GIDEP (see FAR 52.246-26(c)) if—

  • The contractor (or subcontractor) is a foreign corporation or partnership that does not have an office, place of business, or fiscal paying agent in the United States;
  • The contractor (or subcontractor) is aware that the counterfeit, suspect counterfeit, or nonconforming item is the subject of an on-going criminal investigation, unless the report is approved by the cognizant law-enforcement agency; or
  • For nonconforming items (other than counterfeit or suspect counterfeit items), it can be confirmed that the organization where the defect was generated (e.g., original component manufacturer, original equipment manufacturer, aftermarket manufacturer, or distributor that alters item properties or configuration) has not released the item to more than one customer.

The final rule contemplates that contractors and subcontractors will incorporate screening and reporting processes into their existing “inspection system or program for the control of quality.”

As mentioned, contractors need to look out for counterfeit parts and nonconforming common items.  With respect to the former, what constitutes a counterfeit part may not be intuitive.  FAR 52.246-26 defines the term “counterfeit” broadly to mean an unlawful or unauthorized reproduction/substitution/alteration that has been knowingly mismarked/misidentified/misrepresented to be an authentic/unmodified item from the original manufacturer/authorized source.  The part need not be of inferior quality to be counterfeit.

With respect to nonconforming common items, FAR 52.246-26 defines the term “common item” as an “item that has multiple applications versus a single or peculiar application.  The final rule explains that “[w]hether a nonconformance is major or critical depends on the application,” and that these terms “have been used in the FAR for many years and are commonly understood in the quality assurance field.”  See also FAR 46.101.

If necessary, a report to the contracting officer and the GIDEP must be made within 60 days of “becoming aware or having reason to suspect” the counterfeit part, or the major or critical nonconformance of a “common item.”  The final rule provides little guidance on when a contractor or subcontractor may have “reason to suspect” a counterfeit, other than to say an organization could become aware of, or have reason to suspect an item is counterfeit, through “inspection, testing, record review, or notification from another source (e.g., seller, customer, third party).”  What meets the “reason to suspect” standard will therefore likely depend on the circumstances, but will almost certainly require an internal investigation by the company to make that determination.

The new clause only provides protection from civil liability resulting from a report in limited circumstances, consistent with such protections in the existing DFARS electronic counterfeit parts rule and section 818(c)(5) of the NDAA of 2012.  Under the clause, protection from civil liability applies only to DoD contractors or subcontractors who report that electronic parts are, or are suspected to be, counterfeit, and only if the contractor or subcontractor “made a reasonable effort to determine that the report was factual.”  This leaves a concern for contractors and subcontractors that they may face a lawsuit from the source of the part or item (e.g., the manufacturer or supplier) for defamation or interference with a contract, for example, on the ground that the report in GIDEP was incorrect.  Except for the protections above for reporting (suspected) counterfeit electronic parts, the onus is on the contractor or subcontractor to make accurate reports.

Contractors and subcontractors would be well advised to ensure they understand their reporting requirements and appropriately flow down the clause at FAR 52.246-26.  Penalties for noncompliance can be substantial, to include suspension and debarment.  Moreover, the final rule notes that counterfeit or suspected counterfeit parts may involve fraud at some level of the supply chain, which may implicate mandatory disclosure requirements under the FAR.  To discuss further these requirements or their impacts on your business, contact David Yang or Brad Bigos.