On February 23, 2009, the Office of the Secretary of Defense and the Strategic Materials Protection Board issued an analysis of the national security issues associated with the purchase of specialty metals. See 74 Federal Register 8061. The analysis concluded that, while specialty metals are plainly essential for certain important defense systems, they are not "critical materials," nor do national security considerations require that only U.S.-produced specialty metals be used for DOD applications. This conclusion is very interesting, especially in light of the position taken by Congress for the last 35 years that the domestic specialty metals industry is purportedly critical to our national interests and that extraordinary measures are required to protect that domestic industry. 

We have previously expressed the opinion that the Berry Amendment, and the specialty metals restriction in particular, is "a relic of a former age, ill-suited to the realities of our global marketplace and current procurement demands." We hope that this latest analysis from the Strategic Materials Protection Board will provide a foundation for some long overdue Congressional action to simplify, if not eliminate, what has become one the most complex aspects of DOD contracting, with a hodgepodge of different ad hoc rules affecting different contracts being simultaneously performed within a single manufacturing plant. 
 

Background on the Specialty Metals Restrictions

We have already written at length on the specialty metals restrictions (see our discussion here). These restrictions have existed since 1973 (see P.L. 92-570) to protect the domestic specialty metals industry and the domestic specialty metals production base.

Generally speaking, DOD is prohibited by statute and regulation from purchasing "specialty metals" (a term defined by statute as including titanium, beryllium, and a number of other different metal alloys) and products containing specialty metals unless those specialty metals were melted or processed in the U.S. See 10 U.S.C. § 2533b; DFARS 225.7002 and DFARS 252.225-2014 (including currently applicable Class Deviations, which are discussed here).  A number of exceptions may apply (including more broad exceptions recently created in 2006 and 2008, discussed here and here, respectively), but the fundamental requirement remains that all companies selling to the DOD (whether as a prime contractor or a subcontractor; whether as a traditional defense contractor or a commercial supplier) must carefully monitor the source of the specialty metals incorporated in products that are delivered to the DOD. Historically, this has imposed a significant (and costly) burden on industry and DOD alike. 

Background on the Strategic Materials Protection Board

As part of the 2006 reforms to the specialty metals restrictions, Congress created the Strategic Materials Protection Board (see P.L. 109-364, § 843, codified at 10 U.S.C. § 187). The Board consists of representatives of the following:

 

• Determining the need to provide a long-term domestic supply of materials designated as critical to national security to ensure that defense needs are met;

   

• Analyzing the risk associated with each material designated as critical to national security and the effect on national defense that the nonavailability of such material from a domestic source would have; 

   

• Recommending a strategy to the president to ensure the domestic availability of materials designated as critical to national security; 

   

• Recommending such other strategies as the Board considers appropriate to the president to strengthen the industrial base for materials critical to national security; and 

   

• At least once every two years, publishing recommendations regarding materials critical to national security, including a list of specialty metals, if any, recommended for addition to, or removal from, the definition of “specialty metals.”

When the Board was originally created in 2006, we described its creation as "perhaps the most irrelevant" of reforms – "a board that no one asked for and no one except Congress wants."  At the time, we expected the Board to merely rubber-stamp the policy that Congress has consistently embraced since 1973 – namely, that the domestic specialty metals industry requires extra protections and that the specialty metals restrictions should continue with very limited exceptions. Much to our surprise, the Board seems to have actually embraced some common sense, running counter to the implicit "policy demands" that protectionistslike Senator Evan Bayh (D-IN) seem to be pushing.

Recent Conclusions of the Strategic Materials Protection Board

By statute, the Board was supposed to have met by April 2007 (and at least once every two years, thereafter). However, the Board first met on July 17, 2007, conducting basic business and initiating a preliminary analysis on the specialty metals issues. 

The Board again met on December 12, 2008 to discuss the preliminary analysis of national security issues associated with strategic materials, which the Board validated and ultimately published in the Federal Register on February 23, 2009. Fundamentally, the Board concluded that specialty metals, as a whole, are not "materials critical to national security." Interestingly, the Board concluded that the specialty metals restrictions should be significantly loosened (if not outright removed for most specialty metals) to reduce costs and to integrate DOD fully with the global marketplace. 

The summary of the Board’s Report is as follows:

Reliable access to the materiel [sic] it needs is a bedrock requirement for the Department of Defense. However, reliable access does not always necessitate a domestic source. In fact, the Department wants to take full advantage of the competitive benefits offered by access to the best global suppliers; and to promote consistency and fairness in dealing with its allies, all the while assuring that an adequate industrial base is maintained to support defense needs.  Consequently, the Department uses, and sometimes may be dependent on, reliable non-U.S. suppliers.  At the same time, the Department is not willing to accept foreign vulnerability which poses risks to national security.  Non-U.S. suppliers represent a foreign vulnerability if their use would present an unacceptable risk that the Department would be unable to access the capabilities, products, or services that it needs, when it needs them.

The key finding of this analysis is that specialty metals, as defined in 10 U.S.C. 2533b, are not ‘‘materials critical to national security’’ for which only a U.S. source should be used; and there is no national security reason for the Department to take action to ensure a long term domestic supply of these specialty metals. The ‘‘criticality’’ of a material is a function of its importance in DoD applications, the extent to which DoD actions are required to shape and sustain the market, and the impact and likelihood of supply disruption. The analysis showed that specialty metals are ‘‘strategic materials’’ which may require special monitoring and attention/action; but not, in general, a domestic source restriction. Should reliable supplies/capacities be insufficient to meet potential requirements for a projected conflict, other risk mitigation options, including stockpiling, could represent an effective alternative.

(Emphasis added; footnotes omitted). 

The Board observed that it should continue to monitor the issues and issue additional recommendations as circumstances change, but for now it seems that it is recommending a substantial repeal of most of the specialty metals restrictions (with regard to titanium and most other metal alloys). With regard to high purity beryllium, the Board observed that this specialty metal was both a critical material and necessary to the national defense. DOD has already taken special steps to maintain a domestic supply by partnering with and supporting Brush-Wellman, Inc., an Ohio company with affiliates around the globe. But, domestic source restrictions on high purity beryllium may well remain. 

Conclusion

The Board has finally stated what DOD suppliers have known for years – that the specialty metals restrictions are not well suited for DOD’s procurements needs. Given the imminently reasonable conclusion in the Board’s report, we hope that rational minds will prevail and that more reasonable limitations can be injected into the specialty metals restrictions required by Congress. We further hope that the restrictions can be suitably loosened (if not repealed) so that companies selling to the DOD do not need to incur the significant costs of complying with the restrictions (driving up the cost to DOD and the American taxpayer), not to mention the significant risks associated with delivering noncompliant metals (a risk to the defense industry has been plainly apparent over the last few years of "zero tolerance" enforcement). 

These compliance difficulties are further demonstrated by a recent report from the Congressional Research Service, The Specialty Metal Provision and the Berry Amendment: Issues for Congress (updated March 5, 2009), which advocates a number of revisions to the current regulatory regime, including more expansive waiver provisions and outright repeal. Since "enforcement by waiver" is hardly the best way to apply a statutory mandate, we think that repealing the restrictions offer the better of these two alternatives. 

Plainly, given the fact that DOD is again requesting that Congress lift the restrictions on specialty metals (as included in recent testimony from Shay D. Assad, Acting Deputy Under Secretary of Defense (Acquisition & Technology), before the House Armed Services Committee), Congress may finally be willing to let the unwieldy specialty metals regime fall by the wayside. On the other hand, last time DOD lobbied for changes to the specialty metals regime in 2006, the efforts backfired and Congress made a royal mess of things. On behalf of everyone – DOD and industry alike – we hope things will turn out better in 2010.

Authored by:

David S. Gallacher

(202) 218-0033

dgallacher@sheppardmullin.com