• New Rules for Commercial Off-The-Shelf Products Exempts BAA Components And Exempts Recycled Content Reporting Requirement
  • March 9, 2009 | Author: David S. Gallacher
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • On January 15, 2009, the FAR Councils issued the final rule on the purchase of commercial-off-the-shelf ("COTS") products, adding a new section to the FAR to be effective on February 17, 2009.  See 74 Federal Register 2713.

    The new rule is disappointing – even hardened aficionados of the decade-long COTS saga may be shocked to learn that, after thirteen years of careful and arguably obsessive consideration of streamlined procedures designed to make it easier for COTS vendors to sell products to the Government, the FAR Councils have decided to waive only two laws (in addition to a handful of other statutes that already do not apply to commercial purchases) in the vast panoply of federal laws that prevent commercial businesses from selling their standard mass-market products to the Government in the same way that they sell their products to the general public (whether on-line or off-the-shelf at Big Box stores or on Main Street).

    Specifically, the new COTS rule reiterates what we already knew, i.e., a number of statutes do not apply to purchases of "commercial items," and, as noted above, manages to identify only two additional laws that now will not apply to the purchase of COTS items:

    • The “domestic components” element (but not the domestic end product manufacture element) of the Buy American Act  – 41 U.S.C. §§ 10a and 10b; and
    • Estimated percentage of recovered and recycled materials – 42 U.S.C. § 6962(c)(3)(A).

    The final rule also discusses at length various laws that were originally considered as potentially inapplicable to COTS purchases, but (for a number of public policy reasons) are not waived with regard to contracts and subcontracts for COTS products.  The FAR Council's inability (or unwillingness) to waive these laws means, in essence, that the COTS designation is seriously misleading and – arguably – that there is no such thing as a true "COTS sale" to the U.S. Government.  Thus, the circumstances under which companies sell COTS products to the Government bear no resemblance to the manner in which those same companies sell the same products "off-the-shelf" to the general public.

    Regrettably, the Government's piecemeal approach to the removal of Government-unique restrictions has been disappointing and arguably does much less to "lure" commercial contractors into the federal marketplace than many in Congress would have hoped in enacting prior commercial reforms.  Nevertheless – and despite its misleading name – the new final COTS rule necessarily makes the sale of at least some COTS products to the government at least less burdensome than was the case before its issuance.  Additionally, the new rule provides needed clarity in some areas, including its final and dispositive declaration of the distinction between the terms "commercial item" and "commercial off-the-shelf" products.  As discussed in more detail below, "commercial item" refers to a broad category of products and related services that are "of a type" customarily used by the general public, but can include modifications of the item as originally provided to the general public.  "COTS," on the other hand, refers to commercial items that are themselves actually sold to the general public – and offered for sale to the government without modification.  One could say that the relationship between COTS and commercial items is analogous to the relationship between squares and rectangles, i.e., all squares are rectangles, but not all rectangles are squares; so too, all COTS products are "commercial items," but not all commercial items are COTS products.

    These changes are discussed in some detail below. Before doing so, however, two brief editorial comments relating, respectively, to: (a) the substance of the FAR Councils' performance in implementing Congress' direction as to COTS; and (b) the gross inefficiency of the Councils' performance (the latter resulting in an unbelievably tardy delivery of the final product and, more generally, indicating that these entities are jointly afflicted with a bad case of "the slows").

    As to substance, we of course welcome the elimination of any of the burdensome and unique contract clauses that apply only to businesses that sell to the Government.  But because the Government's approach to removal of such restrictions is both reluctant and piecemeal, it has given less than adequate recognition to – and may even be said to have actively betrayed – congressional goals embodied in the passage of the Federal Acquisition Streamlining Act ("FASA") (P.L. 103-355) in 1994 and the passage of the Clinger-Cohen Act (P.L. 104-106) just two years later.  Both of these statutes, as discussed further below, were aimed directly at saving the Government money by simplifying the process when it purchases "commercial items."

    As to efficiency and timeliness, we note that as important as it is for Government contractors to comprehend these new rules, it is equally important for all of us as citizens and taxpayers to ask why it has taken 13 years to determine that one more FAR clause should be eliminated from COTS contracting, along with one-half of one other clause.  Some of you may be old enough to remember General Electric’s television commercials in which it would succinctly explain that “At General Electric, progress is our most important product.”  Would that our Government could make the same claim.

    Background on Commercial Item Exceptions in Contracting

    In 1994, Congress passed FASA, aimed at limiting the number of government-unique, non-commercial terms and conditions that would apply when the Government purchased "commercial items."  Congress hoped: (a) to limit the "red tape" inherent in doing business with the Government; (b) to streamline the acquisition process for non-unique (that is to say, "commercial") products or services; and (c) to lure commercial vendors into the federal marketplace.

    Under FASA, "commercial items" include:

    • Products that are "of a type" customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and that have been (1) sold, leased, or licensed to the general public; or (2) offered for sale, lease, or license to the general public;
    • Products derived from commercial technology and expected to soon be in the commercial marketplace;
    • Products that fit one of the two categories described immediately above and have been modified in either minor, insignificant, or commercially-standard ways;
    • Products and services that fit any of the above-described categories and have been combined in such a way as to be customarily combined and sold in combination to the general public;
    • Services that are designed to service or maintain a commercial product;
    • Services that are offered and sold competitively in substantial quantities in the commercial marketplace based on established market prices; and
    • Certain non-developmental items that are sold in substantial quantities on a competitive basis to multiple State and local governments.

    See 41 U.S.C. § 403.

    Congress expanded on the FASA reforms with the 1996 passage of the Clinger-Cohen Act.  Clinger-Cohen further simplified the procedures and contract conditions applicable to Government procurement of COTS items.  As noted above, the distinction between "commercial items" and "COTS items" is that COTS items are a "subset" of commercial products; COTS items must be "commercial items" (as defined above) that are: (1) sold in substantial quantities in the commercial marketplace; and (2) sold to the Government "without modification."  See 41 U.S.C. § 431.  (By comparison, a product may qualify as a "commercial item" even if a product is modified or sold exclusively to the Government, so long as it is "of a type" as other commercial items sold broadly).

    Clinger-Cohen required regulations to be issued identifying laws that would not apply to contracts or subcontracts for COTS products.  The FAR Councils issued an advance notice of proposed rulemaking in January 2003, soliciting input from the public as to what types of inapplicable laws should be included on the list.  See 68 Federal Register 4874.  In January 2004, the Councils published a proposed rule, identifying a number of laws that could – potentially – be exempt for contracts and subcontracts acquiring COTS items.  See 69 Federal Register 2448.  The Councils observed that a number of provisions had already been exempted with regard to contracts for "commercial items" (see, e.g., FAR 12.504 and 52.212-5), but section 4203 of the Clinger-Cohen Act required the Government to consider separately whether additional clauses would be inapplicable to the "subset" of COTS items.

    Discussion of the New COTS Rule

    Nearly five years later (and, as noted above, nearly thirteen years after Clinger-Cohen was originally enacted), the FAR Councils have now issued final rules with regard to purchases of COTS products:

    The final rules add a new definition of "commercially available off-the-shelf" to the FAR.

    Consistent with the statutory definition described above, the new rules introduce a new definition of "COTS" to FAR 2.101, referring to any item of supply that is:

    • A commercial item (as defined in FAR 2.101);
    • Sold in substantial quantities in the commercial marketplace; and
    • Offered to the Government, without modification, in the same form in which it is sold in the commercial marketplace.

    Two points are worth noting about this new definition.

    • First, the term applies only to "items of supply," that is products – not services.  Services do not qualify as "COTS items" under Clinger-Cohen and the new rules.
    • Second, the rule recognizes that the term "without modification" can be ambiguous, and tries to offer clarification.  For instance, what if a vendor purchases a modified COTS product, but later delivers it unmodified to the Government?  What if a vendor purchases an unmodified COTS products, but later modifies them prior to the delivery to the Government?  In either scenario, is the product "offered to the Government without modification"?  The new definition attempts to clarify the otherwise ambiguous meaning of "without modification" by tying the concept to that used in the DFARS with regard to acquisition of COTS parts incorporating specialty metals.  (See our prior discussion of COTS treatment under the specialty metals restrictions here and here).
      • Specifically, a product qualifies as COTS when it is offered to the Government, under a contract or subcontract at any tier, without modification.  This change is designed to clarify the fact that if a product is delivered to a contractor without modification, it qualifies as a "COTS product," even if that same product is later modified before being delivered to the Government.  For example, if a COTS fastener is delivered to prime contractor without modification, the COTS fastener qualifies for the COTS exception.  The fact that the prime contractor may later modify the fastener before delivering the final product to the Government (by drilling additional holes, shortening the length of the screw, removing the fastener "head," etc.), does not mean that the item has lost its essential "COTS character."
      • While the goal of standardizing the definition of "COTS" so that its meaning is the same wherever it appears in the regulations, it would seem that the impenetrable concepts of the specialty metals rules hardly provide an adequate model for a regulation that purports to "streamline" federal procurement.

    The final rules identify two laws that do not apply to COTS products.

    • (Partial waiver) the Buy American Act ("BAA") (with regard to the domestic components test) (41 U.S.C. §§ 10a and 10b).
      • This waiver would allow a COTS item to be treated as a domestic end product if it is manufactured in the United States without requiring the vendor or manufacturer to track the various countries of origin of the various components or materials of the delivered COTS end-product.
      • The BAA generally requires the Government to purchase only products that have been manufactured domestically substantially from domestically manufactured components. 
      • Note that the new rules do not waive the BAA as a whole – only with regard to the country of origin of the various components.  This "component test" has already been waived for all acquisitions subject to the World Trade Organization Government Procurement Agreement ("WTO GPA"). 
      • “By waiving only the component test of the BAA for COTS items, but still requiring manufacture [of the end product] in the United States, the Government can preserve an incentive to encourage other countries to provide reciprocal access, while reducing the significant administrative burden on contractors and the associated increased cost to the Government.”
    • Estimated percentage of recovered and recycled materials (42 U.S.C. § 6962(c)(3)(A)).
      • This statute generally requires vendors to certify, at contract completion, the estimated amount of recovered and recycled materials used during the life of the contract.  (As a side note, we question the wisdom behind asking a contractor to certify as to the accuracy of an estimate.  But this is the certification required by Congress).
      • In explaining why this requirement should be waived, the final rules note that "these requirements are a paperwork exercise and are not consistent with buying COTS items from the commercial marketplace."  With regard to monitoring purchases of recycled products, "the recycled content statement on the product packaging serves as the certification and estimate" when the product is purchased.
      • Note that this does not waive other recycled- or recovered-materials content requirements more broadly (such as is required under Executive Order 13423), but merely eliminates the need for a contractor to certify upon contract completion.

    Even though considered as potentially inapplicable under the 2004 proposed rule, the final rules indicate that a number of laws continue to apply to COTS items.

    Clinger-Cohen authorized the Government to waive certain laws when in the best interests of the Government in order to lure commercial contractors.  The final rules decline to waive the following laws, finding that doing so is not in the Government's best interests:

    • Trade Agreements Act (19 U.S.C. § 2501 and 19 U.S.C. § 2512) (monitoring the country of origin for products and requiring purchases from domestic sources or certain foreign countries that have entered into free trade agreements with the U.S.);
    • Restrictions on advance payments (31 U.S.C. § 3324) (prohibiting the Government from issuing payment prior to actual receipt of the deliverable, unless specifically authorized);
    • Employment reports for veterans (38 U.S.C. § 4212(d)(l)) (requiring contracts valued at over $100,000 to submit annual reports to the Department of Labor regarding the contractor workforce and to take affirmative action to hire veterans);
    • Equal opportunity for certain disabled veterans (38 U.S.C. § 4212) (requiring equal opportunities for all job postings and job opportunities within a company with regard to disabled veterans);
    • Validation of proprietary data restrictions (41 U.S.C. § 253d and 10 U.S.C. § 2321) (describing the processes by which the Government and a contractor may challenge or validate proprietary data restrictions on technical data);
    • Prohibition on limiting subcontractor direct sales (41 U.S.C. § 253g and 10 U.S.C. § 2402) (limiting prime contractors from restricting their subcontractors from selling directly to the Government);
    • Cargo preference (10 U.S.C. § 2631(a) and 46 U.S.C. § 1241(b)) (requiring the use of only U.S.-flag vessels for ocean transportation of supplies owned by, or destined for use by, the armed forces);
    • Affirmative action for workers with disabilities (29 U.S.C. § 793) (providing protections for and requiring affirmative action with regard to workers with disabilities);
    • Examination of records by the Comptroller General ( 41 U.S.C. § 254d(c) and 10 U.S.C. § 2313(c)) (allowing the GAO audit rights in a vendor's commercial item records);
    • Fly American Act (49 U.S.C. § 40118) (requiring air transportation to be conducted on U.S. carriers rather than foreign airlines);
    • Limitation on appropriated funds to influence certain federal contracting and financial transactions (31 U.S.C. § 1352) (prohibiting use of appropriated funds to lobby Congress or attempt to influence additional funding decisions).

    The final rules reiterate that a number of other laws do not apply to either "commercial" or COTS purchases.

    • Walsh-Healey Act (41 U.S.C. § 43) (requiring overtime rates on contracts valued over $10,000);
    • Contingent fees (41 U.S.C. § 254(a) and 10 U.S.C. § 2306(b)) (prohibiting individuals from earning a contingent fee based on a negotiated contract award);
    • Minimum response time (41 U.S.C. § 416(a) (3) and (6)) (limiting the amount of time that the Government can allot in requiring responses to Government solicitations);
    • Drug Free Workplace Act (41 U.S.C. § 701) (requiring employers to take precautions to prohibit drug use in the workplace);
    • Limitation on the use of appropriated funds (31 U.S.C. § 1354(a)) (prohibiting award to contractors who fail to submit reports to the Department of Labor as required under 38 U.S.C. § 4212);
    • Contract Work Hours and Safety Standards Act (40 U.S.C. § 3701) (limiting the working hours of mechanics and laborers);
    • Anti-Kickback Act (41 U.S.C. § 57(a) and (b), and § 58) (requiring that a contractor has an anti-kickback policy in place, and consents to cooperate with the Government to investigate any issues);
    • Truth in Negotiations Act (41 U.S.C. § 254(d) and 10 U.S.C. § 2306a) (providing cost or pricing data to support the pricing determination for a product or service); and
    • Cost Accounting Standards (41 U.S.C. § 422) (requiring a contractor to have specific accounting standards in place that are disclosed to the Government and consistent with federal requirements).

    The Government has also identified at least one other law that is still under consideration as to whether it applies to COTS products.

    The Government is still considering whether it should waive Rights in Technical Data (41 U.S.C. § 418a and 10 U.S.C. § 2520), specifically with regard to waiver of:

    • Unlimited Government rights in data for operation, maintenance, installation, or training; and
    • The Government's right to make unlimited copies.

    Several respondents to the proposed rule recommended that this provision should be waived, but several stakeholders within the Government disagreed.  “The proposed waiver of the data rights statutes is based on the premise that, because COTS items are developed at private expense, there would be no government rights in technical data associated therewith.  The councils do not agree entirely with this premise.”  The fact that the Government may require additional data rights to continue to operate and maintain COTS items seems to weigh in favor of not waiving this provision.  However, the issue is still under consideration.  Given the fact that the 2009 DOD Authorization Act specifically instructed DOD to assess whether DOD is acquiring sufficient rights in technical data under various procurements (see P.L. 110-417, § 822), we would not be surprised to find the FAR Councils ultimately deciding that waiver of this statute would not be in the Government's best interest.

    Conclusion

    While we generally welcome the elimination of the burdensome and unique contract clauses that apply only to businesses that sell to the Government, the Government's general approach to remove  in a piecemeal fashion does little to "lure" commercial contractors into the federal marketplace, which is what Congress intended when it passed Clinger-Cohen and FASA in the mid-1990s.  And the Government now seems to be signaling that it is less inclined to "streamline" the process moving forward for "commercial items" – both DOD and the 2007 Acquisition Advisory Panel have advocated deletion of the phrase "of a type" from the definition of "commercial item," and Congress has recently required additional cost or pricing data for commercial services "of a type" sold in the commercial marketplace (see P.L. 110-417, § 868).  But, with that said, it seems clear that sale of products qualifying as COTS is now at least moderately easier than it would have been without the passage of FASA and Clinger-Cohen and the subsequent, albeit long-awaited, issuance of this new rule, which recognizes modest concessions to the requirements of "traditional" government contracts.

    Given the fact that it has taken the Government nearly 13 years to conclude that only two laws should be waived with regard to COTS items, this seems to indicate that most such "waivers" are generally disfavored by the Government.  The solution to "luring" commercial companies into the minefield of federal contracting is to clear the minefield – not to remove two landmines over the course of thirteen years and pretend that this is "progress."  We hope that the Government can do better in streamlining its procurement processes for commercial and COTS products.