Export Control Reform

The Specially Designed Bait and Switch

DS_SDDecisionToolThe President’s Export Control Reform Task Force recently published a February 12, 2014 Bureau of Industry and Security (“BIS”) advisory opinion that applies “specially designed” based on original design intent, an interpretation that is contrary to the Task Force’s stated objective in imposing the definition. [FN/1]

The opinion also provides industry with more insight into the role of original design intent in the definition’s paragraph (a) “catch” provisions and introduces an interesting level of complexity that many industry members may miss – the exception to the need to perform the paragraph (b) “release” analysis for decontrol notes.

The Stated Objectives of Specially Designed

Over the years, the Department of State has imposed controls based on design intent (i.e., articles designed, developed, configured, adapted, or modified for a military application) under the International Traffic in Arms Regulations (“ITAR”). These types of controls are problematic because they require companies to obtain information that is often difficult or next to impossible to obtain.

The new definition of specially designed was created by the Task Force to meet a variety of objectives. Principal among them was a definition that was easy to understand and that would reduce the number of control entries on the ITAR U.S. Munitions List (“USML”) based on original design intent. [FN/2] Accordingly, as proposed by the Task Force, the principal objectives of specially designed was a definition:

“[that could be] easily understood and applied by exporters, prosecutors, juries, and the U.S. Government—e.g., by using objective, knowable, and clear requirements that do not rely upon a need to investigate and divine the intentions of the original designer of a part or the predominant market applications for such items” [FN/3]

As part of the export control reform, the Task Force is also transferring many military items of lower national security concern from the USML to the Department of Commerce’s Export Administration Regulations (”EAR”) Commerce Control List (“CCL”). To facilitate this process, the Task Force also imposed the new specially designed definition on many CCL items.

The Definition is Overly Complex

Despite the Task Force’s stated objective of an easily understandable definition, the new definition for specially designed is long, complex, and subject to varying interpretations.

In response to several proposed definitions of the term, many industry members warned the Task Force that complexity of the new definition is a problem. [FN/4] However, after several unsuccessful attempts at proposing a new definition for specially designed, the Task Force imposed the definition over significant industry objections.

Today, the definition remains largely untested and unproven in the real world. Agency guidance on how to apply it is spread throughout federal register notices, online decision tools, conference presentations, webinars, and speeches by senior agency officials.

The EAR definition of the term, with clarifying notes, is over 1700 words in length, principally divided between two core paragraphs: paragraph (a), with two subparagraphs that “catch” an item as specially designed, and paragraph (b), with six subparagraphs that “release” an item from being specially designed. The paragraphs provide:

“(a) Except for items described in (b), an “item” is “specially designed” if it:

[two catch subparagraphs omitted]
(b) A “part,” “component,” “accessory,” “attachment,” or “software” that would be controlled by paragraph (a) is not “specially designed” if it:

[six release subparagraphs omitted] [FN/5]

Subparagraph (a)(1) applies to all items while subparagraph (a)(2) and paragraph (b) only apply to parts, components, accessories, attachments, and software. Therefore, determining whether an item is “specially designed” requires a sequential analysis of:

  • whether an item is caught in subparagraph (a)(1) or
  • if the item is a part component, accessory, attachment or software, whether the item is caught by any of the two catch subparagraphs in paragraph (a) of the definition and, if so, whether any one of the six release subparagraphs in paragraph (b) of the definition apply.

If an item is not caught by paragraph (a), it is not specially designed. Even if caught by paragraph (a), however, it is still not “specially designed” if it is a part component, accessory, attachment or software that is released by any one of the six subparagraphs in paragraph (b).

The Role of Original Design Intent in Specially Designed is Unclear

As noted above, the Task Force promoted the new definition as an objective standard focused on actual product characteristics. However, the definition is subject to varying interpretations on whether original design intent is a factor in determining whether an item is caught by the first catch provision at subparagraph (a)(1):

“…an “item” is “specially designed” if it: (1) As a result of “development” has properties peculiarly responsible for achieving or exceeding the performance levels, characteristics, or functions in the relevant ECCN or U.S. Munitions List (USML) paragraph;” [emphasis added]

As defined at Part 772.1 of the EAR, “‘Development’ is related to all stages prior to serial production, such as: design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, process of transforming design data into a product, configuration design, integration design, layouts.”

Given this language, a common industry question has become whether the words, “as a result of development,” are just another way of saying “design intent,” notwithstanding the Task Force’s previous claims to the contrary. The regulations and informal agency guidance seem to dance around this issue by not explicitly stating whether subparagraph (a)(1) does or does not incorporate design intent.

In the supplementary information to its rule proposing the specially designed definition, the Task Force stated that a key question under subparagraph (a)(1) is whether “someone did something during the item’s development so that it would achieve or exceed the performance levels, characteristics, or functions described in a referenced ECCN.” [FN/6] While this can be reasonably understood to mean that the end use of an item is irrelevant, the issue is still murky because determining performance levels, characteristics, or functions often requires reference to end use information.

Similar industry confusion is caused under the second catch provision at subparagraph (a)(2):

“…an “item” is “specially designed” if it… (2) Is a “part,” “component,” “accessory,” “attachment,” or “software” for use in or with a commodity or defense article ‘ enumerated’ or otherwise described on the CCL or the USML.” [emphasis added]

For subparagraph (a)(2), a common industry question has become whether the words, “for use,” are just another way of saying “intended for use” (i.e., “design intent”).  At least informally, ECR Task Force representatives state that (a)(2) is not an intent-based standard and that the catch applies when an item has been or is actually used with an item with a specially designed control parameter. [F/N 7] However, informal advisements can and often do differ between agency representatives and can change over time. For this and other reasons, the Task Force interpretation of (a)(2) must be clearly stated in the regulations, but it is not.

Clearly, the Task Force has not been transparent on the role of design intent under the new definition. It could have easily codified this principle in the definition itself. But the Task Force chose not to do so, instead leaving industry confused by the language of paragraph (a). The February 2014 Advisory Opinion further addresses the issue.

The February 2014 Advisory Opinion

The February 2014 Advisory Opinion expands on the scope of specially designed in two ways. First, it provides industry with more insight into the role of original design intent in the definition’s paragraph (a) “catch” provisions. Second, it introduces an interesting level of complexity that many industry members may miss – the exception to the need to perform the paragraph (b) “release” analysis for decontrol notes.

The primary question presented in the opinion is whether infrared cameras, otherwise subject to stringent export controls under CCL Export Control Classification Number (“ECCN”) 6A003.b.4.b, are released under a decontrol note:

“Note 3, paragraph c, to ECCN 6A003.b states, in pertinent part, that the ECCN does not control an imaging camera otherwise within its scope if the camera (1) was ‘specially designed for installation into a civilian passenger land vehicle of less than 3 tonnes (gross vehicle weight),’ (2) is ‘operable only when installed in the civilian passenger land vehicle for which it was intended, or a specially designed, authorized maintenance test facility;’ and (3) ‘incorporates an active mechanism that forces the camera not to function when it was removed from the vehicle for which it was intended.”

As provided in the decontrol note, the determination of whether the cameras satisfy the first requirement of the decontrol note requires a determination of whether the camera is specially designed.

In determining whether the cameras are specially designed, the BIS Advisory Opinion did not identify any performance characteristic of the cameras peculiar to vehicles less than 3 tonnes that was deliberately made in the course of production. Instead, the opinion actually considered the manufacturer’s original design intent in applying paragraph (a):

“Based on the facts provided in your request and the foregoing analysis, the [redacted] cameras are “specially designed” for civilian passenger land vehicles of less than 3 tonnes (gross vehicle weight) because they were originally developed for such vehicles and are, in fact, for use in or with such vehicles.” [emphasis added]

Therefore, contrary to the Task Force’s stated objective of imposing the new definition as an alternative to the previous design intent standard seen in the ITAR, it appears that the Task Force has implemented the paragraph (a) catch based on original design intent.

Recall that the next step in the sequential analysis following application of paragraph (a) normally is an assessment of whether any of the releases at paragraph (b) apply to release the item. However, as buried in the specially designed definition quoted above, paragraph (b) applies only when the listed items “would be controlled by paragraph (a).”  As explained in the BIS Advisory Opinion:

“Unlike most uses of “specially designed” in the CCL, the use of the term in this case is as part of a decontrol note. The definition is, however, applicable to both control and decontrol provisions in the CCL. The only difference between the two uses is that if an item is decontrolled by virtue of being “specially designed” under either paragraph (a)(l) or (a)(2), then there is no need to review the release provisions of paragraph (b ). There would be no need to do so because the item would not be controlled by the ECCN at issue.” [FN/8]

Needless Confusion Without Purpose?

The language of paragraphs (a) and (b) are unnecessarily confusing and the Task Force should have simply wrote what it meant in plain English.

It should have clearly stated whether design intent is or is not relevant to the paragraph (a) catch.

For paragraph (b), it should have simply wrote: “Assessment of paragraph (b) is not required where “specially designed” is used in a decontrol note.”

As a result of the Task Force’s failure to simply state what is required, the definition of specially designed confuses even the most seasoned export control professionals and few persons are likely to understand how to properly apply it.

Perhaps even more unfortunate is how complexities of the definition mask what is essentially another export reform “bait and switch” in which the Task Force has imposed a definition of specially designed that achieves the precise opposite of what it was proposed to achieve.

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[FN 1] “Request for Advisory Opinion regarding whether infrared cameras are excluded from control under ECCN 6A003.b.4.b by virtue of Note 3,” Bureau of Industry and Security, February 12, 2014.

[FN 2] See “‘Specially Designed’ Definition,’ 77 Fed. Reg. 36,409 (June 19, 2012); Transcript of April 17, 2013 Export Control Webinar with Assistant Secretary Kevin Wolf, NWX-DOC ITA, at p. 44 (“The way we structured it also so as to get away from a subjective design intent focus where you have to try to figure out what was in the mind of a particular engineer or company in knowing whether something was designed for a controlled application or a military application or dual use application or uncontrolled application. That level of subjective intent would be difficult to discern for whether something was or wasn’t “specially designed” and where you can get reasonable people to disagree.”).

[FN 3] Ibid. at 36,410.

[FN 4] See e.g. Public Comments to “Specially Designed” Definition RIN 0694-AF66 from: TechAmerica(“the “catch and release” approach is overly complex, even for large sophisticated businesses.”);Semiconductor Equipment and Materials International(“This structure is intrinsically complicated and inconsistent with the basic concept of a definition – which should simply specify the meaning of a term.”); Alliance for Network Security(“The definition published in the Proposed Rule is complicated and imprecise.”); ION Geophysical (“This third proposed definition of “specially designed” is again overly complex and confusing.”).

[FN 5] N.B. Design intent is clearly still a factor in certain release provisions at paragraph (b), but only becomes a factor after an item is otherwise caught under paragraph (a) of the definition.

[FN 6] 77 Fed. Reg. at 36,412; see also, “Revisions to the Export Administration Regulations: Initial Implementation ofExport Control Reform; Amendment to the International Traffic in Arms Regulations: Initial Implementation of Export Control Reform; Final Rules,” 78 Fed. Reg. 22,660, 22,685 (April 16, 2013) (“BIS has maintained the ‘‘peculiarly responsible’’ standard in proposed paragraph (a)(1)..”); Transcript of April 17, 2013 Export Control Webinar with Assistant Secretary Kevin Wolf, NWX-DOC ITA, at pp. 45-46 (“And so if you’re dealing with just an end item or if you’re dealing with just material then this will be the beginning and the end of your analysis (paragraph (a)(1) of “specially designed”). You ask yourself this question. Is there something about it? Does it have properties that are the result of development? Did somebody intentionally do something to it so that it has the characteristics of the control of the ECCN or the characteristics in the ECCN that causes it to be controlled.”).

[F/N 7] See Webinar Transcript No. NWX-DOC ITA, U.S. Department of Commerce Bureau of Industry and Security,April 17, 2013, pp. 46-47 (“And this we believe is a much simpler approach than asking a question about what was in the mind of the engineer or the company which designed it because all you’re asking is, is it for use in or with.”).

[FN 8] See also Supplement No. 4 to 15 C.F.R. Part 744 at Note to Paragraph (a)(4) (“If an item would not be classified under a particular ECCN because it falls within the scope of either subparagraph (a)(1) or (a)(2) of the “specially designed” definition, then there is no need to analyze whether any element of paragraph (b) of the definition would apply to the item. One needs only review the “release” provisions in paragraph (b) of the “specially designed” definition if paragraph (a) of the “specially designed” definition applies to the item in a “control” paragraph of an ECCN that uses the term “specially designed.”); BIS Specially Designed Decision Tool, available at: http://www.bis.doc.gov/index.php/specially-designed-tool(“Paragraphs (b)(1)-(b)(6) are only reviewed if your part, component, accessory, attachment, or software, would be controlled under an ECCN that uses “specially designed” as part of the control criteria. A decontrol note of an ECCN is not controlling a part, component, accessory, attachment, or software because of “specially designed.” Decontrol notes instead are releasing a part, component, accessory, attachment, or software from a specific ECCN on the bases of being “specially designed” and meeting the other criteria of the respective decontrol note. Therefore, you do not review paragraph (b) to determine whether the part, component, accessory, attachment, or software is released from a “specially designed” control, because “specially designed” is not being used as part of the control criteria, but rather as part of the decontrol criteria of a specific ECCN.”).

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*The above is not intended as an exhaustive list of restrictions that may apply to a particular transaction nor advice for a specific transaction because the specifics of an individual case may implicate application of other U.S. laws as well as foreign laws that carry added or different requirements.  In addition, U.S. export control and sanctions laws are frequently subject to change.  Such changes can affect the continued validity of the information above, which is based on U.S. law existing as of April 7, 2014. For these reasons, assistance from a qualified attorney competent to advise on such matters is highly recommended.

Matthew A. Goldstein is an International Trade Attorney in Washington D.C. licensed to practice in the District of Columbia.  He can be reached at (202) 550-0040 and Matthew@GoldsteinPLLC.com.