As Venable covered last month, on July 14, 2020 the Federal Acquisition Regulation (FAR) Council issued a long-awaited interim rule implementing "Part B" of Section 889(a)(1) of the National Defense Authorization Act for Fiscal Year 2019 (Pub. L. 115-232). Section 889 imposes sweeping limitations on the acquisition or use of "covered telecommunications equipment or services" as a substantial or essential component of any system, or as critical technology as part of any system. "Covered telecommunications equipment or services" include telecommunications or video surveillance equipment and services produced by Huawei Technologies Company, ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, and Dahua Technology Company, or any other company, including affiliates and subsidiaries, owned or controlled by the People's Republic of China. "Part A" of Section 889 prohibits agencies from procuring covered telecommunications equipment or services. "Part B" of Section 889 prohibits agencies from contracting with entities that use covered telecommunications equipment or services.
While the implications of Section 889 for federal government contractors have been getting most of the attention, Section 889 is not limited to agency procurement and contractor use. Section 889(b)(1) also includes a prohibition on loan and grant funds, stating that "[t]he head of an executive agency may not obligate or expend loan or grant funds to procure or obtain, extend or renew a contract to procure or obtain, or enter into a contract (or extend or renew a contract) to procure or obtain the equipment, services, or systems described in subsection (a)."
On January 22, 2020, the Office of Management and Budget (OMB) issued very limited proposed guidance on Section 889, proposing to revise the Uniform Guidance to align with Section 889 by adopting a new provision at 2 C.F.R. § 200.216, Prohibition on Certain Telecommunication and Video Surveillance Services or Equipment. Proposed § 200.216 simply stated: "Grant, cooperative agreement, and loan recipients are prohibited from using government funds to enter into contracts (or extend or renew contracts) with entities that use covered technology. See section 889 of Public Law 115–232 (National Defense Authorization Act 2019)." OMB stated that "[t]his prohibition applies even if the contract is not intended to procure or obtain, any equipment, system, or service that uses covered telecommunications equipment or services."
While the new proposed language did not offer much in the way of guidance for grant recipients concerned about complying with Section 889's prohibitions on the use of grant funds, on August 13, 2020 OMB issued its Final Guidance covering Section 889. OMB noted that it had received "widespread concerns" from commenters on its proposed guidance from January about the impact and implementation of the Section 889 requirements. OMB stated that it "sought to address commenter concerns by re-writing this section to align closely with the law, add a new definition for telecommunications and video surveillance costs, and add a new section 2 CFR 200.471."
The final § 200.216 states:
- Recipients and subrecipients are prohibited from obligating or expending loan or grant funds to:
- Procure or obtain;
- Extend or renew a contract to procure or obtain; or
- Enter into a contract (or extend or renew a contract) to procure or obtain equipment, services, or systems that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.
"Covered telecommunications equipment or services" is aligned with the definition in Section 889. Section 200.216 adds that "heads of executive agencies administering loan, grant, or subsidy programs shall prioritize available funding and technical support to assist affected businesses, institutions and organizations as is reasonably necessary for those affected entities to transition from covered communications equipment and services, to procure replacement equipment and services, and to ensure that communications service to users and customers is sustained."
The Final Guidance also adds a new § 200.471, Telecommunication costs and video surveillance costs, which makes the costs associated with § 200.216 explicitly unallowable.
- While the Final Guidance does not include an express requirement for recipients to flow down § 200.216 to subrecipients, the Final Guidance applies the prohibition to both "recipients and subrecipients." Therefore, in order to ensure that subrecipients are complying, it would be prudent for recipients to include § 200.216 in their subrecipient agreements.
- A similar approach should be considered with subcontractors. Again, there is no required flow down, but if recipients and subrecipients are ensuring that federal funds are not being expended on covered telecommunications equipment or services, it would be prudent for recipients and subrecipients to include a representation or certification in subcontracts that funds expended under such are not being used to acquire covered telecommunications equipment or services for use.
- Unlike the procurement regulations set forth in the FAR, there is no requirement in the Final Guidance for awardees to make an affirmative certification regarding the procurement or obtaining of covered telecommunications equipment or services using loan or grant funds.
- The Final Guidance does not include a "non-use" provision similar to the "Part B" prohibition that applies to federal contractors. Rather, recipients cannot obligate or expend funds to "procure or obtain equipment, services, or systems that uses covered telecommunications equipment or services as a substantial or essential component of any system." This does not prohibit recipients from using covered telecommunications equipment or services; rather, they simply cannot use federal loan or grant funds to acquire such equipment or services. Grant recipients should still be aware of what they are including in their indirect costs, however, as prohibited equipment should be excluded from an allowable cost pool.
- Federal agencies may issue their own individual guidance on complying with the Section 889 prohibitions and the new requirements set forth in the Uniform Guidance. Recipients should monitor the individual agencies that they receive grant funds from in order to ensure that they are complying with any newly-issued, agency-specific requirements.
Organizations that are subject to the Uniform Guidance need to be aware of how they are using grant or loan funds, and what types of equipment and services they are procuring with those funds, to ensure compliance with Section 889 and 2 C.F.R. § 200.216.
The Final Guidance with respect to Section 889 is effective August 13, 2020.