DOD Interim Rule Relating to Export Control Law

In 2008 the United States Department of Defense (DoD) issued an interim rule that amends the Defense Federal Acquisition Regulation Supplement (DFARS) to specify requirements for complying with export control laws and regulations when performing DoD contracts.  The rule focuses on contractor responsibility to comply with existing export control regulations issued by the Department of Commerce (the Export Administration Regulations, or EAR) and the Department of State (International Traffic in Arms Regulations, or ITAR).  The rule adds two new clauses to be used when (1) export-controlled items, including information or technology, are expected at the outset to be involved in the performance of a contract or (2) there is a possibility that export-controlled items, including information or technology, may become involved during the performance of a contract.

Background

DoD had published proposed rules in both 2005 and 2006 covering these issues, both of which attracted many comments expressing strong concerns.  In the aftermath of these proposed rules, Congress passed legislation to require DoD to issue a regulation no later than July 27, 2008, to address requirements for DoD contractors to comply with export control laws and regulations.  The current interim rule is the result.

Summary of the New Rule

The interim rule creates a new Subpart 204.73, Export-Controlled Items, to DFARS.  This subpart references ITAR and EAR and explains that the U.S. Government and its contractors have an interest in having a common understanding of export-controlled items expected to be involved in contract performance.  It also requires that “the requiring activity” review each acquisition to determine if, during performance of the contemplated contract, the contractor is expected to generate or require access to export-controlled items.  If the solicitation involves research and development, the requiring activity must notify the contracting officer in writing either (a) when export-controlled items are expected to be involved or (b) the work is fundamental research only and export-controlled items are not expected to be involved.  If the solicitation is for supplies or services, the requiring activity must notify the contracting officer in writing, prior to issuing the solicitation, when export-controlled items are expected to be involved or when the requiring activity is unable to determine that export-controlled items will not be involved.

In addition to the notification requirements established for the requiring activity, the rule creates two new clauses (each of which is set forth in the Appendix to this article) to be included in certain contracts.  The primary purpose of these clauses is to put DoD contractors and their suppliers on notice of the fact that they have a separate obligation, beyond the contractor’s obligations to DoD, to comply with ITAR and EAR.  One or the other of these clauses must be included in the DoD solicitation and contract for which the notice by the requiring activity is provided to the contracting officer.  If that notice was that export-controlled items are expected to be involved in the performance of the contract (regardless of whether the contract relates to research and development or supplies or services) the clause found at 252.204-7008 must be included in the solicitation and the contract.  If the solicitation and the contract relate to research and development and the clause found at 252.204-7008 is not being included in the solicitation and the contract (i.e., the requiring activity does not give notice that export- controlled items are expected to be involved), then the clause found at 252.204-7009 must be included in the solicitation and the contract.  For solicitations and contracts for supplies and services with respect to which the contracting officer received a notice that the requiring activity is unable to determine that export-controlled items will not be involved, the clause found at 252.204-7009 must be included in the solicitation and the contract.

In essence, the clause found at 252.204-7008 (used when export-controlled items are expected by the requiring activity to be involved) acknowledges that both parties to the contract anticipate that in the performance of the contract the contractor will generate or need to access export-controlled items.  The clause goes on to note that the contractor must comply with applicable laws and regulations regarding export controls, including ITAR and EAR, must consult with the Department of State regarding ITAR, and the Department of Commerce regarding EAR, and that nothing in the terms of the contract is intended to change, supersede, or waive any of the requirements of applicable federal laws, executive orders, and regulations.  Contractors are required to include the substance of the clause in subcontracts of any tiers that are expected to involve access to or generation of export-controlled items.

The clause found at 252.204-7009 states that the parties do not anticipate that in the performance of the contract the contractor will generate or need access to export- controlled items.  But it goes on to note that if during the performance of the contract the contractor becomes aware that it will generate or need access to export-controlled items, it will notify the contracting officer in writing and the contracting officer will expeditiously modify the contract to include the clause found at 252.204-7008, negotiate a contract modification that eliminates the requirement for performance of work that would involve export-controlled items, or terminate the contract in whole or in part as may be appropriate for the convenience of the Government, in accordance with the termination clause of the contract.  The clause at 252.204-7009 does not contain a flow-down requirement.

Keep in mind that the definition of “export-controlled items” set forth in the rule is broad.  It could cover almost all items in commerce in the United States because it refers to items subject to EAR or ITAR.  ITAR only applies to “defense articles” (items designed, developed, configured, adapted, or modified for military application) and “defense services” (assistance or training relating to defense articles).  But nearly any U.S. origin item (other than publicly-available information or items subject to certain other export control laws, such as ITAR) is covered by EAR.   As a practical matter, though, this clause may have little immediate impact on contractors (except purposes of complying with the rule) because contractors are already subject to export control obligations under the EAR, ITAR, and other U.S. export control laws.  In other words, this clause does not create any new obligations to comply with export control law.  It does, however, require the parties who are involved with contracts that may involve export-controlled items to acknowledge that fact and acknowledge that they will comply with applicable export control laws and regulations.

In a similar vein, bear in mind that the clauses that are used in the contract do not control whether export control laws apply to the performance of the contract.  For example, a contractor cannot assume that ITAR or EAR does not apply to the activities under the contract because the clause found at 252.204-7009 (the parties do not anticipate that in the performance of the contract the contractor will generate or need access to export- controlled items) is used.  The export control laws apply, or do not apply, based upon the items and conduct of the parties under the contract, independent of any rules that DoD may adopt to attempt to address export control law compliance.

The requirement that the parties to the contract acknowledge that they will comply with export control law may be the most significant aspect of the new DoD rule.  In the past, a violation of export control law certainly could create issues with other governmental agencies, but it was not necessarily a violation of the contract with the Government.  But under this new DoD rule, failure to comply with export control laws results in a violation of the contract.  The clauses themselves do not provide specific remedies for any violations.  But the DoD may well increase its focus on this aspect of its contracts and aggressively address violations.

Export control laws are an especially “hot” enforcement item for the Department of State and the Department of Commerce.  The penalties for noncompliance can be severe.  The Department of Defense has jumped on board to acknowledge the importance of these laws.  We will be happy to discuss export control laws with you at any time, whether you are a government contractor or not.

Appendix

252.204-7008  Requirements for Contracts Involving Export-Controlled Items (July 2008)

(a) Definition.  “Export-controlled items,” as used in this clause, means items subject to the Export Administration Regulations (EAR) (15 CFR Parts 730-774) or the International Traffic in Arms Regulations (22 CFR Parts 120-130).  The term includes:

(1) “Defense items,” defined in the Arms Export Control Act, 22 U.S.C. 2778(j)(4)(A), as defense articles, defense services, and related technical data.  The term “defense items” includes information and technology.

(2) “Items,” defined in the EAR as “commodities, software, and technology,” terms that are also defined in the EAR, 15 CFR 772.1.  Regarding the release of items subject to the EAR to foreign nationals within the United States, “items” only include technology and software source code (and not commodities) subject to the EAR.

(b) The parties anticipate that, in the performance of this contract, the Contractor will generate or need access to export-controlled items.

(c) The Contractor shall comply with all applicable laws and regulations regarding export-controlled items, including the requirement for contractors to register with the Department of State in accordance with the ITAR.  The Contractor shall consult with the Department of State regarding any questions relating to the ITAR and with the Department of Commerce regarding any questions relating to the EAR.

(d) The Contractor’s responsibility to comply with all applicable laws and regulations regarding export-controlled items exists independent of, and is not established or limited by, the information provided by this clause.

(e)  Nothing in the terms of this contract is intended to change, supersede, or waive any of the requirements of applicable Federal laws, Executive orders, and regulations, including but not limited to—

(1) The Export Administration Act of 1979, as amended (50 U.S.C. App. 2401-2420);

(2) The Arms Export Control Act of 1976 (22 U.S.C. 2751 et seq.);

(3) The International Emergency Economic Powers Act (50 U.S.C. 1701-1707);

(4) The Export Administration Regulations (15 CFR Parts 730-774);

(5) The International Traffic in Arms Regulations (22 CFR Parts 120-130);

(6) Executive Order 13222, as extended;

(7) DoD Directive 2040.2, International Transfers of Technology, Goods, Services, and Munitions; and

(8) DoD Industrial Security Regulation (DoD 5220.22-R).

(f) The Contractor shall include the substance of this clause, including this paragraph (f), in all subcontracts that are expected to involve access to or generation of export-controlled items.

252.204-7009  Requirements Regarding Potential Access to Export-Controlled Items (July 2008)

(a) Definition.  “Export-controlled items,” as used in this clause, means items subject to the Export Administration Regulations (EAR) (15 CFR Parts 730-774) or the International Traffic in Arms Regulations (22 CFR Parts 120-130).  The term includes:

(1) “Defense items,” defined in the Arms Export Control Act, 22 U.S.C. 2778(j)(4)(A), as defense articles, defense services, and related technical data.  The term “defense items” includes information and technology.

(2) “Items,” defined in the EAR as “commodities, software, and technology,” terms that are also defined in the EAR, 15 CFR 772.1.  Regarding the release of items subject to the EAR to foreign nationals within the United States, “items” only include technology and software source code (and not commodities) subject to the EAR.

(b) The parties do not anticipate that, in the performance of this contract, the Contractor will generate or need access to export-controlled items.

(c) If, during the performance of this contract, the Contractor becomes aware that the Contractor will generate or need access to export-controlled items—

(1) The Contractor shall notify the Contracting Officer in writing; and

(2) The Contracting Officer will expeditiously—

(i) Modify the contract to include the Defense Federal Acquisition Regulation Supplement clause 252.204-7008, Requirements for Contracts Involving Export-Controlled Items;

(ii) Negotiate a contract modification that eliminates the requirement for performance of work that would involve export-controlled items; or

(iii) Terminate the contract, in whole or in part, as may be appropriate, for the convenience of the Government, in accordance with the Termination clause of the contract.

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