Final DoD Counterfeit Rule: Good but Not Enough

Earlier this month, the Department of Defense (DoD) issued its final rule on the detection and avoidance of counterfeit electronic parts in the supply chain. It puts into practice a number of changes and clarifications of the original proposal.

This new rule, that comes almost a year after the proposed rule was issued, is effective immediately and implements the provision in Section 818 of the fiscal year (FY) 2012 National Defense Authorization Act (NDAA). EBN spoke to attorney Keith Gregory to get his thoughts on the new rule. A partner of Snell & Wilmer, Gregory serves on the SAE International AS6081 Committee and the SAE G-19 Committee, both of which tackle the issues around counterfeit components.

(Source: Sasha Lezhnev, Image Journeys)
(Source: Sasha Lezhnev, Image Journeys)

The rule on counterfeit electronic parts requires that covered contractors must put into place and maintain systems to detect and avoid counterfeit parts. It outlines a dozen criteria for the system, including personnel training, inspection and testing, and more.

However, it may be that the rule doesn’t go far enough. For example, it provides for the use of trusted suppliers, but is vague about how a supplier can be deemed trusted. “It’s unfortunate that the new rule doesn’t specify what it takes to be a trusted supplier,” says Gregory, “If they really want to make it a more open game, they would say that contractors have to demonstrate that they are doing certain things.”

The rule gives the electronics industry the opportunity to create tools (such as a checklist) to determine whether subcontractors should be considered trusted suppliers. “We need to develop a series of factors that a distributor or anyone along the supply chain could consider and be able to utilize in helping establish themselves as a trusted supplier,” he says. “Once you get those factors in place, it would be very easy to determine if a company is a trusted supplier or not.”

One of the most substantial changes in this final version of the rule is that it applies only to “counterfeit electronic parts,” rather than the original and broader “counterfeit parts.” Further, the language of the rule covers only intentional fraud, saying that a counterfeit electronic part is one that has been “knowingly mismarked, misidentified, or otherwise misrepresented.”

This second change will make it difficult to enforce the rule. Gregory says:

One of the keys of the new rule is this intent requirement. It’s a key point because that requirement is going to flow down to the authorized distribution market, the independent distribution market, and anyone doing business with DoD subcontractors. I suspect that, if these organizations are able to show that they have taken proper steps to determine whether a part is counterfeit, it will be difficult for any one of those companies to be held responsible if a part is eventually determined to be counterfeit.

Finally, it’s clear that the new rule may put an untenable burden on smaller organizations that can’t bankroll the required systems. “One of the things that this requirement will do is cause those companies that don’t have the ability to invest in the certification, equipment, and testing to go out of business,” he says. As unfortunate as the casualties may be, in all these changes will move toward enhancing the quality of the supply chain. “Now, you are only going to get the suppliers who have the resources to make sure the supply chain is protected.”

Over time, the pool of suppliers being used by the defense industry is likely to continue to shrink. This is one potential consequence of the new world. Likely there will be others. Let us know your thoughts on the impact of the DoD’s final rule in the comments section below.