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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.

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.

— Hailey Lynne McKeefry, Editor in Chief, EBN Circle me on Google+ Follow me on Twitter Visit my LinkedIn page Friend me on Facebook

9 comments on “Final DoD Counterfeit Rule: Good but Not Enough

  1. Eldredge
    May 29, 2014

    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.”


    What if a subcontractor procures a part, and doesn't know that it has been “knowingly mismarked”?  i.e. Who in the supply chain is ultimately responsible? Seems like this phrasing could be a little weak.

  2. ddeisz
    May 30, 2014

    Hailey,

    The latest DFAR ruling says:

    DoD is concerned that defining and using the term “trusted
    supplier,” or a variation of it, would create confusion due to
    the use of this term in other, current DoD and industry
    initiatives. Accordingly, the systems criteria in DFARS are
    revised to express what is intended by “trusted supplier”
    without directly using the term, e.g., 252.246-7007(c)(5) uses
    the phrase “suppliers that meet applicable counterfeit detection
    and avoidance system criteria.”

    and….

    DoD has removed the definition of “legally
    authorized source” and, instead, spelled out at DFARS 246.870-
    2(b)(5) the entities that are authorized to produce a genuine
    item, i.e., the original manufacturer, current design activity,
    or an authorized aftermarket manufacturer.

    There is no more reference to “trusted supplier” explicitly. I'm not sure where the confusion is coming from. Either you are buying from a legally authorized source or you are not.

    Dan

  3. Hailey Lynne McKeefry
    May 30, 2014

    @eldredge, I think that's exactly the convern…

  4. Hailey Lynne McKeefry
    May 30, 2014

    @Dan, Gregory is arguing that that decision is unwise, in that it makes it harder for organizations to judge potential sources. A checklist of items would help espeically in those instances when the parts in question are no longer readilly available. I'm sure this can be argued both ways. What's your opinion? do you think that more clearly defining some of these terms would be unwise?

  5. ddeisz
    May 30, 2014

    Hailey,

    What it does is make it harder to bypass any authorized source on the way toward purchasing from Independents if a particular part is available from the authorized channel. Exhaustivelly going through the authorized channel was/is not something that was being done before because of the loophole of “trusted”. Now, you are either authorized or not and it makes it much clearer. AVL's (authorized vendor lists) present in most DoD OEM's need to include ALL the authorized sources for a product now. Getting that to change is going to be interesting when it comes to CM's especially. 

    My opinion is that “trusted” should be reserved for the program run by DMEA whereby the entire supply chain is vetted and fully authorized. Anything else is much less.

    “No longer readily available” depends on somebody checking all the authorized aftermarket manufacturers like Rochester, Lansdale, and e2V. Too often, we have heard somebody say EOL when in fact it just means EOL where they checked, not the entire authorized ecosystem. This is why authorized aftermarket was explicitly meantioned in the DFARS ruling rather than talking about EOL from the OCM's. EOL from the OCM's is irrelevant if it is still available from authorized sources.

    Judge sources by authorized or not. If not, be ready to take on and mitigate risk however you can…and remember, authentic does not equal reliabie. Just because something is authentic, doesn't mean it isn't used or mishandled. 

    Dan

  6. Hailey Lynne McKeefry
    May 30, 2014

    @Dan, your points are all very well taken, and I agree. In business, there's always a relationship that builds trust over time–and that's not going to change. At the same time, creating loopholes is a natural (and dangerous) tendency when people are trying to just get the job done.

  7. Eldredge
    May 30, 2014

    @Hailey – Additionally, based on the phrasing of the rule, intent has to be demonstrated . That can sometims be a difficult enforcement criteria.

  8. Hailey Lynne McKeefry
    May 30, 2014

    @Eldredge, it's a delicate balance, isn't it? On the one hand, you want to do something that makes people want to really stop counterfeit components, but you also dont want to hold everyone responsible for things they can't control.

  9. michaelmaloney
    July 24, 2018

    For all new rules, there is certain to be a period of time for everything to be tested out to find out how the rule can be more streamlined or refined. There is sure to be some loophole somewhere that needs closing, but it will only be detected when the rules are actually in place and the people start to try and challenge the system. I imagine that there will be plenty of  companies will try to find a way around the regulations if they can help it!

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