LAW OFFICES OF

DEKIEFFER &

HORGAN

SUITE 800

729 FIFTEENTH STREET, N.W. WASHINGTON, D.C. 20005
TELEPHONE (202) 783-6900 Affiliated Office: SAARBRÜCKEN, GERMANY FACSIMILE (202) 783-6909

September 19, 2008 Defense Acquisition Regulations System Attn: Ms. Amy Williams OUSD (AT&L) DPAP (DARS) IMD 3D139 3062 Defense Pentagon Washington, DC 20301-3062 Subject: Comments on Proposed Amendments to Defense Federal Acquisition Regulation Supplement; Restriction on Acquisition of Specialty Metals (DFARS Case 2008–D003)

Dear Ms. Williams: These comments are submitted on behalf of Titanium Metals Corporation (“TIMET”) in response to your July 21, 2008, notice to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to address statutory restrictions on the acquisition of specialty metals not melted or produced in the United States. Background TIMET is a vertically integrated titanium producer headquartered in Dallas, Texas. TIMET produces titanium sponge, the basic form of titanium metal, at its facility in Henderson, Nevada. TIMET produces melted titanium products (ingot, electrodes and slab) at its facilities in Henderson, NV and Morgantown, Pennsylvania. TIMET produces titanium mill products, including long products (billet and bar), and flat products (plate, sheet and strip) primarily at its facility in Toronto, Ohio.

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Titanium is highly desirable for use in defense applications because it is as strong as steel at half the weight, it is corrosion resistant, and it combines more easily than aluminum or steel with advanced composite materials used in military aerospace applications. As a result, titanium is used in the most demanding military applications, such as lightweight armor, munitions, parts for naval vessels operating in corrosive saltwater environments, rockets and aircraft structural parts as well as rotating parts for jet engines. Only four companies in the world currently produce the quality and quantity of titanium required for DoD’s demanding military applications: TIMET; Allegheny Technologies Inc of Pittsburgh, Pa.; RTI International Metals, Inc. of Pittsburgh, PA; and Verkhhnaya Salda Metallurgical Production Association (VSMPO), a Russian state-owned enterprise that is by far the largest producer of titanium in the world. Congress recognized titanium’s strategic nature by enacting the specialty metals provision of the 2007 National Defense Authorization Act, P.L. 109-364 § 842, 10 U.S.C. § 2533b, which reaffirmed Congress’s long-standing policy of requiring that major defense articles incorporating titanium be produced from titanium melted in America. This law is intended to help preserve critical sectors of the United States defense industrial base, including the United States titanium industry, and to prevent the United States military from becoming dependent for strategic materials on foreign suppliers that may be politically unreliable. Comments A. COTS: DoD’s Proposed Interpretation of “without modification”

TIMET is greatly concerned by the proposed regulation’s legally unsustainable implementation of the specialty metals restriction with respect to commercial items procured by the Department of Defense (“DoD”). In Section 804 of the National Defense Authorization Act for Fiscal Year 2008 (Pub. L. 110-181), Congress revised 10 USC §2533b(h) to clarify that the restriction on DoD’s acquisition of specialty metal not melted in the United States extends to specialty metals contained in commercial items procured by DoD. In the same new provision, Congress created an exception from the restriction for most commercial off-the-shelf (“COTS”) items procured by DoD. The new

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subsection (h) provides: (h) Applicability to Acquisitions of Commercial Items (1) Except as provided in paragraphs (2) and (3), this section applies to acquisitions of commercial items, notwithstanding sections 34 and 35 of the Office of Federal Procurement Policy Act (41 U.S.C. 430 and 431). (2) This section does not apply to contracts or subcontracts for the acquisition of commercially available off-the-shelf items, as defined in section 35(c) of the Office of Federal Procurement Policy Act (41 U.S.C. 431(c)), other than— (A) contracts or subcontracts for the acquisition of specialty metals, including mill products, such as bar, billet, slab, wire, plate and sheet, that have not been incorporated into end items, subsystems, assemblies, or components; (B) contracts or subcontracts for the acquisition of forgings or castings of specialty metals, unless such forgings or castings are incorporated into commercially available off-the-shelf end items, subsystems, or assemblies; (C) contracts or subcontracts for commercially available high performance magnets unless such high performance magnets are incorporated into commercially available off-the-shelf-end items or subsystems; and (D) contracts or subcontracts for commercially available offthe-shelf fasteners, unless such fasteners are-(i) incorporated into commercially available off-the-shelf end items, subsystems, assemblies, or components; or (ii) purchased as provided in paragraph (3). ***** The plain language of this law makes it clear that Congress intends for commercial items to be subject to the specialty metals restriction and that only COTS items, as previously defined in law, are to be exempt from the restriction. The statutory

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definition of a COTS item incorporated by reference into the new section 2533b(h) is set forth in 41 USC § 431(c), which provides: (1) As used in this section, the term “commercially available offthe-shelf item” means, … , an item that-(A) is a commercial item (as described in section 403(12)(A) of this title); (B) is sold in substantial quantities in the commercial marketplace; and (C) is offered to the Government, without modification, in the same form in which it is sold in the commercial marketplace.

The definition of “commercial item” referred to in turn provides, in pertinent part: (12) The term "commercial item" means any of the following: (A) Any item, other than real property, that is of a type customarily used by the general public or by nongovernmental entities for purposes other than governmental purposes, and that (i) has been sold, leased, or licensed to the general public; or (ii) has been offered for sale, lease, or license to the general public. (B) Any item that evolved from an item described in subparagraph (A) through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Federal Government solicitation. (C) Any item that, but for (i) modifications of a type customarily available in the
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commercial marketplace, or (ii) minor modifications made to meet Federal Government requirements, would satisfy the criteria in subparagraph (A) or (B). ***** (G) Any item, combination of items, or service referred to in subparagraphs (A) through (F) notwithstanding the fact that the item, combination of items, or service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor. ***** The plain language of these statutory provisions when read together makes it clear that, for the purposes of the specialty metals restriction, COTS items are a subset of commercial items. COTS items are commercial items that are delivered to the Government “without modification.” COTS items that are modified in any way, other than by being combined with other COTS items, are commercial items subject to the specialty metals restriction if the modifications are of a commercially available type. If a COTS item is modified in a way that is not customarily available in the commercial marketplace, then the modified COTS item does not even retain its commercial status. Such a modified COTS item becomes a noncommercial defense article that is squarely within the ambit of the specialty metals restriction. Despite the plain language of the statute, DoD’s proposed regulation would permit commercial articles modified prior to delivery to the Government to be treated as exempt COTS items. The preamble to the proposed regulation states: “As implemented in the proposed rule at 252.225– 70X2(c)(2)(ii), COTS items are determined at the point of sale by the next higher tier in the supply chain.” 73 Fed. Reg. 42300, 42302 (July 21, 2008). The referenced proposed rule say: “(ii) A COTS item is considered to be ‘‘without modification’’ if it is not modified prior to contractual acceptance by the next higher tier in the supply chain.”

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The proposed rule is directly at odds with the plain language of the statute which provides that an article will be treated as a COTS item if it is “offered to the Government, without modification, in the same form in which it is sold in the commercial marketplace.” Thus, according to the plain language of the statute, the status of a putative COTS item is determined at the point of delivery to the Government, not the point of delivery from one subcontractor to another as the proposed rule would require. Fundamental rules of statutory construction require that where Congress has spoken directly to an issue, agencies and courts “must give effect to the unambiguously expressed intent of Congress.” Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837, 843, 81 L. Ed.2d 694, 104 S. Ct. 2778 (1984). In the specialty metals provision, 10 U.S.C. § 2533b, Congress has spoken directly to the issue of when the status of a putative COTS item is to be determined by referring to a pre-existing statutory definition of a commercial off-the-shelf item which states that an article will be regarded as a COTS item only if it is “offered to the Government, without modification,” except by assembly. The condition of an article at the time it is delivered “to the next higher tier in the supply chain” is not relevant to the criteria set forth in the statute for determining whether an article is to be treated as a COTS item. The statutory provisions quoted above draw a clear distinction between the way COTS and commercial items are to be treated with respect to the specialty metals restriction. DoD’s proposed rule regarding COTS, would completely frustrate the will of Congress by conflating the statutory definitions of COTS and commercial items, thus blurring the distinction that Congress established in the law. The COTS exemption as interpreted by DoD would eviscerate the statutory provision requiring that commercial items (i.e., modified COTS items) and noncommercial items comply with the specialty metals restriction. In practical terms, it is not difficult to imagine how DoD’s proposed regulation could be abused. Russian-origin specialty metal mill product in the form of bar or plate could be machined, rolled, and cut into the form of a blank by a subcontractor in DoD’s supply chain. The subcontractor might be located in Russia, China or anywhere else in the world. The blank would arguably be a COTS item when it is sold to the next higher tier in the supply chain if such blanks are sold for ultimate use in commercial as well as military applications. Under DoD’s proposed rule, any item produced from the blank, including military unique compressor blades, would continue to be treated as a COTS item even though the blank had undergone substantial modification that altered the dimensions and metallurgy of the metal to
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meet military specifications prior to being offered to the Government. Under DoD’s proposed rule, the entire supply chain for military unique compressor blades made from specialty metal could be moved offshore. Clearly this is not what Congress intended when it enacted a COTS exception to the specialty metals restriction. The same process could be repeated with respect to virtually any specialty metal product that DoD buys. Mill product in the form of billet could be rolled and/or annealed into an uncontoured ring by one subcontractor. The ring could then be sold to the next tier in the supply chain in a generic state that could, with further modification, be used in either a commercial or military application. Under DoD’s proposed rule, the ring could be further rolled to alter its size or simply heat-treated and/or machined to meet military unique specifications. Despite these substantial and critical modifications, the military-unique contoured ring would be treated as a COTS item that could be produced anywhere in the world. Similarly, specialty metal sheet or plate could be cut and undergo a bending operation to say a 90 degree right angle prior to sale to the next higher tier in the supply chain. The resulting shape could arguably be regarded as a COTS item. Under DoD’s proposed rule, anything produced from that shape would retain its COTS status no matter how extensive or sensitive the modifications might be. With these few examples, it is not difficult to see how DoD’s proposed COTS rule could lead to the wholesale transfer of the supply chain for critical, military unique parts to overseas suppliers that may be politically unreliable. This is not what Congress intended when it enacted the COTS exemption and would seriously undermine the effectiveness of the specialty metals law.

B.

Definition of “Produced”

DoD’s proposed rule includes a definition of “produced” as used in the phrase "melted or produced in the United States" for the purpose of determining whether specialty metals are qualified as US goods. DoD's proposed regulation defines produced as: (9) Produce means the application of forces or processes to a specialty metal to create the desired physical properties through quenching or tempering of steel plate, gas atomization or sputtering of titanium, or final
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consolidation of non-melt derived titanium powder or titanium alloy powder. With respect to titanium, we understand the proposed rule to mean that titanium or the titanium contained in defense articles procured by DoD would be considered compliant material for the purposes of the specialty metals restriction if the titanium was created by melting titanium sponge and/or scrap in the United States, by subjecting previously-melted titanium to a gas atomization or sputtering process, or by consolidating titanium powder that did not undergo a melting process. We further understand that subjecting titanium to a quenching, tempering or similar finishing operation would not make foreign origin titanium compliant material for the purposes of the specialty metals restriction even though the rule contemplates that quenching or tempering steel plate in the United States would transform foreign origin steel plate into compliant material. While TIMET does not object to treating gas atomization, sputtering and powder consolidation as production processes with respect to titanium, TIMET would strongly object to the treatment of finishing processes such as rolling, annealing, quenching or tempering performed in the United States as sufficient to constitute the production of the resulting titanium products in the United States. Such finishing processes are minor in nature and may be carried out using facilities and equipment that are not necessarily dedicated to titanium production. Merely applying finishing processes to foreign origin metal is not sufficient to carry out the intent of Congress to preserve domestic sources for titanium metal. Such an interpretation would discourage United States producers from investing capital in domestic production of basic metal if it means they must compete for DoD sales against foreign metal that merely undergoes a finishing operation in the United States. C. “Fair and Reasonable Price” Criterion for Non-Availability Determinations

When Congress substantially rewrote the specialty metals law in the National Defense Authorization Act for Fiscal Year 2007, it specified the circumstances under which the specialty metals restriction could be waived based on the nonavailability of compliant domestically produced metal. The relevant provision

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enacted into law states: (b) AVAILABILITY EXCEPTION.—(1) Subsection (a) does not apply to the extent that the Secretary of Defense or the Secretary of the military department concerned determines that compliant specialty metal of satisfactory quality and sufficient quantity, and in the required form, cannot be procured as and when needed. For purposes of the preceding sentence, the term ‘compliant specialty metal’ means specialty metal melted or produced in the United States. The repealed law had provided: (c) AVAILABILITY EXCEPTION- Subsection (a) does not apply to the extent that the Secretary of Defense or the Secretary of the military department concerned determines that satisfactory quality and sufficient quantity of any such article or item described in subsection (b)(1) or specialty metals (including stainless steel flatware) grown, reprocessed, reused, or produced in the United States cannot be procured as and when needed at United States market prices. [Emphasis added.] A comparison of the two provisions demonstrates that when it enacted the current law Congress removed the reference to price as a criterion for determining the availability of compliant domestically produced metal. Notwithstanding Congressional deletion of the price reference from the statute, DoD’s proposed rule would reintroduce this criterion by authorizing a waiver whenever it is determined: that specialty metal melted or produced in the United States cannot be acquired as and when needed at a fair and reasonable price in a satisfactory quality, a sufficient quantity, and the required form … .[Emphasis added.] 73 Fed. Reg. at 42305. In the implementation of a statute, an agency must recognize that when Congress enacts a new statute, it is aware of all previous statutes on the same subject. Erlenbaugh et al. v. United States, 409 U.S. 239, 244 (1972). Consequently, substantive amendments to an existing statute may not be construed as unintentional. “It is a rule of law that where a revising statute or one enacted for
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another, omits provisions contained in the original act, the parts omitted cannot be kept in force by construction, but are annulled.” Stewart v. Kahn, 78 U.S. 493, 502 (1871). See also Handan v. Rumsfeld, 548 U.S. 557, 579 (2006) (“Congress’ rejection of the very language that would have achieved the result the Government urges here weighs heavily against the Government’s interpretation.”). In its recent amendment of the specialty metals law, Congress has intentionally omitted price as a criterion for determining whether compliant domestic metal is available within the meaning of the waiver provision. DoD cannot lawfully overturn the will of Congress by reinstating a criterion that Congress has deleted.

D. Exception for Contingency Operations The specialty metals law contains an exception for: “Procurements outside the United States in support of combat operations or in support of contingency operations.” In DoD’s proposed regulation, this exception is described as: (a) Acquisitions in the following categories are not subject to the restrictions in 225.7003–2: *** (2) Acquisitions outside the United States in support of combat operations. (3) Acquisitions in support of contingency operations. The proposed regulation implements the law by extending the exception for contingency operations to all contingency operations not just those outside the United States. DoD’s reading of the law is grammatically incorrect and conflicts with the underlying logic of the exception. Grammatically, the prepositional phrase “outside the United States” contained in the statute follows immediately after the noun procurement and so modifies the noun with respect to both of the subsequent prepositional phases “in support of combat operations” and “in support of contingency operations.” If Congress had intended to place a geographical limitation only on combat operations, the sentence in the statute would have been written: “Procurements in support of combat operations outside the United States or in support of contingency operations.”

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DoD’s interpretation of the exception also ignores the logic of the exception, which is to make it easier for DoD to acquire supplies locally when it is operating outside the United States. The same logic would not support an exception for contingency operations conducted in the United States.

Thank you for your attention in this matter. If you have any questions regarding titanium issues, please do not hesitate to contact us.

Very truly yours, /s/ J. Kevin Horgan

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