On June 19, 2012 the Department of Commerce, Bureau of Industry and Security (BIS) and the Department of State, Directorate of Defense Trade Controls (DDTC) published parallel proposed rules defining the term “specially designed” for use in the Export Administration Administrations (EAR) and the International Traffic in Arms Regulations (ITAR). BIS and DDTC issued the joint proposed rule pursuant to the Export Control Reform Initiative, the U.S. Government’s effort to modernize the U.S. export controls regulatory framework. The proposed rule essentially preserves the definition of “specially designed” set forth in BIS’s proposed rule of July 15, 2011, but attempts to clarify and simplify the rule’s exclusions in response to numerous public comments.
Pursuant to the President’s Export Control Reform Initiative, BIS and DDTC have decided to make the Commerce Control List (CCL) and the United States Munitions List (USML) more “positive,” that is, items subject to controls would be identified based on specific objective criteria rather than a subjective interpretation of the item's original design intent.
The term “specially designed” appears frequently on the CCL, typically as a catch-all term controlling parts and components designed for end items specified in Export Control Classification Numbers (ECCNs), e.g., ECCN 1A004.a, controlling components “specially designed” for gas masks. Comparatively, ITAR Section 120.3 provides that items “specifically designed, developed, configured, adapted or modified for military application” are subject to the USML. While the Export Control Reform Initiative is intended to minimize continued use of the “specially designed” (or “specifically designed”) concept as a parameter for control jurisdiction, both the CCL and USML will continue to use “specially designed” in some instances as a control parameter, thus the need to provide a more-detailed and rigorous explanation of that terminology.
BIS and DDTC have therefore sought to create a uniform definition of “specially designed.” On December 10, 2010, DDTC issued a proposed rule that would have defined “specially designed” to mean that an end-item, equipment, accessory, attachment, system, component, or part has properties that (i) distinguish it for certain predetermined purposes, (ii) are directly related to the functioning of a defense article, and (iii) are used exclusively or predominantly in or with a defense article identified on the USML.
On July 15, 2011, as we have previously advised, BIS issued a proposed rule defining “specially designed.” The proposed rule defined a “specially designed” item as one “that is enumerated on the CCL and, as a result of ‘development,’ has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics, or functions of the referenced item identified in the CCL.” The proposed rule further defined a “specially designed” defense article part or component as a “‘part’ or ‘component’ of an item ‘enumerated’ in a category of the CCL.” This proposed rule then set forth certain exclusions.
Although the public’s comments generally express support for the definition of “specially designed” set forth in the July 15, 2011 proposal, industry commented that the proposed exclusions are difficult to understand and would result in more items being controlled, which is not a stated goal of the Export Control Reform Initiative. Based on these comments, BIS and DDTC have decided to propose a revised definition and set of exclusions.
The new proposed rule preserves the “catch and release” framework of the July 15, 2011 proposed rule, first establishing which items, e.g., equipment, materials, software, or technology, are “specially designed” (the “catch,” in paragraph (a)) and then setting forth exclusions (the “release,” in paragraph (b)). The agencies have generally preserved the definition set forth in the July 15, 2011 proposed rule, but have attempted to simplify and expand the exclusions.
Paragraph (a) defines “specially designed” end items, parts, components, attachments, and accessories as follows:
- An end item is “specially designed” if, as a result of “development,” it “has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics, or functions described in the relevant U.S. Munitions List paragraph.” The proposed rule defines “end item” as “an assembled commodity ready for its intended use. Only ammunition, fuel or other energy source is required to place it in an operating state.” The definition is based on ITAR Part 121.8(a).
- A part or component is “specially designed” if, as a result of “development,” it “is necessary for an enumerated defense article to function as designed.” “Part” is defined as “any single unassembled element of a component, accessory, or attachment which is not normally subject to disassembly without the destruction or the impairment of design use,” while “component” is defined as “an item that is useful only when used in conjunction with an ‘end item.’” These definitions are identical to those set forth in the July 15, 2011 proposed rule.
- An attachment or accessory is “specially designed” if, as a result of “development,” it “is used with an enumerated defense article to enhance its usefulness or effectiveness.” The proposed rule defines “attachments” and “accessories” as “associated items for any ‘component,’ ‘end item,’ or ‘system,’ and which are not necessary for their operation, but which enhance their usefulness or effectiveness.” These definitions are based on ITAR Part 121.8(c).
An explanatory note provides that “‘[d]evelopment’ is related to all stages prior to serial production, such as: design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, process of transforming design data into a product, configuration design, integration design, layouts.” This is based on the definition of “development” set forth in the EAR.
Paragraph (b), which sets forth exclusions, continues the principle in ITAR §120.3 that, in general, a commodity should not be ITAR-controlled if it has a predominant civil application or has performance equivalent to a commodity used for civil applications. The paragraph refines the exclusions set forth in the July 15, 2011 proposed rule and adds two new exclusions (listed at (4)-(5) below) as follows:
- (1) Any part, component, accessory, or attachment is excluded from a catch-all provision of an ECCN (e.g., components “specially designed” for a controlled item) if it is enumerated in the USML.
- (2) Any single unassembled part is excluded if it is of a type commonly used in multiple types of commodities not enumerated on the USML or the CCL, including “threaded fasteners” (screws, bolts, nuts, etc.), other fasteners, and basic hardware. Minor components are not excluded under this provision.
- (3) Any part, component, accessory, or attachment is excluded from a catch-all provision of an ECCN if it has the same performance capabilities as a part, component, accessory, or attachment used in or with a commodity that (i) is or was in “production” (i.e., not in “development”) and (ii) is either not enumerated on the CCL or USML, or is enumerated in an ECCN controlled only for Anti-Terrorism (AT) reasons. This exclusion is broader than that set forth in the July 15, 2011 proposed rule, which did not extend to AT-controlled commodities. Regarding commodities in “production,” BIS explains in its notice that if commodities are subsequently subject to “development” activities, such as those pertaining to quality improvements, cost reductions, or feature enhancements, they remain in “production.” However, any new models or versions of commodities developed from such efforts that change the basic performance or capability of the commodity are in “development” until and unless they enter into “production.”
- (4) Any part, component, accessory, or attachment is excluded if it was or is being developed with a reasonable expectation of (i) use in or with both commodities described on the CCL and commodities not enumerated on the CCL or the USML, or (ii) use in or with commodities not enumerated on the CCL or the USML, provided that there are documents contemporaneous with its development to establish these elements. For example, a component would not be “specially designed” where it was developed to be interchangeable between a military vehicle enumerated in an ECCN and also a vehicle that is not described on the USML or the CCL, such as an EAR99 civilian vehicle. BIS encourages responsible parties to maintain documents establishing such design intent for the life of a product.
- (5) Any part, component, accessory, or attachment is excluded if it was or is being developed with no reasonable expectation of use for a particular application, provided that there are documents contemporaneous with its development to establish this element. BIS proposes estopping a party from claiming this exclusion if he or she had “knowledge” (as defined in the EAR) of its development for a particular application. Furthermore, the proposed rule makes clear that even if a part, component, accessory, or attachment falls under exclusions (4) or (5), it may still be controlled for export (for example, it may be positively identified on the USML). BIS’s notice of proposed rulemaking provides examples demonstrating the application of the definitions and exclusions described above.
BIS’s notice further provides that where an ECCN de-controls an item based on the purpose for which it was “specially designed,” the exclusions of paragraph (b) above have no application.
Agency Requests for Comments
BIS and DDTC have requested that the public comment on the proposed rules’ clarity and ease of use. Furthermore, BIS requests comments regarding the feasibility of a longer-term project to promulgate exhaustive lists of “specially designed” components, rather than rely on catch-all provisions, for 42 ECCNs. BIS also requests comments as to: (1) how the proposed definition of “specially designed” compares with the definition of the term in the Missile Control Technology Regime (MCTR), provided under ITAR Part 121, and (2) whether the new definition will result in commodity control status change uunder the MCTR purposes. “Specially designed” is defined in the MCTR at EAR Part 772.1 as:
Equipment, parts, components or “software” that, as a result of “development”, have unique properties that distinguish them for certain predetermined purposes. For example, a piece of equipment that is “specially designed” for use in a “missile” will only be considered so if it has no other function or use. Similarly, a piece of manufacturing equipment that is “specially designed” to produce a certain type of component will only be considered such if it is not
DDTC requests comments as to whether the proposed definition of “specially designed” provides a bright line between commodities controlled by the USML and those controlled by the CCL. DDTC further requests comments on the use of “specially designed” in proposed rules for
USML revision where the comment period has already closed, as well as those proposed rules with open comment periods.
The comment period will remain open until August 3, 2012.