On October 31, 2016, the Department of Defense (DoD) issued a proposed rule (81 Fed. Reg. 75352) to address DoD’s procedures for the withholding and dissemination of unclassified export-controlled technical data and technology. The proposed rule focuses on regulating DoD’s public release of export-controlled technical data and technology, and DoD’s requirements for the transfer of such technical data and technology to government contractors. Of particular importance, the proposed rule would (1) clarify DoD’s ability to withhold export-controlled technical data and technology from public disclosure; (2) implement a robust qualification framework for U.S. and Canadian contractors seeking access to export-controlled technical data and technology; and (3) create a new DoD sanction regime for export control violations by allowing DoD to disqualify contractors from access to export-controlled technical data and technology where there is “substantial and credible information” of misconduct. Such changes would reflect a significant shift in the export control landscape, empowering DoD with export control enforcement power that historically has been reserved mostly for the Department of Commerce and Department of State.

Withholding of Export-Controlled Technical Data and Technology

The proposed rule clarifies that DoD is not required to release export-controlled information publicly, such as under the Freedom of Information Act, because public release of such information would be the equivalent of an export to foreign persons. Specifically, under the proposed rule, the Secretary of Defense would be authorized to:

withhold from public disclosure any technical data and technology with military or space application in the possession or under the control of the DoD, if such technical data and technology may not be exported lawfully without a license, exception, exemption, or other export authorization, in accordance with U.S. export control laws and regulations.

In other words, the Secretary may withhold export-controlled technical data and technology where the export of such data and technology requires a license, exception, exemption, or other export authorization. However, the proposed rule also clarifies that the Secretary may not withhold unclassified information “regarding DoD operations, policies, activities, or programs, including the costs and evaluations of performance and reliability of military and space equipment.” To the extent such information contains export-controlled technical data or technology that warrants withholding, the Secretary may remove only the export-controlled technical data or technology from whatever is disclosed publicly.

The Proposed Qualification Framework

The proposed rule also would implement additional DoD requirements and qualifications for U.S. and Canadian contractors seeking access to export-controlled technical data and technology. Specifically, under the proposed rule, DoD may disclose export-controlled technical data and technology to U.S. government contractors when: (1) the contractor is certified by the United States-Canada Joint Certification Office; and (2) the technical data and technology “relate[s] to a legitimate business purpose for which the contractor is certified.” The proposed rule would similarly authorize disclosure to certified Canadian contractors “when a legitimate business relationship has been established between the government and the contractor.”[1]

To receive the necessary certification and qualify for access to export-controlled technical data and technology, U.S. and Canadian contractors would have to file: (1) DD Form 2345, “Military Critical Technical Data Agreement,” with the United States-Canada Joint Certification Office; (2) documentation to verify that the contractor is a legitimate business entity[2]; and (3) a business activity statement detailing the business purpose for which access to technical data or technology is requested. Based on the information submitted, DoD would be authorized to release export-controlled technical data and technology to qualified contractors unless:

  • The contractor’s qualification for technical data and technology has been temporarily revoked because DoD has determined, based on the receipt of “substantial and credible information,” that the contractor has violated U.S. export control law, violated its certification, made a certification in bad faith, or omitted or misstated a material fact;
  • DoD determines that the requested technical data and technology is unrelated to the business purpose for which the qualified contractor is certified; or
  • The contractor requested the technical data or technology for a purpose other than to permit the contractor to bid or perform on a contract with a federal agency.

As discussed in the next section, DoD’s proposed authority to temporarily revoke a contractor’s qualification is particularly problematic for government contractors.

DoD Sanction Regime for Export Control Violations

DoD’s proposed qualification framework would allow it to withhold export-controlled technical data and technology from a contractor when that contractor’s qualification for access to such data and technology has been “temporarily revoked” based on “substantial and credible information” of certain export-related violations. The proposed rule also provides that this temporary revocation becomes a disqualification if the contractor is unable to rebut the “substantial and credible information” underlying the revocation within twenty days. This sanction regime is problematic for several reasons.

First, the proposed rule would allow DoD to sanction contractors for conduct that otherwise may already be the subject of investigation by other agencies, such as the Department of State, which ordinarily is the agency charged with investigating defense-related export control violations. As a result, contractors could face multiple inquiries by different agencies regarding the same issues, requiring potentially duplicative and burdensome efforts by the contractor to satisfy agency demands.

Second, DoD’s sanction regime could have a chilling effect on contractor self-disclosures. Contractors are encouraged to voluntarily self-disclose export control violations under International Traffic in Arms Regulations (ITAR), as well as under the civil False Claims Act (to the extent such violations cause a false claim for payment to be submitted to the government). Under the proposed rule, such self-disclosures also would apparently result in a revocation of qualifications for access to controlled technical data and technology, which would inhibit the contractor’s ability to bid or perform on a contract with a federal agency. Consequently, it is possible that a contractor faced with a potential self-disclosure issue may decide that the risk of non-disclosure is outweighed by the risk of losing access to needed technical data or technology.

Third, if DoD considers a contractor’s “initial disclosure” to the Bureau of Industry and Security (BIS) or Directorate of Defense Trade Controls (“DDTC”) of a possible export control violation and internal investigation to be “substantial and credible information” regarding an export control violation, it could be in significant tension with the BIS and DDTC export control regulations. At a minimum, it would put a faster clock on internal investigations associated with potential violations (for example, the ITAR allows 60 days between initial notification and full disclosure), and seems likely to discourage contractors from providing substantial detail in their initial notifications, lest their access to controlled information be suspended by DoD while they investigate.

Fourth, DoD’s sanction regime presents significant due process concerns. Although the proposed rule would offer contractors an opportunity to respond in writing to the information upon which any revocation is based before being disqualified, such opportunity would arise only after the contractor’s qualifications have been temporarily revoked. Moreover, where a contractor is not able to resolve DoD’s concern within twenty days, the temporary revocation of qualifications becomes a disqualification. Thus, under the proposed rule, contractors would have their qualifications revoked before they have had an opportunity to respond to the DoD’s information, and then would have only twenty days to compile the information to rebut such information and clear their names. In effect, DoD would be punishing contractors before they have had a reasonable opportunity to respond to the adverse information levied against them.

Conclusion

Despite the significant changes highlighted above, the proposed rule purports to not require any additional controls on the disclosure of technical data and technology by private contractors or individuals beyond that already required under U.S. export control laws and regulations, or in contracts or other agreements. The proposed rule would leave unaltered the obligation of DoD Components to protect contractors’ proprietary technical data and technology, and would not affect the disclosure of unclassified technical data and technology by DoD Components pursuant to “official agreements or formal arrangements with the U.S. Government (USG), or pursuant to USG-licensed transactions involving such entities or individuals.”

Nevertheless, it is at least clear that the proposed rule would introduce significant changes to the manner in which export control laws and regulations are enforced. If the proposed rule is finalized, DoD would have a significant role in enforcing export control laws and regulations, including the ability to independently sanction contractors for export control violations. The proposed rule therefore has the potential to further complicate an already complex and challenging export control regime. Government contractors therefore should carefully review the proposed rule and consider providing comments to address the potential consequences of DoD’s proposed changes.

Comments on the proposed rule are due by December 30, 2016.