Overview

The United States Department of Defense (“DoD”) recently published two new rules that impose broader obligations to safeguard information that falls within specified categories of sensitive data and to report cyber incidents to the government.  These rules generally apply to companies that have been awarded new DoD procurement contracts, that hold subcontracts under such DoD contracts, or, in some cases, that have been awarded other types of agreements with DoD.  The rules:

  • expand contractors’ and subcontractors’ safeguarding responsibilities and obligations to report and investigate cyber threats;
  • modify the scope of data that contractors and subcontractors must safeguard and the universe of contractors and subcontractors to which the requirements apply;
  • establish requirements for contractors and subcontractors using cloud computing to provide information technology services to DoD, including requiring such contractors to keep government data within the United States, implement DoD-approved safeguards, and limit disclosure of and access to government data;
  • expand and make mandatory DoD’s previously voluntary cyber incident reporting system for defense industrial base (“DIB”) agreement holders; and
  • open DoD’s voluntary cybersecurity information sharing program up to a greater range of agreement holders.

The new rules reflect DoD’s intensified focus on treatment of export controlled technology and other categories of sensitive data.  Awardees of DoD procurement contracts, subcontracts, and other types of instruments such as cooperative agreements are well-advised to make their data-security and export control compliance programs comport with these new requirements.

August Rule

Adequate Security and Incident Reporting

The first interim rule, published in August (“August Rule”), made a number of modifications to requirements addressing adequate security for sensitive information and the reporting of cyber incidents.  These requirements are to be included in all DoD solicitations and contracts, including those for acquisition of commercial items, via incorporation of an implementing clause.  Furthermore, prime contractors are required to incorporate the implementing clause into subcontracts (“flow down”), and, thus, the requirements outlined below will also apply to subcontractors.

The August Rule updates security requirements, obligating contractors to provide adequate security for “all covered defense information on all covered contractor information systems that support the performance of work under the contract.”  The security requirements for covered contractor information systems that are part of an information technology (“IT”) service or system operated on behalf of the government and involve cloud computing are discussed below.  For covered contractor information systems not operated on behalf of the government, the standard defining adequate security is now generally specified by the National Institute of Standards and Technology (“NIST”) Special Publication (“SP”) 800-171.  NIST SP 800-171 requires contractors to use multifactor authentication for all access to privileged accounts and network access to non-privileged accounts.  Because these measures may require significant effort to implement, DoD issued a class deviation on October 8, 2015, giving offerors an additional nine months to comply with this part of NIST SP 800-171 if they inform DoD that it is required.

Further, the August Rule updates reporting rules, requiring contractors to report and investigate cyber incidents that affect a covered contractor information system or “covered defense information” (“CDI”) on the system, or that affect the contractor’s ability to perform the requirements of the contract that are designated as operationally critical support.  Cyber incidents are defined as “actions taken through the use of computer networks that result in a compromise or an actual or potentially adverse effect on an information system and/or the information residing therein.”  The definition includes potentially adverse effects, as well as those that are confirmed.

Consistent with the prior version of the rule, the August Rule requires contractors to report these cyber incidents to DoD within 72 hours.  It requires subcontractors to report cyber incidents to their prime contractors as well as directly to DoD within 72 hours.  In addition to a report explaining the nature and extent of the cyber incident, the August Rule requires contractors to (i) send malware to DoD, provided such malware has been identified and isolated, and (ii) allow DoD, upon request, access to information and equipment that is necessary to conduct a forensic analysis.

While information safeguarding, reporting, and investigation requirements previously applied to the protection of unclassified controlled technical information, the August Rule expands these requirements so that they apply to CDI, which also includes controlled technical information.  CDI includes information provided to a contractor by or on behalf of DoD in connection with performance of the contract, or information collected, developed, received, transmitted, used, or stored by or on behalf of the contractor in performance of the contract that fits into one of the categories below:

  1. (1) technical information with military or space application that is subject to controls on the access, use, reproduction, modification, performance, display, release, disclosure, or dissemination, and is not lawfully publicly available (controlled technical information);
  2. specified facts identified through the Operations Security process about friendly intentions, capabilities, and activities vitally needed by adversaries for them to plan and act effectively so as to guarantee failure or unacceptable consequences for friendly mission accomplishment (part of Operations Security process);
  3. export controlled information defined broadly as unclassified information concerning certain items, commodities, technology, software, or other information whose export could reasonably be expected to adversely affect the United States national security and nonproliferation objectives, to include dual use items; items identified in the export administration  regulations, international traffic in arms regulations, and munitions list; license applications; and sensitive nuclear information; and
  4. “any other information” marked or otherwise identified in the contract that requires safeguarding or dissemination controls pursuant to and consistent with a law, regulation, or policy of the United States.

Cloud Computing

The August Rule also introduced a set of requirements for contractors that make use of cloud computing, broadly defined, in providing information technology services to DoD.  These requirements reflect recent DoD guidance.  Contractors must incorporate these requirements into subcontracts that involve or may involve cloud services.

The August Rule requires these contractors to, among other things, (i) implement and maintain administrative, technical, and physical safeguards and controls with the security level and services required in accordance with DoD’s Cloud Computing Security Requirements Guide (“SRG”), (ii) report all cyber incidents related to the cloud computing service provided under the contract to DoD, (iii) provide DoD with other information and assistance in connection with cyber incidents, (iv) limit access to and use and disclosure of government data and government-related data, and (v) generally keep all government data within the United States unless it is physically located on DoD premises.

The August Rule also amends the obligations of DoD in acquiring cloud computing services.  The August Rule generally requires DoD to acquire cloud computing services using commercial terms and conditions so long as they are consistent with applicable laws and regulations and the agency’s needs.  Further, DoD can only acquire cloud-based services from a company with the appropriate level of provisional authorization by the Defense Information Systems Agency.

October Rule

The second interim rule, issued in October (“October Rule”) modifies the previously voluntary DoD cybersecurity information sharing program for the DIB.  The October Rule makes DoD’s reporting requirements for DIB agreement holders mandatory, while expanding the kinds of DoD awardees that can participate in the still voluntary portion of DoD’s information sharing program.

Prior to the October Rule, DIB agreement holders participating in a voluntary cybersecurity information program (i) were required to report cyber incidents to DoD and (ii) received information from the government including cyber threat information and cybersecurity best practices.  Only DIB agreement holders who met certain conditions were eligible to participate, and no part of the program was mandatory.

The October Rule updates cyber incident reporting and investigation requirements and makes these requirements mandatory for all DIB agreement holders working with CDI independent of participation in any voluntary program.  A voluntary program in which the government continues to share information on cybersecurity threats and best practices remains.  Under the new regulations, any agreement holder that has a clearance to access, receive, or store classified information and meets certain other requirements is eligible to join the voluntary cybersecurity information sharing program.  Under the program, the parties enter into an agreement to share cybersecurity information in a timely and secure manner on a recurring basis.

The reporting and investigation requirements of the October Rule mirror those of the August Rule.  The main difference between the reporting and investigation requirements of the August Rule and the October Rule is the DoD agreements to which they apply.  The August Rule is part of the Federal Acquisition Regulation and, as such, applies only to procurement contracts (and indirectly to subcontracts).  The October Rule mandates application of the new reporting and investigation requirements to all relevant new procurement contracts and subcontracts as well as cooperative agreements and other transaction agreements.  As with the August Rule, the October Rule requirements will be imposed through a clause in the agreement holder’s agreement with DoD.

Conclusion

Companies should expect to see the requirements of the August Rule and October Rule in new DoD solicitations, procurement contracts, and other types of agreements. As a result, companies should pay close attention to the new requirements and begin developing procedures and plans that can assist them in meeting these heightened obligations.  Given the government’s focus on cybersecurity, agreement holders can only expect to face increasing requirements in the future.