Intellectual Property Implications of Export Control Laws

Transcription

1 Intellectual Property Implications of Export Control Laws David S. Bloch, Winston & Strawn LLP Introduction The U.S. Government is an interested party in any IP license involving a U.S. company. Ordinarily, that interest is invisible; Government merely provides a backdrop for private parties to negotiate their best deal. But export control law is an area where the Government takes an active role in determining the proper scope of an intellectual property transaction. Through the export control regime, the Government regulates what U.S.-based IP can be conveyed to foreign parties, and how. The Department of State, which has primary responsibility for export controls, strictly prohibits "exports" of defense articles or services. For purposes of the International Trafficking in Arms Regulations ("ITAR"), "export" covers any overseas conveyance of a "defense article;" disclosure of defense articles or technical data relating them to any foreign person or government (whether inside or outside the U.S., and excepting only permanent residents or "protected" individuals); or performance of defense services for a foreign person or entity, abroad or in the U.S. 1 Re-export is similarly banned. Thus, any further transfer by the foreign recipient or in a foreign country is a separate ITAR violation. And if the technology contains any U.S. parts or IP, it is covered there is no de minimis exception. Even conveying title to aircrafts, satellites, ships, or other vessels can qualify as an ITAR transaction. The Department of Commerce also regulates "exports." Under the department's Export Administration Regulations ("EAR"), the definition of "export" is broader than international transshipment of regulated technology. 2 It includes conveyance of regulated technology within the United States to a foreign national (a "deemed export"), 3 release between two foreign entities or entirely within a foreign country (including wholly foreign products produced by means of U.S. technology and foreign products incorporating regulated U.S. parts), and "re-export" of legitimately exported goods from a proper recipient to an illegitimate third party. "Deemed exports" create a particular problem for IP licensors, in that they may not know the immigration status of persons with whom they are doing business domestically. Nevertheless, if the licensor is offering technologies that would require an export license if shipped overseas, it would do well to consider obtaining a deemed-export license for domestic sales. Also, licensors who may be offering restricted technologies should include contract language restricting who may access the deliverable. Issued patents themselves are public, and therefore can be communicated or conveyed without restrictions. But technology embodying those patents may still be subject to export regulations. The deemed-export rules do not apply to conveyances to naturalized U.S. citizens, permanent residents, or others with "protected individual This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.

2 status" (e.g., persons who have been granted political asylum) but that still leaves a great deal of room for inadvertent deemed exports. The important exception is that deemed-export rules do not apply to encryption source or object code. Rather, the EAR only prohibits actual transfer of certain encryption software abroad. A standing license exemption covers transfers of encryption technology to foreign nationals residing in the U.S. and foreign subsidiaries of U.S. companies. 4 Export Control Laws Federal export controls take three distinct forms. First, there are prohibited transactions. Certain things simply cannot be "exported" without prior Government permission, and often cannot be exported at all. Nuclear, chemical, and biological weaponry, along with strong encryption technologies, are subject to an export ban. Second, there are regulated transactions. Dual-use technologies can be exported, but only pursuant to a license from the Government, and only to designated recipients. Third, there are particular contract terms that may not appear (or may not be enforced) in otherwise unobjectionable licenses. Most prominently, the Government's anti-boycott rules prohibit companies from honoring the Arab League boycott of Israel. But they also would apply to, for example, mainland Chinese efforts to boycott Taiwan. The International Traffic in Arms Regulations (ITAR) The United States has signed the Nuclear Non- Proliferation Treaty and conventions banning the spread of chemical and biological weaponry. The U.S. also recognizes U.N. Security Council Resolution 1540, which "[d]ecides that all States shall refrain from providing any form of support to non-state actors that attempt to develop, acquire, manufacture, possess, transport, transfer or use nuclear, chemical or biological weapons and their means of delivery" and directs all States to implement appropriate legislation to effectuate these goals. 5 These treaties and directives are implemented by the U.N. and a cornucopia of other multilateral organizations. 6 As a consequence of these treaty obligations, it is illegal to export nuclear, chemical, or biological weapons technology. Although nuclear weapon technology already is owned by the Department of Energy 7, it is certainly possible to imagine situations where chemical or biochemical intellectual property could be created by private actors yet nevertheless be barred from export. For example, in 2004 a Texas Tech professor was sentenced to 2 years in prison and fined $50,000 for exporting bubonic plague bacteria to Tanzania without the required licenses. 8 In the United States, Government nonproliferation 9 policies are implemented by ITAR and administered by the State Department's Directorate of Defense Trade Controls ("DDTC") 10 under the Arms Export Control Act and related legislation. 11 ITAR violations are subject to criminal penalties (fines of up to $1 million and imprisonment for up to 10 years per violation) 12 plus administrative remedies (fines, seizure and forfeiture of goods, revocation of licenses or debarment from further exports). 13 In the procurement context, the Government can use the False Claims Act as a separate vehicle to prosecute ITAR violations. 14 Technologies Regulated Under ITAR ITAR regulates "defense articles" and "defense services." "Defense articles" include any item on the "U.S. Munitions List" 15 or otherwise identified by the DDTC. Under the criteria used by the DDTC, a "defense article" includes: A product specially designed, developed, configured, adapted, or modified for military use; A product that does not have "predominant" civil applications, nor is its form, fit, and function equivalent to a civil application; or A product with "significant" military or intelligence applicability.

3 Intent is irrelevant to determine whether something qualifies as a defense article or service. 16 "Defense services" refers to the provision of services, technical assistance, technical data (including nonpublic source or object code), or technology, to foreign persons (domestically or abroad) in connection with the design, testing, repair, or use of defense articles. This includes providing military training to foreigners, whether or not in the United States. 17 Licensing Under ITAR Any exporter, broker, or manufacturer of defense articles or services must be registered (even if not an exporter), and exports must be authorized in advance by a DDTC license, technical assistance agreement, or manufacturing license agreement. 18 An ITAR export license must be provided to Customs at the port of export; Customs will return the license and a record of all shipments under it directly to the DDTC when the shipments permitted under the license have been completed or the license expires, whichever is first. ITAR licenses last a maximum of 4 years. The exporter must also submit a Destination Control Statement. 19 Records must be kept for 5 years after expiration of the license or other ITAR export approval. 20 Challenging ITAR License Determinations ITAR-regulated items are subject to the Government's strictest scrutiny. Therefore, exporters may be motivated to challenge an ITAR determination, preferring instead to be regulated under the dual-use provisions of the Export Administration Regulations. Exporters can challenge ITAR's jurisdiction under the so-called "commodity jurisdiction" process. Products are presumptively subject to ITAR during a commodity jurisdiction proceeding. The DDTC has the power to determine the scope of its own jurisdiction, but is encouraged to consult with other agencies. Appeals are heard by Coast Guard Administrative Law Judges, sitting by designation. The DDTC also can issue nonbinding, revocable opinions as to whether it is likely to grant an approval or license for a particular export. 21 Export Administration Regulations (EAR) Technologies Regulated Under EAR U.S. export control law relating to dual-use technology is implemented by the Department of Commerce's Bureau of Industry & Security ("BIS") pursuant to the Export Administration Act of and the International Emergency Economic Powers Act. 23 Export restrictions are collected in the Export Administration Regulations ("EAR"). 24 EAR is far more relaxed than ITAR, but its scope is correspondingly broader. Indeed, essentially any commodity, software (source or object code), or technology created in the U.S. is subject to EAR. Services may also be covered if they are provided in a dual-use context. Though its coverage is essentially universal, and includes foreign-made technology incorporating more than de minimis U.S. parts, 25 the EAR focuses on dual-use technologies that is, technologies that have both military and commercial applications. Such technologies can be sold overseas, but not to certain recipients, and not without prior Government permission. Designated "dual-use" technologies are listed on the Commerce Department's "Commerce Control List." 26 As a general rule, materials protected by the First Amendment (including software) are not subject to EAR restrictions. Special rules apply to overseas sales of "strong" (greater than 64-bit) encryption software, even if the technology and underlying theories are publicly available and could have been disclosed within the U.S. 27 There is, however, a broad exemption for "mass market" software containing "ancillary" cryptography. For mass-market products, manufacturers can self-classify their hardware (cellphones, laptops, hard drives, games, robotics, and the like). Under the revised rules, most massmarket products will not require advance licensing or approval; rather, exporters can self-identify

4 products containing encryption technology and ship them subject to the standing License Exception ENC (for "ENCryption"). 28 Only four encryption-related technologies remain subject to a 30-day technical review by the Encryption Request Coordinator at Ft. Meade, Maryland: (1) encryption components, (2) items that perform non-standard cryptography, (3) technology for vulnerability analysis, network forensics, or computer forensics, and (4) technologies that enable cryptographic software and other commodities. This has been described as a "first step" in the Obama Administration's effort to modernize the U.S. export control system. 29 Licensing Under EAR The BIS issues individual and bulk ("Special Comprehensive") licenses. Commodities listed on the Commerce Control List ("CCL") and corresponding Commerce Country Chart are presumptively subject to EAR licensing requirements. 30 In each of the 10 categories there are five groups, identified by the letters A-E, 31 and within these groups, specific products are identified by various "types of control." All of these, together, create a detailed Export Control Classification Number, which in turn provides detailed information on what (if any) licenses are required for export. Lastly, the BIS maintains a list at 15 C.F.R. part 744 of individuals and entities to whom exports are prohibited. If a product is not listed on the CCL, it can presumptively be shipped to any non-embargoed location or unlisted entity unless such shipments would violate EAR's ten "General Prohibitions." 32 The General Prohibitions are: 1. No export or re-export of controlled items to listed countries. 2. No re-export or export from abroad of foreign-made items incorporating more than a de minimis amount of controlled U.S. content. 3. No re-export or export from abroad of the foreign-produced direct product of U.S. technology and software. 4. No engaging in actions prohibited by a prior denial order from BIS. 5. No export or re-export to prohibited endusers or for prohibited end uses. 6. No export or re-export to embargoed destinations. 7. No knowing effort to undermine nonproliferation activities. 8. No export or re-export through or transit through listed countries. 9. No violations of any BIS license exception. 10. No proceeding with transactions knowing that a violation has occurred or is about to occur. 33 With these prohibitions in mind, it is perhaps useful to consider a taxonomy of the different ways a company can export a product or service. Under the EAR, there are five basic ways to export: An export license is required if the product to be shipped is on the CCL. 34 A license, which takes 1-3 months to issue, comes from BIS and allows shipment of the licensed goods abroad. Unlike ITAR licenses, which must be submitted to Customs at the port of export, an EAR license, and a record of shipments under it, should be kept by the exporter. The exporter should submit shipment information to BIS using the Automated Export System. For Special Comprehensive Licenses, the exporter is approved in advance but

5 must maintain detailed records of all transactions. EAR also contains a series of standing license exceptions. Furthermore, EAR allows "permissive re-exports" between third parties, as long as the originator could have licensed-out the technology directly to the third-party recipient. A classification ruling from BIS may be necessary when it is not clear whether a particular item is subject to EAR regulations. 35 The exporter can request a classification ruling electronically. The request should include any materials describing the technology to be exported, a proposed classification for the technology, and an explanation of the basis for the proposed classification. EAR requires a response within 14 calendar days. Export to a Verified End-User, a new program for India and China, allows certain commodities to be transferred without further licensing. A determination by the exporter that no license is required, after reviewing the CCL and EAR's General Prohibitions. The exporter bears the burden of mistake here, and thus should operate with care. When in doubt, an exporter can request an advisory opinion with respect to a particular transaction, destination, or recipient. EAR requires a response within 30 days. 36 Shipment records must be maintained for 5 years from the date of export, 37 rather than (as with ITAR) date of license expiry. Many licenses now may be kept in electronic rather than paper form, 38 and may even be conveyed entirely electronically. 39 Challenging License Determinations Export regulation is entirely within the Executive Branch. Adverse determinations may be appealed to the Operating Committee. An adverse decision by the Operating Committee may be brought before the Advisory Committee on Export Policy, whose decisions in turn are reviewed by the Secretary of Commerce (who has delegated his authority to the Export Administration Review Board). Ultimate authority lies with the National Security Council, whose authority is delegated directly from the President. Economic Sanctions Quite aside from technology licensing, companies should be aware that U.S. economic sanctions laws 40 may prohibit otherwise legitimate international trade. The Government's sanctions portfolio is managed by the Office of Foreign Assets Control ("OFAC") within the Department of the Treasury. Export licenses are available in appropriate circumstances. Records must be maintained for 5 years. 41 Each set of sanctions is different. Violating economic sanctions laws is punishable via criminal prosecution (imprisonment and fines) or administrative proceedings (fines of up to $250,000 and denial of export privileges). As of February 2011, the Balkan Peninsula, 42 Belarus, 43 Burma (Myanmar), 44 Cuba, 45 Democratic Republic of the Congo, 46 Iran, 47 Ivory Coast, 48 North Korea, 49 Somalia, 50 Sudan, 51 Syria, 52 and Zimbabwe 53 all were subject to U.S. sanctions. In addition, the Government maintains sanctions directed at particular activities. Note that, in many cases, these sanctions overlap with existing ITAR and EAR provisions. WMD and Highly Enriched Uranium proliferation; 54 Terrorism and terrorist organizations; 55 Narcotics trafficking; 56 Persons undermining Lebanese sovereignty basically, Syria, Iran, and the Hezbollah terrorist organization; 57 "Specially designated" persons or entities associated with the former Saddam Hussein regime in Iraq; 58 "Blood diamond" trading restrictions; 59 and

6 "Specially designated" persons or entities associated with the former Charles Taylor regime in Liberia. 60 Companies should review the specific sanctions imposed before doing any business with listed countries or their nationals. An updated list of sanctions currently in force is available online. 61 Likewise, if a company has any plans to export technology relating to any of the listed subject areas, it should consult the applicable sanctions regulations, which (like the country-specific sanctions) are available online, and which obviously overlap to a substantial degree with ITAR- and EARregulated technologies. 62 In addition, the Department of State sometimes will issue "notices" warning that exports to certain countries not subject to formal sanctions may nevertheless be subject to extra scrutiny. 63 Anti-Boycott Laws Lastly, anti-boycott rules are enforced by the Office of Anti-boycott Compliance, a quasi-independent branch within the BIS at the Commerce Department. These laws prohibit U.S. entities (including foreign subsidiaries of U.S. companies and U.S. subsidiaries of foreign ones) from cooperating in unauthorized boycotts. The primary "target" of U.S. anti-boycott legislation is the Arab League's boycott of materials sold or transshipped through Israel. A U.S. entity cannot execute a contract that would have the effect of honoring the anti-israel boycott, nor certify its compliance with the boycott. 64 But the laws would apply with equal force to any other unauthorized foreign boycott effort. 65 Conclusion While the vast majority of licensing transactions encounter little interaction with Federal law, this does not mean that the Government plays no role. Rather, Government policies find their way into private licenses in a variety of circumstances. Commercial licenses for software and technology whose downstream use includes export even by a customer need to ensure that the license reflects who has the burden of ensuring compliance with applicable export laws. As the above discussion should suggest, U.S. export control laws are Byzantine, with overlapping jurisdictions and sometimes contradictory goals. Fortunately, in April 2010, the Obama Administration announced an export control reform initiative to deal with regulating exports of military and dual-use technologies. The three-phase plan calls for "higher walls around a smaller yard," which is to say, better and tighter controls over a more focused universe of truly sensitive technology. The ultimate goal is to merge the export licensing activities presently handled by entities within the Departments of Commerce and State, as discussed below. The Administration envisions a single control list; a single primary enforcement agency; a single information technology system; and a single licensing agency. 66 As proposed, the Single Licensing Agency will be run by a Board of Directors comprised of officials from the State and Commerce Departments, and will report directly to the President. These reforms, if enacted, would expand economic opportunities for U.S. businesses while protecting American national security interests and reducing the overall bureaucratic irrationality of the current system. Whatever your view of the Administration overall, the export control reform initiative deserves support. David S. Bloch is a partner at Winston & Strawn LLP, San Francisco, California. B.A., Reed College; M.P.H., J.D. with honors, The George Washington University; Fellow in International Trade Law, University Institute of European Studies (Turin, Italy); admitted in California and the District of Columbia. Mr. Bloch may be reached at dbloch@winston.com, and his full biography is available online at C.F.R C.F.R (b)(1). 15 C.F.R (b)(1).

7 4 15 C.F.R (b), United Nations S/Res/1540 (28 April 2004). 6 They include the Australia Group, which seeks to prevent transmission of dual-use chemical and biotechnologies; the Zangger Committee, the Nuclear Suppliers Group, and the Missile Technology Control Regime, which seek to control goods designed or prepared for nuclear purposes, and/or missile/rocket systems, including dual-use goods; and the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies, which maintains a list of controlled military technologies U.S.C Description available online at BIS Export Enforcement Major Cases List (March 2009), jorcaselist.pdf (dated February 2008; last visited February 7, 2011) C.F.R ; 22 U.S.C. 2778; Executive Order 11, See generally (last visited February 7, 2011) U.S.C et seq. and 6701 et seq. 22 U.S.C. 2778(c). 22 C.F.R See United States v. Rocky Mountain Instrument Co., No. 10-CR (D. Colo. 2010) C.F.R C.F.R , C.F.R See generally ITAR Parts C.F.R (b). 22 C.F.R ; see 22 C.F.R. 130 (records of political contributions) C.F.R U.S.C. app U.S.C C.F.R. Parts The definition of de minimis varies from percent depending on the destination. See 22 C.F.R C.F.R C.F.R (b)(3) Fed. Reg (June 25, 2010), revising 15 C.F.R. 730, 734, 738, 740, 742, 748, 772, and See id. 30 See generally (last visited February 7, 2011) C.F.R C.F.R (a). 33 EAR EAR 738, C.F.R (b) C.F.R C.F.R. 762 et seq Fed. Reg (Apr. 5, 2010), amending 15 C.F.R. Parts 740, 748, 750, and C.F.R Authorized generally by 50 U.S.C. app. 5, 1601, and 2349aa-9; 22 U.S.C. 287; C.F.R C.F.R Executive Order 13, C.F.R C.F.R Executive Order 13, C.F.R. 535, Executive Order 13, C.F.R Executive Order 13,536; 31 C.F.R C.F.R C.F.R C.F.R C.F.R C.F.R C.F.R. 536, Executive Order 13, Executive Order 13, C.F.R Executive Order 13,348; 31 C.F.R /programs/index.shtml (last visited February 7, 2011). 62 Id. 63 See, e.g., Web Notice on Exports to the Republic of Niger, available online at df (Dec. 23, 2009; last visited February 7, 2011) C.F.R See generally iboycottcompliance.htm (last visited February 7, 2011). 66 See Fact Sheet on the President's Export Control Reform Initiative, (April 10, 2010; last visited February 7, 2011).