United States: Final Rules Affecting Definitions Of Export And Fundamental Research Take Effect

Antonia I. Tzinova is a Partner in our Washington D.C. office. Farid Hekmat is a Associate in our Washington D.C. office.

HIGHLIGHTS:

  • Amended definitions under the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) are now effective.
  • Important changes to the definitions of "export," "reexport," "transfer," "technology" and "fundamental research" will be of particular interest to industry and research institutions, including universities.
  • The changes are part of final rules published by the Departments of Commerce and State to amend certain definitions and regulations relating to the export of "dual-use" and defense-related goods, services and technology subject to the EAR and the ITAR, in an attempt to synchronize the regulations.

Amended definitions under the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) became effective today, Sept. 1, 2016. Although there are no significant changes to the scope or substance of the regulations, there are important changes to the definitions of "export," "reexport," "transfer," "technology" and "fundamental research" that will be of particular interest to industry and research institutions, including universities. This alert provides a summary of the more significant changes.

Background

The U.S. Department of Commerce's Bureau of Industry and Security (BIS), 81 Fed. Reg. 35586, and the Department of State's Directorate of Defense Trade Controls (DDTC), 81 Fed. Reg. 35611, on June 3, 2016, published notices of final rules (BIS Rules and DDTC Rules, respectively) to amend certain definitions and regulations relating to the export of "dual-use" and defense-related goods, services and technology subject to the EAR and the ITAR. The BIS and DDTC Rules are part of the Export Control Reform (ECR) initiative that began in 2009. The ERC initiative seeks to reorganize and streamline the U.S. export control regime in order to reduce regulatory burdens on U.S. companies while increasing the effectiveness of controls on the most sensitive defense-related goods and technologies. Most notably, previous ECR-related BIS and DDTC rule changes focused on transferring certain goods and technology from the U.S. Munitions List (USML) to the Commerce Control List (CCL), or deregulating them altogether.1 The BIS Rules and the DDTC Rules discussed here are more focused on clarifying existing provisions and harmonizing, to the extent possible, the ITAR and the EAR.

Definitions of Export, Release, Transfer and Foreign Person

1. Export. The BIS Rules and DDTC Rules include new definitions of "export" that attempt to harmonize the EAR and ITAR. Under the BIS Rules, an export under the EAR is defined to include, inter alia, an "actual shipment or transmission out of the United States, including the sending or taking of an item out of the United States in any manner."2 The ITAR definition contained in the DDTC Rules mirrors the BIS definition, and removes activities associated with the further movement of a defense article or its "release" outside the United States, which now fall within the definitions of "reexport" and "retransfer."3

2. Deemed Export. The BIS Rules also clarified long-standing policy on "deemed exports" to "foreign persons" (see below). A "deemed export" occurs when there is a "release in the United States of 'technology' or source code to a foreign person." Similarly, "release" is defined in the BIS Rules as "visual or other inspection by a foreign person of items that reveals 'technology' or source code subject to the EAR to a foreign person."4 Although this adheres to long-standing BIS policy, the requirement that such inspection must "reveal" makes it explicit that a foreign person merely seeing an item or "having theoretical or potential access" to technology or software is not sufficient to constitute a deemed export.5 The DDTC Rules adopt the identical definition of release for the ITAR.

3. Foreign Person. In a similar vein, the BIS Rules simplify the terms used in the EAR to designate non-U.S. persons by adopting the ITAR nomenclature of "foreign person" instead of "foreign national." In turn, under the synchronized definition, "foreign person" is any individual who is not a U.S. permanent resident (aka "green card" holder), U.S. citizen or protected refugee.

4. Reexport / Transfer (in-country). Another important modification to the EAR involves changes to the end-use and end-users within the same foreign country of already exported articles. Although BIS has always considered such changes as re-exports because it involves a material change, existing EAR provisions did not specifically include it in the definition for "reexport." The BIS Rules specifically address this with a new definition for "transfer (in-country)" as a "change in end-use or end-user of an item within the same foreign country."6 Similar language will be included as the standard first condition in BIS licenses.

5. Activities that are not Exports, Reexports or Retransfers. The BIS Rules also include a new provision that gathers various exceptions and exclusions presently found in separate sections of the EAR into a new provision titled "activities that are not exports, reexports, and transfers."7 These activities include, inter alia, (i) the launching of a spacecraft, launch vehicle, or payload into orbit; (ii) the transmission or transfer of technology or software from one person located in the United States to a non-foreign person in the United States; (iii) transmitting or transferring within the same foreign country technology or software between or among only non-foreign persons; (iv) shipping, moving, or transferring items between or among the United States, the District of Columbia, Puerto Rico, or other territories and possessions of the United States; and (v) "sending, taking, or storing" unclassified technology or software so long as it is (a) secured using end-to-end encryption; (b) uses cryptographic modules compliant with FIPS 140-2 or "other equally or more effective cryptographic means"; and (c) is not "intentionally stored" in Russia or a country listed in Country Group D:5 of the EAR.

Fundamental Research

The BIS Rules also modify the provision which excludes technology and software that "arises during, or results" from "fundamental research" from export control restrictions.8 The core concept remains unchanged: The research is to be published and shared broadly without restrictions. As BIS stated, "it was not intended to change the scope of the current section 734.8," rather, just to clarify the definition and move it closer to the definition found in the ITAR.9 First, the new treatment of "fundamental research" moves away from the current definition's focus on the locus of research (e.g., whether it is conducted at a university, private industry or for the federal government), and instead provides a more precise definition of the term that closely tracks the definition currently used in the ITAR – "research in science, engineering, or mathematics, the results of which are published and shared broadly within the research community, and for which the researchers have not accepted restrictions for proprietary or national security reasons."10 Therefore, the location in which fundamental research takes place does not matter so long as the definitional requirements of fundamental research are met, although there is a rebuttable presumption that university-based research is fundamental research.

Additionally, the new definition does not include any reference to research being "basic" or "applied," which BIS did not view as providing any additional clarity. Furthermore, BIS reiterated that commodities resulting from fundamental research are not excluded from EAR restrictions; the fundamental research exclusion applies only to software and technology. Likewise, inputs used for fundamental research (which includes information, software and equipment) that are themselves not intended to be published are also not eligible for the fundamental research exclusion.

The new provision on fundamental research also retains the two types of pre-publication reviews that may be conducted while still qualifying as fundamental research (patent and proprietary information). It also adds a third, review of research within "any appropriate system" to "control the release of information" pertaining to research performed for a federal agency or a Federally Funded Research and Development Center (FFRDC). However, the phrase "arises during, or results from" was purposefully used by BIS to make clear that technology that arises prior to a final result is subject to the EAR unless it otherwise meets all the requirements of Section 734.8.11

To summarize key points about the new definition of fundamental research under the EAR:

  • It mirrors the ITAR definition of fundamental research
  • The focus is on the core concept: The research is to be published and shared broadly without restriction
  • The adjectives "basic" and "applied" are irrelevant; BIS attempted to keep the rule simple
  • Commodities that result from fundamental research are not exempt from controls: According to BIS, "the policy foundations for the exclusion from the EAR of fundamental research apply only to technology and software, not commodities"
  • The definition clarified existing policy on "inputs" – "information that is not intended to be published is not covered by fundamental research" (i.e., fundamental research does not apply to "technology or software subject to the EAR that is released to conduct the fundamental research")
  • Pre-publication review is preserved
  • Locus of the research is removed from the definition on the grounds that, regardless of where the fundamental research takes place, the key is whether it meets the definition, although there is a rebuttable presumption that university-based research is fundamental research

Footnotes

1 An up-to-date list of all updated USML categories is available on DDTC's website.

2 EAR §734.13.

3 ITAR §120.17.

4 EAR §734.15.

5 81 Fed. Reg. 35586, 35592.

6 EAR §734.16.

7 EAR §734.18.

8 EAR §734.8.

9 81 Fed. Reg. 35586, 35589.

10 ITAR §120.11(a)(8).

11 80 Fed. Reg. 31505, 31507.

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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