On December 14, 2007, Congress passed H.R. 1585, the 2008 Defense Authorization Bill. President Bush stated on December 28, 2007 that he intended to "pocket veto" the Bill because he viewed a particular section as potentially jeopardizing the ability of the Iraqi government to focus its resources on rebuilding. Regardless of whether the President’s "pocket veto" is successful (Speaker Pelosi has stated that the House is currently considering whether to revise the legislation), it appears that there is more than enough support to override now that Congress has returned to session. Consequently, the provisions of H.R. 1585 are likely to become law one way or another.
Anticipating that most (if not all) of H.R. 1585 will eventually be enacted into law, this article discusses two particular sections that will amend the specialty metals restrictions of the "Berry Amendment," 10 USC 2533b. 10 USC 2533b restricts the ability of the Department of Defense to procure parts or products containing specialty metals that were not melted or processed in the United States. It also requires companies selling to DOD to purchase domestic specialty metals and to track the origin of all foreign specialty metals in order to ensure compliance with the statute; this includes tracking individual components made from specialty metals that are incorporated into larger assemblies. H.R. 1585 makes several welcome changes, most all of which loosen the restrictions of this archaic and unwieldy statute. Unfortunately, the new changes do not go far enough in reducing the heavy administrative burden imposed on companies by this statute.
1. Commercial-Off-The-Shelf (COTS) Products.
- New exemption for certain COTS products. The restriction on DOD’s ability to purchase specialty metals applies to both commercial and non-commercial products. DOD is not permitted to avoid the specialty metals restrictions simply because a commercial product may be "cheaper" or "more easily available." For both commercial and non-commercial parts, DOD and its suppliers have been required since the mid-1970s to verify that a delivered product contained only approved specialty metals — a task that has proved increasingly difficult, if not outright impossible, for commercial products where the original manufacturers do not track the source of the component specialty metals. Because most DOD suppliers are unable to verify the manufacturing history of their commercial products, delivery of commercial products containing specialty metals to the DOD places a supplier at significant risk of violating the law. Consequently, the statute has required, in large part, "custom" parts for DOD that are significantly more expensive than their commercial equivalents. The proposed legislation, however, provides an exception for some "COTS products," which are defined under the statute and under DOD regulations as those that are: (a) commercial products (as defined in the regulations); (b) sold in substantial quantities in the commercial marketplace; and (c) offered for sale to the Government in the same format that they are offered for sale in the commercial marketplace.
- New statute will be less broad than recent rules proposed by DOD. Rules recently published by DOD in November 2007 exempted all COTS products from the specialty metals restrictions at 10 USC 2533b. See 72 Fed. Reg. 63,113 (Nov. 8, 2007). Section 804 does not go so far, overriding the DOD regulations by declining to exempt all COTS products and indicating that certain products, including COTS fasteners, remain subject to the specialty metals restrictions.
- Exemption applies to some, albeit not all, COTS fasteners. Some COTS fasteners are exempted from the statute, provided they are: (a) incidentally incorporated into other COTS assemblies or components purchased by the DOD, or (b) the manufacturer of the COTS fasteners certifies that it has domestically smelted at least 50% of the total amount of metal used to manufacture the fasteners. All other COTS fasteners must satisfy the specialty metals requirements of 10 USC 2533b. This new statutory requirement reverses, in part, an April 2007 Domestic Non-Availability Determination (DNAD) issued by DOD, which determined that screws, nuts, bolts, washers, rivets, studs and fastening devices manufactured using domestic specialty metals were unavailable, and that the specialty metals restrictions did not therefore apply to those products. Section 804(h) specifically directs DOD to revise its prior DNAD to conform with the new statutory restrictions.
- While these reforms are welcome, difficulties and confusion remains. This new COTS exemption is a welcome reform to this unwieldy statute. DOD may now purchase lower-priced COTS products without regard to the country of origin of the component specialty metals; this exemption also allows DOD and its suppliers to operate more efficiently, requiring less administrative effort to track the "heritage" of each and every delivered product containing specialty metals. However, this change also demonstrates that nothing Congress does is ever easy. The partial exemption for some, but not all, fasteners will still leave many suppliers in a quandary, wondering whether they are complying with the statute and whether they are delivering products that satisfy the exemptions — confusion that is doubly aggravated in the short term by the fact that the efficacy of the existing DNAD for fasteners may or may not continue to apply to particular fasteners, particular assemblies, and particular industries. Hopefully, DOD will act quickly to clarify this confusion.
2. De Minimis Threshold
- New de minimis threshold of 2%. Proposed Section 804(d) would add a new de minimis exception where the noncompliant specialty metals are less than 2% of the total weight of the specialty metals in the delivered item.
- De minimis threshold has long been demanded by industry. Historically, the restriction on specialty metals has applied to all specialty metals incorporated in a product, which has forced contractors to verify that the final delivered product was 100% compliant. This has placed DOD suppliers in a very difficult position, because they have had to control and verify manufacturing and assembly lines to ensure absolute compliance, preventing the commingling of any non-conforming specialty metals or any non-conforming products. Any single lapse in a supplier’s processes places the supplier in the unenviable position of delivering a non-conforming product to the DOD, which carries with it the risk of not being paid by DOD, as well as the risk of being accused of "fraud" by the U.S. Government for failing to comply with the product requirements. Additionally, DOD is prohibited by law from accepting the "non-conforming" product, despite the fact that the product may work perfectly well and the inclusion of trace amounts of non-conforming specialty metals is completely immaterial to the purchase as a whole.
- New de minimis threshold does not go far enough. While the new 2% threshold addresses the problem of "trace" amounts of non-conforming materials inadvertently finding their way into a compliant manufacturing, assembly, or production line, the new threshold does little to reduce the administrative burden in tracking the original source of the base materials or components. While suppliers may rest somewhat assured that they will not be subject to a fraud investigation for lapses in their processes that generate slight amounts of nonconforming materials, suppliers are still required to obtain comprehensive and detailed information about the heritage of their specialty metals to ensure compliance for the final manufactured product. While the 2% de minimis exception creates a small "safe harbor" provision, it does little to reduce the overall administrative burden.
3. Contractor Commits to Purchase Domestic Metals
- "Commercial Derivative Military Articles". Proposed Section 804(d) would exempt a new class of products — "commercial derivative military articles," which are military articles produced in the same production facilities, using a common supply chain, or using other common production processes as used in the manufacture of other commercial products. A product may qualify as a "commercial derivative military article" if a contractor certifies that it (and its subcontractors) have entered into contractual agreements to purchase during the period of contract performance "domestically melted specialty metal" in an amount that is the greater of: (a) 120% of the amount of specialty metal required to produce the commercial derivative military article; or (b) 50% of the amount of specialty metal purchased during the period in which the commercial product and the commercial derivative military article are being produced.
- While industry had supported proposals such as this, the thresholds are very high. Previously, industry has supported "equivalency" proposals such as this, which would allow suppliers to commingle compliant and non-compliant specialty metals in the same manufacturing line, removing the administrative burden to "track" each base material or component. Instead, the supplier could simply certify that it was purchasing from approved sources. Without an alternative such as this, suppliers have had to run separate production lines for their commercial and DOD products to avoid commingling, thereby driving up the price for DOD products significantly. Similarly, suppliers have been forced to track essentially identical products with different stock numbers to avoid confusing products from a commercial line with those from a separate DOD-approved line. Despite the obvious wisdom of this new exception, the thresholds proposed are significantly higher than those previously embraced by industry.
- Without additional clarification, the exemption is confusing. In addition to the high thresholds, the new statute is also unclear as to what exactly constitutes "120% of the amount of specialty metal required to produce the commercial derivative military article" or "50% of the amount of specialty metal purchased during the period in the production of the commercial derivative military article." The former requirement appears to refer to the amount of specialty metals used to manufacture a specific product, while the latter appears to relate to a company’s production line as a whole. Clarification is needed from DOD as to how these "equivalency" thresholds will be calculated.
- Be aware that specialty metals from "qualifying countries" may not satisfy this exception. Another potential trap for suppliers is that the "commercial derivative military articles" exception appears to apply only when a contractor commits to purchase "domestic specialty metals." This is not the same as "compliant specialty metals," because under the "qualifying country" exception to the specialty metals restrictions, DOD may accept delivery of products containing compliant specialty metals from qualifying countries that have entered into trade agreements with the United States. See DFARS 225.7002-2(n) and 252.225-7014(c). Currently, this list of "qualifying countries" includes approximately 20 different countries, including the UK, Canada, and Turkey. See DFARS 225.872-1. But specialty metals from these "qualifying countries" do not constitute "domestic specialty metals;" this term appears, on its face, to refer only to metals mined or processed in the U.S. It may be insufficient, therefore, for contractors to merely rely on the fact that they are purchasing "compliant specialty metals" instead of specifically "domestic specialty metals" in order to claim they satisfy this exemption. Hopefully, DOD will clarify this issue when it promulgates its implementing rules. But if DOD enforces the distinction between "domestic" and "compliant" specialty metals, this will merely add to the compliance confusion by providing that "qualifying country" metals are compliant for some applications, but not all.
- New waiver authority. Proposed Section 804(d) would further allow the DOD to waive the specialty metals restrictions and accept products containing noncompliant metals upon a written determination that the item is necessary to the national security interests of the United States. If the DOD grants such a waiver under section 804(d), Congress must be notified.
- Waiver allows DOD flexibility. This new waiver authority is consistent with that advocated in October 2007 by Rep. Duncan Hunter (R-California), who objected to delivery delays of medium tactical vehicles to the Army because the vehicles contained non-compliant specialty metals. While the Army waited to process and issue a DNAD, Rep. Hunter emphasized that Congress did not intend the specialty metals restriction to frustrate our national security interests.
- While waiver allows DOD to accept a non-compliant product, suppliers are still at risk. But beware that while the waiver authority grants DOD flexibility in accepting a non-conforming product, it does not absolve suppliers from the consequences of delivering a non-conforming product. In deciding whether to grant a waiver, DOD must determine whether the noncompliance was accidental or willful. If the noncompliance was accidental, then DOD must ensure that the contractor implements a remedial compliance plan to ensure future compliance with the specialty metals restrictions. If the noncompliance was knowing or willful, DOD should require similar remedial actions, and should also consider whether the contractor should be suspended or debarred for the violation. The statute does not foreclose additional remedies by the Government, including proceeding under the False Claims Act.
5. Increased Transparency
- Reporting to Congress. Proposed Section 804(i) would require DOD to submit to Congress a report detailing the types of COTS products being procured and incorporated into non-commercial products.
- Public notice on issuing DNADs. Separately, Section 884 requires DOD to publish a notice on the FedBizOpps.gov website at least 30 days in advance of issuing any DNAD, soliciting information from interested parties, including producers of specialty metal mill products, as to the availability of domestic sources. Any information received in response to the public posting on FedBizOpps.gov must be taken into consideration before issuing the DNAD, and DOD is required to disseminate publicly its rationale supporting any DNAD that is ultimately issued.
The Berry Amendment and the specialty metals restrictions of 10 USC 2533b are statutory relics of a time when DOD could advance domestic policy by paying higher prices on custom military products. However, as world markets have evolved and the U.S. Government increasingly demands reasonably priced commercial products, statutes such as 10 USC 2533b do little to "protect" the interests of the United States. Enacting these new reforms in H.R. 1585 is a good first step, because they achieve twin policy goals of allowing DOD the flexibility in meeting its own critical needs while also allowing DOD access to proven, cost-efficient products. However, the heavy compliance burden, and the huge down-side risk for suppliers associated with noncompliance, remains the overarching problem. Where the industry’s high administrative costs are inevitably passed on to the Government and paid for by the American taxpayer, the "policies" that this statute seems to most effectively advance are "waste" and "overspending." While H.R. 1585 clearly attempts to make the law more flexible, the policy that Congress should be advancing is the elimination of the administrative burden altogether.
For further information concerning the Berry Amendment, see:
- The Continuing Saga Of Specialty Metals – Nothing Is Ever So Bad That It Cannot Be Made Worse, April 28, 2007
- Berry Amendment ‘Reform’ – The Sound and The Fury, October 25, 2006
- Speciality Metals and the Berry Amendment – Frankenstein’s Monster and Bad Domestic Policy, April 21, 2004.
Following the President’s veto in December 2007, Congressional leaders met with the White House to negotiate a compromise. Subsequently, the House introduced H.R. 4986 to replace H.R. 1585. H.R. 4986 included the exact same sections regarding the specialty metals restrictions, modifying only the single section the President objected to in vetoing the legislation. H.R. 4986 (Public Law No. 110-181) was promptly passed by Congress and signed by the President on January 28, 2008.