Transcript Document

Implications of “QRS-11” Cases
American Conference Institute
December 5, 2006
Kevin Wolf
Partner, Bryan Cave LLP
[email protected]
202-508-6113
Opening Remarks
• As an attorney involved in the investigation and the settlement, I
will neither praise nor criticize the (March 2006) settlement. A
settlement is a settlement is a settlement.
• Draft Charging Letters (DCLs) are at:
http://pmddtc.state.gov/consent_agreements.htm
• There are, however, many DDTC statements in the DCLs that
exporters and manufacturers should take to heart. The
principle behind the QRS-11 cases is not limited just to the
export of QRS-11 chips.
• Standing request for export control humor in addition to the four
jokes and the eight “Dilbert” cartoons that already exist.
2
Quick Background -- The “QRS-11”
“The QRS11 is a MEMS technology
solid-state ‘gyro on a chip.’”
http://www.systron.com/pro_QRS11.asp
http://chinameasurement.com/engshowpro.asp?id=388
Chip is about the size of
a quarter
3
QRS-11 Basics from DCL
• Technology developed in 1980s. DCL ¶ 10.
• Chip was a component in Commercial Standby
Instrument Systems (CSISs or ISFDs) built overseas
in late 1990s. DCL ¶ 10.
• CSISs are FAA-approved back-up instruments to
provide altitude, attitude and airspeed information to
pilots if their primary flight instrument systems fail.
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QRS-11 Basics from DCL cont.
• DDTC transferred jurisdictional control over CSISs to
BIS in early 1990s. DCL ¶ 27.
• Boeing never purchased or exported the chips, but
beginning in 2000, purchased and installed many
CSIS’s containing QRS-11s for use in its commercial
aircraft, many of which were exported. DCL ¶ 21.
• DDTC had declared the chips to be ITAR-controlled.
DCL ¶ 7.
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Jurisdictional Status of QRS-11s Today
•
In January 2004 -- after issue arose in fall 2003 -DDTC amended USML to remove QRS-11s when
“integrated into and included as an integral part of a
[CSIS] for use on a civil aircraft or exported solely for
integration into such systems.” 69 Fed. Reg. 873
(Jan. 7, 2004) and 69 Fed. Reg. 5928 (Feb. 9. 2004).
• QRS-11s remain ITAR-controlled if used in (i) military
aircraft or military other end-items or (ii) simulators
for civilian or military aircraft. USML Cats. VIII(e) and
XII(d), (e) (2006)
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“See Through Rule”
• DDTC does not use the term.
• Characterization is that parts and components that
are ITAR-controlled do not cease to be ITARcontrolled by virtue of their incorporation into items
specifically designed for and used in civilian enduses. DCL ¶ 28.
• Paragraph 5 of Consent Agreement (see next page)
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Paragraph 5 of Consent Agreement
• EO 11958 and the AECA “authorize [DDTC] to
designate what is a defense article or a defense
service and [the ITAR] require written authorization
before such articles are exported regardless of
whether the underlying defense article is used in a
commercial system or product.”
• “[The ITAR], through the Commodity Jurisdiction
(§120.4) process, is the only official mechanism by
which questions regarding jurisdiction and
categorization may be addressed.”
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Clearing Up Two Misconceptions
1. DDTC did not declare the commercial aircraft or the
commercial navigation devices exported to be ITARcontrolled. Rather, the chip inside of the devices
was ITAR-controlled and the chip was what required
a DDTC license to export or reexport.
2. Paragraph 5 does not mean exporters cannot make
self-determinations about whether something is or
isn’t ITAR-controlled. BUT if something was (i)
specifically designed or modified for military enditems or (2) declared by DDTC to be ITARcontrolled, then only DDTC can declare it to be
EAR-controlled through the CJ process.
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Principal Implications
Anything (i) specifically designed or modified for a military or
spacecraft-related end-item or (ii) otherwise declared by DDTC
to be ITAR-controlled is always ITAR-controlled until and
unless DDTC declares otherwise in a CJ determination,
regardless of:
a. Incorporation into civilian end-item (foreign or domestic)
(Compare to EAR’s Interpretation No. 2)
b. Size or percentage of value in end-item (no “de minimis” rule in
ITAR)
c. Age (no “statute of limitations” in ITAR)
d. Level of sophistication (even if more sophisticated civilian items
exist)
e. Foreign or domestic availability
f. Specific identification on EAR’s CCL
10
EAR’s Interpretation No. 2
• Rule is almost exactly the opposite of the EAR’s “Interpretation
2” regarding the “classification of parts of machinery,
equipment, or other items.”
• “In instances where one or more assembled machines or units
of equipment are being exported, the individual component
parts that are physically incorporated into the machine or
equipment do not require a license. The license or general
exception under which the complete machine or unit of
equipment is exported will also cover its component parts,
provided that the parts are normal and usual components of the
machine or equipment being exported, or that the physical
incorporation is not used as a device to evade the requirement
for a license.” 15 C.F.R. § 770.1(b)(1).
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Implication Reaches Far Down
• Every USML subcategory controls “components,”
“parts,” and “accessories” specifically designed or
modified for a defense article listed elsewhere in that
category.
– Examples of “parts” cited in the ITAR are “rivets, wire, bolts,
etc.” ITAR § 121.8(d)
– An example of an “accessory” is “special paint.”
ITAR § 121.8(c)
• To repeat: The QRS-11 principle reaches deep into far
less sophisticated widgets until and unless DDTC is
willing to declare otherwise.
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Industry Impacts
1. ITAR-Free Certifications
2. ITAR-Free Compliance Clauses in Purchase/Sale
Contracts
3. Difficult jurisdictional reviews of ancient parts or
components
4. Imposition of screens between military and civilian
sides of shops
5. Foreign purchaser decisions to exclude US
suppliers
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More Industry Impacts
6. Re-engineering end-items to develop components
with a completely civilian pedigree
7. More caution and clarity in contracts for
development of new parts and components
8. Reminder that DDTC jurisdictional determinations
are not judicially reviewable
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Impact 1: “ITAR-Free Certifications”
“Supplier hereby represents and warrants that all end-items
(including their parts, components, accessories, and attachments),
software, firmware, systems, materials, and/or technical data
(collectively “Items”) that it has sold to or otherwise provided
Purchaser are not subject to the jurisdiction of the International
Traffic in Arms Regulations (“ITAR”) at 22 C.F.R. pts. 120-130. In
particular, Supplier represents and warrants that it has not sold to
or otherwise provided Purchaser with Items that were “defense
articles” identified on the ITAR’s United States Munitions List at 22
C.F.R. § 121.1 or otherwise specifically designed, developed,
configured, adapted or modified in any way for a military
application, military end-item, or a commercial satellite, spacecraft
or launch application.”
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Impact 2: ITAR Clauses in PO’s
“Each Party represents that (i) the Items, and the parts and components
thereof, it is providing under this Agreement are not “defense articles” as
that term is defined in 22 C.F.R. § 120.6. The Parties acknowledge that
this representation means that an official capable of binding the Party
providing such Items knows or has otherwise determined that such Items,
and the parts and components thereof, are not on the ITAR’s Munitions
List at 22 C.F.R. §121.1. Each Party agrees to reasonably cooperate with
the other in providing, upon request of the other Party, documentation or
other information that supports or confirms this representation.”
“To the extent that such Items, or any parts or components thereof, were
specifically designed or modified for a military end-item or application or
civilian spacecraft- or satellite-related application, the Party providing such
Items shall notify the other Party of this fact and shall also provide the
other Party with written confirmation from the United States Department of
State that such Items, and all such parts or components thereof, are not
subject to the jurisdiction of the ITAR.”
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Impact 3: Difficult Jurisdictional
Reviews
• Parts/components may have designed years or
decades ago
• Companies are bought and sold
• Engineers retire, resign, move on, forget
• Records and business plans unclear about the intent
behind why a part or component was originally
designed – for military and later civilian applications
discovered? Always for both? Predominant military?
• DDTC’s presumption is that it is ITAR-controlled if
you say “I don’t know” in CJ request
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Impact 4: Internal Screens
• Creation of screens so that widgets originally
designed or modified for a military end-items do not
find their way in to civilian end-items being created
• Forces the re-invention of widgets for civilian
applications without benefit of past R&D
• Forces difficult re-consideration of all data directly
related to original widget even when there is little
difference between widget used in civilian end-item
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Impact 5: Exclusion of US Suppliers
• Unlike the EAR and the OFAC sanctions regulations,
the ITAR does not contain a de minimis rule.
• Thus, foreign and domestic manufacturers do not
want to buy ITAR-controlled parts that will effectively
“taint” their civilian end-items.
• Remember: ITAR requires foreign persons to get
DDTC licenses to re-export defense articles, even if
a component in a foreign-made civilian end-item.
ITAR § 127(a)(3).
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Impact 6: Re-engineering
• Instead of subjecting a part arguably specifically
designed for a military end-item that is now useful for
a civilian application to DDTC licensing, companies
will simply re-invent the same part specifically for a
civilian end-item without any reference to data
related to original part.
• Often considered quicker to abandon use of old parts
and re-engineer than to prepare a CJ and wait for
result.
• Irony is that newly designed part is often better than
original part.
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Impact 7: Contract Clarity
• The intent behind why a part or component is being
designed or modified is set forth more clearly in
contracts to avoid any future doubts as to whether it
is ITAR- or EAR-controlled – particularly in USG
contracts.
• Internal jurisdictional determination records are
becoming more explicit in explaining the corporate
intent behind why a widget was designed and
developed. Duel-use business plans are being
written more precisely.
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Impact 8: No Judicial Review
• DDTC has complete discretion in determining what is
and is not a defense article. Indeed, other than in
criminal cases, judicial review of DDTC’s
jurisdictional determinations is prohibited by law. (22
U.S.C. § 2778(h)). In other words, there is no
authority to sue DDTC if you believe it is not applying
the USML as written (although there is room to try).
• Thus, when doing a jurisdictional analysis, one must
not only consider the ITAR’s words but also any
DDTC interpretations of or positions regarding the
words. (See “Law and Lore” Chart)
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Two Other Comments on DCL
• No scienter requirement in Part 127 – they are strict
liability provisions. That is, there is no need to find a
“knowing” or a “willful” violation to violate most
sections of Part 127.
• DDTC expectation that one who sells a civilian enditem containing an ITAR-controlled component must
notify the domestic buyers that the component in the
civilian end-item will require a DDTC license to
export. DCL ¶¶ 14 and 33 and L-3 DCL ¶ 44.
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Goodrich/L-3 DCL and “Materiality”
• Company submitted a CJ Request that was drafted
by outside counsel. It described the capabilities of
the CSIS, but did not state that the devices contained
QRS-11s. DCL ¶ 53.
• DDTC said that this was a “material omission.”
– For a statement to be “material,” it must have a natural
tendency to influence, or be capable of influencing, the
decision.
– Not necessary that Government was actually influenced by
statement.
• Keep these two points in mind in all correspondence
with US Government.
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“Aiding and Abetting” Amendment
• Outside counsel was not charged, but nonetheless alleged to
have “aided and abetted” the making of the material omission.
DCL ¶ 53.
• On April 21, 2006, DDTC amended the ITAR §127.1(d) to
prohibit anyone from “knowingly” (in addition to then-existing
“willfully”) aiding, abetting, causing, counseling, permitting (etc.)
an ITAR violation. 71 Fed. Reg. 20534.
• Suggests DDTC willing to prosecute civilly anyone who assists
in (or “causes,” “counsels,” or “permits”) an act of another
person that DDTC believes constitute an ITAR violation even if
there was no bad (“willful”) intent to violate the ITAR when the
assistance was provided. One could violate the ITAR without
even knowing it!
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