United States: DOE Proposes Highly Burdensome Reporting Obligations With Respect To Export Compliance

On September 8, 2008, we posted a commentary on a newly promulgated interim rule relating to "Export-Controlled Items," that was finalized in 2010 and is now set forth at DFARS Subpart 204.73 and implemented in principal part by the clause set forth at 52.204-7008. Click here. That rule was relatively straightforward, basically reminding DOD contractors (1) that they were obligated to "comply with all applicable laws and regulations regarding export-controlled items" and (2) that those compliance obligations existed independent of the new DFARS rule and its implementing clause. In reality, while the clause had the capacity to transform an export violation into a breach of contract, with all of the attendant liabilities and risks that attend such breaches, it imposed no new substantive obligations on DOD contractors.

If DOE has its way, DOE contractors will soon be confronted with far more rigorous export-related obligations. Under a proposed rule published at 78 Fed. Reg. 35195 (June 12, 2013), DOE contractors would find themselves obligated, in effect, (1) to advise virtually every recipient of any transmittal under any DOE contract with an export compliance notice that rivals the obverse page of a credit card agreement, and (2) to affirmatively notify the contracting officer of every export control requirement that the contractor has determined apply to the performance of its contract and that the contractor has taken "appropriate steps" to comply with those requirements. These obligations transcend any reporting obligations heretofore imposed on contractors and will impose significant administrative burdens and legal risks on DOE contractors.

The period for public comment on the proposed rule expires at the close of business on July 12, 2013. So, time is short to make your views known.

The principal flaws in the proposed clause are in paragraphs (c) and (e). Paragraph (c) requires a notice to be included "in all transfers, sales or other offerings of unclassified information, materials, technology, equipment or software pursuant to a DOE contract." We will address the notice itself below, but let's stop and dwell on that language, because it advises the contractor when it must include the notice. If the contractor includes the notice where required, it complies with the contract; if it does not include the notice when required, it breaches the contract.

Let's start at the beginning – "all transfers." Just what does that mean? Does it apply only to formal transfers, such as contract deliverables, or does it include all "transfers" of any information, including transfers via e-mail between (a) contractors and government customers, (b) contractors and private customers, (c) contractors and higher tier contractors, (d) employees of the same contractor? A little clarification would seem to be in order here. Without such clarification, contractors should probably operate on the assumption that "all" means just that, because they will find no leniency from regulators, enforcement personnel or whistleblowers.

What about "information"? The notice is not limited by its terms to "transfers" of "information" that is subject to export controls. It simply applies, indiscriminately, to all transfers pursuant to a DOE contract. Read literally, the notice is mandatory in an email establishing the time for any meeting to be convened under any DOE contract. Silly? Of course, but that is the literal, plain meaning import of the rule. And the same notice would be required for any "materials" transferred under the contract, including items that are not export controlled.

Let's move to the end of the sentence in question – "pursuant to a DOE contract." The dictionary defines "pursuant to" to mean "in accordance with," a term that is in turn defined to mean "agreement" or "conformity" with. Does this mean that the transfer must be required by the contract in order for the notice to attach? Or, will any "transfer" be covered that occurs under the broad umbrella of contract activity provided that the transfer is not in "disagreement" with or out of "conformity" with its terms? Again, given the risks, prudence would suggest a broad interpretation in the absence of further regulatory clarification.

The notice itself is simply overpowering. In full flower, I replicate it below:

[Start of Export Restriction Notice]

Export Restriction Notice—The use, disposition, export, and re-export of this property are subject to export control laws, regulations and directives, in effect on the date of contract award and as amended subsequently, that include but are not limited to: the Atomic Energy Act of 1954, as amended; the Arms Export Control Act (22 U.S.C. 2751 et seq.); the Export Administration Act of 1979 (50 U.S.C. app. 2401 et seq.) as continued under the International Emergency Economic Powers Act (Title II of Pub.L. 95–223, 91 Stat. 1626, October 28, 1977; 50 U.S.C. 1701 et seq.); Trading with the Enemy Act (50 U.S.C. App. 5(b) as amended by the Foreign Assistance Act of 1961); Assistance to Foreign Atomic Energy Activities (10 CFR part 810); Export and Import of Nuclear Equipment and Material (10 CFR part 110); International Traffic in Arms Regulations (22 CFR parts 120 through 130); Export Administration Regulations (15 CFR parts 730 through 734); regulations administered by the Office of Foreign Assets Control (31 CFR parts 500 through 598); DOE Order 142.3A, Unclassified Foreign Visits and Assignments Program, October 14, 2010; DOE Order 551.1D, Official Foreign Travel, June 24, 2008; and DOE Order 580.1A, Department of Energy Personal Property Management Program, March 30, 2012; and the Espionage Act (37 U.S.C. 791 et seq.) which among other things, prohibit—

(1) The making of false statements and concealment of any material information regarding the use or disposition, export or reexport of the property; and

(2) Any use or disposition, export or reexport of the property which is not authorized in accordance with the provisions of this agreement.

[End of Export Restriction Notice]

I have highlighted the language in paragraph (c)(1) only to underscore the fact that DOE is quite mindful that misinformation communicated with respect to export compliance can have drastic consequences under Title 18 and, potentially, under the civil provisions of the False Claims Act in Title 31.

Which leads us to paragraph (e). Let this sink in for a moment:

The Contractor shall notify the Contracting Officer in a timely manner, in writing, of:

(1) Any export control requirements it has determined apply to contract performance; and

(2) That it has taken appropriate steps to comply with such requirements.

Now, go back and read the notice. First, paragraph (e) requires you to make an affirmative determination of which of those many, many statutory and regulatory requirements applies to contract performance. The DOE's rationale for this requirement is simple – you have a duty to make that determination in any event or you risk violating an applicable requirement. This is true, but it really does beg the question – "If the duty exists independent of the clause, what purpose is served by paragraph (e)?" It cannot be to educate the contractor; the notice in paragraph (c) already lists all the potentially relevant obligations.

What conceivable purpose is served by obligating the contractor to notify the contracting officer of the rules and regulations that apply to the contract? Is not the Government generally the ultimate arbiter of the rules it promulgates? If specificity with respect to the application of export rules is desired on a contract-by-contract basis, why does the proposed rule not merely require the agency, when issuing a solicitation, to identify the specific export controls that apply to the contract and simply remind the contractor, as the DFARS rule does, of its general obligation to comply with the applicable rules? The proposed approach merely affords the agency, the IG, the DOJ and whistleblowers the opportunity to second guess the contractor's judgment – or even the adequacy of the process pursuant to which it reached that judgment – and to seek administrative or punitive recourse against the contractor for mistakes in reports that would be unnecessary but for paragraph (e).

Second, you now have an affirmative duty, not only to comply with the laws that you hope you have properly determined to be applicable to your contract, but to advise the contracting officer that you have taken "appropriate steps" to comply with them. What steps are "appropriate"? How often do you need to update your advice to the contracting officer? Do any changes to your internal controls, policies and procedures necessitate an updated advisory? Does the rule require you to disclose the steps you deem to be appropriate? No, not explicitly. But does anyone believe that auditors and IGs will ignore the opportunities presented here to till those fields?

There are other problems with and inconsistencies in the proposed rule. For example:

  • The Notice of Proposed Rulemaking states that the rule is being proposed "for consistency with a 2010 amendment to the Department of Defense Acquisition Regulations . . ." It would appear, frankly, that the DEAR draftsmen either have not read the DFARS or require vocabulary training with respect to the meaning of "consistency."
  • Paragraph (h) of the proposed rule requires flow down to subcontracts, but the flow down is not limited to subcontracts the subject matter of which is export controlled. That problem, of course, is identical to the one discussed above in trying to interpret and apply the prescribed "Export Restriction Notice." And it raises two potential problems. First, will the in terrorem effect of the Notice simply dissuade smaller and less sophisticated subcontractors from participating in the contracting process altogether? Note, this flow down requirement extends to all tiers. Second, there is a slight linguistic difference between the prefatory language relating to the Notice and the flow down requirement. Paragraph (c) requires the Notice to be included in "all transfers, sales or other offerings of unclassified information, materials, technology, equipment or software." Paragraph (h) requires flow down into any subcontract that involves "transfer, sale or other offering of items, including but not limited to unclassified information, materials, technology, equipment or software." (Emphasis added) Query, what are these other "items"? Or is this just inattentive draftsmanship. The law generally presumes that differences in language, particularly within the same regulation, are intended to have some meaning.

At bottom, this proposed DEAR rule evidences the complete disconnect between rule makers and the real world and the administrative burdens (spelled "c-o-s-t") and legal risks that unnecessary rules impose on contractors. This rule is not necessary – the obligation to comply exists, as the NPR and paragraph (b) of the proposed clause explicitly state, irrespective of the clause. Moreover, to justify this proposed rule based on its purported consistency with the DFARS borders on the delusional.

It is time to pick up your pen – or your laptop – and let the DOE know what you think. Remember, July 12th is your deadline. Silence forfeits your right to complain when the rule becomes final.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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