The Deemed Export Issue. To Paraphrase Mr. Hope Thanks For The Queries!

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1 GCD Gardner Carton & Douglas International Trade and Technology Transfer (IT 3 ) Update Spring 2004 Issue To receive future editions, please complete and return the form on the back page. Inside This Issue Upcoming Events Page 2 ITAR Compliance By Vendors and Suppliers Page 3 DOD Guidelines on DOD ITAR Exemptions Page 5 About GCD Page 6 New Export Enforcement Targets: Universities and Those Who Collaborate With Them In the past several years, company-sponsored research at universities and other institutions of higher learning in the United States has increased dramatically. Corporations have realized that these institutions have significant potential to develop cutting-edge products and technologies. Concurrently, the U.S. Government (USG) has expressed concern that many of these institutions are not taking proper actions to ensure that unauthorized exports do not occur where research is conducted by foreign persons at those institutions. Accordingly, the USG has stated that it intends to target universities that are suspected of export violations for enforcement action. In light of the USG s aggressive new posture, it is crucial for universities and those who collaborate with them to understand their duties and responsibilities under the U.S. export control laws and regulations. The Deemed Export Issue To begin with, it is imperative for universities and those with whom they collaborate to recognize that exports can occur in a variety of ways, including when technology, software, or technical data is released to a foreign person in the United States. An export is broadly defined under the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) to include, inter alia, the following types of activities: (1) the actual shipment of any controlled items to a foreign country; continues on page 2 To Paraphrase Mr. Hope Thanks For The Queries! Earlier this year we decided to try something new for our Spring 2004 issue. We asked readers to us with their questions and suggestions for articles. The response was better than we d hoped and, as a result, we have devoted two articles in this issue of the IT 3 Newsletter to concerns and issues raised by you. We are continuing to sift through your questions and hope you will send more so that we can make this a regular feature of our publication. THANKS FOR YOUR ENTHUSIASTIC RESPONSE!!

2 2 Gardner Carton & Douglas LLP New Export Enforcement Targets continued from page 1 (2) the electronic or digital transmission of any controlled items to a foreign country; (3) any release or disclosure, including oral disclosures or visual inspections, of any controlled technology, software, or technical data to any foreign person anywhere, including in the United States; or (4) the actual use or application of any controlled technology, software, or technical data on behalf of, or for the benefit of, any foreign person anywhere, including in the United States. Moreover, the terms foreign person and foreign national are defined under the ITAR and the EAR, respectively, to include any person who is not a U.S. citizen or permanent resident (i.e., an alien possessing a green card ). As such, foreigners who merely possess temporary visas, including foreign students and foreign research fellows at U.S. universities, fall under this definition. The expansive definitions of export and foreign persons have profound implications for universities and those who collaborate with them. As the discussion above indicates, any release of controlled technology, software, or technical data to a foreign person, even when that foreign person is in the United States, constitutes an export. Under the EAR, it is made explicitly clear that such a release is considered to be a deemed export (i.e., a release deemed to be an export to the home country or countries of the foreign national ), and while there is no such specific definition under the ITAR, it is an inescapable reality that such a release must be considered an export. Therefore, if a foreign student or foreign professor who is engaged in a research project at a university in the United States is provided controlled technology, software, or technical data, the deemed export rule applies. Export Authorization Requirements Unless an exemption applies, an export authorization must be obtained from either the U.S. Department of Commerce s Bureau of Industry and Security (BIS) or the U.S. Department of State s Directorate of Defense Trade Controls (DDTC) depending on whether the deemed export pertains to controlled technology, software, or technical data that is subject to either the EAR or the ITAR. Typically, the type of export authorization that would be sought from BIS would be a deemed export license and the type sought from DDTC would be a foreign person DSP-5 or a technical assistance agreement. It can easily take more than two months to obtain these types of authorizations. U.S. Affiliates of Foreign Companies Panel Discussion on U.S. Export Controls Thursday, April 29, 2004 Moderator George W. Norwood, Major General of the U.S. Air Force (Ret.) Panelists Lt. Col. Glenn J. Danielson - Licensing Officer, Office of Defense Trade Controls Licensing, U.S. Department of State Gaert W. Sime - President, Saab Technologies, Inc. George N. Grammas Partner, Gardner Carton & Douglas LLP Panel Discussion and Reception to Follow: 5:30 p.m. Location: The East Tower Penthouse 1301 K Street, NW Washington, D.C. For More Information and To Register, Contact: SACC - Washington, D.C. Phone: (202) sacc-dc@swedish-embassy.org Sponsored by the Swedish-American Chambers of Commerce, Gardner Carton & Douglas LLP and the Cooperative for Trans-Atlantic Security Upcoming Events Save the Date! U.S. - European Defense and Technology Trade Conference Thursday, May 27, 2004 The half-day, high-level conference will discuss the current state of U.S. export controls, regulations, actions and policies and their impact on U.S. and European trade, business and diplomatic relations in technology, defense, aerospace and other sectors. Speakers will include high-level U.S. Government officials, legislative representatives, and legal and industry experts. We will be sending out more details in the near future. Sponsored by the French-American Chamber of Commerce, Gardner Carton & Douglas LLP and the Cooperative For Trans-Atlantic Security

3 IT 3 Update Universities and those who collaborate with them should be aware that there are significant limitations on the fundamental research exemption that is often thought to apply in the case of university research. Generally, fundamental research is defined under the EAR and the ITAR to include basic or applied research in science and/or engineering at an accredited institution of higher learning in the United States where the resulting information is ordinarily published and shared broadly in the scientific community. However, research conducted at universities will not meet the fundamental research requirement in either of the following situations: (1) the university accepts any restrictions on the publication of the information resulting from the research, other than limited prepublication reviews by research sponsors to prevent disclosure of proprietary information provided to the researcher by sponsor or to insure that publication will not compromise the patent rights of the sponsor; or (2) the research is federally funded and specific access and dissemination controls regarding the resulting information have been accepted by the university or the researcher. Thus, in the case of company-funded research, if the sponsoring company imposes restrictions on the publication of the resulting information in any way that exceeds limited prepublication review, then the fundamental research exemption cannot be claimed. Moreover, sponsoring companies and universities should be aware that the release of the company s proprietary information to the university is not within the scope of the fundamental research exemption. Therefore, the release of such information, to the extent that it contained controlled technology, software, or technical data, to a subject foreign national would constitute an export violation that could potentially result in harsh penalties (e.g., loss of export privileges, substantial monetary penalties, and/or imprisonment). Compliance Strategies In light of the discussion above, it is imperative for universities and those who collaborate with them to take appropriate steps to ensure their compliance with applicable U.S. export control laws and regulations. As an initial matter, they must determine whether the items, technology, software, or technical data that will be the subject of sponsored research is controlled under the EAR or the ITAR. If the items, technology, software, or technical data at issue are controlled, then it must be ascertained whether the fundamental research exemption or some other export license exemption applies. If no exemption applies, then a necessary export authorization must be obtained from either BIS or DDTC depending on whether the items, technology, software, or technical data at issue are controlled under the EAR or the ITAR. If the necessary export authorization is obtained, then the universities and their sponsors must consider how to develop and implement a technology transfer control plan relating to the research, because the USG (i.e., BIS) has vowed that it will conduct numerous verification visits relating to deemed export licenses that are issued and that it will initiate export enforcement actions against entities that are found to be committing export violations. ITAR Compliance By Vendors and Suppliers Several readers have asked what they should be doing to ensure that their vendors and suppliers are in compliance with the International Traffic in Arms Regulations (ITAR). For example, is it necessary to ascertain that a manufacturer of defense articles purchased by your company is properly registered with the Directorate of Defense Trade Controls (DDTC)? Or, suppose it comes to your attention that one of your company s defense article suppliers is moving its manufacturing operation from the United States to Mexico. Should you request that the supplier provide you with a copy of its DDTC-approved manufacturing license agreement? What obligation does a company have for ascertaining whether suppliers it provides with defense technical data employ foreign nationals? The threshold issue raised by these questions is the extent to which your company may have legal responsibility or liability for ensuring supplier or vendor compliance with the ITAR. Or, stated differently, is there exposure for being found in violation of the ITAR because of a supplier s violation? The short answer is that companies generally will not be liable for ITAR violations committed by independent contractors such as vendors and suppliers. Despite the general rule, two exceptions should be kept in mind. The first is that the distinction between an independent contractor and an agent may become blurred in situations where a nominally independent vendor or supplier is seen as acting on behalf of the company. Giving a vendor any authority to act on a company s behalf should be viewed with caution because of the potential for giving rise to an agency relationship that, in turn, could trigger the company s liability for the acts of the vendor. 3

4 4 Gardner Carton & Douglas LLP The second exception is the aiding and abetting provision of the ITAR. Pursuant to Section 127.1(d) of the ITAR, no person may willfully cause, or aid, abet, counsel, demand, induce, procure or permit the commission of any act prohibited by, or the omission of any act required by any regulation, license, approval, or order issued under the ITAR. Thus, a person found to have aided and abetted another s violation of the ITAR will himself have committed a violation of the ITAR under this provision. In criminal law, the phrase aid and abet means to assist or facilitate the commission of a crime, or to promote its accomplishment. The term aid in this context, as in common usage, means to assist or help another, while abet in its legal sense means to encourage, advise, or instigate the commission of a crime. Note, however, that the language of Section 127.1(d) makes it a violation not only to actively promote or assist the ITAR violation, but also to permit it. The rare case of a defense contractor actively and deliberately assisting a vendor s ITAR violation is easy to distinguish as a violation of Section 127.1(d) of the ITAR. Less apparent may be the implications of various levels of knowledge of the vendor s activity that might be attributed to its customer. At one end of the spectrum, imagine that a defense contractor delivers technical data to a vendor while having actual knowledge that the vendor intends to export that data without a license. Here, the defense contractor almost certainly is in violation of Section 127.1(d) for aiding and abetting the vendor s violation. Changing the scenario, what if the company does not have actual knowledge, but has reason to suspect that the vendor intends to export the data without a license? This situation presents a somewhat lowered, but still real, risk of liability for aiding and abetting under Section 127.1(d) if the technical data is delivered to the vendor without further investigation. At the other extreme, a defense contractor that actively avoids knowledge of the vendor s activities may also be at risk. If it is determined that normal due diligence or evident red flags should have led to knowledge of a vendor s intention to violate the ITAR, DDTC may find conscious avoidance or willful blindness in this head-in-the-sand approach that could result in a charged violation under Section 127.1(d). The prudent approach to the knowledge issue is to obtain a reasonable level of confidence of your vendors commitment to ITAR compliance as part of the normal due diligence process of engaging and contracting with reliable vendors and suppliers having a good reputation in the industry. Making a general assessment of a vendor s ITAR compliance program or record should be part of that normal due diligence process. Assessing a company s exposure or liability for a vendor s violation of the ITAR is a fact-specific exercise, and no one size fits all. However, assuming you have conducted reasonable due diligence on your vendors that gives you a basis to have confidence in their commitment to ITAR compliance, and have no reason to suspect that they might be violating the ITAR, in most circumstances there need be little concern for such vicarious exposure. In the case of a vendor employing foreign nationals, it would generally seem advisable to routinely include in your contracts or ordering documents appropriate statements that the data is delivered with the understanding that the vendor will protect the data from being accessed by foreign national employees or visitors. On the other hand, requesting a vendor to provide a list of all its foreign national employees is probably unnecessary unless there is a particular reason for concern. In the example of a vendor moving its manufacturing facility offshore, it would seem appropriate for you to request a copy of your vendor s manufacturing license agreement (MLA) and DDTC approved. Companies may also protect themselves by making full disclosure to their vendors of the ITAR requirements, such as disclosure of the obligation to register with DDTC and of ITAR controls. This is commonly done with a destination control statement similar to the one in Section 123.9(b) of the ITAR. Of course, apart from any legal exposure, most defense companies take seriously their role in protecting the national security of the United States and may properly view ensuring vendor compliance with the ITAR in that light. DDTC considers the most compelling reason for parties to disclose voluntarily violations of the ITAR is that failure to disclose may result in circumstances detrimental to U.S. national security and foreign policy interests, and that every unauthorized transfer of technical data constitutes a potential threat to national security and foreign policy, possibly even to world peace. The responsible defense contractor may recognize the same dangers in failing to take reasonable steps to promote vendor compliance with the ITAR. There is at least some prospect that a company seen as being unconcerned with vendor compliance could risk its reputation with DDTC as a responsible exporter of ITAR-controlled products and services.

5 IT 3 Update DOD Issues Guidelines on DOD ITAR Exemptions On March 8, 2004, the U.S. Department of Defense, Defense Technology Security Administration issued guidelines concerning when a DOD agency (Military Department) may issue a written certification to a U.S. person to use one of the exemptions under the International Traffic in Arms Regulations (ITAR) that require a DOD written request, directive or approval. These so-called DOD Exemptions include those found at ITAR Sections 125.4(b)(1), 125.4(c), 126.4(a) and 126.4(c). The Guidelines identify the DOD persons who may issue the certifications and the activities that are eligible for certification. The Guidelines also provide guidance specific to each of the exemptions. Persons Who May Certify. The Guidelines identify certain Authorized Exemption Officials (AEO) who are specifically designated general officers or Senior Executive Service personnel in the military departments who are authorized to certify use of the exemptions. The AEO, in turn, may delegate authority to certify use of the exemptions to the specifically designated Exemption Certifying Official (ECO). The ECO are also identified in the Guidelines. Activities Eligible for Certification. The Guidelines identify the following specific U.S. Government (USG) activities that may qualify for certification when the services of U.S. persons are required: (i) USG sales, loans, leases or grants of defense articles, services and technical data to foreign governments and international organizations; (ii) international cooperative armaments research, development and acquisition agreements; (iii) government-to-government military and civilian personnel exchange agreements; (iv) combined military operations and training; and (v) unilateral U.S. military operations abroad. The Guidelines provide that Military Departments may only certify the use of exemptions in connection with their own contracts. Use of exemptions will not be certified solely for the benefit of the exporter, when Congressional notification is required, for offshore procurement/production of defense articles, or for exports to prohibited persons or destinations. The Guidelines also clarify that exemptions for exports of classified and unclassified technical data may be certified in conjunction with classified and unclassified plant visits in accordance with Section of the ITAR (b)(1). Section 125.4(b)(1) permits the export of technical data to foreign persons. It does not apply to hardware or defense services. The Guidelines provide that the exemption may be certified for a U.S. person to export classified and unclassified technical data to foreign persons to permit participation only in planning discussions/negotiations with foreign governments and international organizations for activities listed in subparagraphs (i) and (ii) above. The certification is authorized only when the foreign person is under contract to the foreign government or international organization and when the contractor is accompanied by the foreign government or international organization and is specifically requested and approved. The export must also be under the direct control and supervision of the Military Department. The phrase direct control and supervision means that the Military Department physically supervises the export or that it has reviewed and approved the actual technical data to be exported. The exemption may, alternatively, be authorized in limited circumstances for a U.S. person to export classified and unclassified technical data as a part of a government-led team when the exporter is under contract to the Military Department for the required technical data, the export supports one of the activities listed in subparagraphs (iii) through (v) above, the export is for a definite event, and time constraints preclude amending the contract or obtaining the appropriate export license (c). Section 125.4(c) permits the export of certain defense services and related unclassified technical data to nationals of NATO countries, Australia, Japan and Sweden for the purposes of responding to a written request from DOD for a quote or bid proposal. The Guidelines permit a Military Department to certify this exemption for a U.S. person to solicit subcontract proposals from foreign firms for the purpose of developing responses to Military Department acquisition authority requests for quote or bid proposals (a). Section 126.4(a) permits the temporary import or export of defense article hardware, technical data or performance of defense service by or for any USG agency for use by that agency or for carrying out foreign assistance, a cooperative project or a sales program. The exemption applies only when all aspects of a transaction are effected by a USG agency or when the export is covered by a USG bill of lading, but it does not apply when a USG agency acts as a transmittal agent on behalf of a private individual or firm. The Guidelines permit certification for official use by the Military Department or pursuant to a USG sale, loan, lease, grant or international cooperative armaments research, development or acquisition agreement administered by the Military Department (c). Section 126.4(c) permits the temporary import, temporary export or permanent export of classified or unclassified defense article hardware, technical data or performance of defense services for end-use by a USG agency in a foreign country when the urgency of the USG requirement precludes obtaining a USG bill of lading or export license in a timely manner. The export or temporary import must be pursuant to a contract with, or written direction by, an agency of the U.S. Government. The Guidelines provide no further guidance on when a certification can be issued for this exemption. 5

6 6 Gardner Carton & Douglas LLP Core Expertise The International Trade and Technology Transfer (IT 3 ) Practice specializes in the myriad of U.S. laws and regulations that govern bilateral and multilateral technology transfers and ventures, as well as foreign investment in the U.S. space and defense industries including, for example, export controls, customs, economic sanctions and foreign corrupt practices. We are intimately familiar with the interagency review process and decision-makers involved in Federal Government approvals. Integrated Legal Solution While we serve as special counsel in our core area, we also often act as outside general counsel to technology ventures or as transaction counsel. The IT 3 Team Members are an inter-disciplinary group of business lawyers, each with a specialization relevant to domestic and foreign technology transactions and ventures. The IT 3 Team has the experience and breadth to address corporate law and governance, transaction negotiating and drafting, venture structure and finance, intellectual property, human resources and international tax matters. Global Capability The IT 3 Team works closely with the Firm s Global Law Practice, a group of attorneys with linguistic, cultural and legal experience in various countries and regions of the world, including Europe, the Pacific Rim, India, the Middle East and South Africa. We are also supported by the World Law Group, an organization of law firms located in all major world commercial centers. This affiliation allows us to secure reliable and practical counsel for our clients doing business outside the United States. IT 3 Team Members George N. Grammas, Chair Partner (202) ggrammas@dc.gcd.com Francis E. Fletcher, Jr., Partner (202) ffletcher@dc.gcd.com Thomas J. Dougherty, Jr., Partner (202) tdougherty@dc.gcd.com Joseph S. Carlin (202) jcarlin@dc.gcd.com Sarah D. Green (202) sgreen@dc.gcd.com Geoffrey M. Goodale (202) ggoodale@dc.gcd.com Jennifer A. Lewis (202) jlewis@dc.gcd.com Corey A. Stewart (202) cstewart@dc.gcd.com Please Return This Form by , Facsimile or Mail to: Gardner Carton & Douglas LLP 1301 K Street, N.W., Suite 900, East Tower Washington, D.C (202) Telephone (202) Facsimile cstewart@dc.gcd.com Attn: Corey A. Stewart Name Title Company Address Phone Fax To Receive Future Issues To add a name to our mailing list, or to correct or update information, please complete and return the form below. The IT 3 Update is a complimentary service of the DC Corporate Business Unit of Gardner Carton & Douglas LLP. IT 3 Update Copyright Restriction - Readers are permitted to copy this IT 3 Update in total and circulate copies, but may not copy it in part or use the content for other purposes. This newsletter is not intended as legal advice, which may often turn on specific facts. Readers should seek specific advice before acting with regard to the subjects discussed herein Gardner Carton & Douglas LLP