A Section 889 State of Mind: Federal Contractors' Connections to China Continue to Receive Scrutiny

6 min

The John S. McCain National Defense Authorization Act (NDAA) for Fiscal Year 2019 (Pub. L. 115-232) became law on August 13, 2018, including Section 889's prohibition on federal agencies contracting for (Section 889(a)(1)(A), or "Part A"), or with entities using (Part B), certain telecommunications and video surveillance services or equipment.1 The U.S. Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) have issued several interim rules implementing Section 889 that went into effect on August 13, 2019, December 13, 2019, August 13, 2020, and October 26, 2020. These rules generally explained that Section 889 covers certain equipment and services produced or provided by Huawei Technologies Company or ZTE Corporation, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, and Dahua Technology Company, including these companies' subsidiaries and affiliates. The DoD also issued a final rule partially implementing Section 889 Part A on January 15, 2021.

In addition to the U.S. government's hard line taken with China through Section 889, recent developments show that scrutiny of federal contractors' connections with the People's Republic of China continues. Accordingly, contractors and other recipients of federal funds can expect and should plan for further developments on this matter from policymakers and other officials for some time to come.

Proposed Legislation

For example, Senator Marco Rubio introduced S.1048, "A bill to require disclosure by Federal contractors of contracts with Chinese entities, and for other purposes," on March 25, 2021. The bill, called the "Federal Acquisition and Contracting Transparency Act of 2021" or the "FACT Act," would require:

  • Disclosure, "as a condition for being awarded a contract for the procurement of goods or services," of all "covered information related to any contracts or other relevant commercial ties" a contractor—or its first-tier subcontractors or related entities—has "with a covered entity," which includes:
    • the Government of the People's Republic of China;
    • the Chinese Communist Party (CCP);
    • the Chinese military;
    • an entity owned, directed, controlled, financed, or influenced directly or indirectly by the Government of the People's Republic of China, the CCP, or the Chinese military (including a parent, subsidiary, or affiliate of such an entity); or
    • an entity substantively involved in People's Republic of China economic and industrial policies or military-civil fusion.
  • The creation of a "public database containing the information about contracts with covered entities disclosed" under the foregoing provisions.

Senator Rubio stated with respect to the bill that "[i]t is common sense that any company working with the U.S. government should publicly disclose its connection to the Chinese Government and Communist Party and related entities." He also stated that "[p]reviously undisclosed relationships between federal contractors and CCP-related entities may pose serious institutional conflicts of interest."

Similarly, Senator Rick Scott introduced S.1062, "A bill to prohibit the procurement of solar panels manufactured or assembled in the People's Republic of China," on March 25, 2021. According to a press release, the Keep China Out of Solar Energy Act would require "the Director of the Office of Management and Budget to develop standards and guidelines to prohibit Federal funds from being used to purchase solar panels manufactured or assembled by entities with ties to the Communist Party of China." Senator Scott stated that "[r]eports show that many solar companies rely on materials and labor from Communist China's Xinjiang province, which is known for forced labor and horrific abuse of the Uyghurs."

Senator John Kennedy also introduced S.590, the "Concerns Over Nations Funding University Campus Institutes in the United States Act" or the "CONFUCIUS Act," in early March, which passed without amendment by unanimous consent. The bill would prohibit institutions of higher education or other postsecondary educational institutions from receiving certain federal funds "unless the institution ensures that any contract or agreement between the institution and a Confucius Institute"—a "cultural institute directly or indirectly funded by the Government of the People's Republic of China"—includes certain terms related to academic freedom, the application of foreign law on campus, and managerial authority.

Recent Court Cases

Federal contractors' connections to China have been at issue in recent court decisions as well. In BYD Co. v. VICE Media LLC, BYD—"one of the world's largest producers and suppliers of electric vehicles, solar panels, lithium batteries, and protective masks and equipment, among other products"—sued VICE for defamation over an article titled "Trump Blacklisted This Chinese Company. Now It's Making Coronavirus Masks for U.S. Hospitals." See No. 20-CV-3281 (AJN), 2021 WL 1225918, at *1 (S.D.N.Y. Mar. 31, 2021). BYD alleged that VICE published the article "despite knowing that there was no 'blacklist' and that the ASPI [Australian Strategic Policy Institute] Report did not support the claim that BYD used forced labor in its supply chain." Id. at *2. The United States District Court for the Southern District of New York dismissed the complaint because the article's "headline fairly indexes the content of the article," notwithstanding the use of the word "blacklist," and BYD "failed to plead facts that plausibly establish that VICE acted with actual malice[.]" Id. at *5, *10.

The United States District Court for the Northern District of California also recently granted summary judgment in favor of a federal contractor in a qui tam False Claims Act lawsuit alleging the contractor "offered for sale and sold hundreds of variations of electric power supply products to the government under" its GSA Multiple Award Schedule (MAS) contract, "knowing that they contained parts…that were manufactured in China and the Philippines, countries that are non-designated countries under the Trade Agreements Act of 1979 ('TAA')." United States ex rel Matthew Macdowell v. Synnex Corp., No. C 19-00173 (WHA), 2021 WL 1164803, at *1 (N.D. Cal. Mar. 26, 2021). The court held that the "relator is not an original source and, therefore, his claims are barred by the public disclosure bar." Id. at *7.

Ongoing Regulatory Implementation

Finally, federal officials are continuing to implement Section 889's requirements. The GSA's March 31, 2021 "Unified Agenda of Federal Regulatory and Deregulatory Actions" stated that the GSA "is amending the General Services Administration Acquisition Regulation (GSAR) to extend the requirements of" Section 889 "to lease acquisitions by requiring inclusion of the related Federal Acquisition Regulation (FAR) provisions and clause." Moreover, the most recent "Semiannual Regulatory Agenda" from the DoD, GSA, and NASA lists May 2021 as the anticipated date for release of a final rule implementing Section 889(a)(1)(B).

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Policymakers, the media, and potential litigants are paying close attention to federal contractors' perceived and actual connections to China. Given this ongoing scrutiny, companies and other organizations working with the U.S. federal government and which have connections with China (some of which may be required under Chinese law as a cost of doing business in China) should remain mindful of developments in this space (as we will), as they may impact their future ability to obtain and comply with U.S. government law and regulation.

[1] Section 889 also prohibits agencies from obligating or expending loan or grant funds for the same reasons. The Office of Management and Budget (OMB) issued final guidance on this issue and revised 2 C.F.R. Part 200 on August 13, 2020. The DoD, GSA, and NASA have compiled relevant guidance on Section 889 Part B here.