M&E Government Contracts & Export Controls Alert

The United States Department of Defense promulgated an “interim” rule, effective August 26, 2015, which placed imposing and costly burdens on all DoD contractors and subcontractors (including small businesses and commercial item contractors) in the areas of cybersecurity and cloud-based security. See 80 Fed. Reg. 51,739 (August 26, 2015). The public comment period ended in late October and reflects the frustrations and concerns many in the DoD contracting community are having in understanding and implementing its requirements.

What follows is a brief synopsis of said rule’s two key components: (1) safeguarding “covered defense information” and reporting cyber incidents; and (2) cloud computing. Although the changes are wide in scope, industry would be well-advised to also pay attention to: (1) the more precise 72-hour cyber incident reporting procedures (now found at DFARS 204.7302(a)(1) and clause 252.204-7012(c)); (2) the reporting requirements of all subcontractors (now found at DFARS 204.7302(a)(2)); and (3) and the inclusion of new contractual clauses when covered defense information is at issue (now found at DFARS 204.7304).

Safeguarding Covered Defense Information and Reporting Cyber Incidents

Former DFARS subpart 204.73, Safeguarding Unclassified Controlled Technical Information (the “UCTI rule”), has been retooled and renamed DFARS 252-204-7012, Safeguarding Covered Defense Information and Cyber Incident Reporting, to cover the safeguarding of covered defense information residing on contractor (or subcontractor) information systems and to require contractors to report any cyber incident (defined below).

Under the clause, contractors must provide “adequate security,” defined as “protective measures that are commensurate with the consequences and probability of loss, misuse, or unauthorized access to or modification of information.” The baseline for adequate security has been changed from 51 security standards in NIST 800-53 to a framework outlined in NIST 800-171. If DoD contractors and subcontractors cannot meet the specific requirements of NIST 800-171 at the time of award, they may seek pre-award authorization from DoD to use “[a]lternative but equally effective security measures.” Contractors must self-assess the adequacy of their protective measures given the consequences and probability of adverse outcomes of a potential cyber incident. In addition, they must provide adequate security “for all covered defense information on all covered contractor information systems that support the performance of work under the contract.”

There are a number of new or newly defined terms that support the reader in understanding the rule and its implications. Key among them is “covered defense information,” which now consists of:

1. controlled technical information (regardless of whether it bears a restrictive legend under DoD Instruction 5230.24 if the contractor deems the criteria for DoD Distribution Statements B through F,

2. critical information (operations security),

3. export control information, and

4. other information, marked or otherwise identified in the contract, that requires safeguarding dissemination controls pursuant to and consistent with law, regulation, and government-wide policies.

In a nutshell, covered defense information is any information furnished by the DoD for performance purposes or information that resides on a covered contractor information system (however received) in support of performance of the contract and fits within one of the four above-defined subcategories.

A “covered contractor information system” is “an information system that is owned or operated by or for, a contractor and that processes, stores, or transmits covered defense information” (DFARS 252.204-7012(a)). The term “cyber incident” is now defined at DFARS subpart 202.101 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 same subpart defines the terms ‘‘compromise’’ and ‘‘media’’. A “compromise” includes the disclosure of information to unauthorized persons, or a violation of the security policy of a system, in which unauthorized intentional or unintentional disclosure, modification, destruction, or loss of an object, or the copying of information to unauthorized media may have occurred. The term “media” includes physical devices or writing surfaces including, but not limited to, magnetic tapes, optical disks, magnetic disks, large-scale integration memory chips, and printouts onto which covered defense information is recorded, stored, or printed within a covered contractor information system.

As mentioned above, contractor IT systems are now subject to a 72-hour cyber incident reporting obligation. Protections are included for contractor proprietary information reported to DoD.

Cloud Computing

The interim rule imposes information security and cyber incident reporting requirements on Cloud Service Providers (CSPs) and impacts all DoD contracts (including commercial item contracts) for information technology services, whilst implementing the two policies: (1) DoD Chief Information Officer (CIO) memorandum dated December 15, 2014 (“Updated Guidance on the Acquisition and Use of Commercial Cloud services”), and (2) the DoD Cloud Computing Security Requirements Guide from January 2015. The following is a brief synopsis of key changes:

1. The interim rule creates DFARS subpart 239.76, Cloud Computing, to implement policy for the acquisition of cloud computing services.

  • Requires DoD to acquire cloud computing services using commercial terms and conditions

  • DoD may only acquire cloud services from CSPs that have been granted a provisional authorization by the Defense Information Systems Agency (DISA).

  • Requires DoD to provide CSPs with certain information in connection with a request for cloud services (descriptions of the government data, applicable limitations regarding access to and use/disclosure of the data, etc.).

  • CSPs must maintain all government data that is not physically located on DoD premises within the 50 states, DC, or outlying areas (for example Puerto Rico).

2. Creates contract clause DFARS 252.239-7009, Representation of Use of Cloud Computing.

  • Requires an offeror to indicate whether it intends to use cloud computing services in performance of the contract.

3. Creates DFARS 252.239-7010, Cloud Computing Services.

  • Provides standard contract language for the acquisition of cloud computing services, including access, security, and reporting requirements.

  • Establishes the minimum security requirements that apply to DoD cloud services contracts.

  • Imposes limitations on, access to, and use and disclosure of government data and government related data.

  • Creates mandatory procedures for reporting cyber incidents involving cloud services contracts.

  • Requires CSPs to provide DoD access to information, equipment, and facilities.

October 8, 2015 Class Deviation

Although DoD contractors and subcontractors are required to comply with the interim rule immediately, some DoD contractors (and subcontractors, through the prime contractor) may notify the contracting officer that they need up to nine months (from the date of award or the date of a modification incorporating the new clauses) to comply with the requirements in Section 3.5.3 of NIST SP 800-171, which requires contractors to “[u]se multifactor authentication for local and network access to privileged accounts and for network access to non-privileged accounts.” Therefore, if a contractor decides that it cannot timely implement the necessary measures, and is later awarded a contract subject to the new requirements, the contractor ought to immediately notify the contracting officer in writing and should ensure that all subsequent communications with the government are adequately documented. Following said notice, contractors will have up to nine months (from the date of contract award or modification incorporating the revised clauses) to comply with Section 3.5.3 of NIST SP 800-171.