International Law Advisory - DoD Issues Interim DFARS Provision Regarding Export Controlled Items

On July 21, 2008, the Department of Defense (DoD)  issued an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to specify requirements for complying with export control laws and regulations when performing DoD contracts.  See 73 Fed. Reg. 140 at 42274-42279 (July 21, 2008).  The rule recognizes contractor responsibilities to comply with existing Department of Commerce and Department of State export control regulations (the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR), respectively).  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 the contract.  Comments on the interim rule are due on or before September 21, 2008.

Background

This interim rule has been some time in the making.  DoD had published proposed rules in both 2005 and 2006 covering these issues, both of which having attracted comments expressing strong concerns.  The first proposed rule appeared to place possibly significant compliance requirements on contractors above and beyond those specified in the ITAR or EAR.  The second proposed rule, while somewhat more modest, would have resulted in contracting officials essentially being involved in export control classification determinations, with the potential for possible confusion when such determinations were compared to the Department of State’s or Department of Commerce’s views.  In the aftermath of these proposed rules (the second of which generated 167 public comments), Section 890(a) of the National Defense Authorization Act for Fiscal Year 2008 (Pub L. 110-181), enacted on January 28, 2008, required 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.  DoD’s July 21, 2008 rule is the result.

Summary of the New Rule

The interim rule is a relatively modest and scaled back version of its predecessors, particularly when compared with the first proposed rule, though there are still elements of the new rule which may cause some confusion.  The interim rule sets forth a new Subpart 204.73, Export Controlled Items, to the DFARS, as well as two new clauses, 252.204-7008, Requirements for contracts involving export-controlled items and 252.204-2009, Requirements regarding potential access to export controlled items.  There are also additional provisions in Subsection 204 of DoD’s companion Procedures, Guidance and Information (PGI).

The key sections in the new rule are 204.7304 and 204.7305. Section 204.7304(a) states that prior to the issuance of a solicitation for research and development, the requiring activity shall notify the contracting officer in writing when – (1) export controlled items are expected to be involved; or (2) the work is fundamental research only, and export controlled items are not expected to be involved.  Section 204.7304(b) states that prior to the issuance of a solicitation for supplies or services, the requiring activity shall notify the contracting officer in writing when – (1) export-controlled items are expected to be involved; or (2) the requiring activity is unable to determine that export controlled items will not be involved.

Section 204.7305 sets out when particular contract clauses will be inserted into solicitations and prime contracts.. 

First, for solicitations covered by section 204.7304(a)(1) or (b)(1) – i.e., when export-controlled items are expected to be involved in the performance of the contract – the clause found at 252.204-7008 shall be used.  That clause acknowledges that both parties anticipate that, in the performance of the contract the contractor will generate or need to access export controlled items, and the clause goes on to note that the contractor shall comply with applicable laws and regulations regarding export controls, including the ITAR and the EAR.  It also states that the contractor shall consult with the Department of State regarding the ITAR, and the Department of Commerce regarding the 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, including but not limited to the various export control statues and regulations, DoD Directive 2040.2, International Transfers of Technology, Goods, Services, and Munitions, and the DoD Industrial Security regulation (DoD 5220.22-R).  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.

Second, for solicitations involving fundamental research only where no export-controlled items are expected to be involved, or solicitations for supplies or services where it cannot be determined if export controlled items will be involved, the clause found at 252.204-7009 shall be used. That clause is more limited than the one found at 252.204-7008.  It 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.  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 shall notify the contracting officer in writing and the contracting officer will expeditiously modify the contract to include 252.204-7008, negotiate a contract modification that eliminates the requirement for performance of work that would involved 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.  252.204-7009 does not contain a flow-down requirement.

The definition of “export controlled items” set forth in the rule is broad.  As a technical matter, it could cover almost all items in commerce in the United States, since it refers to items “subject to the - - - -“.  For example, under the definition of “items subject to the EAR” in the Export Administration Regulations, nearly any U.S. origin item (other than publicly-available information, or items subject to certain other export control regimes) is covered.  See 15 C.F.R. § 734.3.  In reality, this clause may have little immediate impact on contractors, as they are already subject to export control obligations under the EAR, ITAR, or other U.S. export control regimes.  However, this clause will serve as an ample reminder of the need to comply with these important regulatory regimes. 

Over the long term, though, the increased “contractualization” of international compliance requirements may have more significant ramifications for defense contractors.  For instance, whereas in the past a violation of export control law was not necessarily a violation of a contractual requirement, under this new regime, failure to comply with export control laws could be viewed as a contractual violation, though there are no independent remedies within the clause itself, e.g., no reference to termination for default or potential debarment as there are in the FAR’s human trafficking rules.  However, in light of the renewed emphasis of the federal government on contract compliance, and the FAR’s new ethics and compliance provisions implemented late last year, it is not inconceivable that contractors could face new government enforcement scrutiny and become subject to DoD (rather than State or Commerce) investigations as a result of export control difficulties. 

Moreover, as a result of requiring a flowdown, DoD seems to be reminding the contractor community that export control compliance is an essential matter to address between prime contractors and subcontractors.  In some respects, the existence of the clause may be a helpful means for primes to remind smaller and perhaps less experienced subcontractors of the need for export control compliance, including in situations where potential export activity may not be so apparent (e.g. when export-controlled technical data, technology or software source code is released to a foreign nationals even in the U.S.).

Notwithstanding the apparent broad applicability of 252.204-7008, it is conceivable that DoD requiring activities will not read the definition of “export controlled items” as broadly as a literal reading of the rule would appear to mandate.  In that case, it is conceivable that 252.204-7009 may be included in circumstances where 252.204-7008 is actually more appropriate.  In such instances, the contractor will need to be mindful of this possible incongruity and will still need to comply with export control rules.  In other words, if 252.204-7009 is used, the contractor should not take this to mean that the ITAR or the EAR do not apply.  And ultimately, if a contractor comes to that realization, it presumably needs to notify the contracting officer of its view and have the contract modified to contain 252.204-7008.

If utilized correctly, it appears that 252.204-7009 would most typically be applicable in situations involving fundamental research by universities, which means basic and applied research in science and engineering, the results of which ordinarily are published and shared broadly within the scientific community.  DoD stated that it received many comments from universities regarding the proposed rules and notes in the pre-amble to the interim rule that there are rare instances in which export-controlled information or technology may be used to conduct fundamental research.  DoD also expressed concern about the line between fundamental research and more advanced applied research and states that one purpose of the DFARS rule is to remind universities that they must notify the contracting officer when they have reason to believe this line may be crossed.  Therefore, in light of these comments, universities must continue to be mindful that DoD views export controls as applicable to some of their activities.

If you have any questions regarding the interim rule, please contact Andy Irwin at 202.429.8177 or Ed Krauland at 202.429.8083.  If you have additional questions regarding government contracting issues, please contact Tom Barletta at 202.429.8058.