Perhaps one of the few silver linings of the COVID-19 pandemic was a realization of how ubiquitous and essential semiconductors have become to many of the technologies people use and rely on in their daily lives. This reliance on semiconductors extends to technologies that are critical to the U.S.'s future global economic competitiveness and national security, including artificial intelligence, biotechnology, and clean energy, as well as U.S. critical infrastructure and military technologies. As such, the stakes of disruption and the opportunities for adversaries are significant. The U.S. must therefore take steps to ensure a steady supply of safe and secure semiconductors. 

Section 5949 of the 2023 National Defense Authorization Act (NDAA) is Congress's answer to this national security imperative. It prohibits executive agencies from purchasing electronic parts, products, or services that contain semiconductors from certain Chinese companies and other foreign countries of concern. While the prohibition is not set to go into effect until December 23, 2027, the Federal Acquisition Regulatory Council (FAR Council) recently took the next step towards implementation by issuing an advanced notice of proposed rulemaking (ANPR) relating to certain parts of the Section 5949 prohibition. 

Relevant Language and Proposed Definitions 

Section 5949 contains two primary prohibitions:

• 5949(a)(1)(A) states that the head of an executive agency may not "procure or obtain, or extend or renew a contract to procure or obtain, any electronic parts, products, or services that include covered semiconductor products or services"
• 5949(a)(1)(B) states that the head of an executive agency may not "enter into a contract (or extend or renew a contract) with an entity to procure or obtain electronic parts or products that use any electronic parts or products that include covered semiconductor products or services."

The ANPR proposes definitions for several terms within the statute. Here are the few most relevant to government contractors and subcontractors:

• "Critical system" is to be defined as a "national security system (see 40 U.S.C. 11103(a)(1)); Additional systems identified by the Federal Acquisition Security Council; or Additional systems identified by the Department of Defense." This is important because subsection (B) only applies to products or services that are part of a critical system. 
• "Reasonable inquiry" is to be defined as an inquiry designed to uncover relevant information. Importantly, the proposed definition makes clear that contractors may rely on certifications of compliance from providers and subcontractors. While the proposed definition does not require the use of independent third-party audits, depending on the facts and circumstances, "other mechanisms of diligence review" may be required. Diligence reviews will be required for entities established or operating in foreign countries of concern even when they certify compliance with this rule. 

Application of the Prohibition

The ANPR anticipates that the prohibition will apply to all solicitations and contracts regardless of dollar value. Specifically, solicitations will require offerors to certify, after a reasonable inquiry, to the non-use of covered semiconductor products or services in electronic products or services provided to the government. Solicitations and contracts will be required to include a clause that incorporates the prohibitions in 5949 (a)(1)(A) and (B), as well as the requirements in Section 5949(h). Prime contractors will be required to flowdown the clause to subcontractors. 

Understanding that the products and services relevant to the prohibition can often be of small dollar value, though recognizing that this does not diminish the significant national security risk involved, the ANPR does not anticipate excepting solicitations and contracts at or below the simplified acquisition threshold for the acquisition of commercial products and services, or for the acquisition of commercial off-the-shelf (COTS) items. The ANPR likewise does not intend to except purchases that fall below the micropurchase threshold. 

Potential Supply Chain Representation Requirements

The FAR Council is also considering requiring offerors to "identify the provenance of the supply chain for the semiconductor components for each electronic product provided to the Government." This information will allow the government to independently validate a contractor's compliance certification. Suggested provenance information includes:

• Identification of vendors and facilities responsible for the design, fabrication, assembly, packaging, and test of the product
• Manufacture codes used for the product
• Distributor codes used for the product

Public List of Prohibited Items

The FAR Council is considering directing the Department of Commerce to create and maintain a list of electronic products and services that include prohibited semiconductor products or services. While such a list could be a helpful starting point for contractors and subcontractors, it is unlikely that the list would be exhaustive. As such, in order to comply with the "reasonable inquiry" requirement, contractors and subcontractors would still be obligated to conduct a search that extends beyond consulting the Commerce list. 

Moving Forward

The FAR Council acknowledges the significant impact implementation of this prohibition is likely to have on contractors and subcontractors. As such, it is inviting feedback, including responses to 18 different questions, by July 2, 2024. 

We will provide updates on this ANPR and further implementation of the prohibition as they become available, including future rulemaking to implement paragraph (g) of Section 5949, which relates to mitigating supply chain risk associated with the procurement of semiconductor products and services. If you have questions about how Section 5949 may impact you or need assistance preparing responses to the ANPR, please contact one of the Miller & Chevalier attorneys below: 

Ashley Powers, apowers@milchev.com, 202-626-5564

Alex L. Sarria, asarria@milchev.com, 202-626-5822

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