On April 26, 2013, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued Department of Defense (“DoD”) Instruction No. 4140.67 to further establish policy to prevent counterfeit materiel at any level of the DoD supply chain. As we have previously blogged about, Section 818 of the National Defense Authorization Act of 2012 required DoD to assess its internal policies for detection and avoidance of counterfeit electronic parts by June 28, 2012 and revise the DoD acquisition regulations to address the detection and avoidance of counterfeit parts by September 26, 2012. However, despite the statutory mandate, DoD has not revised its acquisition regulations and this Instruction appears to be another interim measure.

The instruction serves two main purposes – (1) to establish DoD’s policies regarding counterfeit prevention and (2) assign responsibilities for the prevention, detection, and remediation of counterfeit material. Pursuant to the Instruction, it is DoD’s policy not to procure counterfeit material and DoD will employ a risk-based approach to reduce the frequency and impact of such material by applying prevention and early detection procedures within the supply chain and strengthening the oversight and surveillance procedures for critical material. DoD’s policy under the Instruction is to investigate all cases of suspected counterfeit material and document all occurrences of suspected and confirmed counterfeit material. DoD will make information about counterfeiting available at all levels of the supply chain, seek restitution when cases of counterfeiting are confirmed, and notify at the earliest opportunity criminal investigative organizations or intelligence authorities and those who use such materials.

Primary responsibility for carrying out these policies will fall to DoD component heads, who will be responsible for integrating DoD anti-counterfeiting policy into all relevant contract requirements. DoD component heads are also responsible for identifying critical material and material that is susceptible to counterfeiting. The Instruction requires that DoD component heads procure material from suppliers that meet appropriate counterfeit avoidance criteria or apply additional counterfeit risk management measures when such suppliers are not available. DoD component heads are also responsible for detecting counterfeit material using sampling techniques, material testing, and auditing, and are required to investigate and report all instances of suspected and confirmed counterfeit materials.

It is not yet clear how DoD will integrate these policies into contracts or what would qualify as appropriate counterfeit avoidance criteria. Depending on how these policies are implemented, the new burdens on DoD contractors could be substantial, and could impact the cost of performance. We will continue to monitor developments at DoD as these policies are implemented and incorporated into contracts, and will provide updates on any regulatory developments.