By: Lindsay Simmons
The Department of Defense (DOD) has issued a proposed rule to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to ensure that contractors are held responsible for detecting and avoiding the use of counterfeit or suspect electronic parts. The overall effect of this rule would be to shift the burden of detecting and avoiding counterfeit parts from the Government to contractors. Thus, now more than ever, contractors should be vigilant about detecting and preventing the use of counterfeit parts in their work.
The proposed rule defines a counterfeit part as one that is –
(1) An unauthorized copy or substitute part that has been identified, marked, and/or altered by a source other than the part’s legally authorized source and has been misrepresented to be from a legally authorized source;
(2) An item misrepresented to be an authorized item of the legally authorized source; or
(3) A new, used, outdated, or expired item from a legally authorized source that is misrepresented by any source to the end-user as meeting the performance requirements for the intended use.
A suspect counterfeit part is defined as one “for which visual inspection, testing, or other information provide reason to believe that a part may be a counterfeit part.”
The proposed rule would create contractor liability for damage to government property resulting from the use of counterfeit parts, and make identifying, avoiding and reporting counterfeit parts required criteria for contractors’ purchasing systems. Most importantly, contractors will not be reimbursed for counterfeit electronic parts or for the cost of corrective action necessitated by the use of such parts, except where a DOD-approved system is in place to detect counterfeit parts, the parts were provided by the Government and the contractor provides timely notice to the Government. No clarification is provided on the nature and content of the inspections and testing necessary to identify counterfeit parts or to achieve a DOD-approved system.
The problem of counterfeit electronic parts is a growing one that has been highlighted by several recent high-profile cases. One such case was the prosecution of VisionTech Components in Florida. VisionTech sold over a thousand counterfeit semiconductor chips to customers before their counterfeiting operation was uncovered by law enforcement. VisionTech advertised name brand American-made conductor chips as available for purchase on their website. Like many counterfeit electronic parts, the parts sold by VisionTech were forgeries manufactured in Hong Kong and Guangdong province in southeast China. Many of the “named” manufacturers of the chips sold by VisionTech lost customers as a result of VisionTech’s inferior and defective products claimed to be those of the American companies. Stephanie A. McCloskey, the proprietor of VisionTech, was sentenced to 38 months in prison in what was the first sentencing in the United States for the distribution of counterfeit chips.
The proposed rule, which can be found here, implements parts of Section 818 of the National Defense Authorization Act (NDAA) for FY 2012 and Section 833 of the NDAA for FY 2013. DOD will accept comments on the proposed rule until July 15, 2013. In addition to reviewing comments, DOD is hosting a public meeting on the proposed rule on June 28, 2013, from 9:00 a.m. to 12:30 p.m. at the General Services Administration (GSA). More information on the meeting is available here.
This article was drafted by Summer Associate Michael Samuels, with guidance from attorneys Lindsay Simmons and Katie Calogero.