Medical device manufacturers that sell their products to the U.S. government may soon be required to implement programs for the detection and reporting of counterfeit or nonconforming end items and parts.  On June 10, 2014, the Federal Acquisition Regulatory (FAR) Council issued a proposed rule that would require government contractors to report to the Government-Industry Data Exchange Program (GIDEP) the use and delivery of counterfeit items, suspect counterfeit items, and major or critical nonconforming items that have multiple applications in contractors’ work, and that suppliers provided to contractors and other customers with nonconformances that were not detected by the suppliers’ internal quality control systems.  The proposed rule would also require contractors to report counterfeit and suspect counterfeit items to contracting officers when the items were purchased for delivery to the U.S. Government, regardless of whether contractors actually deliver or  intend to deliver the items.  In addition, the proposed rule would require contractors periodically to screen reports submitted to GIDEP in an effort to avoid using or delivering counterfeit, suspect counterfeit, or nonconforming items.  The proposed rule applies to contracts for commercial and commercially available off-the-shelf items, which implicates medical devices sold on the Department of Veterans Affairs’ medical equipment supply schedule or otherwise sold to government purchasers.

The proposed rule is one of a number of recent efforts to address the risks presented by counterfeit items. The FAR Council issued the proposed rule approximately one month after the Department of Defense (DoD) issued a final rule requiring DoD contractors subject to the Cost Accounting Standards, as well as their subcontractors, to implement internal controls for detecting and reporting counterfeit electronic parts as required by the National Defense Authorization Act for Fiscal Year 2012.  The proposed rule also follows the European Parliament’s endorsement of a recent recommendation to assign unique identifiers to medical devices as a means to trace counterfeit items, which we discussed in a recent post, and FDA’s publication of its final rule implementing a “unique device identifier” (UDI) system for devices, as discussed in another prior post.

The proposed rule recognizes that the danger posed by counterfeit and nonconforming items “extends far beyond electronic parts and can impact the mission of all Government agencies.”  The proposed rule  highlights a policy letter issued by the Office of Federal Procurement Policy that recognizes that counterfeit and nonconforming items can pose a risk to public safety and health.

In its current form, the proposed rule could have a substantial economic impact on device manufacturers that sell their products to the U.S. government.  Manufacturers may be required to incur significant expense in modifying their purchasing systems to screen for counterfeit, suspect counterfeit, and nonconforming items, which could require measures above and beyond compliance with the FDA’s UDI requirements.  In addition, the rule would require manufacturers to subject their suppliers to similar requirements, ensuring that each tier of a manufacturer’s supply chain implements measures to detect and report covered items.  However, the proposed rule provides minimal guidance on compliance with its detection and reporting requirements.  Unlike DoD’s final rule, which as previously reported provides contractors with explicit guidelines with respect to their internal control systems, the proposed rule merely directs contractors to “avoid the use and delivery of” counterfeit, suspect counterfeit, or nonconforming items, apparently leaving the means of implementing the proposed rule’s requirements to contractors’ discretion.  Manufacturers may be forced to balance the risk of being found noncompliant with the expense of establishing additional internal controls.  Manufacturers may also need to consider costs associated with potential civil liability arising out of the rule’s reporting requirements.  Although the rule protects DoD contractors from civil liability arising out of reporting counterfeit electronic parts, the rule does not extend this protection to other contractors.

A public meeting on the proposed rule was held in Washington, D.C. on June 16, 2014.  Comments are due on or before August 11, 2014.