On November 25, 2002, President George W. Bush signed the Homeland Security Act of 2002 (Public Law 107-296) into law. The Homeland Security Act ("HSA") creates a new Department of Homeland Security ("DHS") to detect, prevent, and manage the national response to domestic acts of terrorism and natural disasters. The HSA pulls together 22 federal agencies for inclusion in the new department, initiating the most ambitious government reorganization in more than 50 years. The Act sets an effective date of January 24, 2003, and the Bush Administration already has issued a reorganization plan for the implementation of the new law and is beginning to put that plan into action. The Administration has until January 24, 2004 to consolidate the designated agencies into the new DHS, but under the Administration’s announced plan most of the departmental transfers will be complete by March 1, 2003. 

Perhaps the greatest impact of this undertaking will be on the transportation industry and the procurement community. DHS jurisdiction over security matters will extend to every mode of transportation. In addition, under the new law, DHS procurement of goods and services will differ in very significant ways from that of other executive departments. 

Among the key changes, the Transportation Security Administration ("TSA") will be moved wholesale from the Department of Transportation ("DOT") to DHS. The TSA will generally have responsibility for transportation security with respect to all transportation modes, though the U.S. Coast Guard will retain primary responsibility for maritime and port security. The TSA will remain a discrete entity within the new Department for two years, after which it will cease to exist and its functions will be rolled into a DHS Border and Transportation Security directorate. For the first time since its inception, DOT will not regulate any part of transportation security (though it will continue to regulate hazardous materials shipments), and the TSA will become a major part of what must be regarded as primarily a law enforcement agency. 

To facilitate the billions of dollars in procurements that the new Department will make, the HSA gives the DHS extensive acquisition flexibility within the general parameters of the Federal Acquisition Regulation ("FAR"). The Secretary of DHS is given the authority to use new streamlined procedures for buying security-related goods and services, as well as to extend the FAR's commercial item procurement procedures to non-commercial goods and services needed to fight terrorism. The DHS also will house a new Homeland Security Advanced Research Projects Agency, with procurement authority modeled on the Defense Advanced Research Projects Agency of the Department of Defense ("DOD"), to encourage new research and development in the security field. Sellers of qualified anti-terrorism products and services will receive a substantial shield from third party liability suits under a codified government contractor defense. 

As all of these changes occur and the statute is implemented, it is no overstatement to predict that scores of new transportation security and related procurement regulations will be issued, and, with them, new policy and legal issues will arise.

The HSA sets in motion the largest federal government reorganization since the National Security Act of 1947 created the Department of Defense out of the various service branches. The HSA creates an entirely new Department of Homeland Security, which will have several primary goals, identified by the statute as: preventing terrorist attacks within the United States; reducing the nation’s vulnerability to terrorism; minimizing the damage and assisting in the recovery effort from any terrorist attacks that do occur; and monitoring connections between illegal drug trafficking and terrorism and coordinating efforts to sever such connections. The HSA will bring together 22 agencies to fulfill this mission, organized into four sub-departments, or "directorates." The new department will start with about 170,000 employees – making it the largest federal department other than the departments of Defense and Veteran Affairs – and it will have a projected annual budget of over $37 billion. 

The four directorates are: Border and Transportation Security; Emergency Preparedness and Response; Science and Technology; and Information Analysis and Infrastructure Protection.

The Coast Guard, as noted above, unlike the other agencies included in the new Department, survives as a discrete entity and will report directly to the DHS Secretary, though the President retains the authority to move that service to the Department of Defense when necessary. Each of these four directorates will be headed by an Under Secretary reporting to the Secretary of DHS. In addition, there will also an Under Secretary for Management who will report to the Secretary and oversee DHS procurement (see below for a discussion of procurement matters and issues under the new statute). 

Some functions will not move to the DHS. For example, the customs revenue functions of the Customs Service (which will survive, at least in name) – its authority to impose and collect customs duties, excise taxes, fees, and penalties due on imported merchandise – remain with the Treasury Department. The State Department continues to be responsible for issuing visas, though the new DHS, as the successor to the INS (which will be abolished), will have the authority to adjudicate visa, naturalization, asylum, and refugee petitions. 

The statute makes numerous changes in the security regime already significantly altered by the Aviation and Transportation Security Act.

• Transportation Worker Identification Card ("TWIC").

The HSA expressly provides that a national identification card or system is not authorized. The TWIC had been a major, if slow-moving, TSA initiative that was to apply to employees in all transportation modes. The new Maritime Transportation Security Act (discussed below), however, includes a requirement for a maritime worker ID card, and it is not clear whether these two provisions will conflict.

• Hazardous materials regulation.

The DOT’s Research and Special Programs Administration ("RSPA") issues regulations governing carriage of hazardous materials by all transportation modes, and modal administrations enforce them. The ATSA enacted in 2001 did not alter this arrangement, and neither does the HSA. When the DHS issues a security-related order or regulation, the statute does require the DHS to consult with DOT.

• Transportation Security Oversight Board and FAA-DHS liaison.

The ATSA created the Transportation Security Oversight Board as an advisory body to TSA. This Board will now move over to the DHS. The Board's membership will be the same as under the previous statute, except that the DOT representative, who has been presiding over the Board, will be replaced by a DHS representative.

• Emergency regulations.

The new statute also makes a minor change in the Transportation Security Oversight Board’s authority under the DHS. The ATSA had given TSA the authority to issue emergency regulations or directives without a notice and comment period. These regulations or directives were (and will continue to be) reviewed by the Board. Under the ATSA’s language, such regulations remained in effect unless disapproved by the Board or rescinded by TSA. Under the new law, emergency regulations will have an effective period of 90 days, during which they can be ratified or rejected by the Board, or rescinded by TSA itself. Thus, if neither the Board nor TSA acts, emergency measures become ineffective after 90 days.

The Maritime Transportation Security Act of 2002

Somewhat lost in the fanfare surrounding the creation of a new federal department was the enactment of the Maritime Transportation Security Act of 2002 (or the "MTSA"), also signed by the President in November. This statute (Public Law 107-295) aims to do for maritime and port commerce what the ATSA did for aviation – effect a thorough reworking of the sector’s security regulation and dramatically change the way that industry stakeholders carry out security in their own operations.

Though it generally lacks the tight timelines that characterize the ATSA (and that have driven the TSA to focus almost exclusively on aviation in the past year), this statute makes major changes to the maritime and port security regime, most of them to be implemented by the Coast Guard and DHS generally. Among many other significant changes, the MTSA:

• Requires vessel operators (both foreign and U.S.-flag) and port operators to develop and implement security plans for vessels serving the U.S. and for U.S. ports. These security plans are to be based upon a national maritime transportation security planning system that the Coast Guard will develop. The Coast Guard, in turn, will base its national plan on port vulnerability assessments that it will conduct around the nation. Once the Coast Guard issues its plan, port and vessel operators will have six months to put their own specific security plans into place.

• Establishes a requirement for the Coast Guard to assess the effectiveness of security systems in certain foreign ports and to deny entry to vessels from ports that do not maintain effective security. Individuals who enter secure areas on vessels or facilities will be required to have background checks and transportation security cards issued by the Federal government. It is not clear how this requirement will mesh with the HSA’s directive that no further work be done in support of a TWIC.

• Authorizes grants for enhanced facility security at U.S. ports for the next six fiscal years. These grants will help cover the costs of port security improvements and fund research and development projects to determine which technologies will improve port security.

• Contains several provisions to improve the security of containers. The bill requires the DHS to maintain a cargo tracking, identification, and screening system for shipping containers shipped to and from the United States.

• Requires the establishment of performance standards to enhance the physical security of shipping containers, including standards for container seals and locks. Contains other important security enhancements concerning enhanced vessel crewmember identification, Coast Guard sea marshals, and vessel transponders to track the movement of vessels in U.S. waters.

Most of the implementation of the ATSA over the past year has been focused on the aviation sector. As the ATSA’s remaining aviation-specific deadlines are met in the next year, TSA and DHS will undoubtedly turn increasingly to maritime security – and the MTSA is intended to ensure that this new emphasis comes about quickly.

The upshot of all this new legislation is that the DHS will begin to issue numerous new regulations with respect to non-aviation modes and will begin to establish new policies concerning those regulations – starting as early as January 2003. And, of course, the new DHS will have to begin procuring the goods and services needed to fulfill its daunting mission.

The procurement of goods and services by the DHS, like most Federal government procurements, will be governed by the Federal Acquisition Regulation. The HSA, however, provides the new Department with some very important latitude within the FAR parameters not afforded to other Federal agencies. As noted, a new DHS Under Secretary for Management will have principal responsibility for administering the Department's procurement activities.

• Streamlined acquisition authority.

The Act permits the Secretary of DHS to exercise "special streamlined acquisition authority" until September 30, 2007, if the Secretary determines in writing that the mission of the Department "would be seriously impaired" without the use of such authority. This special authority extends to three areas.

First, and most important, the Secretary may deem "any item or service to be a commercial item" for purpose of Federal procurement laws. The item or service, in other words, need not meet the normal FAR requirement that it be a standard "off-the-shelf" item sold in the commercial marketplace in order to qualify for purchase under Part 12 of the FAR. Part 12 permits the government to use streamlined procedures in soliciting and evaluating offers, while relieving contractors of certain burdensome Federal procurement statutes and regulations. Any new or unique item or service, as well as traditional commercial items and services, can be purchased by DHS exercising this authority. Moreover, until September 30, 2007, DHS acquisitions of commercial items not exceeding $7,500,000 may be conducted using any of the additional simplified acquisition procedures provided in FAR Part 13.

Second, the Act increases the simplified acquisition threshold, or ceiling, from $100,000 to $200,000 for DHS contracts to be awarded and performed, or purchases to be made, within the U.S., and to $300,000 for those outside of the U.S. The reason for the different ceilings for domestic and foreign procurements is not clear. Nonetheless, procurements by DHS below these ceilings can be made under the provisions of FAR Part 13, which will permit DHS to make such purchases using a variety of simplified procedures, including government purchase cards, unpriced purchased orders, and blanket purchase agreements. Contractors, in turn, will be exempt from many statutory mandates, including the requirements of the Anti-Kickback Act, the Miller Act, the Contract Work Hours and Safety Standards Act, the Drug-Free Workplace Act, the Solid Waste Disposal Act certification requirements, and the Procurement Integrity Act.

Third, under the HSA, the micro-purchase amount is raised from $2,500 to $7,500. Designated employees of the new Department will be able to use government purchase cards for buying items up to this limit.

• DHS research and development procurements.

The HSA offers DHS additional flexibility for encouraging private sector research and development ("R&D") projects. Specifically, the Act provides, for a five-year pilot period, that the Secretary will have the same "other transactions" authority as the Secretary of Defense in carrying out research and development projects. This authority will allow the DHS to enter into transactions other than contracts, grants, or cooperative agreements where those vehicles are not feasible or appropriate either because the R&D effort will not produce deliverable items or items for the direct benefit and use of the Federal government.

• A new process for evaluating security technologies.

Consistent with its overarching mission, the HSA establishes a broad framework for evaluating security technologies, offering sellers and contractors several ways to market innovative products and services.

First, as stated above, the HSA creates a new Homeland Security Advanced Research Projects Agency ("HSARPA"), to foster the development and deployment of state-of-the-art technologies that will promote homeland security. HSARPA is modeled on the Defense Advanced Research and Projects Agency ("DARPA"), which was created within the Department of Defense after the Soviet Union launched Sputnik to accelerate the development of U.S. technologies for national security. Like DARPA, it is anticipated that HSARPA will be staffed by a small, talented science team that will encourage private industry and existing government science agencies to address homeland security threats. To this end, the HSA establishes an "Acceleration Fund" to be used by HSARPA for awarding competitive contracts, grants, and cooperative agreements, with an initial $500 million authorized to seed the Fund for FY2003. The legislation does not make clear whether HSARPA can also use DHS's "other transactions" authority in conjunction with the Acceleration Fund.

Second, the HSA creates a federally funded research and development center to be known as the Homeland Security Institute. Like other federally funded research and development centers, such as the National Defense Research Institute, the Homeland Security Institute will function as DHS' "think tank." Its primary mission will be to evaluate the vulnerabilities of the nation's infrastructures, to analyze the costs and benefits of alternative strategies intended to lessen those vulnerabilities, and then to assess the effectiveness of security measures that are subsequently deployed. In carrying out its functions, the Institute is required to consult with representatives from private industry, institutions of higher education, nonprofit institutions, other government agencies, and other federally funded research and development centers. Curiously, however, the HSA provides that the Institute will terminate in three years.

Third, the HSA directs DHS, acting through the new Under Secretary for Science and Technology, to establish a centralized federal "technology clearinghouse" to disseminate information on innovative security technologies to federal, state and local governments, and also to private entities. The program will include a technical assistance team to assist DHS in the screening of various security technology proposals. The clearinghouse also is to provide interested parties with guidance on how to pursue their technology proposals, including information relating to federal acquisitions and funding opportunities.

Finally, the HSA requires, within one year of its enactment, that the Federal Acquisition Regulation be "revised to include regulations concerning unsolicited proposals." The revised regulations are to require that before undertaking a comprehensive evaluation, an agency's point contact -- and presumably this will apply to all federal agencies, not just DHS -- must consider whether the unsolicited proposal contains "technical and cost information for evaluation and overall scientific, technical, or socioeconomic merit." Absent further explanation, this appears merely to be a refinement of the existing FAR provisions addressing unsolicited proposals (found in FAR Subpart 15.6), which already require that any unsolicited proposal contain sufficient technical and cost information for evaluation and be related to the agency mission.

• Restriction on certain DHS procurements.

The HSA expressly prohibits the Secretary from entering into any contracts with so-called "corporate expatriates." The Act provides that a foreign incorporated entity will be treated as an "inverted domestic corporation" if after enactment of the Act, the following occurs: the foreign entity acquires "substantially all" of the properties of a U.S. corporation or partnership; the entity acquires at least 80 percent of the stock of the U.S. corporation, or 80 percent of the capital or profits interest in the U.S. partnership; and the affiliated group after the acquisition does not have substantial business activities in the foreign country when compared to the affiliated group's total business activities. Cutting through the verbiage, this prohibition reflects Congress' reaction to the recent reports of U.S. companies relocating off-shore for tax avoidance purposes.

• Government Contractor Defense

Perhaps as important as anything in the Act to prospective sellers and contractors, the HSA provides a codified government contractor defense covering "qualified anti-terrorism technologies" approved by the Secretary of DHS "should a product liability or other lawsuit be filed for claims arising out of, relating to, or resulting from an act of terrorism." The Act defines these qualified technologies as including "…any product, equipment, service (including support services), device, or technology (including information technology) designed, developed, modified or procured for the specific purpose of preventing, detecting, identifying, or deterring acts of terrorism or limiting the harm such acts might otherwise cause…." Sellers of such technology may apply to the Secretary who, upon review and approval in accordance with specified standards, will issue a certificate of conformance to the seller and place the technology on an Approved Product List for Homeland Security. Sellers with approved technology who then provide that technology to either federal or non-federal customers must obtain anti-terrorism liability insurance, but limited to no more than "the maximum amount of liability insurance reasonably available from private sources on the world market at prices and terms that will not unreasonably distort the sales price of Seller's anti-terrorism technologies." Should a product liability or other lawsuit stemming from an act of terrorism subsequently be filed implicating an approved technology, the seller's liability for non-economic damages (e.g., pain and suffering) will be limited to the percentage of harm caused by the seller, punitive damages cannot be assessed, and the seller's total liability "shall not be in an amount greater than the limits of liability insurance" obtained.

* * *

The Homeland Security Act emerged after months of congressional wrangling over several competing bills and contentious issues. The finished product is not model legislation, however; it raises many questions involving transportation security and the DHS’s procurement authority, among others, as even this brief overview shows. Regulations implementing the statute will undoubtedly raise still more questions. Clarifying legislation correcting at least the obvious errors and ambiguities is likely in 2003. Litigation can also be expected. We will be following these developments closely.

For further information, we invite you to contact any of the following firm lawyers:

Top of page