Government contractors are required to comply with a new set of prohibitions on telecommunications equipment acquired from certain Chinese companies, and they may face False Claims Act liability since the prohibitions require certification that they have not used prohibited products. These prohibitions come from the John S. McCain National Defense Authorization Act for Fiscal Year 2019,* which contains a number of provisions intended to keep U.S. government funds from moving to Chinese government-owned corporations. Section 889 in particular lists companies the Chinese government owns that are now prohibited sources of supply for telecommunications equipment. Effective August 13, 2019, these prohibitions are incorporated into the FAR in Subpart 4.21.
This prohibition marks the second year in a row in which the NDAA has effected a relatively quick added prohibition to the FAR. Previously, the 2018 NDAA prohibited the use of any hardware, software, or service developed by Kaspersky Lab in performance of any government contract, due to Kaspersky’s connections to the Russian government.
These unusually rapid FAR additions showcase the government’s increasing emphasis on tighter cybersecurity controls from all angles. The move in this direction goes back to 2011, as noted during early discussion of the 2019 NDAA in May 2018. In that discussion, members of Congress pointed to a U.S.-China Commission report from 2011, titled “The National Security Implications of Investments and Products from the People’s Republic of China in the Telecommunications Sector,” which identified products made by the now-prohibited companies as a national security risk due to the level of control the Chinese government exerts on the now-prohibited telecommunications companies.
Following that report, China’s near-ubiquitous presence in telecommunications became a constant topic of discussion for policymakers. However, the focus was not only on national security; it was also on the ripple effect a prohibition on these products would have in the federal procurement sphere. A ban on low-cost products imported from China necessarily means price increases in federal procurement. However, as far as the government is concerned, this price increase is analogous to a best value analysis. Here, Congress has overwhelmingly decided that national security outweighs the lower price of the products in question.
While the overall result of this prohibition remains to be seen, the effect is immediate for contractors; comply with the new FAR clauses, or face removal from competition. Contractors may also face False Claims Act liability, since the new clause at FAR 52.204-24 requires them to certify that they have not used prohibited products. Contractors will need to be vigilant in protecting themselves against this liability, since the government has recently shown that it is ready to move into the nascent world of FCA litigation based on cybersecurity breaches.
To assist government contractors and related companies in understanding the False Claims Act and how to avoid False Claims Act liability, PilieroMazza has launched “Ex Rel. Radio,” a multi-part series of our GovCon Live! podcast, which will include commentary on potential pitfalls for your company, enforcement issues, and emerging trends. The first episode of Ex Rel. Radio: "Cybersecurity, Implied Certifications, and the False Claims Act," is available on Apple Podcasts, Spotify, Google Podcasts, TuneIn, Stitcher, and our website.
*Pub. L. 115-232