Procurment Lawyer

News from the Committees

by Herman D. Levy

Commercial Products and Services Committee

January 18, 2018

Cochair Jeff Clayton called on guest speaker David A. Drabkin to discuss the Section 809 Panel (Panel), of which David is chair. Section 809 of the 2016 National Defense Authorization Act (NDAA) established the Panel, which “is tasked with finding ways to streamline and improve defense acquisition” (https://section809panel.org/). The panel has 18 commissioners, of which Deidre Lee is chair. In turn, the Panel has 10 teams, plus one on title 10 U.S.C. David asked one and all to send comments to the above Panel website. The Panel has a policy of nonattribution. In addition, Congress made the Panel not subject to the Federal Advisory Committee Act (FACA) and the Freedom of Information Act (FOIA).

Jeff then called on guest speaker Darryl Scott, Corporate Vice President of Contracts and Pricing at the Boeing Company. He had 34 years’ experience in the U.S. Air Force, mainly as a contracting officer and in logistics. Darryl noted that there are numerous definitions of a “commercial item,” not all of which are congruent. In addition, the current definition of “commercial services” is inconsistent with that of the Section 800 Panel. In DoD, 54 percent of acquisition expenditures is for services. The Section 800 Panel is considering doing away with the category of “commercial off-the-shelf” (COTS); the problem is that the definition of “minor” is very subjective. Concepts of commercial services are “substantially the same,” e.g., servicing fan blades in an aircraft engine. There also is the question of what constitutes a subcontract, e.g., when Boeing buys some commodities for inventory. The FAR and DFARS are not clear on this; contracts for items not purchased for a particular contract generally are not considered subcontracts. There also is a need to review executive orders and to clean up the DFARS regarding intellectual property. Darryl regarded the latter also as a workforce training issue. A question and answer period followed.

February 8, 2018

John Howell discussed the Energizer Battery decision of the U.S. Court of International Trade (USCIT), which found News from the COMMITTEES the Generation II military flashlight to be of foreign (Chinese) origin. The case was on appeal from a determination of Customs and Border Patrol (CBP) of the Department of Homeland Security (DHS). Essentially, the USCIT found that “[a]ssembly operations in U.S. (Vermont) [didn’t] result in a substantial transformation of the imported components; accordingly, country of origin is China.”

The flashlight was made up of about 50 components. Except for the white light- emitting diode (LED) and hydrogen getter, all components were of Chinese origin. The white LED wafer was “grown” in the United States; “after certain manufacturing operations in China,” final assembly, testing, and packaging occurred in the United States, taking about seven minutes. The total value of the imported components was $12.96; the finished cost of the flashlight was $23.55 (45 percent U.S.).

The USCIT noted that the CBP’s final determination “does not examine in detail whether the imported components … undergo a change in name, character, or use.” Nor is “essential character” an “established factor in the substantial transformation analysis.” “When, as here, the post-importation processing consists of assembly, courts have been reluctant to find a change in character, particularly when the imported articles do not undergo a physical change” (emphasis added). The USCIT allowed, however, that “there is no bright line rule on the number of components required or the minimum amount of time spent on assembly before an assembly process is no longer considered ‘simple assembly’ or ‘combining operations’ and is, instead, considered substantial transformation.”

In a handout, John discussed one pre-Energizer Battery CBP final determination and one post-Energizer Battery one.

The first, HQ H039955 (Nov. 30, 2009), requested by Sharp Electronics Corp., involved 11 main subassemblies, 10 of which were manufactured in China and the other in Japan. The final assembly, testing, and inspection took place in Japan; the final assembly appeared to be simple installation, attaching the various subassemblies by screws. The firmware was developed and manufactured in Japan. The decision held that the “Japanese operations are sufficiently complex and meaningful to result in a new and distinct article of commerce” so as to make Japan the country of origin. John stated that this is “[n]ot likely the result after [the] Energizer Battery case.”

John then compared this with HQ H280619 (Apr. 18, 2017), requested by Ixia for Net Optics Slim Tap network taps. Three of the components came from Taiwan (adapters), two were from China (splitters), and the rest were from the United States. Assembly and testing occurred in the United States, taking approximately 15 minutes. CBP applied Energizer Battery tests, with particular focus on whether Ixia’s “post-importation assembly of foreign subassemblies, where such assembly consists of physically connecting the subassemblies through wiring and relatively simple insertions and fastening, render[s] the foreign subassemblies into a product with a new name, character, and use.”

Neither the adapters nor the splitters changed in name, character, or use as a result of post-importation assembly and remained physically recognizable. CBP therefore determined that Slim Tap was not a U.S. product. John concluded that “Energizer Battery imposes a higher standard for finding substantial transformation [than had prior CBP determinations], particularly for products that involve post-importation assembly.… [The] [d]ecision suggests that, absent truly complex final assembly, substantial transformation will only occur when an imported part is subject to further fabrication prior to final assembly.”

John then urged contractors to “conduct a risk analysis … to determine whether imported products, particularly those that involve post-importation assembly, are compliant with this new standard.” To protect the company, John recommended that contractors “obtain a CBP final determination” rather than relying on a submission to the contracting officer to provide “safe harbor.”

April 12, 2018

Cochair Jeff Clayton called on Sam Knowles and Kevin Mullen to provide their annual update on commercial item contracting, covering legislation, regulations, policy, and case law. Sam opened the discussion with several sections of the NDAA for fiscal year (FY) 2018 (H.R. 2810): (1) section 846, “Procurement Through Commercial E-Commerce Portals”; (2) section 847, “Revision to Definition of Commercial Item”; (3) section 848, “Commercial Item Determinations”; (4) section 849, “Review of Regulations on Commercial Items”; and (5) section 850, “Training in Commercial Item Procurement.”

Sam then addressed the following regulations: (1) Paid Sick Leave for Federal Contractors, 81 Fed. Reg. 91,627 (Dec. 16, 2016) (effective Jan. 1, 2017) (interim FAR rule); (2) Uniform Use of Line Items, 82 Fed. Reg. 4709 (Jan. 13, 2017) (final FAR rule); (3) Contractor Employee Internal Confidentiality Agreements or Statements, 82 Fed. Reg. 4717 (Jan. 13, 2017) (effective Jan. 19, 2017) (final FAR rule); (4) Payment of Subcontractors, 81 Fed. Reg. 93,481 (Dec. 20, 2016) (effective Jan. 19, 2017) (final FAR rule); (5) Privacy Training, 81 Fed. Reg. 93,476 (Dec. 20, 2016) (effective Jan. 19, 2017) (final FAR rule); and (6) Removal of Fair Pay and Safe Workplaces, 82 Fed. Reg. 51,773 (Nov. 8, 2017) (effective Nov. 6, 2017) (final FAR rule).

Sam closed with the following policy items: (1) DoD Guidebook for Acquiring Commercial Items (Draft) (Feb. 2017); (2) Section 809 Panel Interim Report (May 2017); (3) U.S. General Services Administration (GSA) policy, “Transactional Data Reporting Rule”; and (4) U.S. Government Accountability Office (GAO) report, Recent Legislation and DoD Actions Related to Commercial Item Acquisitions, GAO-17-645 (July 2017).

Kevin then discussed case law from the U.S. Court of Federal Claims, GAO, and Boards of Contract Appeals: (1) Analytical Graphics, Inc. v. United States, No. 16-1453C, 2017 U.S. Claims LEXIS 1640 (Fed. Cl. Nov. 17, 2017); (2) Draeger, Inc., B-414938, 2017 CPD ¶ 308, 2017 WL 4417219 (Comp. Gen. Sept. 21, 2017); (3) Gichner Systems Group, Inc., B-414287 et al., 2017 CPD ¶ 129, 2017 WL 1735688 (Comp. Gen. Apr. 27, 2017); (4) Peers Health, B-413557.3, 2017 CPD ¶ 93, 2017 WL 1056074 (Comp. Gen. Mar. 16, 2017); (5) CRAssociates, Inc., B-414171, 2017 CPD ¶ 92, 2017 WL 1173891 (Comp. Gen. Mar. 16, 2017); (6) IR Technologies, B-414430 et al., 2017 CPD ¶ 19, 2017 WL 2570952 (Comp. Gen. June 6, 2017); (7) ESCgov, Inc., ASBCA No. 58852, 17-1 BCA ¶ 36,772; and (8) Consultis of San Antonio, Inc. v. Department of Veterans Affairs, CBCA 5458, 17-1 BCA ¶ 36,701.

May 10, 2018

Cochair Jeff Clayton called on Information Technology Alliance for Public Sector (ITAPS) representatives Eminence Griffin and Pam Walker to discuss the Section 809 Panel’s recommendations on commerciality.

The Panel released its first full report in late January 2018. Its recommendations included (1) bifurcating the term “commercial item” to distinguish between “commercial services” and “commercial products,” and eliminating the distinction between “commercial items” and “commercial off-the-shelf items” (COTS) (section 831); (2) establishing a uniform definition of “subcontract” and “subcontractor” (section 832); and (3) deleting the vast majority of mandatory flow-downs for commercial item contracts and making it more difficult for additional flowdowns to be added in the future (section 833). ITAPS set forth its Section 809 recommendations in four lanes.

Eminence noted that the Section 809 Panel released its “Implementation Plan” in March. Among other things, it raised the micro-purchase threshold to $25,000 for purchases through GSA-approved portals (section 834). Also, the Implementation Plan amended the application of statutory competition requirements to include the procedures established by GSA for purchasing through the commercial e-commerce portals (section 834).

Pam then discussed the DoD JEDI cloud. The draft request for proposal (RFP) was issued on March 7 and again on April 16. DoD sought a commercial cloud but still had various security requirements not found in a commercial system. The FY 18 Omnibus and NDAA contained oversight provisions and directives from Congress on the JEDI cloud RFP. ITAPS expects that the final RFP will be issued soon.