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Implications of “QRS-11” Cases American Conference Institute December 5, 2006 Kevin Wolf Partner, Bryan Cave LLP 202-508-6113.

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Presentation on theme: "Implications of “QRS-11” Cases American Conference Institute December 5, 2006 Kevin Wolf Partner, Bryan Cave LLP 202-508-6113."— Presentation transcript:

1 Implications of “QRS-11” Cases American Conference Institute December 5, 2006 Kevin Wolf Partner, Bryan Cave LLP

2 2 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: 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.

3 3 Quick Background -- The “QRS-11” “The QRS11 is a MEMS technology solid-state ‘gyro on a chip.’” Chip is about the size of a quarter

4 4 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.

5 5 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.

6 6 Jurisdictional Status of QRS-11s Today In January after issue arose in fall 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 (Feb ). 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)

7 7 “See Through Rule” DDTC does not use the term. Characterization is that parts and components that are ITAR-controlled do not cease to be ITAR- controlled by virtue of their incorporation into items specifically designed for and used in civilian end- uses. DCL ¶ 28. Paragraph 5 of Consent Agreement (see next page)

8 8 Paragraph 5 of Consent Agreement EO 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.”

9 9 Clearing Up Two Misconceptions 1.DDTC did not declare the commercial aircraft or the commercial navigation devices exported to be ITAR- controlled. 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 end- items or (2) declared by DDTC to be ITAR- controlled, then only DDTC can declare it to be EAR-controlled through the CJ process.

10 10 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

11 11 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).

12 12 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.

13 13 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

14 14 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

15 15 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 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. § 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.”

16 16 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. § 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. § 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.”

17 17 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

18 18 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

19 19 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).

20 20 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.

21 21 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.

22 22 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)

23 23 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 end- item 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.

24 24 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.

25 25 “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 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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