Enacting part of Section 818 of the National Defense Authorization Act for Fiscal Year 2012, the Department of Defense (“DoD”) issued its final rule on counterfeit electronic parts, effective immediately on May 6, 2014.1  The new clause, DFARS § 252.247-7007, applies directly to Cost Accounting Standards (“CAS”) covered contractors “that supply electronic parts or products that include electronic parts” and it must be flowed down on all subcontracts, at every tier, including subcontracts for commercial items and those awarded to small businesses.

The stated policy of the clause is to “prescribe[ ] policy and procedures for preventing counterfeit electronic parts and suspect counterfeit electronic parts from entering the supply chain when procuring electronic parts or end items, components, parts, or assemblies that contain electronic parts.”  The clause provides definitions for the terms “counterfeit electronic parts,” “electronic part,” “obsolete electronic part,” and “suspect counterfeit electronic part.” 

Electronic parts are defined as “an integrated circuit, a discrete electronic component (including, but not limited to, a transistor, capacitor, resistor, or diode), or a circuit assembly” including “any imbedded software or firmware.” The term counterfeit part means

an unlawful or unauthorized reproduction, substitution, or alteration that has been knowingly mismarked, misidentified, or otherwise misrepresented to be an authentic, unmodified electronic part from the original manufacturer, or a source with the express written authority of the original manufacturer or current design activity, including an authorized aftermarket manufacturer. Unlawful or unauthorized substitution includes used electronic parts represented as new, or the false identification of grade, serial number, lot number, date code, or performance characteristics.

DFARS § 252.246-7007. Unlike the proposed rule, the final rule added an element of intent to the definition of a counterfeit part. As a result, for a part to be considered a counterfeit part, it must have been knowingly mismarked, misidentified or misrepresented as an authentic part. This change helps to protect contractors or subcontractors from having parts treated as “counterfeit” when there are issues with the parts (e.g. does not meet the spec, quality, mismarked) that were not intended to mislead the buyer.

The primary directive of the clause is for covered contractors to have an acceptable counterfeit electronic part detection and avoidance system. The clause lists 12 areas that must “at a minimum” be addressed by this system. The clause allows for a risk-based approach, requiring contractors to establish systems that reduce the risk to the government of counterfeit parts entering the supply chain.  Other requirements of the system are that it includes a process for reporting suspected counterfeit parts to the contracting officer and to the Government-Industry Data Exchange Program, and that it includes processes for maintaining electronic part traceability.

Conclusion

The rule is effective immediately, but it will take some time before the kinks get worked out. Interestingly, the DoD seems to recognize this. The DoD is aware that many issues associated with management of the counterfeit parts problem remain to be resolved, but at the same time has determined that it “cannot afford to wait to take action.” In the meanwhile, contractors who are covered, either as a prime or a subcontractor, should familiarize themselves with the requirements of the rule and watch for prime contractors to begin flowing down the clause. Those who expect to be covered should also begin to design and implement a detection and avoidance system that meets the clause requirements. While the DoD may eventually issue clarifications and revise the DFARS clause, it is unlikely that the basic structure of the rule will be significantly changed any time soon.