US State Department proposes to eliminates TAA in certain circumstances

In April, the US Department of State, Directorate of Defense Trade Controls (DDTC) published a proposed rule that has the effect of limiting the scope of activities that are considered a defense service and establishes new definitions of ‘‘Organizational-Level Maintenance,’’ ‘‘Intermediate-Level Maintenance’’ and ‘‘Depot-Level Maintenance.’’ The change would allow certain activities to proceed without any DDTC approval, when Technical Assistance Agreement (TAA) approval is now required. DDTC will accept comments on this proposed rule until June 13, 2011.

The discussion below reviews each paragraph of the proposed new definition of defense services and relates our comments on the impact of the change and the impact of the new definitions of O-, I- and depot-level maintenance.

§ 120.9 Defense service.

(a) Defense service means:

(1) The furnishing of assistance (including training) using other than public domain data to foreign persons (see § 120.16 of this subchapter), whether in the United States or abroad, in the design, development, engineering, manufacture, production, assembly, testing, intermediate or depot level repair or maintenance (see § 120.38 of this subchapter), modification, demilitarization, destruction, or processing of defense articles (see § 120.6 of this subchapter)…

The addition of “using other than public domain data” will allow substantially greater flexibility for collaborative R&D and fundamental research, but the change falls short by not excluding other information which is not ITAR-controlled technical data. Under the heading “Supplemental Information” in the Federal Register notice of the proposed rule, DDTC states that “[t]he proposed change removes the requirement in § 124.1(a) to seek the Directorate of Defense Trade Controls’ approval if the defense service that is being rendered uses public domain data or data otherwise exempt from ITAR licensing requirements” (emphasis added). We agree that providing assistance related to a defense article which does not involve the use of ITAR-controlled technical data should not be deemed a defense service. However, this concept is not reflected in this paragraph.

Assistance related to a defense article should not be deemed a defense service if the assistance:

• Uses only public domain information (as stated in the proposed rule);
• Uses only general scientific, mathematical or engineering principles commonly taught in schools, colleges and universities;
• Uses only basic marketing information on function or purpose or general system descriptions of defense articles; or
• Uses only technology subject to the Export Administration Regulations.

However, only the first bullet above is excluded in the proposed definition. We recommend that DDTC change the proposed rule by adding the clause “using technical data (see § 120.10 of this subchapter) rather than the clause “using other than public domain data,” as currently proposed.

Limiting repair and maintenance to Intermediate and Depot Level eliminates the need for a TAA for basic or organizational repair and maintenance assistance. This change is discussed further on the following pages.

(2) The furnishing of assistance to foreign persons, whether in the United States or abroad, for the integration of any item controlled on the U.S. Munitions List (USML) (see § 121.1 of this subchapter) or the Commerce Control List (see 15 CFR part 774) into an end item (see § 121.8(a) of this subchapter) or component (see § 121.8(b) of this subchapter) that is controlled as a defense article on the USML, regardless of the origin…

This new provision is a clarification of existing practice. Assistance in integrating a defense article is a defense service even if the assistance is limited to the integration of dual-use items. For example, a contractor could be involved in integration of IT and communication equipment into a military command center for a foreign military. The IT and communication equipment may comprise dual-use, off-the-shelf hardware and software. While the equipment is dual-use the total solution is a defense article – a military command center. The assistance in designing and integrating the command center is a defense service. The Supplemental Information section of the Federal Register notice provides a useful definition of ‘‘integration.’’ DDTC states in the notice that integration means the systems engineering design process of uniting two or more things in order to form, coordinate or blend into a functioning or unified whole including introduction of software to enable proper operation of the device. This includes determining where to install something (e.g., integration of a civil engine into a destroyer which requires changes or modifications to the destroyer in order for the civil engine to operate properly; not simply plug and play).

Integration should be distinguished from installation, which DDTC indicates means the act of putting something in its pre-determined place and does not require changes or modifications to the item in which it is being installed (e.g., installing a dashboard radio into a military vehicle where no changes or modifications to the vehicle are required; connecting wires and fastening the radio inside of the preexisting opening is the only assistance that is necessary). Consequently, if the contractor merely installed a dual-use antenna system at the military command center, without making modification to the antenna, the service would not be a defense service.

(3) Training or providing advice to foreign units and forces, regular and irregular, regardless of whether technical data is transferred to a foreign person, including formal or informal instruction of foreign persons in the United States or abroad by any means including classroom or correspondence instruction, conduct or evaluation of training and training exercises, in the employment of defense articles; or

(4) Conducting direct combat operations for or providing intelligence services to a foreign person directly related to a defense article.

Serving as an advisor to a foreign military concerning the use of defense articles is a defense service. Engaging in combat operations using defense articles also constitutes a defense service. The proposed rule provides better clarity and limits the scope of activities that will be deemed defense services. Under the proposed rule, military training and assistance combat operations will only be deemed a defense service when related to the use of defense articles.

(b) The following is not a defense service:

(1) Training in the basic operation (functional level) or basic maintenance (see § 120.38) of a defense article…

As stated in the proposed Section 120.9(a)(1) above, training or assistance in basic or O-level repair and maintenance is not a defense service. The proposed new Section 120.38 defines O-level repair and maintenance. Organizational-level maintenance (or basic-level maintenance) is defined as “the first level of maintenance performed by an end-user unit or organization ‘on-equipment’ (directly on the defense article or support equipment) assigned to the inventory of the end-user unit or organization . . . [consisting of] repair, inspecting, servicing, or calibration, testing, lubricating and adjusting equipment, as well as replacing minor parts, components, assemblies and line-replaceable spares or units.”

(2) Mere employment of a U.S. citizen by a foreign person…

This provision of the proposed new rule is intended to “prevent the anomalous situation where foreign companies are reluctant to hire US citizens for fear that such employment alone constitutes a defense service, even where no technical data would be transferred to the employer,” according to DDTC. Thus, it appears that DDTC intends that a US citizen is deemed not to be furnishing defense services to the employer provided the US citizen is not employed in a capacity involving performing tasks that would cause the employee to release ITAR-controlled technical data in the course of employment. In practice, this may mean that the employee may not be engaged in a technical capacity involving defense articles without prior DDTC approval, but employment with other responsibilities would not be defense services. Clarifying language could be added to this provision by DDTC such as “where the employment does not involve the release of technical data by the US citizen.”

(3) Testing, repair, or maintenance of an item ‘‘subject to the Export Administration Regulations’’ (see 15 CFR 734.2) administered by the Department of Commerce, Bureau of Industry and Security, that has been incorporated or installed into a defense article…

This proposed exclusion follows the logic of the new provision at proposed Section 120.9(a)(2). Repair of a dual-use item incorporated into a defense article is not a defense service because the assistance relates only to the dual-use item and not to the defense article into which the dual-use item is installed. However, by contrast, troubleshooting the problems related to the operation of the dual-use item as integrated into the defense article would be defense service if it involved assisting to correct problems with the integrated solution.

(4) Providing law enforcement, physical security or personal protective training, advice, or services to or for a foreign person (see § 120.16 of this subchapter), using only public domain data…

This proposed provision serves as an exception to proposed Sections 120.9(a)(3 and 4) when the services are limited to physical security or personal protective training, advice, or services using only public domain information. This training or assistance apparently is not deemed a defense service even if it does involve training in the use of defense articles.

(5) Providing assistance (including training) in medical, logistical (other than maintenance), or other administrative support services to or for a foreign person.

This proposed provision also serves as an exception to proposed Sections 120.9(a)(3 and 4) when the services are limited to medical, logistical (other than maintenance) or other administrative support services.

The proposed definition of defense services and related proposed definitions and changes will clarify and limit the activities which DDTC will deem to be defense services and will eliminate the need to obtain TAAs in such circumstances.