DoD Publishes Interim Rule On Supply Chain Security For Defense Contractors

Dec 06

Article by Stewart A. Baker, Thomas P. Barletta, Marc Frey, Stephen Heifetz, Andrew D. Irwin, William Koegel, Jr., Edward J. Krauland and Theodore N. Nemeroff

The Department of Defense has issued an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to include “Requirements Relating to Supply Chain Risk.” Issued on November 18, 2013, the interim rule is one of several recent efforts to address cybersecurity concerns related to defense contractors and is part of a growing number of national and agency-level supply chain security initiatives. The interim rule, which puts in place a pilot program to implement authorities granted by section 806 of the National Defense Authorization Act (NDAA) for FY 2011 as amended by the NDAA for FY 2013, allows DoD to address the impact of IT supply chain risk in certain types of procurements related to national security systems.

Specifically, the interim rule authorizes officials in DoD to exclude certain sources for information technology, whether acquired as a service or a supply, or to direct DoD contractors to exclude certain sources as subcontractors. Moreover, the interim rule grants those officials authority to limit disclosure of exclusion decisions and makes those decisions unreviewable in bid protests. Although these authorities apply only with respect to procurements related to “covered systems,” which are defined as national security systems, the interim rule requires that relevant clauses be included in all IT procurements subject to the DFARS. As a result, contractors that directly or indirectly provide IT products or services to DoD should consider whether and how the security of their supply chains might affect their eligibility for future contracts.

Background

The security of the US Government’s supply chain for sensitive information technology has been the subject of increasing concern in Congress and other policymaking circles. The concern is that malicious actors could infiltrate or sabotage systems critical to US national security by compromising components of those systems (e.g., by inserting malware or backdoors) during the development and production process. A response to this concern has been efforts to increase the government’s authority to exclude from government contracts suppliers suspected of producing compromised products or services as well as to prohibit the acquisition of IT systems unless the risk of cyber espionage or sabotage has been addressed. The authority granted by section 806 of the FY 2011 NDAA is the most prominent example of these efforts.

The interim rule implements “pilot” authority granted to DoD that will expire on September 30, 2018. Citing the need to put in place a pilot program with ample time to assess its efficacy as well as the need to immediately protect the supply chain security of key procurements, DoD published the interim rule, effective immediately, without notice and comment. However, DoD will consider comments submitted before January 17, 2014 in the formation of its final rule.

The Interim Rule Applies Only to Procurements Related to National Security Systems

The interim rule applies to “covered procurements”—procurements to acquire “covered items” of technology, whether as a service or a supply, that are purchased for inclusion in a “covered system” and that if compromised could pose a supply chain risk to that system. ¹ Covered systems have the same meaning as “national security systems” (NSS), as defined in 44 U.S.C. § 3542(b). NSSs are information systems that are involved in intelligence activities, cryptologic activities related to national security, command and control of military forces, equipment that is an integral part of a weapon or weapon system, or that is otherwise critical to the fulfillment of military or intelligence missions (but unrelated to routine administrative functions). NSSs also include IT systems that are otherwise protected by procedures established to secure classified information related to the national defense or foreign policy.

According to the interim rule, information systems need not be used or operated by a government agency in order to qualify as NSSs. They could be contractor systems. Moreover, the interim rule explicitly states that a telecommunications system may qualify as a NSS.

The Interim Rule Permits DoD to Exclude Sources and Limit Disclosure of Information About the Exclusion

With respect to those covered procurements, the interim rule grants authority to the Secretary of Defense, the Secretaries of the individual services, and their delegees to make exclusions from certain procurements. Specifically, the rule permits these DoD officials to:

Exclude a source that fails to meet certain qualification standards established for the purpose of reducing supply risk in the acquisition of NSSs;
Exclude a source that fails to achieve an acceptable rating with regard to an evaluation factor providing for the consideration of supply chain risk in evaluation of proposals for the award of a contract or the issuance of a task order; or
Withhold consent for a contractor to subcontract with a particular source or direct a contractor for a covered system to exclude a particular source from consideration for a subcontract under the contract.

The interim rule does not explain what “qualification standards” or “evaluation factor providing for the consideration of supply chain risk” will be used by DoD.

In the event that any of these actions are taken, authorized individuals also have the authority to limit disclosure of information relating to the basis for this action. If disclosure is limited, DoD will notify appropriate parties of a covered procurement action and the basis for the action “only to the extent necessary to effectuate the” action itself.

But there are also more significant consequences to a decision to limit disclosure of information about an exclusion. A decision to limit disclosure of information makes the underlying exclusion action unreviewable in a bid protest. As contemplated by section 806 of the 2011 NDAA, the interim rule specifically states that once disclosure of information is limited, “[n]o action undertaken . . . shall be subject to review in a bid protest before the Government Accountability Office or in the Federal court.”

Further, in the event that disclosure of information about an exclusion is limited, the interim rule also requires the DoD official that made the decision to notify other DoD departments and other US government agencies that may be subject to similar supply chain risk of the decision to exclude the particular source. Thus, even if a contractor does not know that it has been excluded from a procurement out of concern for supply chain security, other government entities may take actions to further exclude it, which in essence could operate as “de facto debarment.” We note in this regard that section 309 of the FY12 Intelligence Authorization Act provides the intelligence community agencies – aside from those components within DoD – similar authority to exclude suppliers on the basis of assessed supply chain risk. This provision’s sunset is explicitly linked to that of Section 806 of the FY11 NDAA.

The Interim Rule Provides a Required Procedure For Exclusion Actions

The interim rule does, however, limit the ability of authorized officials to use this authority by requiring a specific procedure. The authorized official must first obtain a joint recommendation from the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L) and the Chief Information Officer of DoD, based on a risk assessment by the Under Secretary of Defense for Intelligence, that there is a significant supply chain risk to a particular NSS. (Pursuant to DoD Instruction 5240.24, the Defense Intelligence Agency provides supply chain threat analyses to DoD acquisition programs.)

Then, the authorized official must make a determination in writing, with the concurrence of the Under Secretary for AT&L, that exercise of the authority is necessary to protect national security and that less intrusive measures to reduce the supply chain risk are not reasonably available. Finally, the authorized official must notify Congress of the exclusion in advance of the action.

The procedure appears aimed at ensuring the accuracy of exclusion decisions. Given the number of actors that must be involved in an exclusion determination, it may also, if nothing else, limit the frequency with which the authority is ultimately used.