DHS Issues Interim Rule Implementing the SAFETY Act

On October 10, 2003, Secretary of Homeland Security Tom Ridge signed an interim rule implementing the SAFETY Act.¹ The interim rule is effective immediately and formally launches the application, review, and acceptance process that informally began on September 1, 2003. The interim rule also seeks another round of comments to be submitted within sixty days after the date the interim rule is published in the Federal Register. ²

One significant disappointment is that the interim rule does not include the application approved by the Department of Homeland Security ("DHS") that was due to be published on September 1, 2003. While a draft of the application packet has been in an underground circulation, the dissemination of the packet has unfortunately not been made public. In any event, the interim rule does not require use of the DHS form (whenever it might be issued) to apply for SAFETY Act designation or certification. Given the clarifications provided by the interim rule, there is no reason to wait any longer to submit a SAFETY Act application for candidate technologies.

The interim rule addresses many of the concerns raised by commentators regarding various aspects of the proposed rule. In this alert, some of the more significant aspects of the interim rule, including some new gloss on the Act that provides greater clarity to the breadth of the SAFETY Act, will be addressed.

Interactive Application Process

For the first time, DHS advises potential applicants that once an application has been submitted, members of DHS will interact with the applicant to perfect and clarify an application. Under the proposed rule, DHS offered the possibility of DHS involvement in the application process only in certain circumstances. Now, under the interim rule, DHS appears to understand that the application process will be a difficult and complex process where DHS input will be necessary at every stage.

Preapplication Submissions

The proposed rule encouraged would-be sellers to involve the DHS early in the design and development process so that DHS could provide feedback to the entity as to whether the proposed or developing product might meet the definition of a qualified antiterrorism technology. Now, DHS has developed a "preapplication submission" process to encourage and facilitate such feedback.

Many companies have taken the position that a particular technology they are developing is too early in the development cycle to warrant the submission of a SAFETY Act application. DHS's restatement of its interest to provide feedback on such technologies early in the development cycle and the creation of the "preapplication submission" demonstrates the importance of paying attention to the SAFETY Act even if the technology is only in the prototype stage.

Gaining DHS involvement early in the development cycle may be critical not just in possibly shaping the technology itself but also in helping companies decide which tests to conduct and which "technology standards" to apply to a particular technology. In short, it appears that DHS is telling industry"it is never too early" to apply for SAFETY Act protections.

Expedited Review

The current review cycle envisioned in the proposed and interim rule for a SAFETY Act application is at least five months. The proposed rule suggested that expedited review was available for technologies subject to an "agency procurement" of antiterrorism technologies. The interim rule now makes clear that expedited review is available for procurements of antiterrorism technologies conducted by federal, state, or local government agencies.

Retroactivity

A very significant clarification has been provided by DHS regarding the application of SAFETY Act protections to technologies already sold. Questions had been presented as to the treatment of those technologies that had already been sold and deployed in the stream of commerce before the effective date of a SAFETY Act designation or certification. Some suggested that the protections of the Act should be applied retroactively to predesignation or precertification sales of the same technology.

The intermix rule addresses this issue and distinguishes between the date of "deployment" and the date of "sale." For technologies that have been deployed prior to the effective date of a designation for such technology, the protections of the Act will not be applied retroactively.

For technologies that have been sold, but not yet deployed in defense against, response to, or recovery from an act of terrorism, the Act's protections might be applied retroactively as long as the technology sold is within the scope of the designation and the item was sold by the seller to whom the designation was issued. Thus, the only critical date for determining the possible retroactive application of the Act is the date of "deployment" not the date of "sale." The Act might apply to technologies sold prior to the effective date of the designation as long as the technology has not yet been deployed.³

To implement this dichotomy, the interim rule now requires the undersecretary to specify in each designation and certification the "earliest date of the sale of the technology to which protections will apply." Thus, it is incumbent upon applicants to demonstrate which predesignation sales of the technology have and have not been deployed so that the undersecretary can determine with precision the proper retroactive application of the Act.

Use of "Standards"

Much was said during the comment period regarding the use of "safety and effectiveness" standards as stated in the proposed rule. DHS has now changed the term to "technical standards" and recognizes the importance of using "voluntary consensus standards" to aid the DHS in developing its "technical standards." In other words, DHS plans to involve users, manufacturers, and technical communities in developing standards to be used in evaluating applications.⁴

Thus, it is imperative that applicants explicitly identify "consensus standards" applicable to the technology at issue when submitting an application. By doing so, the applicant will be able to guide DHS in determining whether the consensus standard is sufficient to evaluate a technology and whether the technology, in fact, satisfies the standard.

Many clients have been concerned that the development and institution of standards might lead to the exclusion of technologies worthy of protection that might not meet a particular standard. Fortunately, DHS has addressed this concern by suggesting that the use of standards will not be pervasive:

The Department also understands, however, that there is a continuing need for flexibility in the technical evaluation criteria under the SAFETY Act, and accordingly the Department will apply standards in SAFETY Act evaluations only to the extent that they are applicable to a particular technology and the circumstances of its proposed deployment. For those technologies without applicable standards (or with incomplete standards), additional methods of evaluation will be used, such as best practices, existing laboratory or field testing, etc.

Thus, for those technologies where established standards do not exist, DHS will use other methods of evaluation.

Scope of Required Insurance Coverage

The proposed rule requires applicants to obtain insurance coverage for all upstream and downstream entities that sell to or buy from the seller of the antiterrorism technology. Concern had been expressed that the cost of obtaining such an open-ended insurance coverage would always be prohibitive.

DHS responds to this concern by noting that the statute requires such coverage so there is nothing DHS can do to alter the congressional directive, and, more importantly, that because only the seller of the technology (and not the upstream or downstream entities) can be sued, the actuarial analysis of the insurance should focus on only the seller's liability. Thus, DHS reasons, insurance should be available in most circumstances. In the event insurance is not available in a particular instance, self-insurance may be possible.

Termination Resulting from "Significant Modification"

The proposed rule automatically terminated the protections of the Act for any designated technology that underwent significant modification or change. Of course, what is meant by "significant" is subject to debate, and because there was no mechanism to discuss whether a particular modification merited such a draconian response, there was concern as to how this provision should be interpreted.

DHS has attempted to soften the impact of this provision by now applying automatic termination only to those changes that "significantly reduce the safety or effectiveness of the technology." Whether this change is substantive remains to be seen. In any event, the clear message to those with designated technologies is simple: the burden is on the seller to submit to the undersecretary any proposed change or modification to a designated technology so that a proper review can be undertaken. It is worth repeating that this submission should occur before the change or modification is implemented in the technology.

Under the interim rule, the undersecretary can now issue a certificate to the seller declaring that the modification is not "significant" and that the existing designation applies to the aschanged technology.

"Act of Terrorism"

The Act provides liability protection only in the event of an act of terrorism. The term "act of terrorism" is defined very broadly in the statute and the proposed rule. DHS confirms in the interim rule that the statutory definition provides significant flexibility in defining what is a "terrorist act." Significantly, DHS clarified that the term potentially covers acts that occur outside the territory of the United States if it causes harm to a person, property, or an entity in the United States.

"Specific Purpose"

The proposed rule stated that a technology must be designed, developed, modified, or procured for "the specific purpose" relating to antiterrorism. Some comments expressed concern that the use of the article "the" as opposed to "a" might lead to an overly restrictive interpretation of the Act and allow for protection only for single-purpose technologies related to antiterrorism. In other words, a technology that had several purposes including an antiterror purpose might not be deemed to have "the specific purpose" of antiterror. DHS clarifies that multipurpose technologies qualify for protection as long as one specific purpose of the technology is related to antiterrorism.

Reciprocal Waivers

The statute requires the seller to obtain reciprocal waivers of claims by upstream and downstream entities for losses sustained by them or their employees arising from an act of terrorism with respect to which a qualified antiterrorism technology is deployed. Obtaining such waivers is not standard practice and such waivers may be very difficult, if not impossible, to obtain. There was concern that the inability to obtain such waivers would result in the denial of an application for designation or certification.

DHS now recognizes that obtaining reciprocal waivers of the breadth required under the statute may be difficult. The interim rule specifies that a designation will not be withheld or revoked for failure to obtain one or more required reciprocal waivers, as long as the applicant demonstrates that "it made diligent efforts in good faith to obtain such waivers."

Thus, it is imperative that all applicants demonstrate the extent to which it attempted to obtain the reciprocal waivers required by the statute.

Conclusion

The DHS interim rule clarifies several areas of concern that were created by the proposed rule. Again, as in the case of the issuance of the proposed rule, DHS has done an admirable job in maintaining the proper breadth of the Act's coverage by supplying clarity to various areas of the statute's coverage. The SAFETY Act is now "in business" and companies should be encouraged by the interim rule to take full advantage of the Act.

For more information on the SAFETY Act, the proposed rule, or help in preparing applications under the SAFETY Act, please contact Jacob B. Pankowski, team leader of Nixon Peabody LLP's Government Contracts Team, at 202.585.8181 or jpankowski@nixonpeabody.com.

1. For a description of the contours of the SAFETY Act, see Mr. Pankowski's detailed analysis of the DHS proposed rule, "Department of Homeland Security Proposes Rule to Implement SAFETY Act," published July 15, 2003, at http://www.nixonpeabody.com/publications_detail3.asp?ID=350.

2. As of the date this alert was written, the interim rule had not yet been published in the Federal Register. It will appear in final form at 6 CFR Part 25.

3. Consistent with this new scheme, the interim rule makes clear that for those technologies that are in continuous deployment (e.g., sensors or cameras), the protections of the Act will apply only to those deployments that occur after the effective date of the designation or certification.

4. When DHS identifies a "voluntary consensus standard" as being applicable to an antiterrorism technology, DHS may publish a summary of the standard, along with a link to the relevant Web site.