What effect does DoD-GSA-NASA interim rule have?
What does this mean for US companies?
Further pain for Huawei on the export side?
Bottom line for US companies?
In another blow to Huawei, on 7 August 2019 the Department of Defence (DoD), the General Services Administration (GSA) and the National Aeronautics and Space Administration (NASA) issued an interim rule amending the Federal Acquisition Regulation to implement a key provision of the John S McCain National Defence Authorisation Act for Fiscal Year 2019 (FY19 NDAA).
While this interim rule prohibits executive agencies from procuring telecoms and video surveillance equipment and services from Huawei and other Chinese tech companies, it represents only the partial implementation of the NDAA provision enacted by Congress in 2018.
Separately, on 19 August 2019 the US Department of Commerce's Bureau of Industry and Security (BIS) announced that it had added 46 additional Huawei Technologies Co, Ltd affiliates to the Entity List.
Finally, two criminal cases against Huawei are slowly proceeding.
All of these mean more Huawei headaches for US companies seeking to comply with the new rules, which are described below.
What effect does DoD-GSA-NASA interim rule have?
The interim rule prohibits executive agencies from:
procuring or obtaining, or extending or renewing a contract to procure or obtain, any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system, unless [an exception or waiver applies].
The interim rule became effective on 13 August 2019 and implements Section 889(a)(1)(A) of the FY19 NDAA.
A keen observer will note that the interim rule went into effect without prior comment. According to the interim rule, "urgent and compelling reasons exist to promulgate this interim rule without prior opportunity for public comment". However, interested parties may submit written comments on or before 15 October 2019 to be considered in the formation of the final rule.
The interim rule includes a few noteworthy definitions. First, 'covered foreign country' is defined exclusively as China. Further, the interim rule adopts the same definition of 'covered telecoms equipment or services' as the FY19 NDAA – namely:
- Huawei and ZTE – telecoms equipment produced by Huawei Technologies Company or ZTE Corporation (or any subsidiary or affiliate);
- Hytera, Hikvision, and Dahua – for the purpose of public safety, security of government facilities, physical security surveillance of critical infrastructure and other national security purposes, video surveillance and telecoms equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company or Dahua Technology Company (or any subsidiary or affiliate);
- services – telecoms or video surveillance services provided by any of the aforementioned five entities or using their equipment; and
- unnamed entities connected to China – telecoms or video surveillance equipment or services produced or provided by an entity that the secretary of defence, in consultation with the director of national intelligence or the director of the Federal Bureau of Investigation, reasonably believes to be an entity owned or controlled by, or otherwise connected to, the government of a covered foreign country.
The interim rule adopts the definition of 'critical technologies' that was enacted in the Foreign Investment Risk Review Modernisation Act 2018, encompassing defence articles or services included on the US Munitions List and dual-use items that are included in key parts of the Commerce Control List. It also defines 'substantial or essential component' as "any component necessary for the proper function or performance of a piece of equipment, system, or service". Thus, for example, the key part of a car GPS system would be the GPS itself.
The interim rule requires contractors to represent whether their offer includes any of these covered telecoms equipment or services and, if so, to identify additional details about its use. Contractors that identify covered telecoms equipment or services or that are notified of it must report the information.
The interim rule authorises agency heads, including the director of national intelligence, to grant a one-time waiver on a case-by-case basis for up to a two-year period. Further, there are two exceptions to the application of the rule. Agencies are not prohibited from procuring, and contractors are not prohibited from providing:
- [a] service that connects to the facilities of a third-party, such as backhaul, roaming, or interconnection arrangements…[or]
- [t]elecommunications equipment that cannot route or redirect user data traffic or permit visibility into any user data or packets that such equipment transmits or otherwise handles.
Finally, the FY19 NDAA has delayed by one more year the implementation of Section 889(a)(1)(B) – the other part of this important provision – which prohibits government agencies from entering, extending or renewing a contract:
with an entity that uses any equipment, system, or service that uses covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology as part of any system.
This provision will not take effect until 13 August 2020, and will be implemented through separate rulemaking.
What does this mean for US companies?
The interim rule took effect on 13 August 2019. In order to comply with the prohibitions discussed above, US companies that contract directly or indirectly with the US government will need to create a supply chain compliance procedure to ensure that they are alerted before they purchase any parts of the system from one of the five designated companies or any additional designated companies for a government bid. When such proposed purchases are flagged, they will need to be reviewed to see whether they are prohibited by the interim rule and what reporting is required. Essentially, for government contractors and subcontractors, this adds another layer of compliance complexity for the supply chain, already reeling from the China and other tariffs.
US companies should also note that this is merely the beginning of what could be significant further restrictions on federal contracts with Chinese companies:
- The interim rule sweepingly defines 'covered telecoms equipment or services' as encompassing "telecommunications or video surveillance equipment or services produced or provided by an entity that the Secretary of Defence, in consultation with the Director of National Intelligence or the Director of the Federal Bureau of Investigation, reasonably believes to be an entity owned or controlled by, or otherwise connected to" the Chinese government. This broad definition gives the DoD authority (which it is likely to exercise) to designate a whole swath of Chinese or other companies in addition to the five set out in the interim rule.
- It remains to be seen how the US government will interpret 'connected to' the Chinese government and whether it will apply a presumption that all Chinese companies (whether government or private) are, at the very least, connected to the Chinese government. In recent years, other key federal agencies with national security responsibilities have taken an expansive view of the Chinese government's ability to influence even private Chinese companies.
- The definition of 'critical technologies' includes "emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018". Of course, no emerging and foundational technologies have yet been named, so these are empty buckets that BIS will soon fill. However, as evidenced by the numerous comments on the advanced notice of proposed rulemaking on emerging technologies, US companies already fear that this definition may be potentially far-reaching.
- Finally, the delayed implementation of Section 889(a)(1)(B) of the FY19 NDAA means that further restrictions on federal agencies doing business with entities that use covered telecoms equipment or services are coming in 2020; therefore, companies should start preparing for this now. Seeking advice from counsel who are knowledgeable on export control matters, supply chain management and government contracting would be a prudent step.
Further pain for Huawei on the export side?
The interim rule marks the latest in a string of actions by the US government against Huawei.
On 15 May 2019 President Trump issued an executive order declaring a national emergency with regard to the creation and exploitation by foreign adversaries of vulnerabilities in information and communication technology and services (for further details please see "Sanctions on steroids: Huawei is a prohibited entity and foreign adversaries lurk in tech services"). Then, effective on 16 May 2019, BIS added Huawei and its 68 non-US affiliates to the Entity List, effectively halting exports and re-exports of items subject to the Export Administration Regulations to Huawei. On 20 May 2019 BIS issued a temporary general licence permitting certain transactions with Huawei to continue despite the Entity List designation.
On 19 August 2019 US Commerce Secretary Wilbur Ross announced a 90-day extension of the temporary general licence until 18 November 2019. BIS issued this extended temporary general licence with certain changes (mostly narrowing and making the temporary general licence more difficult to use), including:
- clarifying changes to the authorised transactions to improve public understanding, such as more specifically describing what kind of software updates and patches are authorised;
- requiring that the exporter, re-exporter or transferor obtain a certification statement and additional supporting documentation from the relevant Huawei entity prior to using the temporary general licence; and
- removing authorisation for the development of 5G standards and issuing a general advisory opinion on the same. BIS is posting new FAQs and guidance on the temporary general licence.
On the same day the temporary general licence was extended, BIS published a final rule adding 46 additional Huawei Technologies Co, Ltd affiliates to its Entity List.
These recent actions show that Huawei remains squarely in the crosshairs of national security officials in the US government.
Further to that end, the United States has continued with the prosecution of two criminal cases that it had filed against Huawei, including one in which it charged Wanzhou Meng, the chief financial officer of Huawei Technologies and, perhaps more importantly, the daughter of Huawei founder Ren Zhengfei.
Trade secret theft indictment
On 16 January 2019 in the US District Court for the Western District of Washington, Huawei Device Co, Ltd and Huawei Device Co USA were both indicted for theft of trade secrets conspiracy, attempted theft of trade secrets, seven counts of wire fraud and one count of obstruction of justice. According to the indictment, Huawei began a concerted effort to steal a proprietary robotic phone testing system known as 'Tappy' from T-Mobile in 2012.
On 28 February 2019 Huawei pled not guilty to all charges. On 2 July 2019 the judge granted the prosecution's request to withhold certain classified information from discovery by Huawei, based on national security considerations and the US government's classified information privilege. On 1 August 2019 Huawei filed a motion to dismiss the indictment for 'selective prosecution', arguing that it was being prosecuted as leverage in trade discussion and in order to disadvantage China in the 5G technology race. Further, Huawei alleged that the suit was unconstitutional because it discriminated against Huawei based on national origin. A jury trial is currently scheduled for 2 March 2020.
Bank fraud and economic sanctions indictment
Additionally, on 24 January 2019 Huawei Technologies Co, Huawei Device USA, Skycom Tech Co and Wanzhou Meng were indicted in the US District Court for the Eastern District of New York. Defendants Huawei and Skycom were charged with:
- bank fraud and conspiracy to commit bank fraud;
- wire fraud and conspiracy to commit wire fraud;
- conspiracy to defraud the United States;
- substantive violations of the International Emergency Economic Powers Act and conspiracy to violate the act; and
- conspiracy to commit money laundering.
Additionally, Huawei and Huawei USA were charged with conspiracy to obstruct justice relating to the grand jury investigation in the Eastern District of New York. Wanzhou Meng was charged with bank fraud, wire fraud and conspiracy to commit bank and wire fraud. On 14 March 2019 Huawei Technologies Co and Huawei Device USA pled not guilty to all charges. Skycom has not entered a plea yet, nor has Wanzhou Meng.
Huawei constitutional case against US government
In turn, Huawei has sought to fight back by filing a complaint on 6 March 2019 against the US government in the United States District Court for the Eastern District of Texas, alleging that Section 889 of the FY19 NDAA is unconstitutional for violating, among other things, the due process clause by selectively depriving Huawei of its liberty to do business. In July 2019 the US government filed a motion to dismiss.
Stay tuned! The US government has clearly signalled that, for reasons of national security, it intends to take a strong stance against Huawei and other Chinese tech companies. Therefore, US companies would be wise to carefully review their transactions with Chinese tech companies to ensure that they do not fall foul of any prohibitions and US government contractors and subcontractors should put in place procedures in their supply chains to ensure future compliance with the telecoms restrictions.
For further information on this topic please contact Kay C Georgi, David Hanke or Sylvia G Costelloe at Arent Fox LLP's Washington DC office by telephone (+1 202 857 6000) or email ([email protected], [email protected] or [email protected]). Alternatively, contact Marwa M Hassoun at Arent Fox LLP's Los Angeles office by telephone (+1 213 629 7400) or email ([email protected]). The Arent Fox LLP website can be accessed at www.arentfox.com.