Government Contracts Monitor

Update: DOD Issues Final Rule on Detection and Avoidance of Counterfeit Electronic Parts

May 13, 2014

On May 6, 2014, the Department of Defense (DoD) issued a final rule on the Detection and Avoidance of Counterfeit Electronic Parts. The final rule includes several substantive changes from the proposed rule (which we discussed here), to address a number of industry concerns. The final rule, like the proposed rule, shifts the burden of detecting counterfeit parts from the Government to the contractors and makes the costs of any counterfeit parts, as well as the cost of replacing those parts, unallowable. The rule is complex and will greatly impact CAS-covered DoD suppliers. Contractors should be aware of their important obligations under this new rule, which is effective as of the date it was issued.

Here is a summary of the key changes made to the final rule:

First, DoD revised the definitions of “counterfeit part” and “suspected counterfeit part” by (i) expressly limiting the definitions to electronic parts only; (ii) adding an intent element to the definition of counterfeit electronic parts so that counterfeit parts are those that are “knowingly mismarked, misidentified, or otherwise misrepresented;” and (iii) altering the definition of “suspect counterfeit parts” to require that there be “credible evidence” which provides reasonable doubt that the electronic part is authentic.

Second, DoD clarified the rule to require flow down of this clause to subcontractors at all tiers, including in subcontracts for commercial items and commercial-off-the-shelf (COTS) items. DoD explained, “Any electronic part procured by a CAS-covered prime contract is therefore subject to the restrictions concerning counterfeit and suspect counterfeit part, without regard to whether the purchased part is a commercial or COTS item.” Therefore, in the final rule, DoD expressly requires that the clause be flowed down to all subcontractors.

Third, DoD removed two ambiguous terms that respondents believed caused confusion. DoD removed the term “trusted suppliers” and instead expressed what was intended by that term rather than using it. DoD also removed the term “legally authorized source” and instead spelled out the entities that are authorized to produce genuine items, i.e., “the original manufacturer, current design activity, or an authorized aftermarket manufacturer.”

Finally, with respect to the primary requirement of the new clause – that covered contractors must establish and maintain a counterfeit electronic part detection and avoidance system – DoD further clarified what would be required for an acceptable system. The proposed rule listed nine criteria that an acceptable system should address. In the final rule, DoD added three additional criteria and further clarified the original criteria. According to the final rule, an acceptable system must address:

Training of personnel. The rule leaves it up to the contractor to determine the methods and types of training necessary.
Inspection and testing of electronic parts, including criteria for acceptance and rejection. The final rule further clarifies that tests and inspections shall be performed in accordance with accepted Government- and industry-recognized techniques, and must minimize the risk to the Government. The final rule also recognizes that contractors’ risk for receiving electronic parts may vary depending on the sources they use, so the final rule allows greater flexibility for contractors to implement “risk-based” systems.
Processes to abolish counterfeit parts proliferation.
Processes for maintaining electronic part traceability. The final rule further explains that these processes should enable tracking of the supply chain back to the original manufacturer, whether the electronic parts are supplied as discrete parts or are contained in assemblies.
Use of suppliers that are the original manufacturers, or sources with express written authority of the original manufacturer. The final rule further clarifies that these sources include authorized aftermarket manufacturers or suppliers that obtain parts exclusively from one or more of these sources. If parts are not available from one of these sources, contractors may use suppliers that meet the system criteria.
Reporting and quarantining of counterfeit parts and suspect counterfeit parts. The final rule explains that reporting is required to the Contracting Officer and to the Government-Industry Data Exchange Program (GIDEP), when the contractor becomes aware of, or has reason to suspect that, any electronic part or end item, component, part, or assembly containing electronic parts purchased by the DoD, or purchased for the DoD, contains counterfeit parts or suspect counterfeit parts.
Methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit part is, in fact, counterfeit.
Design, operation, and maintenance of systems to detect and avoid counterfeit parts and suspect counterfeit parts. The final rule explains that contractors may elect to use current Government- or industry-recognized standards to meet this requirement.
Flowdown of counterfeit detection and avoidance requirements. As explained above, one of the primary changes to the final rule is further clarification that prime contractors must flow down these requirements to subcontractors at all tiers responsible for buying or selling electronic parts or assemblies containing electronic parts, or for performing authentication testing.
Process for keeping continually informed of current counterfeiting information and trends. This includes all detection and avoidance techniques contained in appropriate industry standards and using such information to continuously upgrade internal processes.
Process for screening GIDEP reports and other credible sources of counterfeiting information to avoid the purchase or use of counterfeit electronic parts.
Control of obsolete electronic parts in order to maximize the availability and use of authentic, originally designed, and qualified electronic parts throughout the product’s life cycle.

DoD rejected requests to issue a second proposed rule and elicit further comments before issuing the final rule. As a result, we will likely see some growing pains as this clause is implemented and DoD suppliers begin complying with its terms. The final clause can be found at DFARS 252.246-7007.

Katie Calogero is the attorney responsible for the content of this article.