|February 12, 2014|
Previously published on February 2014
On October 15, 2013, Export Control Reform ("ECR") took an important step. On that date, articles and technology previously included in Category VIII of the United States Munitions List ("USML") officially moved to the newly created 600 Series of the Commerce Department's Commerce Control List ("CCL"). The full effect of this first transition continues to be felt by industry, the U.S. government, the supply chain, and foreign parties. As the first of what is expected to be many transitions, the consequences of this shift provide valuable lessons for those yet to come.
The many challenges involved in the transition of thousands of defense articles from the USML to the CCL include the arduous task (for companies and government) of determining which items are now within the jurisdiction of the Department of Commerce ("Commerce") and which remain under the jurisdiction of the Department of State ("State"). To assist affected parties, both the Directorate of Defense Trade Controls ("DDTC") and the Bureau of Industry and Security ("BIS") have issued rules and written guidance documents, and both agencies have created web-based tools designed to assist with product classification under the new rules (the latter focusing on assisting parties with the difficult task of determining, where applicable, whether their products and services meet the new definitions of "specially designed" under the International Traffic in Arms Regulations ("ITAR") and the Export Administration Regulations ("EAR"). Despite all of the assistance and guidance provided, as well as the question of whether such guidance is legally binding given the pronouncements in the Lachman cases, export classification remains a dicey proposition. Because misclassification can result in a succession of systemic violations, parties continue to voice concerns about "getting it right" under the new rules. Since the inception of the Arms Export Control Act ("AECA"), DDTC has considered the commodity jurisdiction ("CJ") process to be the sole mechanism for assessing the legally binding export jurisdiction of items and technology—i.e., whether it is ITAR controlled or not.
The commodity classification ("CCATS") process at BIS provided exporters export classification guidance once the item was determined not to be subject to ITAR controls. Under recent practices at DDTC to meet the needs of ECR, however, questions exist whether this remains the case.
CJ Versus Licensing Decision
Both DDTC and BIS issued "transition plans" in their respective April 16, 2013 final rule notices. These plans address a number of issues that the agencies expect will arise as a result of the ECR transitions. While the plans were not intended to address every conceivable question and answer—a process that would evolve as the agencies and exporters gained experience implementing the transfers from State to Commerce—the issues surrounding how to deal with CJ determinations and their effectiveness were raised in the submitted comments and responded to by DDTC and BIS. The DDTC rule of April 16, 2013 devoted a section of the transition plan to the use, effectiveness, and compliance implications of CJs within the ECR process:
Commodity Jurisdiction Determinations
Previously issued commodity jurisdiction (CJ) determinations for items deemed to be subject to the EAR shall remain valid. Previously issued CJ determinations for items deemed to be USML but that are subsequently transitioning to the CCL pursuant to a published final rule will be superseded by the newly revised lists. Exporters are encouraged to review each revised USML category along with its companion CCL category to determine whether the items subject to a CJ have transitioned to the jurisdiction of the Department of Commerce. These CJs are limited to the specific commodity identified in the final determination letter. Consistent with the recordkeeping requirements of the ITAR and the EAR, licensees and foreign persons subject to licenses must maintain records reflecting their assessments of the proper regulatory jurisdiction over their items. License holders unable to ascertain the proper jurisdiction of their items may request a CJ determination from DDTC through the established procedure. License holders who are certain their items have transitioned to the CCL are encouraged to review the appropriate Export Control Classification Number (ECCN) to determine the classification of their item. License holders who are unsure of the proper ECCN designation may submit a Commodity Classification Automated Tracking System request (CCATS) to the Department of Commerce. See 15 CFR 748.3. Parties making a classification self-determination or submitting a CCATS are advised that only a CJ determination provides an official and exclusive decision on whether or not an item is a defense article on the USML.
DDTC also issued occasional guidance between April 2013 and October 2013, designed to remind registrants of the impact of ECR on their export classifications and to alert registrants to various deadlines.
In a subsequent, undated "Industry Notice" posted on DDTC's website but not published in the Federal Register, the Department posted a document titled "Reasons Cases were Returned Without Action (RWA) last week," with "last week" referring to the week of August 26, 2013 through August 30, 2013. Among the reasons cited for recent RWAs, the Industry Notice cites: "Exporting CCL items on a DSP-5." As written, this language rejects and returns a submitted license application because the items were subject to Commerce's jurisdiction, not State's jurisdiction—the same conclusion drawn through the submission of a CJ request and determination. The possibility of this type of confusion was anticipated earlier in the ECR process, and it resulted in the addition of "(x) paragraphs" to the USML. These "(x) paragraphs" were developed specifically to allow DDTC to license items transitioned to the CCL when those items "are to be used in or with defense articles controlled on the USML and are described in the purchase documentation submitted with the application." Therefore, the RWAs cited in the industry guidance were not due to including USML and CCL items on the same license.
DDTC's Unintended Alternative to the CJ
By issuing RWAs to license requests, and indicating in those RWAs that the authorization has been returned because the item for which an entity sought DDTC authorization is actually outside DDTC's jurisdiction, DDTC is issuing a de facto CJ through the license RWA. If DDTC rejects a license application, directs the exporter to the Department of Commerce, and in that action tells the applicant that the request has been returned because the articles or technology are not, in fact, subject to DDTC jurisdiction, it is difficult to imagine that the same agency could later attempt to assert jurisdiction over the activity or allege violations based on a failure to either independently self-classify or seek a CJ determination to confirm the licensing officer's RWA determination. These types of RWAs, therefore, are practically and effectively CJ determinations.
Legal Viability and Reliability from an Export Classification Perspective
Both agencies clearly foresaw that there is, and will be, confusion with respect to classifications for those items transitioning from the USML to the CCL. DDTC also likely anticipated a sharp increase in the number of CJ submissions during transition periods. What DDTC may not have anticipated was that handling the CJ process and licensing in this manner would result in license application decisions acting as "CJ determinations" in those instances where the reason for an RWA is because the DDTC licensing officer concludes that the items "are subject to the CCL."
The question is whether these licensing decisions replace the need for either a CJ determination or a self-determination regarding export jurisdiction, especially since the Supplemental Information to various ECR transition plans reiterates, as noted above, that the CJ process is the method used by DDTC to determine jurisdiction. One could argue that the DDTC licensing decision is not so much a CJ jurisdictional determination as a removal of any "uncertainty" regarding the proper licensing authority for the item in question.
This argument, however, begs the question of whether exporters could use the licensing process—a shorter and deadline-driven process—to obtain a jurisdictional determination from State without needing to spend the time or money to obtain a CJ. Depending upon the details provided in the RWA—i.e., whether the licensing officer states that the item is not only subject to the CCL, but provides the ECCN that controls the item—a CJ could be rendered duplicative if the licensing officer provides the same information that would be included in the CJ determination.
This issue may take on a higher degree of importance if the Department (or a court through which a jurisdictional challenge may be raised, as was done in Pulungan and Wu) determines that a licensing RWA does not carry the same effect as a CJ determination. Given that neither DDTC nor BIS provided for an "amnesty" period from liability for violations of transitioned or transitioning items, exporters may be assuming the risk by using or relying upon a licensing RWA decision as an export classification determination.
Due to the nature of these RWA decisions, it is not clear whether the DDTC Office of Defense Trade Controls-Policy, which is the office within DDTC responsible for considering and issuing CJ determinations, is involved in the decision to RWA various authorization requests for jurisdictional reasons. It also is unclear whether the agencies that would normally consider a CJ request (i.e., the Defense Technology Security Administration ("DTSA"), within the Department of Defense ("DoD") and the Commerce Department), are privy to DDTC's licensing RWAs. If neither DTSA nor Commerce participates in these RWA decisions, then DDTC may have fundamentally altered the export jurisdictional process in the name of not issuing licenses for transferred items.
Before ECR, this problem had been resolved by DDTC accepting parties' classifications of their articles and data. If a party submitted a license request to DDTC, the Department generally accepted the application and considered that the applicant was the most knowledgeable party regarding the technical characteristics of its items (and certainly sufficiently knowledgeable to understand whether the items were USML controlled). The act of submitting the request to DDTC to authorize the export, rather than submitting a CJ request, was deemed a confession of jurisdiction. If a party submitted an authorization request to DDTC, the article or technology involved was treated as ITAR controlled, and only through a CJ request could that ITAR jurisdiction be undone.
This approach, however, appears to have been altered under ECR. Post-ECR, it appears that DDTC licensing may be changing these rules and removing the exclusivity of CJs as a jurisdictional part of the effort to accelerate the ECR transitions. In so doing, however, DDTC may have opened an unintended "back door" to jurisdictional determinations that avoids the CJ process—one that results in more rapid jurisdictional determinations that will necessarily be binding on DDTC and that avoids the full staffing of jurisdictional determinations envisioned by the CJ process.
Whether this door stays open long remains to be seen. However, if these determinations are not receiving the full examination that a CJ request would receive, the practice is likely to change quickly.
Given the current difficulties with determining export classifications, created by the export reform effort, exporters are looking for the most efficient manner to obtain guidance regarding the proper licensing agency for their products as each category transitions from State to Commerce. Based on DDTC's recent RWA approach, exporters appear to be able to:
- Submit an export license to DDTC and obtain an RWA (or other licensing determination) that states that the proper jurisdiction is the Department of Commerce;
- Consider the export license RWA a binding DDTC determination upon which the exporter can reasonably rely, given how most U.S. courts have interpreted that concept; and
- Save time, effort, and resources because of the strict timelines used in licensing determinations, which do not apply to the CJ process.
Potential Pitfalls from Using the License RWA Alternative
Although using a license RWA to avoid filing CJs appears to offer an exporter another method to obtain a binding export jurisdiction classification, legal questions still exist regarding the reliability of these RWAs as jurisdictional determinations. If DDTC-Policy does not participate in the licensing process when a licensing officer determines that an application should be subject to an RWA, both the DDTC enforcement branch and a court might conclude that the decision is not a binding jurisdictional determination.
If DDTC-Policy does participate—as the "owner" of the CJ process—then the question remains whether Policy (and/or licensing) staffs the license application to the DoD for its review. DDTC has indicated in public statements made at various U.S. conferences that it relies on DTSA's technical skills to assess the technical characteristics of items subject to CJ requests. On that basis, DDTC consistently staffs such applications to DTSA (which may further include the military services) for technical assessments.
If neither Licensing nor Policy forwards a license application to DoD under this new ECR-motivated process, who is conducting the technical analysis to determine that an item is subject to Department of Commerce jurisdiction? Given that agencies are required to follow their own regulations under the principle enunciated in Accardi v. Shaughnessy, it remains to be seen whether a licensing determination that is a de facto CJ decision is binding on the agency not only for licensing reasons, but for export jurisdictional reasons as well.
 See 78 Fed. Reg. 22,740 (April 16, 2013) (establishing October 15, 2013 as the effective date for the transition of articles and technical data published in April).
 22 C.F.R. Parts 120 to 130.
 15 C.F.R. Parts 730 to 744.
 United States v. Lachman, 521 F.3d 12 (1st Cir. 2008); United States v. Lachman, 387 F.3d 42 (1st Cir. 2004); United States v. Lachman, 48 F.3d 586 (1st Cir. 1995); and United States v. Lachman, 278 F.Supp.2d 68 (D. Mass. 2003).
 22 USCA § 2778 (1976, as amended).
 78 Fed. Reg. 22,749-750 (emphasis added).
 See, e.g., DDTC Industry Notice of August 30, 2103 ("Effective September 1, the DDTC will review newly submitted commodity jurisdiction requests that involve articles or services relating to USML Category VIII and Category XIX pursuant to the rule revising these categories").
 DDTC provides the exporting community guidance through a variety of mechanisms—i.e., Federal Register notices, web notices, and licensing instructions posted to the "Licensing" section of the DDTC website. Information regarding reasons for RWAs has been provided by DDTC personnel at various conferences and through comments made to the Defense Trade Advisory Group over the last 15 years. The September 2014 notice, while not unusual, is nonetheless unique in that it was published a little over a month before the first final transfers of USML items to the CCL, and thus parties should have been submitting license applications to the appropriate authorities in anticipation of the October 15, 2013 shift. The timing of this notice's publication—i.e., just prior to the October 15, 2013 implementation date—identifies the development highlighted in this Commentary and indicates, not unreasonably, that DDTC intended to address ECR-related problems ahead of the transition. Even if this were not the case, and the issuance of this Notice were simply a coincidence, it foreshadowed the development we discuss here.
 78 Fed. Reg. 22,749.
 United States v. Pulungan, 569 F.3d 326 (7th Cir. 2009).
 United States v. Wu, 711 F.3d 1 (1st Cir. 2013).
 In addition, license submissions are subject to certifications governed by the False Statements Act, as well as ITAR § 127.2(a) regarding false statements or material omissions—certifications that counsel against submitting a license application for items a party believed were not subject to the ITAR.
 347 U.S. 260, 268 (1954).