Overview: Innovation Opportunities Under the National Defense Authorization Act for Fiscal Year 2023 | Fenwick & West LLP

The U.S. government’s national security and economic priorities in promoting and embracing innovation are fully articulated in the soon-to-be-completed Fiscal Year 2023 National Defense Authorization Act (NDAA). In this Customer Alert, we are highlighting provisions that may be of interest to technology and life sciences companies of all sizes.

Towards the end of 2022, Congress is nearing completion, and President Biden is expected to sign the NDAA 2023 into law authorizing funds for the Department of Defense (DOD), the Department of Energy, and other defense-related activities. In addition to serving as an approval of funds, the NDAA would also establish defense policies and limitations, and address organizational administrative matters related to the DOD that may have greater implications for the technology and life sciences industries. The NDAA passed by Congress for fiscal year 2023 would support over $850 billion in total funding.

Technology-oriented highlights

  • Artificial intelligence (AI) and digital solutions: The DOD must establish priority enterprise projects for data management, AI, and digital solutions for business efficiencies and combat capabilities, including specifying a five-year AI systems acquisition program for DOD cyberspace operations. Specific funding allocations include $75 million for the Defense Advanced Research Projects Agency (DARPA). Other non-DOD agencies are also being directed to expand their use of AI.
  • Internet security: The NDAA will also include funding for cyber operations, including seed funding for consortia and manpower pilot programs.
  • Cloud Service Provider: DOD would need to establish a policy for future DOD contracts with cloud service providers to handle secrets that would allow DOD to conduct independent testing of commercial cloud infrastructure before it could go live on DOD networks.
  • Other Technologies: Select highlights of specific industry funding or other policies include:
    • Quantum Computing Activities (DARPA): $20 million
    • Electronic warfare, jamming and signature technologies: $85 million
    • 5G technology development, experimentation and transition support: $120 million
    • Airplane Technology (Low Cost, Eligible): $25 million. (“Attritable Aircraft” is an affordable solution where an unmanned aircraft can be manufactured quickly with no expectation of extended life, and can be purpose-built in response to emerging and unforeseen threats.)
    • Internet Freedom and Circumvention Technologies: $49 million
    • Technology for People with Disabilities: $44 million
    • Health Technology Wearables: DOD to pilot a program to monitor brain health from hyperbaric exercise using off-the-shelf wearable sensors
  • Climate Tech related funding and policies:
    • Environmental Remediation: $6.8 billion
    • Military construction, including energy resilience and energy conservation projects, solar roofs, setting standards for microgrids, commissioning a study on the feasibility of adopting innovative construction techniques and sustainable materials, and creating EV charging infrastructure: $19.5 billion
    • Future Non-Tactical Vehicle Requirements: Subject to initial cost estimate reports, beginning October 1, 2035, non-tactical vehicles purchased or leased by the DOD must be electric, zero-emission, or advanced biofuel or hydrogen.
    • Rare Earth Metals Recovery/Recycling: DOD shall establish a spent battery recycling policy that encourages the recovery or return of precious metals, rare earth minerals, or other elements of strategic importance.
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Highlights of DOD Contracting and Procurement Policy

  • Software: The new program would test the feasibility of unique software data rights negotiation approaches to improve the speed, efficiency and effectiveness of defense acquisitions.
  • Life Sciences: The DOD would have the right to enter into transactions other than contracts, collaborative agreements, or grants to conduct medical care and health studies or demonstration projects.
  • Notable small businesses: The NDAA will codify the mentor-protégé program, in which small companies work with larger companies, and establish a five-year pilot program for a protégé company to receive significant compensation for engineering, software development, or manufacturing customization contracts, and will be the of the summary rating program used to codify small business administration to assess how well federal agencies are achieving their goals in small business procurement. The NDAA also requires the DOD to create a commercial due diligence program to help small businesses identify threat actors.
  • Codification of the FedRAMP program within the General Services Administration: The NDAA will create a standardized approach to evaluating and authorizing cloud computing products and services for unclassified information about federal agency systems.
  • Inflation Adjustments: Subject to certain conditions, the NDAA will grant temporary authority until December 31, 2023 to change contract terms or the option to provide an economic price adjustment for fixed-rate contracts.

Foreign Policy and Notable Restrictions

  • China Specific Policies: The NDAA will lead an assessment of dual-use technologies that the Chinese Communist Party could potentially exploit, including better tracking of Chinese companies collaborating with universities, and prohibits federal agencies from buying semiconductor products or services from certain Chinese companies (SMIC, YMTC, and CXMT) to obtain. , and the extension of the ban on Chinese equipment provided by drone maker DJI and other companies subject to certain restrictions. Also, there are new DOD supply chain restrictions on products mined, produced or manufactured by forced laborers in the Xinjiang Uyghur Autonomous Region.
  • Continued funding from Taiwan and Ukraine in support of US policies: The NDAA will continue to fund an ongoing policy regarding US-Taiwan relations and continued security assistance to Ukraine. With respect to the latter, until fiscal year 2027, the DOD may not use funds for (i) US-Russia military cooperation; and (ii) activities recognizing Russian sovereignty over Crimea, Donetsk, Luhansk and other areas in Ukraine, except where it would be in US national security interests to do so.
  • Rare Earth Supply Chain Disclosures: All contractors supplying the DOD with rare earth or strategic/critical material magnets must disclose where the magnets were mined, and the DOD may require the contractor to implement a traceability system in its supply chain.
  • Risk reduction in foreign investments: The NDAA will direct the DOD to provide more oversight over analytical methods to prevent competing foreign capital markets from benefiting from the consequences of US corporate bankruptcies.
  • Other bans:
    • The NDAA will block the intelligence agencies from providing grants unless the prospective recipient certifies that they have disclosed funding from China, Iran, North Korea, Russia or Cuba in the five years prior to applying for the grant.
    • The NDAA will also ban companies using unmanned aerial systems from China, Russia, Iran and North Korea from contracting with the Department of Defense or the Coast Guard from October 1, 2024.
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Other notable highlights:

  • Foreign suppliers of medicines: The DOD is to develop guidance to identify gaps and risks in supply chain management of scarce pharmaceutical supplies due to reliance on foreign suppliers.
  • India and New Zealand: DOD will work with the Department of Defense in India to promote collaboration on new technologies, readiness and logistics, while New Zealand has been added to the National Technology Industrial Base to improve collaboration on research, development and manufacturing for a reliable industrial base.
  • Microelectronics working group: The NDAA will establish requirements for a government, industry, and academic forum to share topics of interest related to microelectronics research, development, and manufacturing.

Conclusion

While this cannot fully summarize the NDAA, we hope it provides an insightful look at 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 NDAA’s potential opportunities or compliance requirements.

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