Contractor found liable for installing counterfeit switches

A Florida jury this week found a large systems integrator guilty of violating a trade law for supplying counterfeit goods to fulfill a Navy contract, but the tainted equipment will remain installed in the service's IT network.

The ruling shines a spotlight on the problem IT managers in government and contracting firms face in trying to keep fake products out of government networks.

On Wednesday, the jury found that Largo, Fla.-based computer equipment supplier Gulfcoast Workstation, a division of Relational Technology Services, broke the Florida Deceptive and Unfair Trade Practices Act by supplying foreign-made counterfeit Cisco network switches to a subcontractor for a Navy project. The jury, however, did not require Relational to pay any damages for the violation.

Meanwhile, the Navy has chosen not to shut down a portion of its network to swap out the counterfeit switches for legitimate ones manufactured by Cisco. The subcontractor, American Data, ended up having to pay Relational $250,111 for the nonconforming equipment.

American Data had refused to make the payment after prime contractor Lockheed Martin discovered duplicate serial numbers on the Cisco switches, which indicated the switches were counterfeit. According to court documents, investigations by Cisco confirmed that the switches came from the gray and black markets, with invoices indicating that some of the products came from China.

The jury found that American Data's refusal to pay, which touched off the legal battle, represented a breach of contract with Relational.

"It's contradictory for the jury to find us in breach of contract, after finding Relational liable for [deceptive and unfair trade practices] and seeing proof that the equipment was counterfeit," said Robert Castro, president of American Data. "How can we be expected to pay for counterfeit equipment?"

Regardless of the question of who should pay the penalty, federal agencies have a right to have counterfeit products replaced, said Steven Schooner, associate professor of law and co-director of the Government Procurement Law Program at George Washington University. The government is entitled "to be made whole," meaning that the contractor can be forced to replace faulty or counterfeit products and pay all accrued costs.

"It's perfectly common for government to say 'I'm not paying for what you gave me,' or 'I get my money back and you're going to pay for a new product, as well as the cost to remove what you gave me and install the replacement,'" Schooner said.

He recalled one example when a contractor was required to remove and replace reworked ball bearings from an aircraft engine.

"[Government] should hold contractors accountable for bargains negotiated," Schooner said. "On the flip side, it shouldn't cut off its nose to spite its face. At the end of the day, there's a job to do, and no government agency has unlimited resources to track these things. That means some get away with this stuff."

For that very reason, the federal government should have been represented during the Florida case to help educate the court about federal contracting law and the importance of keeping counterfeit products out of the federal procurement system, said Larry Allen, executive vice president of the Coalition for Government Procurement.

"It is unlikely that a circuit court would take federal procurement rules into account in settling what it sees as a contract dispute between two companies," he said. "Most courts don't know, and don't want to learn, federal contract law. I think that the feds should have intervened at least as friends of the court -- their interests were in play here and they should have been represented."