New Rule Expands Counterfeit Reporting.

• Author: Cassidy, Susan

* On Nov. 22, the Federal Acquisition Regulatory Council issued a final rule setting forth new provisions that require the reporting of certain counterfeit and suspect counterfeit parts and certain major or critical nonconformances to the Government-Industry Data Exchange Program. This rule comes more than five years after it was first proposed in the Federal Register in June 2014.

The council describes the final rule as "significantly descoped" from the version proposed in 2014, but it nonetheless constitutes an expansion of the existing counterfeit part reporting obligations, which to date have applied only to electronic parts under Defense Department contracts.

The final rule provides that the implementing contract clause (FAR 52.246-26) will be inserted into a contract that concerns one of four categories of items: those that that are subject to higher-level quality standards when the relevant contract includes the clause at FAR 52.246-11; items that the contracting officer has determined to be "critical;" electronic parts or items containing electronic parts, provided that the contract exceeds the simplified acquisition threshold; and services provided in conjunction with any of the three above categories of items.

The new clause set forth in the final rule must be flowed down in subcontracts that fit in any of the categories described above. Notably, the prime contractor is responsible for determining whether the subcontract is for "critical items for which use of the clause is appropriate." This may impact negotiations between primes and their subcontractors if there are questions as to whether the product clearly fits within the "critical" definition.

The rule also incorporates several carve-outs and exemptions that limit its applicability. Most notably, the clause is not required in contracts or subcontracts for commercial items, which is a significant limitation on applicability.

Additionally, the final rule recognizes exemptions for: foreign corporations that do not have any offices, locations or fiscal paying agents in the United States; contractors that are aware that the relevant item is the subject of "an on-going criminal investigation;" and contractors that have confirmed that the supplier from which they purchased the item in question has not sold the item to anyone else.

The core requirements of FAR 52.246-26 are twofold. First, contractors are required to "screen" the exchange program database to ensure that they do not...