On December 31, 2011, President Obama signed into law new federal anti-counterfeiting restrictions and penalties. The bipartisan amendment (S.AMDT 1092) to the 2012 National Defense Authorization Act requires that the Department of Defense (“DOD”), the Department of Homeland Security, and government contractors "detect and avoid counterfeit parts in the military supply chain." Within 270 days of December 31, 2011, the DOD is directed to write new regulations under the Federal Acquisition Regulation (“FAR”) to address the detection and avoidance of counterfeits. These regulations will cover all contractors who supply electronic parts, including products that contain electronic parts.

Highlights of the legislation include the following:

• Requires covered contractors who supply electronic parts or systems that contain electronic parts to establish polices and procedures to eliminate counterfeit parts from the defense supply chain (HR. 1540, SEC. 818(e)(5)(2)(a));

• Requires a contractor or subcontractor who becomes aware or has reason to suspect that any end item, component, part, or material contained in supplies purchased by the Department of Defense, contractor, or subcontractor contains counterfeit electronic parts must report the purchase, in writing, to the appropriate government authorities within 60 days (HR 1540 SEC. 818 (c)(4)); and

• Requires the Department of Homeland Security to establish and implement a risk-based methodology for the enhanced targeting of electronic parts imported from any country (HR 1540, SEC. 818(d)).

The new law prohibits defense contractors from charging the DOD for the costs of rework or corrective work to remove and replace counterfeit parts. Further, defense contractors are now responsible for the remedies required after the use or inclusion of counterfeit components they may have accidentally supplied, regardless of where the counterfeit components entered the supply chain. Moreover, the law authorizes the debarment of contractors who fail to detect and avoid counterfeit parts or who do not exercise adequate due diligence. Finally, the law provides for criminal penalties for those who are found to be intentionally trafficking in counterfeit electronic parts. For a first offense, an individual will be fined $2 million and will face a jail term of up to 10 years, or both. A company will be fined $5 million. There is an escalation of penalties for additional offenses.