On April 13, 2011, the Department of State’s Directorate of Defense Trade Controls (DDTC) published proposed amendments to Parts 120 and 124 of the International Traffic in Arms Regulations (ITAR) to narrow and clarify the scope of activities that are considered “Defense Services” subject to the ITAR’s licensing requirements.1 Although not as important as the ongoing revisions to the U.S. Munitions List (USML), this proposed rule change, if adopted, may have significant benefit for exporters of technology and services to military end users because the proposed rule would eliminate the notion that the provision of public domain data can form the basis of ITAR-covered Defense Services. Announced as part of the President’s Export Control Reform effort, industry and the Defense Trade Advisory Group have been pushing for revisions to the definition of Defense Service for some time.

The proposed changes to the definition of Defense Service reflect DDTC’s efforts to enhance support to allies, improve efficiency in licensing and reduce unintended consequences of the current definitions. By DDTC’s own admission, the current definition is “overly broad” and captures activities that do not warrant ITAR control.

The ITAR defines Defense Service in two provisions: Section 120.9, among the other definitions in the ITAR, and Section 124.1, where the definition is amplified and license requirements are specified. DDTC’s proposed rule change would impact both provisions, and would also add a new Section 120.38 to include definitions of “organizational” or “basic level maintenance,” ‘‘intermediate level maintenance’’ and ‘‘depot level maintenance.”

 Proposed Changes to 22 C.F.R. §§ 120.9 and 124.1, Definition for Defense Service:

First, a proposed change in Section 120.9(a)(1) narrows the focus of services to the furnishing of assistance (including training) to a foreign person “using other than public domain data.” Thus, services based solely upon the use of public domain data would no longer constitute a Defense Service under the proposal, and therefore, would not require a DDTC authorization.

This change would eliminate one of the ITAR’s most challenging jurisdictional attributes, a position that was somewhat recently emphasized by DDTC in its February 2009 consent agreement with Analytical Methods, Inc. Specifically, DDTC noted in its charging letter in the Analytical Methods case that service activities built around the provision of public domain information only can indeed constitute Defense Services under the ITAR. Since Analytical Methods was not even accused of providing a Defense Service using public domain information, DDTC’s emphasis on this point was understood to be a reminder to industry that DDTC would continue to use the broadest possible view of Defense Service in the licensing and enforcement context.

Second, DDTC proposed revisions to Section 120.9(a)(2) to narrow the focus of services to the furnishing of assistance for the integration of any items controlled on the USML or the Commerce Control List (CCL) into an item that is controlled as a defense article on the USML. Thus, under the proposal, assistance to foreign persons on the integration of EAR99 items into defense articles would not be a Defense Service unless the service is covered by another provision of the definition, such as Section 120.9(a)(1). To that end, there may not be much room for a U.S. person to perform integration of an EAR99 item into a Defense Article—which is outside the scope of Section 120.9(a)(2)—without also providing assistance in the engineering, manufacture, production or assembly of the same defense article, activities covered under Section 120.9(a)(1).

Third, the proposed rule offers in Section 120.9(b) an illustrative list of activities that are not considered Defense Services. The proposal mirrors the spirit of Section 120.10(a)(5), in which DDTC helpfully identifies items of information that are not “Technical Data” subject to the ITAR. The proposed list at Section 120.9(b) includes:

  •  training in the basic operation (functional level) or basic maintenance (as defined in new Section 120.38) of a Defense Article;
  • mere employment of a U.S. citizen by a foreign person (according to DDTC, its intent here is to “prevent the anomalous situation where foreign companies are reluctant to hire U.S. citizens for fear that such employment alone constitutes Defense Services, even where no technical data would be transferred to the employer”);
  • testing, repair or maintenance of an item “subject to the Export Administration Regulations” that has been incorporated or installed into a defense article;
  • providing law enforcement, physical security or personal protective training, advice or services to or for a foreign person using only public domain data; or
  • providing assistance (including training) in medical, logistical (other than maintenance) or other administrative support services to or for a foreign person.

The proposed rule also contains changes to conform certain ITAR provisions to the proposed revisions made to Section 120.9. This includes modifications to Section 124.1(a), which provides the basic DDTC approval requirements for Defense Services (e.g. manufacturing license agreements and technical assistance agreements). Consistent with the revised definition in Section 120.9 with regard to public domain information, DDTC proposes to remove the reference in Part 124 to Defense Services rendered using public domain data or data otherwise exempt from ITAR licensing requirements.

In addition, DDTC proposes to delete Section 124.2(a) in its entirety, as it is no longer applicable as a result of the proposed changes to § 120.9. Conforming changes are also made to § 124.2(c) to reflect the proposed deletion of § 124.2(a).

Proposed Addition of 22 C.F.R. § 138, Definitions of Maintenance Types:

In the April 13 notice, DDTC also proposes a new Section 120.38 to provide definitions for “basic level maintenance,” “intermediate level maintenance” and “depot level maintenance,” terms that are used in the proposed revision of Section 120.9 and also appear elsewhere, without definition, in the current Part 124. The definitions are not only helpful to understanding the revised Section 120.9, but also to understanding the meaning of these terms as currently used in the ITAR.

The new provision at Section 120.38 defines the maintenance types as follows:

  • Organizational or Basic Level Maintenance – this maintenance is performed by the end user “on equipment” and consists of repair, inspecting, servicing, calibration, testing, lubricating and adjusting equipment, as well as replacing minor parts, components, assemblies and line-replaceable spares or units;
  •  Intermediate Level Maintenance – this maintenance is performed by designated maintenance shops, tenders or mobile teams “off equipment” (i.e. a part or component has been removed for maintenance) and consists of calibration, repair, or testing and replacement of damaged or unserviceable parts, components or assemblies;
  • Depot Level Maintenance – this maintenance is performed “on equipment” or “off equipment” by a “major” repair facility, shipyard or field team with extensive equipment, and personnel of higher technical skill and, consists of inspection, testing, calibration or repair, including overhaul, reconditioning and one-to-one replacement of any defective items, parts or components (but excluding any modification, enhancement upgrade or other form of enhancement of the performance or capability of the defense article).

Concluding Observations:

This proposed rule change is a welcome effort by DDTC. Key potential benefits to industry include:

  • services rendered using only public domain data will no longer be covered by the ITAR (a change that perhaps seemed unlikely after the Analytical Methods case);
  • the ability to sell and “integrate” EAR99 technology and items into defense articles abroad;
  • a helpful illustrative list of activities that do not constitute Defense Services, including the employment of U.S. citizens by foreign persons and the maintenance of items subject to the EAR even if incorporated or installed into a defense article; and
  • definitions of maintenance types referenced in the current and revised Parts 120 and 124 as proposed.

Despite the potential benefits to industry, the proposed rule does, however, raise some new questions that DDTC will hopefully address in the final rule, including:

  • the somewhat confusing relationship and potential overlap between Sections 120.9(a)(1) and (2), particularly the extent to which “integration” activity under subparagraph (a)(2) would also be covered as “production” activity under subparagraph (a)(1); and
  • the introduction of new, undefined terms in the revised provisions, such as “major repair facility” and “personnel of higher technical skill” in Section 120.38(c).

In addition, many exporters will remain disappointed that services rendered using technology or items on the CCL can still give rise to Defense Services, even in the absence of any transfer of ITAR-controlled Technical Data.

DDTC will accept comments on this proposal until June 12, 2011.