In July 2015, we published a blog post regarding the U.S. Department of State, Directorate of Defense Trade Controls’ (“DDTC”) temporary modification of Category XI of the United States Munitions List (“USML”). At the time, DDTC had recently modified paragraph (b) of Category XI on a temporary basis to clarify the extent of International Traffic in Arms Regulations (“ITAR”) control over “certain intelligence analytics software.” In December 2015, DDTC published a final rule that continued the July 2015 temporary modification to August 30, 2017. On August 30, 2017, DDTC published another final rule announcing its determination to continue the matter for yet another year to August 30, 2018.
Although some may wish otherwise, this issue and other related complications will not ease with time. Various aspects of export control reform and deregulation instituted initially in 2013 have inserted subjective engineering intent as a controlling principle in determining whether certain parts, components, and software constitute a defense article, in particular, ITAR Section 120.41(b)(4). In short, the U.S. Government, by that provision and associated provisions in Section 120.41’s definition of “specially designed,” no longer always controls under the current version of the ITAR which parts, components, and software constitute “defense articles.”
That determination, at least with regard to certain non-enumerated items which are only controlled if “specially designed,” now falls to an engineer and company which documents contemporaneously that the part, component, or software “was or is being developed with knowledge that it is or would be for use in or with both defense articles enumerated on the USML and also commodities not on the USML.” See ITAR Section 120.41(b)(4) (emphasis added).
Although the President’s designation of items as “defense articles” may not be subject to judicial review according to Arms Export Control Act (22 U.S.C. § 2778(h)), the State Department in ITAR Section 120.41(b) has empowered private engineers — based on their business imagination and plans (i.e., good faith “knowledge” or subjective intent) and careful recordkeeping — to determine whether certain parts, components, or software are not “specially designed” and thus not “defense articles” under the ITAR unless otherwise enumerated within the USML.
In fact, under the definition of “specially designed” adopted in October 2013, Company A which develops certain software for use in a defense article but also with “knowledge” that the software would also be for use in a non-USML commodity may be able to treat its software as non-ITAR and subject to the EAR, including EAR99. At the same time, Company B which develops the identical software for use in the identical defense article but does so without “knowledge” that it would also be for use in a non-USML commodity may be unable to treat its software as non-ITAR and subject to the EAR.
Particularly in the arena of national security regulations, which carry significant criminal penalties, one might reasonably suggest that the regulatory scheme established by ITAR Section 120.41(b) presents an illustrative example of arbitrary and capricious governmental regulation. Perhaps this conundrum helps to explain, in some part, why DDTC and other agencies have now struggled for more than two years – and continue to struggle – with developing a “long term solution” to ensure DDTC’s desired Category XI control over certain intelligence analytics software.