Department of Defense Issues Interim Rule Amending DFARS to Add Export Compliance Provisions

July 25, 2008

The United States Department of Defense ("DoD") has issued an interim rule amending the Defense Federal Acquisition Regulation Supplement ("DFARS") Parts 204, 235, and 252 to address contractor requirements to comply with export control laws and regulations when performing DoD contracts.[1]  The implementation of an interim rule was necessitated by the National Defense Authorization Act for Fiscal Year 2008 (Pub. L. 110-181), which requires DoD to prescribe, by July 26, 2008, regulations addressing requirements for DoD contractors to comply with export control laws and regulations applicable to goods or technology.

The interim rule requires contractors to comply with the International Traffic in Arms Regulations ("ITAR") and the Export Administration Regulations ("EAR").  The rule further requires "requesting activities" (i.e., government entities initiating solicitations) to assess the possible involvement of export-controlled items in the performance of the contract and to notify contracting officers prior to any solicitation.  It also adds two new clauses.  One is to be used when export-controlled items, including information or technology, are expected to be involved in the performance of a contract.  The other, which is to be used when  export-controlled items are not expected to be involved, and addresses obligations on the contractor and contracting officer when the initial assessment turns out to be incorrect.

The DoD had previously published two proposed rules on July 12, 2005 (70 Fed. Reg. 39976) and August 14, 2006 (71 Fed. Reg. 464340).  The second proposed rule simplified the policy framework to eliminate a number of fairly burdensome requirements that duplicated requirements already existing  in the ITAR and EAR.   In response to public comments received with regard to the second proposed rule, DoD developed the interim rule.   The major differences between the second proposed rule and the interim rule are as follows: 

• Addition of text in the clause at 252.204-7009, Requirements Regarding Potential Access to Export-Controlled Items, to specify that, if during performance of a contract that otherwise was not expected to involve export-controlled items, the contractor becomes aware and notifies the contracting officer that the contractor will generate or need access to export-controlled items, the contracting officer may, as one of three options prescribed, terminate the contract in whole or in part for the convenience of the Government.
• Reduction of the number of prescribed contract clauses from three to two by eliminating the separate clause for fundamental research contracts.
• Use of the term "export-controlled items" instead of "export-controlled information and technology" to describe more appropriately what is controlled by the ITAR and EAR, and addressed by the new rule.  In this regard, the definition of "items" has been clarified to make clear that merely providing access to an "export-controlled item" is not necessarily an export subject the EAR.  Instead, the interim rule notes that only technology and software source code are subject to the EAR when released to a foreign national inside the United States.

The new DFARS 204.7304 imposes the following procedures on the "requiring activity" to notify the contracting officer in writing prior to the issuance of a solicitation as follows:

• For research and development:  when (1) export-controlled items are  expected to be involved or (2) the work is fundamental research only, and export-controlled items are not expected to be involved.
• For supplies or services:  when (1) export-controlled items are expected to be involved or (2) the requiring activity is unable to determine that export-controlled items will not be involved.

The two new contract clauses included in the interim rule are as follows:

DFARS 252.204-7008, Requirements for Contracts Involving Export-Controlled Items.  This clause applies when the requiring activity has given the contracting officer pre-solicitation notice that performance of the contract is expected to involve export-controlled items.  It requires the contactor to comply with all applicable laws and regulations regarding export-controlled items, including the requirement for contractors to register with the Department of State in accordance with the ITAR.  Notably, U.S. companies must register with the Department of State if they are producing ITAR-controlled goods or technology even if they are not exporting those items. 

DFARS 252.204-7009, Requirements Regarding Potential Access to Export-Controlled Items.  This clause applies when the requiring activity has given the contracting officer pre-solicitation notice that performance of the contract is not expected to involve export-controlled information or technology.   This clause requires contactors to notify the contracting officer in writing if, during the performance of the contract, the Contractor becomes aware that the Contractor will generate or need access to export-controlled items.  In such a case, the Contracting Officer is to take expeditiously one of three actions: (i) modify the contract to include the DFARS clause 252.204-7008; (ii) negotiate a contract modification that eliminates the requirement for performance of work that would involve export-controlled items; or (iii) terminate the contract, in whole or in part, as may be appropriate, for the convenience of the Government.

Although less administratively burdensome than the first and second proposed rules, the interim rule will nevertheless impose an additional notification requirement on contractors, and gives rise to a need for contractors both to  understand and comply with export requirements.   It is also important for contractors to carefully evaluate solicitations to ensure that the requiring activity’s assessment of the possible involvement of export-controlled items is accurate.

The new rule serves as an important reminder of the importance of export control laws and regulations, including the EAR, which is administered by the Bureau of Industry and Security at the Commerce Department for commercial or dual-use items and technology, and the ITAR, which is administered by the Directorate of Defense Trade Controls at the State Department for defense-related items, technology and services.  Aside from the contractual obligations arising under the new  DFARS provisions, violations of the ITAR and EAR independently carry significant criminal and civil penalties, ranging from $250,000 to $1,000,000 per offense and including imprisonment for individual criminal violations. 

Gibson Dunn lawyers have extensive experience in both export compliance and government contracting matters and are prepared to advise clients on any issues arising from this interim rule or other related issues.

Comments on the interim rule are due not later than September 19, 2008.  Even though comments are being sought, it is important to note that the rule was effective as of July 21, 2008.

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