On July 21, 2008, the Department of Defense (DoD) published an interim rule that addresses requirements for preventing unauthorized disclosure of export-controlled information and technology in connection with DoD contracts. See Defense Federal Acquisition Regulation Supplement; Export-Controlled Items (DFARS Case 2004-D010), 73 Fed. Reg. 42274 (July 21, 2008). Most notably, the interim rule amends the DFARS to confirm that DoD contractors remain subject to U.S. export control laws and regulations, and to require DoD contracting officers to include one of two new clauses in contracts: one for use when the contractor is expected to generate or need access to “export-controlled items,” and an alternative clause for use when the work is “fundamental research” and “export-controlled items” are not expected to be involved. The interim rule went into effect immediately on July 21, 2008. Interested parties have until September 21, 2008, to submit comments for consideration in the formulation of the final rule.
This is the third version of the rule, issued almost two years after the DoD published a second proposed rule on August 14, 2006, in response to overwhelmingly negative comments to its first proposed rule published on July 12, 2005. The current interim rule addresses comments from 167 persons and organizations.
Key Provisions of the Interim Rule
In response to public comment, DoD has streamlined the contractual provisions previously proposed to address export control issues, and has added more explicit references to the governing regulations - the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR). These revised clauses are designed to serve as a reminder to defense contractors that they must comply with relevant export-control regulations, and to provide options for contractual modification if export-control issues arise in the course of fundamental research.
- The interim rule has eliminated a draft clause in the second proposed rule that separately addressed information resulting from Fundamental Research, reducing the overall number of contract clauses from which the Contracting Officer can choose to two. Fundamental research is now addressed in the second clause described below. The full text of the two clauses is provided in the attached Annex.
- Clause 1: Export-controlled items are present. The first clause is to be used in cases when the contractor is expected to generate or require access to controlled items. The clause adds specific definitions of “defense items” from the Arms Export Control Act and “items” from the EAR, clarifying that the EAR only applies to items released to foreign nationals in the United States if these items are technology or source code (and not commodities). The clause still requires the contractor to comply with all applicable laws, including the EAR and ITAR. The clause must also be included in subcontracts for which the subcontractor is expected to generate or need access to controlled items.
- Clause 2: No export-controlled items are present. The second clause is used in cases where the contractor is not expected to generate or require access to controlled items. As in clause 1, this second clause adds the definitions of “items” and “defense items” into its contractual language. Furthermore, this clause outlines the procedure to be followed if export-controlled items arise in the course of the contract. First, when it becomes clear that export-control related issues will arise, the clause requires the Contractor to notify the Contracting Officer in writing. In response, the Contracting Officer has three options. First, the Contracting Officer can modify the contract to include Clause 1 above. Second, the Contracting Officer can alter the contract in order to eliminate activity that would involve export-controlled items. Third, the Contracting Officer can terminate the agreement for the convenience of the government (in accordance with the termination clause of the contract). This new termination provision was added in response to one comment that termination for convenience be allowed for projects that begin as fundamental research but later develop export-control issues.
- The interim rule changes the contractual wording for both clauses from “export-controlled information and technology” to “export-controlled items” in order to capture hardware, software, technology, and services, and thereby “more appropriately describe what is being controlled by ITAR and EAR.” Consistent with the “deemed export” rules under the EAR, the interim rule specifically clarifies that releases of EAR-controlled items to foreign nationals within the United States result in exports only when the “items” released are technology or software source code. This clarification is important because it confirms the Commerce Department’s position that the mere access to or use of equipment or executable software by foreign nationals in the United States is not an export. In contrast, the language in the interim rule related to the ITAR is less clear and does not expressly state that mere access to ITAR-controlled hardware or executable software by foreign nationals within the United States would not be an export.
Questions remaining about the interim rule
- The interim rule continues to define Fundamental Research in reference to the NSDD 189 definition without express reference to the definitions in the ITAR or EAR. Because the ITAR and the EAR define Fundamental Research differently, it is not clear that the DoD sponsoring agency will have the expertise and training to make determinations about whether specific information is eligible for the Fundamental Research exemptions under the ITAR and/or EAR.
- It still remains unclear what process the DoD sponsoring agencies will use to identify whether a contract involves export-controlled items, or which regime (ITAR or EAR) applies. For instance, the rule still does not discuss whether the DoD sponsoring agencies will consult with other agencies in making such determinations and what input the Contractor will have.