International Law Advisory - DoD Issues Second Proposed Rule Amending the DFARS to Address Export Controls

In response to comments received from the public, the Department of Defense (“DoD”) has revised its proposed rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to prevent the unauthorized disclosure of export-controlled information and technology under DoD contracts.  See 71 Fed. Reg. 46434 (August 14, 2006), attached.

DoD’s new proposal represents a significant retraction of certain overly prescriptive compliance burdens contained in DoD’s initial proposal, published on July 12, 2005.  The new rule continues to require contracting officers to identify any export-controlled information that contractors would need to access as part of their involvement in the contract.  The proposed rule also creates a separate provision and contract clause addressing export compliance as it relates to fundamental research.  

Requirements Removed from Proposed Rule
In response to comments received from 145 parties in response to the first proposed rule, DoD acknowledged that the proposed rule would have created more expansive regulatory requirements for export compliance than currently are mandated by the Export Administration Regulations (“EAR”) or the International Traffic in Arms Regulations (“ITAR”).  The proposed rule has been revised in an attempt to eliminate potential conflicts with the ITAR and the EAR.  Specifically, the new proposed rule removes the requirement that contractors awarded DoD contracts involving export-controlled information:

• maintain an export compliance program;
• conduct training on export compliance controls; 
• perform periodic assessments;
• develop an access control plan that includes badging and segregated work areas. 

Under the revised proposal, contractors are directed to the ITAR and EAR to determine whether they are in compliance with export compliance-related regulatory requirements.

Fundamental Research
In response to comments received from numerous academic institutions, the proposed rule contains a specific clause for inclusion in fundamental research contracts.  DoD states that the revised rule does not place new burdens on universities, but instead simply alerts contractors to their existing responsibilities under the ITAR and EAR.  Moreover, the notice emphasizes that, although fundamental research is to remain unrestricted to the extent possible, it is not altogether exempt from statute-based export controls.  

Notification to Contractors of Export-Controlled Information or Technology
The proposed rule continues to require contracting officers to notify contractors if, during performance of the contemplated contract, the contractor will generate or require access to export-controlled information or technology.  The new proposal specifies that the contracting officer must make the determination based on information received from the requiring activity.  DoD indicates that this is intended to prevent mistakes in the identification of what constitutes export-controlled information and technology.  If export-controlled information or technology is required for performance of the contract, the rule proposes the inclusion of contract clauses acknowledging the contracting officer’s responsibility to identify the specific export-controlled information or technology involved, as well as the obligation of the contractor to comply with EAR and ITAR requirements.  DoD contracts would also contain a clause requiring the parties to modify the contract should they learn of the need for the contractor to access any export-controlled information or technology not specifically listed in the contract.

As a consequence of this provision of the proposed regulation, contractors should be prepared to interface increasingly with contracting officers regarding export control issues, as there may be frequent instances in which contract modifications may be necessary.  The fact that the contracting officer has a continuing role in the identification of export controlled information may lead to disagreements between contractors and DoD.  Moreover, the role of the State and Commerce Departments in making such determinations – and the potential specificity of such determinations – is not clearly delineated in the rule and may lead to further disagreement.  Finally, the language of the proposed regulation suggests that the absence of a contract clause containing notification of export-controlled information is not necessarily determinative, and a contractor has an obligation to inform DoD if it believes export-controlled technology or information will be involved. 

Conclusion
DoD will be accepting comments regarding these proposed revisions of the DFARS until October 13, 2006.  Should you have any questions regarding these proposed changes, please contact Peter Lichtenbaum at 202-429-6263, Ed Krauland at 202-429-8083, or Negar Katirai at 202-429-8028.