The Tail That Wags the Dog: Parts Originally Designed for Military Applications Can Control Licensing Requirements for Contemporary End Products

April 17, 2006

In a case that demonstrates the risks associated with the cross-utilization of even minor components in military and commercial applications, a major aerospace company recently agreed to pay $15 million to settle allegations that it violated the Arms Export Control Act ("AECA"), as implemented by the International Traffic in Arms Regulations ("ITAR"). Specifically, the company was alleged to have exported commercial airliners that contained a motion sensor chip to various countries, including the People’s Republic of China ("PRC"). This is among the largest fines a company has paid for violations of the ITAR, which regulates the export of military products, and the company also was required to submit to oversight requirements, including the appointment of an outside Special Compliance Official. 

According to the U.S. State Department’s draft charging letter, the chip, which was contained in a flight instrument system the company incorporated into some of its airliners, was also used in the guidance system of the Maverick missile. The proposed charges were based on the State Department’s July 30, 1993 determination that the chip’s capabilities were inherently military and on the company’s failure to cease aircraft exports involving the chip after State Department notification that it considered the aircraft sales to be in violation of the ITAR. Under State Department interpretations of the ITAR, the incorporation of the chip into a flight instrument that was then integrated into commercial airliners required that both the systems and the airliners themselves be treated as military items. This was so even though the chip made up only a tiny fraction of the cost of the airliner and more than 80 percent of the chips are reportedly used in commercial applications. Additionally, the charges were proposed even though control of the chip was later transferred to the jurisdiction of the Commerce Department, and thus are no longer even subject to ITAR.

Companies that use component parts originally manufactured for military items in developing commercial items, no matter how minor, may be violating the ITAR. Many companies undertake such practices to improve efficiency and reliability. Other companies may unwittingly purchase component parts that are controlled under the ITAR. The U.S. State Department has a voluntary disclosure program that may help companies avoid penalties once such problems are identified and remedied. Additionally, in some cases component parts can be removed from the State Department’s U.S. Munitions List through what is known as a commodity jurisdiction request. This can dramatically reduce export restrictions, including the ITAR’s absolute prohibition on exports of defense articles to several countries, including the PRC.

For further information, please contact Judith A. Lee (202-887-3591) or James D. Slear (202-955-8578) in Gibson, Dunn & Crutcher’s Washington, D.C. office.

© 2006 Gibson, Dunn & Crutcher LLP

The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.