BIS

Second Proposed Category XII Rule is Better but Far From Good

There was significant industry opposition to the Administration’s first proposed revisions to U.S. Munitions List (USML) Category XII (Fire Control, Range Finder, Optical and Guidance and Control Equipment) of the State Department’s International Traffic in Arms Regulations (ITAR) and corresponding Commerce Control List (CCL) entries on the Commerce Department’s Export Administration Regulations (EAR) [FN 1], resulting in a second round of proposed rules from the departments of Commerce and State. [FN 2] The State Department recently released public comments received in response to these latest agency proposals. [FN 3]

The Commerce Department’s second proposed rule is very complex. As described in public comments:

“The new CCL is now so complicated that two Engineers and a scientist with a Ph.D. could not understand these new rules after three days of reading them. There are so many ECCNs that refer to other ECCNs that it appears circular in nature. This is not a simplification of the rules but a way of making them more complex. They are so complicated that we could not provide great guidance on the new set of rules.” [FN 4]

Although many comments describe the second State Department proposal as a significant improvement, many raise the same concerns expressed in opposition to the first proposal.

Public comments again warn that the proposed State Department revisions impose ITAR control over items with widespread commercial availability in foreign markets, transfer jurisdiction over items subject to the EAR to ITAR control, subject items in normal commercial use to ITAR control, fail to draw a bright line between EAR and ITAR control, lack clarity in many key areas, and that the proposed revisions will hinder the ability of U.S. companies to compete abroad.

Among the many criticisms, public comments to the State Department proposal oppose use of the specially designed catchall term in lieu of positive performance parameters, oppose imposition of ITAR control of homeland security technologies, and oppose imposition of ITAR control of certain defense articles based solely on Department of Defense (DoD) funding.

Use of the Specially Designed Catchall Instead of Performance Parameters

Despite decades of interagency squabbles over controls based on specific Category XII performance parameters, the State Department’s second proposed rule adds the “specially designed” catchall term throughout proposed control listings. While some commenters welcome use of the specially designed catchall, many others oppose use of the term and seek positive control parameters consistent with the original promise of reform.

Reports from respected members of the defense trade industry, to include the State Department’s own Defense Trade Advisory Group, establish how the specially designed term is vague and subject to varying interpretations. [FN 5] Not surprisingly, many public comments to the second proposed rule express the same sentiment.

Public comments also oppose widespread use of the specially designed term in Category XII because, as stated in the second proposed rule, if contemporaneous documentation cannot support design intent, use by a military end user establishes that an item is specially designed for a military end user. [FN 6] Public comments note how contemporaneous documentation of design intent is often not available, especially from suppliers of legacy products. This will result in many purely commercial technologies defaulting to ITAR control. Moreover, the apparent requirement for contemporaneous documentation that an item was created for no specific end user is inconsistent with the realities of the development process, wherein lack of intent for use by a specific end user normally results in the absence of documents (i.e., you would expect to see documentation where a specific end user was in mind, but not in cases where no end user was in mind). [FN 7]

ITAR Control of Homeland Security Technologies

Public comments highlight proposed State Department revisions that would impose ITAR control over certain night vision, infrared, and imaging systems used in civilian law enforcement, border security, and critical infrastructure protection. Comments also express concern with proposed controls on certain items “specifically designed for a military end user” wherein the State Department proposes to define “military end user” at Category XII to include “national police” and certain other persons and entities. [FN 8] This new ITAR definition appears to subject many commercial technologies developed for the Department of Homeland Security (DHS) and other non-military government agencies to ITAR control.

The public comments note how imposing ITAR control over civilian homeland security technology will discourage companies from developing technologies and from engaging in international collaborations that support homeland security interests. This impact is contrary to Congressional intent behind the Support Anti-Terrorism by Fostering Effective Technologies Act (a/k/a the “SAFETY Act”) [FN 9] and other relevant public policy.

Imposing ITAR control over homeland security technologies is also contrary to findings of the National Research Council Committee on Homeland Security and Export Controls, which issued a report at the start of export control reform to explain how the DHS mission to prevent terrorists and lethal materials from entering the United States requires international collaborations and the overseas deployment of U.S. hardware and software—often with countries that do not have an established security relationship with the U.S. Government. [FN 10]

Impact of the Magic DoD Dollar on Research and Development

Despite previous public comments opposing ITAR control based on DoD funding, the State Department’s second proposed rule still includes several “Magic DoD Dollar” provisions. [FN 11]

Public comments note how DoD funds can be used in the development of technology that does not provide a critical military or intelligence advantage. As such, the DoD Magic Dollar is inconsistent with the Administration’s claim that “[i]tems that would be controlled on the USML in [the second proposed Category XII rule] have been identified as possessing parameters or characteristics that provide a critical military or intelligence advantage.” [FN 12]

The Magic DoD Dollar also has an adverse impact on basic and applied research in science and engineering that may otherwise qualify as fundamental research. Specifically, the ITAR fundamental research exclusion is much narrower than the EAR fundamental research exclusion. This means that defaulting to ITAR control under the Magic DoD Dollar significantly limits utility of, and will at times altogether prevent use of the fundamental research exclusion by U.S. universities and other accredited institutions of higher learning in research funded with a dollar or more of DoD funds.

The DoD Magic Dollar also strongly disincentivizes private research and development companies from doing business with the DoD. This result is contrary to DoD acquisition policy, as established in an unclassified memorandum issued by Former Secretary of Defense William Perry some twenty years ago, known as the “Perry Memo,” which noted:

“To meet future needs, the Department of Defense must increase access to commercial state-of-the-art technology and must facilitate the adoption by its suppliers of business processes characteristic of world class suppliers. In addition, integration of commercial and military development and manufacturing facilitates the development of dual-use processes and products and contributes to an expanded industrial base that is capable of meeting defense needs at lower costs.” [FN 13]

Ironically, the DoD’s own hand in attempting to control too much under the ITAR through the Magic DoD Dollar undermines its key acquisition goal by forcing universities and private research and development companies to chose between accepting DoD funds or more freely pursuing research, global development, and commercialization activities.

The State Department’s second proposed rule does provide exceptions from the DoD Magic Dollar for items in production that are determined to be subject to the EAR via a commodity jurisdiction determination, or that are identified in the relevant DoD contract or other funding authorization as being developed for both civil and military applications.

However, as noted in the public comments, the exception provided where a commodity jurisdiction determination establishes EAR control is illusory because most companies will not make the initial investment in time and money to develop commercial items where there is a threat of possible ITAR control. Moreover, the commodity jurisdiction process is plagued with significant delays, procedural inadequacies, and the risk of a final determination that is inconsistent with the regulations.

The comments also explain how the exception for contracts that identify development for both civil and military applications would be difficult to use because leverage is often lacking to request contract changes, and because DoD contracting officers are reportedly instructed not to make export control designations in contracts.

Far from Good, but Good Enough for Reform

Overall, the State Department’s second proposed Category XII rule is not as bad as the first proposal. Public comments to both agency rules vary from enthusiastic support to rejection. Underlying this, industry now has much lower expectations after six years of reform. So, with little time remaining, the Administration is unlikely to issue a third round of proposed Category XII revisions. It may still refine the definition of military end users and make many other changes requested by public comments. However, considering how it repeatedly employed the Magic DoD Dollar provisions in many other reform revisions, the Administration is expected to include these controversial provisions in a final rule before the end of the year.

 

*   *   *

[1] 80 Fed. Reg. 25798 (May 5, 2015) and 80 Fed. Reg. 25821 (May 5, 2015).

[2] 81 Fed. Reg. 8421 (February 19, 2016) and 81 Fed. Reg. 8438 (February 19, 2016).

[3] See public comments posted at http://www.pmddtc.state.gov

[4] Public Comment of Princeton Infrared Technologies (Further noting, “The CCL is complicated, lengthy and should be simplified to better serve the needs of small businesses. Currently, we are able to manage the workload with minimal advice from our attorneys. However, due to the new, complex language and overuse of acronyms and multiple ECCNs that are circular, small businesses must hire expensive attorneys for advice and assistance in establishing the correct procedures for exports.”).

[5] Defense Trade Export Control Reform Working Group White Paper, October 28, 2015 (“The most important definition of ECR is specially designed. That too has come under scrutiny as not being clear. The adage that 10 people given the same pieces of information will yield the same jurisdiction and classification in using specially designed simply is not reality.”), available at http://www.pmddtc.state.gov/DTAG/index.html

[6] See 81 Fed Reg. 8439 (“If an item is created for both military and non-military end users, or if the item was created for no specific end user, then it is not specially designed for a military end user. Contemporaneous documents are required to support the design intent; otherwise, use by a military end user will establish that the item was specially designed for a military end user.”).

[7] See e.g., Irving M. Copi, Introduction to Logic, Macmillan, New York: 1953, p. 95 (“In some circumstances it can be safely assumed that if a certain event had occurred, evidence of it could be discovered by qualified investigators. In such circumstances it is perfectly reasonable to take the absence of proof of its occurrence as positive proof of its non-occurrence.”).

[8] 81 Fed. Reg. at 8446.

[9] See Homeland Security Act of 2002, Public Law 107-296. For more information on the SAFETY Act, visit www.safetyact.gov

[10] National Research Council. Export Control Challenges Associated with Homeland Security. Washington, DC: The National Academies Press, 2012, at pp. 8-10.  Available at http://www.nap.edu/catalog/13369/export-control-challenges-associated-with-homeland-security

[11] See proposed paragraphs (b)(7), (c)(9), (d)(6), and (e)(23).

[12] 81 Fed. Reg. at 8441.

[13] “Military Standards Conversion: A New Way of Doing Business,” Former Secretary of Defense William J. Perry, June 29, 1994. N.B. Later Department of Defense memoranda later eliminated some of the Perry memo requirements, but the provisions for integration of commercial technologies (i.e., the “New Way of Doing Business”) were expressly maintained in later instructions.

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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 12, 2016. 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

 

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