DDTC Issues Overly Expansive Interpretation of the ITAR for Defense Services (and Presumably Technical Data)

Transcription

1 DDTC Issues Overly Expansive Interpretation of the ITAR for Defense Services (and Presumably Technical Data) Summary Christopher B. Stagg Attorney, Stagg P.C. Client Alert No December 8, 2014 = = = = = = = = = = The International Traffic in Arms Regulations (ITAR) controls defense services on the U.S. Munitions List that are directly related to a defense article. The Directorate of Defense Trade Controls (DDTC) has maintained a consistent public position for over thirty years that it narrowly construes the ITAR s controls for defense services. This was most recently noted in the preamble to the initial implementation rule for Export Control Reform in April Recently, however, it has been revealed that DDTC has a new and overly expansive interpretation of defense services that disregards its longheld narrow construction. This narrow construction by DDTC originated over thirty-five years ago from the holding in United States v. Edler Industries (9 th Cir. 1978). DDTC s new interpretation would control as defense services those services that are common to civilian aircraft and ITAR-controlled military aircraft. For example, services provided to the civilian Boeing 787 aircraft would be considered a defense service by DDTC if the Boeing 787 aircraft incorporates a mission system (a defense article) even if the services do not involve the incorporated mission system. This means that aircraft maintenance providers would need a technical assistance agreement from DDTC to repair a common part or component, such as a tire on a Boeing 787 aircraft, merely because the aircraft incorporates a mission system. The repair of a Boeing 787 tire is obviously the same whether or not the aircraft incorporates a mission system. In other words, this service is indirectly related to a defense article. This new interpretation raises a number of questions. If DDTC now regards these types of services as directly related to a defense article, then what does it consider is indirectly related? DDTC is also now imposing an enduse control and the ITAR explicitly states that end-use, by itself, is not a factor for determining jurisdiction. Based on DDTC s new interpretation of defense services, does this also mean that the information required for the Boeing 787 aircraft is technical data when it incorporates a defense article? After all, if DDTC considers the services to be the furnishing of assistance in the repair of a defense article, then it would seem logical that it would consider information required for the repair of a defense article to likewise be controlled as technical data. Finally, given the background and significant legal issues involved over this topic, is this new interpretation even valid? Introduction The Arms Export Control Act (AECA) and its implementing regulations, the International Traffic in Arms Regulations (ITAR), regulate the furnishing of defense services directly related to a defense article, as well as the export of technical data directly related to a defense article. The ITAR is administered by the Directorate of Defense Trade Controls (DDTC) within the U.S. Department of State. While the applicable law is published within the U.S. Code (AECA) and the Code of Federal Regulations (ITAR), DDTC tends to be coy as to how it interprets or otherwise applies these laws. However, it has been recently revealed that there is a new interpretation by DDTC regarding defense services that is has been applying via formal advisory opinion requests and presumably in informal communications as well. This interpretation was disclosed by DDTC at the Practising Law Institute s Coping with U.S. Export Controls and Economic Sanctions program (December 11-12, 2014). Specifically, in discussing "significant [advisory opinion] decisions likely to be incorporated into upcoming rules," DDTC states that: Services rendered on an aircraft that incorporate a mission system constitute a defense service regardless of the system The relevant portion of the U.S. Munitions List that is being referred to here is Category VIII(a)(11) of the U.S.

2 Munitions List, which controls: Aircraft incorporating a mission system. A mission system is defined as a system that are defense articles that perform specific military functions such as by providing military communication, electronic warfare, target designation, surveillance, target detection, or sensor capabilities. Category VIII(i) controls defense services (see of this subchapter) directly related to the defense articles described in paragraphs (a) through (h) of this category. services subject to its statutory authority. The AECA does not provide a list of such defense articles and defense services, and it does not define these terms. Instead, the AECA defers to the agency responsible for administering the associated regulations to determine these matters. In this case, those responsibilities were delegated by an Executive Order to the Secretary of State and specifically to DDTC. The U.S. Munitions List is published within the ITAR. It lists those items that are designated as defense articles. The U.S. Munitions List does not expressly enumerate any specific defense service. Instead, it provides a catchall provision that any defense service (as defined by 120.9) that is directly related to a defense article is controlled on the U.S. Munitions List and therefore subject to the ITAR. The ITAR also provides a definition of a defense service within ITAR 120.9, which defines a defense service as: FIGURE: A copy of DDTC's presentation slide This new interpretation would control as defense services those services that are common to civilian items that are not subject to the ITAR. For example, services provided to the civilian Boeing 787 aircraft would be considered a defense service by DDTC if the Boeing 787 aircraft incorporates a mission system (a defense article) even if the services do not involve the incorporated mission system. This means that aircraft maintenance providers would need a technical assistance agreement from DDTC to repair a common part or component, such as a tire on a Boeing 787 aircraft, merely because the aircraft incorporates a mission system. The repair of a Boeing 787 tire is obviously the same whether or not the aircraft incorporates a mission system. To understand the background and significant legal issues raised with this interpretation by DDTC, it is necessary to review what the AECA and ITAR say about the scope of controlling services involving a defense article. Applicable Law The AECA provides for the creation of the U.S. Munitions List to list the defense articles and defense (1) The furnishing of assistance (including training) to foreign persons, whether in the United States or abroad in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles; (2) The furnishing to foreign persons of any technical data controlled under this subchapter (see ), whether in the United States or abroad; or (3) Military training of foreign units and forces, regular and irregular, including formal or informal instruction of foreign persons in the United States or abroad or by correspondence courses, technical, educational, or information publications and media of all kinds, training aid, orientation, training exercise, and military advice. (See also ) As the AECA provides that only defense services controlled on the U.S. Munitions List are subject to its statutory authority, the legal requirements for whether a specific service is subject to the AECA is if it meets the definition of a defense service within and that such defense service is directly related to a defense article. This is because the U.S. Munitions List provides

3 for an additional requirement of only controlling defense services that are directly related to a defense article. To emphasize the point: the AECA only provides the legal authority to control defense services (as defined by 120.9) that are directly related to a defense article. Therefore, a service, even a defense service, that is not directly related to a defense article is therefore not controlled on the U.S. Munitions List as it is not within the legal authorities of the AECA. The scope of the ITAR is restricted to the authority provided by the AECA. To represent this concept visually: The blue box represents all activities that could constitute a service under the standard dictionary meaning of the word. The gray box represents the broad scope of the definition for defense services. The white box shows how the directly related to qualifier acts to limit the actual scope of the definition for defense services within the U.S. Munitions List. Depending on the type of defense article and situation, the directly related to qualifier will function as a more significant limitation on controlling defense service, or it may have little limiting effect. In the case of aircraft that are only defense articles because they incorporate another defense article, the directly related to qualifier would have a significant limitation on defense services. This is because the aircraft is otherwise subject to the Export Administration Regulations (EAR). Until DDTC s latest interpretation, this would have meant that services to the aircraft are not defense services if they are common between the aircraft when treated as subject to the EAR or subject to the ITAR (i.e., regardless of whether or not mission systems are incorporated). Moreover, ITAR provides that: The intended use of the article or service after its export (i.e., for a military or civilian purpose), by itself, is not a factor in determining whether the article or service is subject to the controls of this subchapter. DDTC s Previous Interpretations DDTC s new interpretation as to what constitutes a defense service is inconsistent with DDTC s longstanding public statements, and even as recently as from a Federal Register Notice published on April 16, Specifically, DDTC provided its interpretation as to the application of defense services: Two commenting parties recommended revising USML Category XIX(g) to control only technical data and defense services directly related to the military functionality of a defense article, for otherwise data and services common to commercial engines would be captured. The Department believes the ITAR definitions for technical data and defense service would preclude this occurrence, and therefore did not accept these recommendations. It is important to note that federal courts have held that statements issued in the preamble to a Federal Register Notice are considered as if they were contained themselves in the Code of Federal Regulations, and such statements are controlling so long as the preamble language is consistent with the regulatory text. To the extent that the regulatory text is ambiguous, then the preamble language is used to resolve such ambiguity. As the definitions of defense service and technical data apply to every category of the U.S. Munitions List, this guidance in the Federal Register is not limited to Category XIX and is applicable to the entire U.S. Munitions List. Based on DDTC s interpretation of its regulations here, information and services that are common to items that are defense articles and civilian articles (i.e., items not subject to the ITAR) are not controlled by the U.S. Munitions List. DDTC s public interpretation in the Federal Register is consistent with its long-standing and narrow application of controlling defense services and technical data that are only directly related to a defense article. For example, a Federal Register Notice from December 6, 1984 stated that:

4 In recent years, some parts of the academic community have expressed concern about the application of government export regulations to disclosures of information in university classrooms. This concern (for example, that the language of the ITAR was overly broad) did not occur because of any changes in the text of the ITAR, or in the policies and practices of the Department of State in administering the regulations. In order to address the concerns expressed about the regulations, however, the language with regard to what information is subject to ITAR controls has been clarified. The Department's long-standing practice of regulating only information that is directly related to defense articles, as reflected in U.S. v. Edler, 579 F. 2d 516 (9th cir. 1978), remains unchanged. (Emphasis added.) DDTC has also asserted this concept to the federal courts in civil actions and criminal prosecutions, such as in Karn v. Department of State, 925 F. Supp. 1 (D.D.C. 1996): "In United States v. Edler Indus., 579 F.2d 516 (1978), the Ninth Circuit addressed the argument that the definition of "technical data" in the ITAR is "susceptible to an overbroad interpretation." Id. at 520. The court chose to read the technical data provision narrowly to avoid finding a constitutional violation. Id. at 521. The Department of State has since limited its application of the provision in practice to the interpretation expressed by the court in Edler Indus. See Preamble to Revisions of International Traffic in Arms Regulations (Final Rule) 49 Fed. Reg , (Dec. 6, 1984). In evaluating the plaintiff's overbreadth claim, the Court "'must... consider any limiting construction that a... court or enforcement agency has proferred.'" Ward, 491 U.S. at 796 (quoting Hoffman Estates v. The Flipside, Hoffman Estates, Inc., 455 U.S. 489, 494, n. 5, 71 L. Ed. 2d 362, 102 S. Ct (1982)). Accordingly, based on the plaintiff's lack of standing, and in light of the limitations to the "technical data" provisions adopted by the Department of State (Emphasis added.) Although this makes reference to the controls on technical data, these directly related to limitations apply to defense services. This is because the U.S. Munitions List s directly related to qualifier exists for both defense services and technical data. This is made clearer by DDTC s public and formal interpretation of the application of both defense services and technical data as published into the Federal Register on April 16, It is also evident by the proposed rules for defense services that was issued on April 13, 2011 and May 24, The proposed rules made it clear that it is not a defense service for the [s]ervicing of an item subject to the EAR (see of this subchapter) that has been integrated or installed into a defense article. This evidences that this provision was not a new concept but merely making it clearer within the regulations as to what constitutes a defense service and what does not. This is simple to understand as it has been the existing practice for over three decades to not control such services as defense services. During the consent agreement between DDTC and Boeing over QRS-11 in 2006, the issue of providing common services to aircraft that incorporated a defense article was not raised by DDTC. In the QRS-11 case, Boeing civilian passenger aircraft incorporated the QRS- 11, which DDTC determined was a defense article under Category XII and designated as Significant Military Equipment. DDTC initiated a civil enforcement action against Boeing due to the export of these aircraft, as DDTC contended that they required an authorization under the ITAR because of the incorporated defense article. This is known as the see-through rule. But DDTC never contended that common services rendered on these aircraft constituted a defense service because the aircraft incorporated a defense article. The Directly Related To Qualifier As previously discussed, DDTC s new interpretation is reading out of the AECA and ITAR a material requirement: that a defense service must be directly related to a defense article. DDTC cannot read this requirement out of the AECA and ITAR. As not all services that meet the definition of a defense service are subject to the ITAR, it is clear that there is a distinction between those that are directly related to a defense article and those that are indirectly related to a defense article.

5 Given this distinction, how would a service to repair the tire of a Boeing 787 that merely incorporates a defense article constitute a defense service directly related to a defense article? The Boeing 787 is a civilian aircraft subject to the EAR. The tire equally is subject to the EAR. The repair services of the tire would be the same regardless as to whether the Boeing 787 were treated as a civilian article or a defense article. Again, how would such service in this situation be directly related to a defense article? If DDTC maintains that this repair service is directly related to a defense article, then what is indirectly related? The directly related to aspect is a material qualifier within the ITAR. It arose from a court case that went to the United States Court of Appeals for the Ninth Circuit, United States v. Edler Industries, 579 F. 2d 516 (9th cir. 1978). In Edler, the Court of Appeals held that technical data must relate in a significant fashion to some item on the Munitions List and that adequate notice to the potential exporter requires that the relationship be clear. The court also determined that [a] careful reading of the regulations also suggests that the broad definition of technical data...is not to be taken literally. The court concluded that: the accompanying regulations prohibits only the exportation of technical data significantly and directly related to specific articles on the Munitions List. The prohibition includes the provision of technical assistance for the foreign manufacture of articles that, if manufactured domestically, would be on the Munitions List. If the information could have both peaceful and military applications, as Edler contends that its technology does, the defendant must know or have reason to know that its information is intended for the prohibited use. It is important to note that this court case originated under the Mutual Security Act of 1954, which was the predecessor to the AECA. The court case s holdings were released in 1978, after the AECA was enacted in After the enactment of the AECA in 1976, the U.S. Government engaged in a full review of how it regulates defense trade - similar to the current Export Control Reform initiative. It was not until December 1984 that those efforts were finalized. Ultimately, the Department of State incorporated the Edler case s holding and considerations into the revised ITAR. DDTC, however, did not adopt the scienter requirement for defense services based on end-use, as adding this as a control parameter would not be practical. Instead, the ITAR adopted the same directly related to qualifier for both defense services and technical data. The ITAR also explicitly moved away from the end-use and scienter aspect for defense services by putting into the regulations that: The intended use of the article or service after its export (i.e., for a military or civilian purpose) is also not relevant in determining whether the export is subject to the controls of this subchapter. 22 C.F.R (1984). DDTC s Interpretation The significant legal issues that are invoked by DDTC s recent interpretation of what constitute a defense service should now be apparent. Again, DDTC s interpretation is that: Services rendered on an aircraft that incorporate a mission system constitute a defense service regardless of the system Based on a review of the legal authorities under the AECA, including a review of the defense services definition and the U.S. Munitions List, it is clear that only defense services that are directly related to a defense article are subject to the AECA. Therefore, DDTC s recent interpretation that services involving a Category VIII(a)(11) aircraft constitutes a defense service is an interpretation inconsistent with the law. To be a defense service, it is not just enough to be a service, as DDTC contends. The service must meet the definition of ITAR In addition, the AECA and ITAR require that such a defense service is directly related to a defense article. DDTC s interpretation is too expansive and appears to ignore both requirements of meeting the definition of a defense service and being directly related to a defense article. As a legal matter, both requirements must be met for DDTC to have legal authority over such a defense service. The ITAR s definition of a defense service is quite broad. In the situation of where a U.S. company seeks to assist a foreign company with maintenance and repair services, the U.S. company would need to evaluate whether it was

6 furnishing assistance (including training) to foreign persons in the maintenance and repair of defense articles. If that criteria is met, then the analysis turns to the second requirement as to whether the defense service is directly related to a defense article. In other words, it is not enough that the maintenance and repair involves a defense article. The maintenance and repair services must also be directly related to a defense article. This directly related to aspect appears to be the test that DDTC s new interpretation completely ignores, as DDTC contends that services common to aircraft regardless of whether they incorporate mission systems is a defense service when performed on an aircraft incorporating a mission system. This is, by the way, an end-use control and violates ITAR 120.3, which has consistently stated since 1984 that: The intended use of the article or service after its export (i.e., for a military or civilian purpose), by itself, is not a factor in determining whether the article or service is subject to the controls of this subchapter. As DDTC is interpreting defense services broadly, services common to civilian aircraft would require a technical assistance agreement to lawfully provide them. It would be curious to know what provisos are issued for these technical assistance agreements. As a mission system is a defense article, it could be a defense article that is designated as Significant Military Equipment and thus require the execution of a DSP-83. It is likely then that such authorizations would have a proviso that the approved defense service shall not include defense services on the mission systems. In other words, in applying DDTC s new interpretation, DDTC would require an authorization for the provision of a defense service - for an item that is only a defense article because it incorporates another defense article - and then not include within the authorization of a defense service that one aspect for which makes the aircraft a defense article. This evidences that these services are not directly related to a defense article. They may involve a defense article but they are not directly related to it. Is DDTC s New Interpretation Valid? The obvious question now is whether DDTC s new interpretation is valid under the law. Although a conclusion on this question cannot be provided, as the purpose of this article is not to provide legal advice, the following is a short summary of likely arguments for and against DDTC s new interpretation. DDTC s likely position is that they have the legal authority to interpret the AECA and ITAR. However, this authority is not without limitation. The federal courts have held that regulatory agencies are required to be consistent in applying their regulations and must provide an explanation for any departure from consistent practice, and DDTC has not provided an explanation. As a regulatory agency, DDTC must also follow its own rules. Here, DDTC must follow the criteria of only controlling defense services directly related to a defense article. DDTC s possible reliance on controlling services based on end-use is a clear violation of its own rules, as provided in ITAR DDTC s new interpretation also clearly goes against the holding in U.S. v. Edler by taking the directly related to qualifier out of the ITAR. As a very broad interpretation of the regulations, it may be unconstitutional. Federal courts have expressed these constitutional concerns but used DDTC s narrow interpretation to avoid that result. It can also be contended that this is not a regulatory or statutory interpretation by DDTC that should be afforded any deference since it is plainly erroneous or inconsistent with the regulation, and this is an informal interpretation by DDTC as it was not issued in the Federal Register and therefore is not a formal, public statement by DDTC. This new interpretation was made at the office director level while the previous statements were made at a higher level, and with interagency clearance. There is also a recent Supreme Court case that has held that official statements by regulatory agencies contained in opinion letters are not provided deference but only considered so long as they have the power to persuade. Conclusion DDTC has maintained a consistent public position for over thirty years that it narrowly construes its controls on defense services and technical data. The federal courts have identified that this narrow construction has saved the ITAR from being held unconstitutional. However, DDTC s new interpretation that broadly construes the controls on defense services (and presumably technical data) now opens the door to such constitutional challenges against the ITAR.

7 After all, DDTC s new interpretation is inconsistent with the holding of U.S. v. Edler in which the court required directly related to as a qualifier to avoid finding DDTC s controls as unconstitutional. If DDTC maintains this position, then it can no longer claim to have a narrow construction. As of right now, DDTC s interpretation adds confusion as to what services constitute a controlled defense service and whether this new interpretation applies to technical data as well. It is curious that DDTC would depart from its consistent and long-standing position, especially in light of the proposed defense services definition that makes this issue more clear. DDTC should publically clarify this new interpretation preferably by returning to its narrow construction. Christopher Stagg is an international trade and regulatory attorney at Stagg P.C. where he advises clients on U.S. export control laws, as well as the ongoing regulatory revisions under Export Control Reform. Mr. Stagg was previously with the Department of State where he was deeply involved in Export Control Reform. For more information, please go to