‘Counterfeit’ is Not a Matter of Interpretation


If it weren’t so scary, it would be funny: two different U.S. appeals courts came to two different conclusions about subsidies associated with the Affordable Care Act. Interpreting the language of the law, it seems, is a bit tricky.

Interpretation continues to be an issue with the National Defense Authorization Act (NDAA) or as I like to call it, “the gift that keeps on giving.” Most recently, the Federal Acquisition Regulatory (FAR) Council proposed a rule that in effect treats counterfeit electronics parts and suspected counterfeits as one in the same in regard to reporting requirements.

According to Federal News Radio:

Joe Petrillo, a partner with Petrillo & Powell said, “This will have enormous consequences throughout industry. They define those terms [counterfeit and suspected counterfeit] in the same way [the Defense Department] does in their proposed regulations on counterfeit regulations, and then parts with a critical or major non-conformance — so these are parts that may be perfectly valid, fine parts, but they have a problem with them. And a major non- conformance is defined as one that is likely to result in failure or simply materially reduce the usability of the item for its intended purpose.”

Petrillo said the FAR Council’s liberal reading of the law means that every vendor providing any product, commercial or otherwise, would have to report back to the government.

“The entire supply chain is going to have this obligation to report these parts that will have a problem,” he said.

The issue of reporting has been raised before: experts in the electronics distribution industry say that many companies avoid reporting counterfeits for fear of repercussions. The NDAA/FAR rule requires companies to report suspected and actual counterfeit goods to the Government-Industry Data Exchange Program (GIDEP), which publishes the names of all parties involved in the transaction. Companies fear that even the suspicion of a counterfeit reflects poorly on their supply chain policies and practices. Additionally, as Petrillo points out, non-conformance and counterfeit are not the same thing.

A related issue has recently been discussed within industry forums that also bears some examination: the source of counterfeits in the electronics supply chain. Companies that buy and sell outside of franchised, or authorized, resales channels, generally referred to as the open market, are believed to be the source of counterfeits in the supply chain. This group of companies is comprised of different kinds of players: companies that have put stringent anti-counterfeit measures in place; companies with mediocre efforts; and companies that procure bogus parts and pass them off as authentic. (See: Anatomy of an Electronics Counterfeit Operation.)

Here’s where it gets interesting: many of the parts sold in the open market are 100% authentic products. They came from OCM factories and may even come in their original packaging. However, if these authentic products are sold, for example, for a military application they haven’t been qualified for, technically they are counterfeit. So now we are back to interpretation: what exactly does counterfeit mean in NDAA/DoD speak? And what are the implications for authorized distributors and suppliers that might receive parts that are returned due to non-conformance? Will they be listed on GIDEP?

Here’s Petrillo’s take on one possible effect:

The council would develop a list of problem parts using the Government-Industry Data Exchange Program, and contractors would have to check their lists before obtaining parts to use in final products.

“I could certainly see a chain reaction happening where one contractor reports an item of supply or a component as being defective, and that triggers many, many reports by other contractors that use the same item of supply,” Petrillo said.

The Pentagon has been plagued for years with counterfeit parts, the majority of which are traced back to China. In 2011, the Senate Armed Services Committee found 1,800 counts of false or counterfeit parts in government equipment.

“There’s a lot of concern about parts that aren’t working properly and suspect counterfeit parts, and there may very well be a desire to purge the entire supply chain,” Petrillo said.

One other note: The GIDEP reporting, Federal News Radio said, will cost companies both time and money.

But under this new, broad proposed rule, the council said 15,800 industries would collectively spend more than 1.4 million hours each year developing the reports.

I see a lot of unintended consequences stemming from an effort that set out to do the right thing: protect the people that serve in our armed forces from defective equipment.