International Trade Legal Issues for the Optics Industry

APOMA

Tucson Technical Workshop

November 10, 2016

Agenda • U.S. Export Controls

– Overview – ITAR, EAR and OFAC – Dawn of a New Era - Export Control Reform Finally

Hits Optics – Making ECR Work for You

• Foreign Corrupt Practices Act

• Committee on Foreign Investment in the U.S.

• Other Issues – Data Privacy – Cyber Security – IP Protection – Etc.

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The Key Regimes

• International Traffic in Arms Regulations (“ITAR”) – Controls “military” articles, technical data and

services

• Export Administration Regulations (“EAR”) – Controls “commercial” articles and technology

• Office of Foreign Assets Control (“OFAC”) – Bars transactions involving embargoed countries

or certain individuals and entities – Umbrella - Controls both military and commercial

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A Variety of Agencies

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ITAR Overview

• U.S. Munitions List (Cat. XII and others) • Definitions

– Defense article – Technical data – Defense service

• License required to most destinations in most circumstances – Even closest allies – “Embargoed” countries (e.g., China) – Limited license exceptions

• Mandatory disclosure? 5

EAR Overview

• Commerce Control List (see Cat. 6 and 7) • Definitions

– Controlled item – Technology – No “service”

• License required to some destinations in some circumstances – ECCN “reason for control” and country chart

analysis – EAR99 ≠ license not to care – Significant license exceptions

But take care with administration requirements • Voluntary self-disclosure?

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Structure

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Is it on the CCL? If not = EAR99

Still need to consider General Prohibitions

Deemed Exports

Think you are not export, think again . . .

• Release of technical data or technology or source code to a foreign person / foreign national within the U.S. is considered an export to that person’s home country

• Rule covers virtually any means of communication to a foreign person / foreign national – Face to face; Telephone; E-mail; Fax; Sharing of computer

files; Visual inspections; Site tours • Also includes re-exports (e.g., communications to a foreign

person / foreign national abroad of U.S. origin technology) • Applies to employees, contractors, visitors, joint venture

partners, etc. • Must analyze as if physical export to home country

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OFAC Overview

• Embargoes on Cuba, Iran, North Korea, Sudan and Syria

• Embargo on Crimea region of Ukraine

• Sectoral sanctions on Russia • Specially Designated Nationals and

Blocked Persons • Cuba and Iran sanctions extend to

activities of U.S. owned and/or controlled foreign entities

• Beware “facilitation”

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Extraterritorial Application

• U.S. origin goods take on U.S. “nationality” – Retransfer / Re-export issues

• “See-through” rule under ITAR • Foreign items incorporating more than

“de minimis” EAR-controlled content • Goods produced abroad utilizing U.S.

technology/technical data, machinery, assistance, etc.

• OFAC rule against foreign affiliates’ Cuba or Iran transactions

• OFAC prohibition on “facilitation”

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EXPORT CONTROL REFORM THE NEW DAWN

Export Control Reform

America’s decades-old, bureaucratically labyrinthine system does not serve our 21st-century security needs or our economic interests. Our security interests would be far better served by a more agile, transparent, predictable, and efficient regime.

• Secretary of Defense, Robert Gates, April 20, 2010 [T]he current export control system is overly complicated, contains too many redundancies, and, in trying to protect too much, diminishes our ability to focus our efforts on the most critical national security priorities.

Whitehouse Press Release, August 10, 2010.

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Photo: www.huffingtonpost.com

Highlights

• Realigned control lists

– Many items on the simple / highly restrictive ITAR will move to the complex / far more flexible EAR

• Positive USML – objective control criteria. If not enumerated – has moved to new 600 series on CCL

• License exceptions under the EAR – including Strategic Trade Authorization (STA) – 36 countries

• For most items that transition - no see-through rule - EAR De minimis (but no 600 series items to China)

• Harmonized definition of “specially designed”

• No requirement for TAAs or MLAs under EAR

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Highlights – Creation of 600 Series

• Items no longer listed on revised USML will become subject to EAR 600 Series ECCN’s

• Still controlled as military items • License will be required to export and re-export most

600 series Worldwide (except Canada) unless:

– EAR license exception applies; or – Enumerated in .y subparagraph

• ITAR 126.1 country embargoes remain (including China) and countries listed in Country Group D:5

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Optics Finally Addressed by ECR

• Final Rule goes into effect Dec 31, 2016 • Moves items from ITAR to EAR that

President determined no longer warrant control under USML Cat. XII (and Cat. XI)

• Movement of items from USML Cats. VIII, XIII, and XV to USML Cat. XII or EAR

• Amends various EAR Cat. 6 ECCNs and ECCN 7A611, and creates new ‘‘600 series’’ ECCNs 7B611, 7D611, and 7E611

• Amends OA987 and adds ECCN 0E987 • Significant use of “specially designed” • Certain military end-use controls

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Critical! Understand Jurisdiction and Classification

• Review ITAR USML − Is it specifically enumerated? − Is it within a catch-all control (“specially designed”)?

• If not covered by ITAR, review EAR CCL − Determine CCL category and sub-category − Review 600 / 515 series ECCN’s

• Is it specifically enumerated in .a through .w? • Is it specifically enumerated in .y? • Is it with a catch-all control (“specially designed”)?

− Review non-600 / 515 series ECCNs • Software and Technology

– If item is on USML = associated software and technical data is on USML

– Otherwise Group D (software) or Group E (technology) of CCL – If classified data re: USML and 600 / 515 Series = USML

• Is a license required? – ITAR – likely unless limited exemptions apply – EAR – maybe (detailed analysis)

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Specially Designed

• Needed to clearly define what was caught by the catch-all controls – especially for items moving to CCL from USML

• “Enforceable and capable of being prosecuted.”

• Prior reliance upon design intent led to inconsistent results

– Subjective – Times change – may no longer warrant strict control – Determining design intent may be difficult

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Specially Designed – Catch

Paragraph (a)

Except for items described in (b) (“release”) an item is specially designed if:

(1) As a result of development, the item has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics, or functions described in the relevant: ITAR definition: USML paragraph EAR definition: ECCN paragraph or USML paragraph

(2) Is a part, component, accessory, attachment, or software for use in or with a: ITAR definition: defense article EAR definition: commodity or defense article enumerated or described on the CCL or the USML

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Specially Designed – Release

Paragraph (b)

A part, component, accessory, attachment or software that would be controlled by (a) (“catch”) is not specially designed if:

(1) ITAR definition: a CJ establishes item is subject to EAR EAR definition: a CJ or interagency-cleared CCATS (EAR 748.3(e)) says the item is controlled in an ECCN that does not use “specially designed” as a control parameter or EAR99 (EAR)

(2) Both: the item is a fastener (e.g. screw, bolt, nut, nut plate, stud, insert, clip, rivet, pin), washer, spacer, insulator, grommet, bushing, spring, wire, or solder

(3) the item has the same function, performance capabilities, and same or equivalent form and fit as a commodity or software used in or with an item that is or was in production that: ITAR definition: is not enumerated on the USML EAR definition: is either not enumerated on the USML or CCL, or is described in an ECCN controlled for AT only

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Specially Designed – Release

Paragraph (b)

A part, component, accessory, attachment or software that would be controlled by (a) (“catch”) is not specially designed if:

(4) It was or is being developed with knowledge that it would be for use in or with: ITAR definition: both defense articles enumerated on the USML and also commodities not on the USML EAR Definition: commodities or software (i) described in an ECCN and (ii) also commodities or software either not enumerated on CCL or USML or commodities or software described in an ECCN controlled for AT reasons only

(5) Both: the item was or is being developed as a general purpose item, i.e. with no knowledge of use in or with a particular item or type of commodity

(6) EAR only: the item was or is being developed with knowledge that it would be used in or with commodities or software (i) described in an ECCN controlled for AT reasons only and EAR99 commodities or software, or (ii) exclusively for use in or with EAR99 item

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Need contemporaneous documents to support design intent in (b)(4)-(6)

Specially Designed – Recap in Plain English

• Not specially designed if:

(1) a CJ or CCATS establishes that it is not specially designed;

(2) it is low level part such as a fastener;

(3) it is used in both controlled and uncontrolled / lowest level controlled item that is in production; or

(4)-(6) You have contemporaneous documents to show developed as dual-use or general purpose item.

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License Exceptions

• Few under ITAR, many under EAR • EAR License Exception Strategic

Trade Authorization (STA) is key – Prior consignee statement – Separate written communication

regarding intention to use STA and applicable ECCNs

– AES filing – Record-keeping

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License Exception STA (cont’d)

• §740.20(c)(1) - STA 36 Countries (Group A:5):

• §740.20(c)(2) - STA 8 Countries (Group A:6):

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If reasons for control are national security (NS); chemical or biological weapons (CB); nuclear nonproliferation (NP); regional stability (RS); crime control (CC), and/ or significant items (SI). Unless excluded in “License Exceptions” list within applicable ECCN.

Albania Hong Kong India Israel

Malta Singapore South Africa Taiwan

If reasons for control are national security (NS) only and not excluded in “License Exceptions” list within applicable ECCN.

Argentina Australia Austria Belgium

Bulgaria Canada

Croatia Czech Republic

Denmark Estonia Finland France

Germany Greece Hungary Iceland Ireland Italy

Japan Latvia Lithuania Luxemborg Netherlands New Zealand

Norway Poland Portugal Romania Slovakia Slovenia

South Korea Spain Sweden Switzerland Turkey United Kingdom

Leverage De Minimis • For items that transition to EAR – no further U.S.

jurisdiction and control over retransfer and re-export if de-minimis applies

– 25% most countries – 10% E:1 Countries – 0% D:5 Countries

• “Controlled content” = U.S.-origin items that require a license to the ultimate destination of the foreign product

• Use fair market value of controlled content to calculate de minimis percentage

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Recap

• Understand jurisdiction / classification

• Understand license requirements & tech controls

• Maximize use of license exceptions (e.g., STA)

• Consider overseas business opportunities from de minimis

• Create contemporaneous documentation for dual use products in development

• Train and retrain

• Get it right – beware increased enforcement – no excuses

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OTHER TRADE-RELATED

LEGAL ISSUES

Foreign Corrupt Practices Act

• Prohibition on offering or paying anything of value to a foreign government official for purposes of obtaining or retaining business

• Broad concept of “gov’t official” • Limited exception for “facilitating

payments” (beware) • Exposure through reps/agents • UK Bribery Act (no facilitating

payments)

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Committee on Foreign Investment in the United States • USG committee authorized to review,

investigate and block any transaction or investment that could result in the control of any U.S. business or asset by a foreign person that may raise national security concerns, or involve critical infrastructure

• Voluntary filing that must be coordinated between buyer and seller – Variety of triggers and complicated

judgement whether or not to file • CFIUS has authority to investigate

transactions after-the-fact and direct unwind / disgorgement

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Other Trade-Related Issues

• Data Privacy – EU Directives – Other country-specific requirements

• Cyber Security – Cyber espionage and hacks – USG directives – Best practices

• IP Protection – Patents, Trademarks, Copyrights

and Domains

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These materials have been prepared by Baker & Hostetler LLP for informational purposes only and are not legal advice. The information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should consult a lawyer for individual advice regarding your own situation.

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Kerry T. Scarlott Baker & Hostetler T 202-861-1585

kscarlott@bakerlaw.com