On May 3, 2024, the FAR Council published an advanced notice of proposed rulemaking (the “Advanced Notice”) seeking to implement Section 5949 of the James M. Inohfe National Defense Authorization Act for Fiscal Year 2023 prohibition on procuring certain covered semiconductor products and services. The Congressional prohibition does not go into effect until December 2027, but the FAR Council was directed to promulgate regulations by December 2025. Though this only is an Advanced Notice at this time, the publication provides government contractors with information crucial to developing compliant infrastructures and preparing for the forthcoming rule’s publication. Interested parties are directed to submit written comments in response to the Advanced Notice by July 2, 2024 for consideration in the forthcoming proposed rule – an opportunity all contractors impacted by this prohibition should take advantage of.
Semiconductor Prohibition Overview
In October 2021, the National Counterintelligence and Security Center (“NCSC”) released a Fact Sheet regarding Protecting Critical and Emerging U.S. Technologies from Foreign Threats, which identified semiconductors as one of the U.S. technology sectors “where the stakes are potentially greatest for U.S. economic and national security.” NCSC noted the increasingly “global nature of the semiconductor supply chain has resulted in greater geographic concentration and interdependence, creating chokepoints that can result in interruptions and opportunities for foreign adversaries to impair U.S. access to trusted semiconductors,” pointing to the U.S.’s increasing reliance on semiconductors from Taiwan and China in particular. As explained by the FAR Council, this increasing global supply chain also creates opportunities for foreign adversaries and threat actors to introduce backdoors and malicious firmware or software during production – potentially compromising critical U.S. infrastructure and Government systems.
In consideration of these various supply chain and national security risks, Section 5949 of the NDAA FY 2023 imposed a two-part prohibition on Federal executive agencies:
- In Part A, Congress prohibited executive agencies from “procur[ing] or obtain[ing], or extend[ing] or renew[ing] a contract to procure or obtain, any electronic parts, products, or services that include covered semiconductor products or services.” The focus in Part A is on products and services delivered directly to government end customers. This prohibition applies to all procurements as described herein.
- In Part B, Congress then prohibited agencies from “enter[ing] into a contract” with any entities “to procure or obtain electronic parts or products that use any electronic parts or products that include covered semiconductor products or services.” Importantly, the Part B prohibition is limited to use in a critical system – however, the Advanced Notice indicates the Part B prohibition will apply unless expressly waived by the procuring agency. Further, the Part B prohibition “goes beyond the prohibition” in Part A, as it could apply in situations where an agency is not actually acquiring any semiconductor products or services being used.
- For example, Part B could “restrict a Federal agency from acquiring a replacement control panel within a critical system that enables an Internet of Things (IoT) device that includes a covered semiconductor product or service and was purchased prior to the effective date of the prohibition.” Notably, though, the “use” contemplated by the Part B prohibition is not the same broad “use” prohibition as under Section 889 – contractors will not be prohibited from “using” Covered Semiconductors when completely unrelated to a Government procurement.
Importantly, Congress noted that any semiconductor products or services already existing in equipment and systems before the effective date do not need to be removed or replaced. According to the Advanced Notice, contractors should expect promulgation of a solicitation clause requiring representation of compliance, as well as contract clauses incorporating the prohibition and reporting requirements discussed further below.
FAR Council’s Proposed Implementation of Section 5949
The FAR Council’s proposed implementation appears to track with similar requirements and trends of Congress to reduce the U.S. Government’s reliance on products and services from foreign countries, including Section 889 restrictions and the FASCSA Exclusion and Removal Orders. We highlight some of these areas below, though caution requirements are subject to change with the proposed rule’s actual publication.
- Applicability – According to the Advanced Notice, the forthcoming regulatory prohibition will apply to all products, parts, and services, and all government contracts of all types and sizes – as we have seen in recent sourcing restrictions there are no exemptions for procurements of commercial products or services, for small businesses, or for the procurement of commercial products and services or commercially available, off-the-shelf items.
- Covered Semiconductor Product or Service – The Advanced Notice indicates the Council’s intent to prohibit electronic parts or electronic services provided to the Government that either (1) include Covered Semiconductor Products or Services; or (2) use electronic products that include Covered Semiconductor Products or Services. Covered Semiconductor Products or Services are those designed, produced, or provided by:
- Semiconductor Manufacturing International Corporation (SMIC)
- ChangXin Memory Technologies (CXMT), including subsidiaries, affiliates, or successors;
- Yangtze Memory Technologies Corp (YMTC), including subsidiaries, affiliates, or successors;
- Any other entities deemed to be owned, controlled, or otherwise connected to the government of a Foreign Country of Concern, so long as that designation is published in the Federal Register.
- Foreign Country of Concern – Includes four (4) named countries: (1) Democratic People’s Republic of Korea; (2) People’s Republic of China; (3) Russian Federation; and (4) Islamic Republic of Iran. But the definition also is left open ended, allowing the Secretaries of Commerce, Defense, and State, and the Director of National Intelligence to designate any other countries that “engage[] in conduct that is detrimental to the national security or foreign policy of the United States.”
- Reasonable Inquiry – The Advanced Notice adopts a substantially similar requirement and definition of “reasonable inquiry” as seen under Section 889. That is, contractors have an obligation to conduct a reasonable inquiry into compliance with the prohibition and representation clauses. According to the Council, the reasonable inquiry can serve as a basis for limitations on civil liabilities or administrative remedies for non-compliance. However, the Advanced Notice also indicates that some additional diligence review may be required in certain circumstances, and in particular that additional diligence is required for entities established or operating in a Foreign Country of Concern.
- Mandatory Flow Down – As with similar sourcing restrictions in recent years, the Semiconductor Prohibition will be a mandatory flow down for all subcontractors.
- Additional Requirements for “Covered Entities” – Covered Entities will include any company, whether domestic or foreign, that (1) develops a semiconductor that is the direct product of U.S. origin technology or software, and (2) purchases covered semiconductor products or services from SMIC, or any entity owned, controlled, or connected to the government of a Foreign Country of Concern. According to the Advanced Notice, such Covered Entities will have additional compliance obligations, such as disclosing to their customers the inclusion of any Covered Semiconductor in the purchased electronic product or service regardless of its role (e.g., contractor, subcontractor, or supplier).
Now is the Time to Submit your Comments
As mentioned, comments to the Advanced Notice are due July 2, 2024, and the FAR Council has given contractors an indication not only of additional requirements the Council is considering, but also of the types of information it would like to receive. For example, the FAR Council has indicated its intent to require offerors to identify the “provenance of the supply chain for the semiconductor components for each electronic product provided to the Government,” which would require contractors to identify not only their vendors, but also the vendor facilities responsible for the “design, fabrication, assembly, packaging, and test” of the products, in addition to identifying the code manufacturers. The Council also is considering use of a Department of Commerce run website identifying specific electronic products and services that include Covered Semiconductor Products or Services covered by this prohibition.
The Advanced Notice also contains eighteen (18) specific questions the Council is seeking input from industry on, including:
- Clarifications to the scope of the prohibition or definitions
- Whether companies have “sufficient visibility” into supply chains to meet these prohibitions
- How the prohibition will impact companies, and in particular, small and disadvantaged businesses,
- How long it will take for companies to provide compliant products and services
- And any other information needed to effectively comply with future rulemaking.
As we have seen in recent regulatory implementation of sourcing restrictions, the proposed rules themselves often are ambiguous and leave contractors with little insight into how the Government anticipates and expects companies to comply with these obligations. We also know from the Section 889 regulations, as well as the FASCSA regulations – both of which still remain in “Interim” draft form – the FAR Council can be slow to provide guidance and clarity once the regulations have been drafted and become effective. Contractors are encouraged now to analyze their supply chains, determine how this forthcoming rule will impact companies, and submit questions and comments to the FAR Council prior to the July 2, 2024 deadline.