Overview: Innovation Opportunities within FY2023 National Defense Authorization Act | Fenwick & West LLP


The U.S. government’s national security and economic priorities around encouraging and adopting innovation is on full display in the soon-to-be-finalized Fiscal Year 2023 National Defense Authorization Act (NDAA). In this client alert, we highlight provisions that may be of interest to technology and life sciences companies of all sizes.

As we approach the end of 2022, Congress is set to finalize and President Biden is expected to sign the 2023 NDAA into law authorizing appropriations for the Department of Defense (DOD), Department of Energy, and other defense-related activities. In addition to serving as an authorization of appropriations, the NDAA would establish defense policies and restrictions, and address organizational administrative matters related to the DOD, which may have larger implications on the tech and life-sciences industry. The FY2023 NDAA as passed by Congress would support a total of over $850 billion in funding.

Technology-Focused Highlights

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  • Artificial Intelligence (AI) and Digital Solutions: DOD must establish priority enterprise projects for data management, AI, and digital solutions for business efficiency and warfighting capabilities, including mandating a five-year program to acquire AI systems for DOD cyberspace operations. Specific allocations of funding include $75 million for the Defense Advanced Research Projects Agency (DARPA). Other non-DOD agencies are also directed to expand their use of AI.
  • Cybersecurity: The NDAA will also include funding for cyber operations, including consortium seed funding and workforce pilot programs.
  • Cloud Service Providers: DOD would be required to set a policy for future DOD contracts with cloud service providers’ handling of classified data that would permit DOD to conduct independent testing of the commercial cloud infrastructure before it could go live on DOD networks.
  • Other Technologies: Selected highlights of specific industry funding or other directives include:
    • Quantum computing activities (DARPA): $20 million
    • Electronic warfare, jamming and signature technologies: $85 million
    • 5G technology development, experimentation and transition support: $120 million
    • Aircraft technology (low-cost, attritable): $25 million. (“Attritable aircraft” is an affordability solution in which an uncrewed aircraft can be quickly manufactured without an expectation to have an extended service life and be built specifically in response to emerging and unanticipated threats.)
    • Internet freedom and circumvention technologies: $49 million
    • Technology for people with disabilities: $44 million
    • Health tech wearables: DOD to pilot a program to monitor brain health from overpressure exposure using commercially available wearable sensors
  • Climate Tech Related Funding and Policies:
    • Environmental cleanup: $6.8 billion
    • Military construction, including energy resilience and conservation projects, solar roofing, establishing standards for microgrids, commissioning a study on feasibility of adopting innovative construction techniques and sustainable materials, and creating electrical vehicle charging infrastructure: $19.5 billion 
    • Future nontactical vehicle requirements: Subject to initial cost-estimate reports, beginning on October 1, 2035, nontactical vehicles purchased or leased by DOD must be electric or zero-emission or powered by advanced biofuel or hydrogen. 
    • Rare earth reclamation/recycling: DOD is to establish a policy for recycling of spent batteries that would promote reclamation or return of precious metals, rare earth minerals or other elements of strategic importance.

DOD Contracting and Procurements Policy Highlights

  • Software: New program would test the feasibility of unique approaches to negotiating software data rights to improve the speed, efficiency and effectiveness of defense acquisitions.
  • Life Sciences: DOD would be authorized to enter into transactions other than contracts, cooperative agreements or grants to carry out medical care and health studies or demonstration projects.
  • Small Businesses Notables: NDAA will codify the Mentor-Protégé program partnering small businesses with larger companies and establishes a five-year pilot program for a protégé firm to receive significant reimbursement for engineering, software development or manufacturing customization contracts, and will codify the summary rating program used by the Small Business Administration to evaluate how well federal agencies achieve their small business contracting goals. NDAA also requires DOD to create a commercial due diligence program to support small businesses identify threat actors.
  • Codifying the FedRAMP Program within the General Services Administration: NDAA will create a standardized approach to assess and authorize cloud computing products and services for unclassified information on federal agency systems.
  • Inflation Adjustments: Subject to certain conditions, NDAA will provide temporary authority to modify terms and conditions of a contract or option to provide an economic price adjustment for firm-fixed price type contracts until December 31, 2023.

Foreign Policy and Notable Restraints

  • China-Specific Policies: NDAA will direct an assessment be done of dual-use technologies that the Chinese Communist Party might exploit, including better tracking of Chinese companies working with universities, baring federal agencies from procuring semiconductor products or service from specified Chinese companies (SMIC, YMTC and CXMT), and expanding the prohibition of Chinese equipment provided by drone-maker DJI and other entities subject to certain restrictions. Also, there are new DOD supply chain restrictions on products mined, produced or manufactured by forced labor from the Xinjiang Uyghur Autonomous Region.
  • Continued Funding to Taiwan and Ukraine to Support U.S. Policies: NDAA will continue to fund enduring policies regarding U.S.-Taiwan relations as well as the continued security assistance to Ukraine. On the latter, DOD cannot use funds for (i) military cooperation between the U.S. and Russia through fiscal year 2027; and (ii) activities that recognize Russian sovereignty over Crimea, Donetsk, Luhansk and other territories in Ukraine, unless it would be in U.S. national security interests.
  • Rare Earth Supply Chain Disclosures: All contractors that provide DOD with magnets with rare earths or strategic/critical materials will be required to disclose where the magnets were mined, and DOD may require the contractor to implement a tracking system through its supply chain.
  • Foreign Investment Risk Mitigation: NDAA will direct DOD to provide more oversight on analyzing methods for preventing foreign adversary capital markets from benefiting in the aftermath of United States businesses in bankruptcy.
  • Other Prohibitions:
    • NDAA will prevent the intelligence community from providing grants unless the potential recipient certifies it has disclosed any funding from China, Iran, North Korea, Russia or Cuba in the five years prior to applying for the grant.
    • NDAA will also forbid the companies that use uncrewed aircraft systems from China, Russia, Iran and North Korea from contracting with DOD or the Coast Guard starting October 1, 2024.

Other Notable Highlights:

  • Foreign Suppliers of Pharmaceuticals: DOD is to develop guidance to identify gaps and risk in supply chain management of scarce pharmaceutical supplies from reliance on foreign suppliers.
  • India and New Zealand: DOD is to engage with the Ministry of Defense in India to promote cooperation on emerging technologies, readiness and logistics, while New Zealand was added to the National Technology Industrial Base to enhance cooperation on research, development and production for a reliable industrial base.
  • Microelectronics Working Group: NDAA will establish requirements for a government-industry-academia forum to share items of interest relating to microelectronics research, development and manufacturing.

Conclusion

While this cannot completely summarize the NDAA, we hope it provides an insightful look into some of the defense funding priorities and policies set by Congress. As we continue to study the new law, we will continue to send out alerts and analysis to help you navigate the potential opportunities or compliance requirements of the NDAA.



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Overview: Innovation Opportunities within FY2023 National Defense Authorization Act | Fenwick & West LLP

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