Most commercial businesses are cognizant of the need to comply with U.S. export control laws concerning the export of defense articles and services. Many of these companies are also aware that the term “export” includes not only the shipment of products abroad, but also technical data that is “deemed” an export by its mere disclosure or transfer to a foreign national, even within U.S. borders. Despite their awareness, commercial businesses may find it difficult to grapple with the compliance issues related to disclosure of technical data to their own foreign national employees. The difficulties commercial businesses have with these internal technical transfers makes it increasingly likely that these same businesses may unintentionally ignore the fact that these compliance issues flow down to all entities they are affiliated with, including universities and other institutions of higher learning. Companies need to recognize that as the number of their interactions with foreign nationals increase, so does the potential for conduct that is subject to export control laws.
Controlling Export Requirements for Commercial Businesses
The U.S. Department of State is responsible for the control of permanent and temporary export and temporary import of defense articles and services. Such exports and imports are governed primarily by 22 U.S.C. 2778 of the Arms Export Control Act (“AECA”). The AECA implements export control regulations through the International Traffic in Arms Regulations (“ITAR”).1 The ITAR controls any product that has been designed, developed, configured or adapted for a military application. The export of defense articles, defense services, and related technical data enumerated in the ITAR’s U.S. Munitions List are prohibited under the ITAR, unless the exporter has obtained a validated license or written approval from the U.S. Department of State or is operating under a valid license exception. Included in these prohibitions is the disclosure or transfer of technical data to a foreign national, known as a “deemed export,” regardless of whether such actions take place in the United States or abroad. Since the disclosure of technical data to a foreign national located in the United States is considered an export to that person’s country of citizenship, it is subject to licensing requirements.
Fundamental Research Exemption for Universities
Under the ITAR, certain research is exempt from U.S. export controls. However, this fundamental research exemption is contingent on whether the results of the research are intended for publication. In order to meet this exemption, the research must apply to information resulting from basic and applied research in science and engineering, conducted at an institution of higher learning located in the United States that is ordinarily published and shared broadly within the scientific community, and is subject to specific U.S. government access and dissemination controls.2 This exemption is treated as a subset of the “public domain” exemptions under the ITAR. However, the ITAR states that university research will not be considered fundamental research if the information resulting from the research is (1) funded by the U.S. government and specific access and dissemination controls protecting the information resulting from the research are applicable, or (2) the university or its researchers accept other restrictions on publication of the information resulting from the project.3
The fundamental research exemption basically incorporates the provisions of National Security Decision Directive (“NSDD”) 189, which was originally issued in September 1985 and reaffirmed in 2001. NSDD 189 states that “[f]undamental research means basic and applied research in science and engineering, the results of which ordinarily are published and shared broadly within the scientific community, as distinguished from proprietary research and from industrial development, design, production, and product utilization, the results of which ordinarily are restricted for proprietary or national security reasons.”
The Need for Compliance Between Commercial Businesses and Universities
In today’s global economy, it is not uncommon for companies to enter into a partnership with a university or a for-profit spin-off of the university. The parties entering into these agreements need to recognize the different compliance obligations for commercial businesses and universities, as well as the limited circumstances where export exemptions apply. In particular, companies need to recognize that universities cannot conduct restricted research under partnerships when the potential to compromise the fundamental research exemptions is present. Failure to do so can result in violations of the export control laws and lead to indictments against commercial businesses, universities, and employees of both entities.
Potential Problems with Compliance: The Roth Case
During the 1990s, Atmospheric Glow Technologies, Inc. (“AGT”), a for-profit, publicly traded company, entered into two successive contracts with the United States Air Force. The University of Tennessee (“UT”) became involved in the project through a subcontracting arrangement with AGT for the development of plasma actuators for use in flight controls of unmanned aerial vehicles. As part of this arrangement, UT was required to provide AGT with reports containing export controlled technical information on plasma research.
AGT hired Professor John Reece Roth, renown for his efforts in the field of plasma technology, to serve as the transfer consultant for the second contract. In turn, Professor Roth employed two graduate assistants to help him perform the necessary research—one a U.S. citizen, and the other a Chinese foreign national. Initially, Professor Roth divided the work between the two graduate assistants, who performed different tasks at two separate facilities. However, as the project progressed, the work of the graduate assistants overlapped, which allowed the Chinese foreign national to review the designated reports that contained technical information and to receive training on testing equipment. As the Chinese foreign national graduate assistant’s graduation date approached, Professor Roth attempted to hire an Iranian foreign national as the replacement.
Although Professor Roth knew of the military nature of the project, he allowed the Chinese foreign national to work with technical data and access testing equipment in violation of export control regulations. Based on these actions, Professor Roth, AGT, and AGT’s president were indicted for federal crimes. Since UT, aware of its export compliance obligations, continually warned Professor Roth about the potential violations related to his conduct with the Chinese foreign national, it escaped prosecution.
On August 20, 2008, AGT pleaded guilty to 10 charges of knowingly exporting defense services and technical data without the required license under the AECA and the ITAR.4 Approximately one year later, Professor Roth was sentenced to 48 months in prison for the 17 counts of indictment against him, including conspiracy, wire fraud, and violations of the AECA.5 Professor Roth’s argument that the research at issue concerned matters in the public domain and thus were exempt from export control laws held no merit, because the research fell outside of the fundamental research exemption.
Lessons Learned from Roth
The Roth case highlights the potential problems that can germinate from arrangements between universities and companies. First, commercial businesses and universities need to recognize the different compliance obligations each entity has. Second, both entities must design and implement compliance processes to address export compliance issues. Third, commercial businesses and universities should individually educate all employees who are involved in projects subject to export control regulations, about the controlling restrictions, as well as the policies and procedures in place to comply with them. Fourth, both entities must understand the limits of the fundamental research exemption, specifically as it applies to affiliated research. In addition, both parties in a partnership should be aware of the export restrictions that would control if the fundamental research exemption did not apply and be careful not to compromise the exemption. Finally, the Roth case shows the U.S. government’s willingness to investigate and prosecute deemed export cases against researchers and affiliated companies.
As the number of arrangements between commercial businesses and universities continues to increase, the need for each party involved to comply with export regulations intensifies. Universities and affiliated companies must be aware of the potential for deemed export violations by sharing technical data with foreign nationals involved in university research. Furthermore, universities and companies must bolster their compliance programs to account for these potential transfers. Strong compliance programs not only address these issues at a policy level, but they also provide mechanisms to disseminate the policy to every relevant individual within the organization. Organizations can do this in a number of ways, ranging from requiring employees to certify they have reviewed the compliance policy, to providing or requiring regular compliance and awareness training for personnel and management. The dissemination of the compliance policy throughout the organization is essential because all persons involved in these programs need to be able to identify situations where activities may fall outside the exemption for “fundamental research.”
The lawyers at Reed Smith can help commercial companies and universities design broad compliance programs, or refine and target existing policies. Additionally, Reed Smith’s attorneys are available to work with companies to provide training programs for management to then spread to their employees.