June 2012

Real Parts: DoD Continues to Develop Policy on Counterfeit Electronic Parts

6 min

Section 818 of the National Defense Authorization Act of 2012, enacted last December, contains new requirements for the Department of Defense (DoD) to detect and avoid counterfeit electronic parts.  While the DoD works to meet Section 818’s mandates of assessing current departmental policies and developing specific actions to be taken, the DoD has recently provided guidance to agencies on how to address the growing problem of counterfeit electronic parts in the supply chain.

Recent DoD Directive

As part of the assessment process required by Section 818, the Under Secretary of Defense for Acquisition, Technology and Logistics issued a memorandum on March 16, 2012 to the secretaries of the military departments and directors of the defense agencies regarding the DoD’s policies related to counterfeit electronic parts.  The memorandum directed specific actions to prevent, detect, remediate, and investigate counterfeiting in the DoD supply chain.

The memorandum defines counterfeit material as “an item that is an unauthorized copy or substitute that has been identified, marked, and/or altered by a source other than the item’s legally authorized source and has been misrepresented to be an authorized item of the legally authorized source.”  The memorandum also indicates that a used item that is represented to be a new item may also be considered as a counterfeit electronic part.  Some of the actions directed by the memorandum include:

  • Program Managers (PMs) are to ensure they are notified by the contractors and suppliers – including those below the prime contractor level – when critical items are not obtained from the original equipment manufacturer, original component manufacturer, or an authorized distributor.
  • PMs must evaluate counterfeit risk and implement countermeasures for mission critical components, which are outlined in the July 18, 2011 DoD Memorandum “Document Streamlining-Program Protection Plan.”  That memorandum provides outline, content and formatting guidance for the Program Protection Plans (PPP), which are required to be submitted for any acquisition program at Milestone Decision Authority review, approved at Milestone A, and updated at each subsequent milestone and the Full-Rate Production Decision.  The PPP has to address counterfeit prevention, including what measures will be in place and how the program will mitigate the risk of the insertion of counterfeit parts during Operations and Maintenance.
  • Require that Defense Federal Acquisition Regulation Supplement (DFARS) clause 252.246-7003, “Notification of Potential Safety Issues,” be included in solicitations and contracts for: (1) repairable/consumable parts for critical safety items; (2) systems and subsystems, assemblies, and subassemblies integral to a system; or (3) repair, maintenance, logistics support, or overhaul services for systems and subsystems, assemblies, subassemblies, and parts integral to a system.  This DFARS clause sets forth the actions to be taken concerning nonconformance and deficiencies that could result in a critical safety impact, including requiring contractors to:
    • Notify the Administrative Contracting Officer (ACO) and the Procuring Contracting Officer (PCO) as soon as practicable, but not later than 72 hours, after discovering or acquiring credible information concerning nonconformance and deficiencies;
    • Provide a detailed written notification to the ACO and PCO within five (5) working days after discovering or acquiring credible information concerning nonconformances and deficiencies; and
    • Flowing the requirements of the clause down to subcontractors.

What constitutes “credible information” will vary with each particular incident, but contractors need to be aware of the 72-hour reporting deadline and have internal policies in place to address this requirement.  DoD agencies are to use the procedures in “Procedure, Guidance, and Information,” Section 246.371, for notifications received regarding counterfeit parts.

  • The Government-Industry Data Exchange Program (GIDEP) is designated as the central reporting repository for the DoD for suspected and confirmed counterfeit parts.  GIDEP is a DoD program to facilitate the sharing of technical information between government agencies and industry partners to increase system safety, reliability, and readiness and reduce systems development, production and ownership costs.  Contractors, subcontractors, and DoD activities are to report counterfeit parts using the GIDEP’s Product Quality Deficiency Reporting process.  Under that process, suspected counterfeit parts are typically reported on one of the standard GIDEP documents, such as: ALERTs, SAFE-ALERTs, Problem Advisories, Agency Action Notices, Lessons Learned or Urgent Data Requests.  The counterfeit reports are provided to all GIDEP members and are maintained in an on-line searchable database.  Companies do not have to be GIDEP members to submit counterfeit reports.

These measures, while working within established policies and procedures, reinforce Section 818’s focus on contractor and subcontractor reporting.  Contractors need to confirm that their testing and reporting procedures are established and up to date to ensure their companies are prepared if counterfeit electronic parts are discovered.

Stepped-up Enforcement

The consequences for not aggressively reporting suspected counterfeit electronic parts can be severe, as demonstrated earlier this year when the Air Force suspended two companies and their affiliates from government contracting because of counterfeit electronic parts.  The first company, Hong Dark, was a foreign corporation that supplied approximately 84,000 counterfeit electronic parts to a second company, Global IC.  Global IC, a California company, then supplied the parts to DoD contractors and subcontractors.  Many of those counterfeit parts were installed on DoD aircraft, such as the C-17, C-130, and AH-64.  Global IC allegedly discovered the counterfeit nature of Hong Dark’s electronic parts as early as 2009, but did not disclose that information to government contractors and subcontractors.

The suspension memorandum notes that this failure to disclose by Global IC “impacted DoD’s ability to take swift action to protect itself.” The suspension memorandum indicates that Global IC’s failure to report indicated “a lack of business integrity or business honesty” that under FAR 9.407-2(a)(9) seriously affects the company’s present responsibility to be a government contractor.  While this appears to be the first suspension based on the failure to report counterfeit electronic parts since Section 818 was enacted, it may be indicative of the heightened scrutiny of reporting that contractors can expect in the future.

Key Upcoming Dates

Under Section 818, the DoD has until June 28, 2012 to implement a risk-based policy to minimize the impact of counterfeit electronic parts.  This policy will include ensuring the traceability of parts, inspecting and testing of parts, and taking corrective action to recover costs for replacing counterfeit electronic parts from contractors.  At that time, the DoD plans to issue guidance on remedial actions – including suspension and debarment – against contractors who fail to detect or avoid counterfeit electronic parts or who fail "to exercise due diligence in the detection and avoidance”  of counterfeit electronic parts.

Following the issuance of the DoD counterfeit electronic parts policy, the DoD will have until September 26, 2012, to revise the DFARS to address the detection and avoidance of counterfeit electronic parts.  The revised DFARS are to establish:

  • Requirements for the inspection, testing and authentication of electronic parts that a contractor or subcontractor obtains from sources other than the original manufacturers of the parts or their authorized dealers.
  • Written reporting systems, under which a contractor or subcontractor who becomes aware, or has reason to suspect, that a component, or part or material supplied to the DoD contains counterfeit electronic parts has 60 days to report it to the government.

Contractors need to be aware of these upcoming dates and be ready for new requirements that will result from new Section 818-based policies so that they may adjust their policies and procedures accordingly.

For more information on the DoD requirements regarding counterfeit electronic parts, please contact Paul Debolt at padebolt@Venable.com or any of the other attorneys in Venable’s Government Contracts Practice Group.