The FCC’s Wireline Competition Bureau has issued a Public Notice[1] that seeks comment on the applicability of the National Defense Authorization Act for Fiscal Year 2019 (NDAA)[2] to the FCC’s National Security rulemaking. Specifically, the FCC wants stakeholders to comment on how Section 889 of the NDAA, Prohibition on certain telecommunications and video surveillance services or equipment, may impact the FCC’s proposal to prohibit the use of Universal Service Fund (USF) support to purchase equipment or services from suppliers that pose a national security threat.[3] Comments are due on or before November 16, 2018. Reply comments are due December 7, 2018.

Overall, the NDAA is helpful to the FCC and USF-recipients, especially those that have purchased and are currently using Huawei and ZTE equipment. The NDAA is helpful to the FCC because it provides legal authority for the rule proposed in the NPRM. The NDAA is helpful to communications providers that receive USF support because it adds some clarity to which companies may be blacklisted and it may provide a path toward reimbursement for replacing prohibited equipment that is currently in use.

Regardless of how the NDAA may help clarify the FCC’s NPRM, it will not soften the blow of the FCC’s prohibition on Chinese equipment. For some, the FCC’s rule is going to be very costly in terms of time and money. For all, the rule will eliminate one of the lowest-cost options for equipment. Wireless and wireline providers that receive USF support need to make every penny count. Many have purchased Huawei and ZTE equipment because of the low cost. This won’t be possible anymore. Moreover, it looks like the days of carriers purchasing any equipment from Chinese manufacturers are probably over. Ok, let’s take a look at the FCC’s Public Notice.

National Defense Authorization Act for Fiscal Year 2019 – FCC Public Notice

In general, Section 889(b)(1) of the 2019 NDAA prohibits the head of an executive agency from obligating loan or grant funds to procure or obtain telecommunications equipment manufactured by Huawei and ZTE and their subsidiaries and affiliates. It blacklists video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company or any of subsidiary or affiliate of these three companies. Section 889(b)(1) also prohibits the purchase of telecommunications or video surveillance services provided by these entities or using their equipment. Finally, there is a catch-all provision prohibiting telecommunications or video surveillance equipment or services produced or provided by an entity owned or controlled by, or otherwise connected to, the government of China.

One obvious conclusion that comes to mind when considering Section 889(b)(1) alongside the FCC’s national security NPRM is that the NDAA is more specific. The NDAA identifies which equipment and service providers are on the blacklist, something the FCC was not able to do in the NPRM. What the FCC proposes in the NPRM – withholding USF support – is a big deal. Any rule with that type of penalty needs to be very clear so USF recipients can comply. The NDAA brings some much needed clarity to the FCC’s proposal. There is now a definitive blacklist with five companies on it. And, at any time, any Chinese company could be added to the list. Here’s the clarity: stop buying and using Chinese-made equipment.

To explain the suspicion surrounding Chinese tech companies, let’s take a look at one of the suppliers on the NDAA blacklist that isn’t Huawei or ZTE. Dahua Technology Company. Who is it? It provides video surveillance products and services. Here’s some information from the company’s Wikipedia entry:

Dahua Technology has around 13,000 employees all over the world. Dahua solutions, products, and services are used in over 180 countries and regions. It has 35 subsidiaries globally covering Asia, the Americas, Europe, Middle East, Oceania, Africa, etc. In September 2016, the largest DDoS attack to date, on KrebsOnSecurity.com, was traced back to a botnet. According to Internet provider Level 3, the most commonly infected devices in this botnet were Dahua cameras and DVRs. HackRead reports that over one million Dahua cameras have been infected with the BASHLITE malware.

The last bit is what’s important. Dahua’s equipment was commandeered on a massive scale by someone and used for a cyber-attack. It doesn’t matter who it was. What matters is that in the future, it could be the Chinese government that harnesses Dahua’s equipment for nefarious purposes. And there’s really no limit to the Chinese government’s power over Chinese companies. So, this rationale applies to every piece of telecommunications or technology equipment manufactured in China. This is the red scare.

One other problem with the FCC’s NPRM was the lack of clarity with respect to existing equipment that may be in use when rules are adopted. Communications providers are using Chinese equipment and have been for years. Numerous companies submitted comments in response to the NPRM explaining that they are currently using Huawei equipment – wireless and wireline providers. And some even quantified the amount of money spent to purchase it. They questioned whether they would have to rip out existing equipment and replace it, and if so, if they would receive any reimbursements for doing so. The NDAA seems to answer the first question with a yes and the second question with a maybe:

In implementing the prohibition..., heads of executive agencies administering loan, grant, or subsidy programs, including the heads of the Federal Communications Commission...shall prioritize available funding and technical support to assist affected businesses, institutions and organizations as is reasonably necessary for those affected entities to transition from covered communications equipment and services, to procure replacement equipment and services, and to ensure that communications service to users and customers is sustained.[4]

There will probably be a number of comments that latch on to this section. We may even see some commenters raise a takings argument. It should be fairly easy for providers to quantify the cost of replacing their Chinese equipment. Is there enough USF surplus to fully reimburse every provider that has to rip out equipment? Maybe. But, some carriers won’t be able to pay for replacement equipment on their own.

Here are the specific questions raised by the FCC in the Public Notice:

• Does the prohibition in section 889(b)(1) apply to support provided by the Universal Service Fund?

• To the extent the provision is intended to apply to USF, what obligation might it impose upon the Commission?

• Would the Commission’s proposed rule in the Protecting Against National Security Threats to the Communications Supply Chain NPRM satisfy the intent of section 889(b)(1)?

• Likewise, does section 889(b)(1), standing alone or in conjunction with the rest of section 889, support or otherwise authorize the Commission to adopt the proposed rule or any of the proposed alternatives presented in the NPRM?

• Should the list of companies in section 889(f)(3)(A)-(B) and any potential additions to the list pursuant to section 889(f)(3)(D) of the 2019 NDAA serve as a basis for determining which entities pose “a national security threat to the integrity of communications networks or the communications supply chain”?

• Does section 889(b)(1) apply to other Commission funding programs, in particular, the Telecommunications Relay Service (TRS) Fund?

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For more on this topic, try these articles:

Red Scare II: Will FCC Blacklist Equipment Providers That Present National Security Threat

Red Scare: FCC To Blacklist Equipment Providers That Present National Security Threat – Proposed Rule Would Bar Use of Universal Service Funds to Purchase From Blacklisted Companies

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[1] Wireline Competition Bureau Seeks Comment On Section 889 Of John S. McCain National Defense Authorization Act For Fiscal Year 2019, WC Docket 18-89, Public Notice, DA 18-1099 (Oct. 26, 2018).

[2] John S. McCain National Defense Authorization Act for Fiscal Year 2019, H.R. 5515, 115th Cong., PL 115-232, 132 Stat. 1636 (2018) (NDAA).

[3] In an April 2018 Notice of Proposed Rulemaking, the FCC sought comment on a rule prohibiting the use of USF funding to purchase equipment or services from suppliers that pose a national security threat to the integrity of U.S. communications networks or the U.S. communications supply chain. The comment cycle closed July 2, 2018. An earlier blog post provided a summary of the NPRM. Protecting Against National Security Threats to the Communications Supply Chain Through FCC Programs, WC Docket 18-89, Notice of Proposed Rulemaking, FCC 18-42 (Apr. 17, 2018).

[4] NDAA Section 889(b)(2).