Aeroflex ITAR Settlement Illustrates Export Control Compliance Challenges

by Orrick, Herrington & Sutcliffe LLP
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Aeroflex, Inc., a U.S. producer of microelectronics devices, recently settled allegations that its exports of certain types of semiconductor devices violated the International Traffic in Arms Regulations (“ITAR”). The settlement, in which Aeroflex neither admitted nor denied the allegations, consists of payment of up to $8 million and imposition of an extensive range of compliance measures, reports and training.

The State Department estimated that roughly 50,000 semiconductor devices related mostly to civilian satellites and space vehicles were exported over a ten year period without the necessary ITAR authorization. Based on mitigation related to Aeroflex’s voluntary disclosures and cooperation, the State Department was prepared to bring 158 charges against Aeroflex.

Jurisdiction Determination

The charges were primarily due to what the State Department characterized as “systemic and corporate-wide failure to properly determine export control jurisdiction over commodities.” Aeroflex had largely self-classified its devices, often with the advice of Commerce Department officials, as subject to the jurisdiction of the Export Administration Regulations (“EAR”) rather than the ITAR.

The U.S. export control system is predicated upon voluntary compliance, starting with the self-classification of items by exporters. Neither industry nor government can afford a system where each item to be exported has to undergo a government jurisdiction determination. Yet only the State Department has the authority to make definitive ITAR jurisdiction determinations, and industry is strictly liable for any errors in self-classification.

The case underscores the many pitfalls to self-classifying items with respect to ITAR jurisdiction, especially when dealing with civilian products and parts and components.

Errors in Self-Classification

The Proposed Charging Letter from the State Department identified several alleged errors by Aeroflex in self-classifying its semiconductor devices, errors that embody familiar challenges facing exporters:

  • Aeroflex determined that certain of its devices did not qualify as defense articles under Category XV of the U.S. Munitions List (“USML”) and therefore classified these devices under the EAR. Although Aeroflex’s semiconductor devices did not qualify as defense articles under Category XV (d), they could still qualify as parts and components set forth in Category XV(e) as “specifically designed or modified” for defense articles, in this case civilian satellites and space vehicles. The “catch-all” categories of the USML typically pose the most difficult classification challenges to exporters of electronics and related items that can serve as parts and components.
  • Aeroflex applied for and received a commodity jurisdiction (CJ) determination from the State Department in 2006 but did not “use… the rationale provided in this CJ determination for future self-jurisdictional analyses.” As a general matter, the State Department seldom explains in any detail its rationale for CJ determinations, especially as it may relate to the “specifically designed or modified” standard of a catch-all provision. In addition, the subject of a CJ determination generally differs in several respects from other products that may need to be classified.
  • Aeroflex and its affiliates reportedly completed at least 158 unlicensed, ITAR-inconsistent exports between 1999 and 2009. Ninety-six of the exports were to China, which is subject to an ITAR embargo (ITAR licenses are generally not issued for exports or other transfers to China).
  • Aeroflex reportedly failed to obtain an ITAR license for certain of its radiation hardened devices even after the State Department notified the company that similar devices are ITAR-controlled, and Aeroflex also reportedly continued to treat certain of its devices as not controlled while a request for guidance covering those devices was pending with the State Department.
  • Aeroflex apparently relied upon its original classifications for its standard product offering based on its generic, “one size fits all” design even when the device to be exported was subsequently modified. To be sure, modifications to an item warrant a new assessment of the appropriate jurisdictional treatment. In its Proposed Charging Letter, the State Department notes that some of the offending items “met specific customer requirements;” some were “designed” for space; and some were “marketed as ideal for space applications.” The Proposed Charging Letter, however, does not address the explicit standard for ITAR jurisdiction for Category XV parts and components: “specifically designed or modified for” a satellite or space vehicle. As applied by the State Department, this standard has long appeared to be highly elastic and hence quite elusive for industry generally.
  • According to the Proposed Charging Letter, certain Aeroflex semiconductor devices that were “specifically customized and programmed” for use on a satellite or were “built to specifications for a military application” should have been made subject to ITAR controls. These factual characterizations come much closer to meeting the “specifically designed or modified for” standard even though the Proposed Charging Letter does not explicitly tie them to that standard.
  • Aeroflex “primarily relied on commodity classification guidance from the Commerce Department in reviewing the export control status of its microelectronics.” Although it would seem natural to give some weight to the views of competent and experienced export control officials from the Commerce Department, only the State Department, as a legal matter, has the authority to determine ITAR jurisdiction. Aeroflex’s mistake in this regard is not uncommon. The only avenue to a definitive ITAR jurisdiction determination is through a formal request to the State Department.
Lessons from the Aeroflex Settlement

The Aeroflex case has implications for companies that manufacture and export items that themselves do not constitute defense articles, but might be used as parts and components of defense articles, among other things. Some of the more straight-forward lessons include:

  • Give careful attention to regulatory jurisdiction and treat this status separately from commodity classifications that may arise under particular regulatory regimes. Only State Department actions are relevant to ITAR jurisdiction determinations.
  • Be alert to product modifications. Product modifications—no matter how seemingly innocuous—can result in a change in regulatory jurisdiction.
  • If in doubt, seek a CJ determination from the State Department and try to comprehend the rationale for such determination. If the rationale is ambiguous, seek clarification; then try to apply the rationale to similarly situated products.
  • Focus on the actual standard for determining ITAR jurisdiction. For parts and components, the standard is usually “specifically designed or modified for” a defense article. Effective application of the standard involves both a technical and legal judgment.
Changing Context

Although too late for Aeroflex, there have recently been major changes in the ITAR treatment of parts and components relating to space. First, civilian satellites and spacecraft are proposed to be removed from the USML so that they will no longer be subject to the ITAR. This will eliminate an anomaly that has long plagued the U.S. space industry and comports with the common sense notion that civilian items are not munitions.

In accordance with this change, parts and components of civilian satellites and spacecraft will be moved to the EAR, although they will be subject to special restrictions there.

Second, the “specifically designed” standard will be replaced by a new “specially designed” definition. Although extraordinarily complicated, the new definition includes the central elements that were necessarily the core of the specifically designed standard, that is, does the military version of an item have the same functionality and performance as the civilian version? When are the differences in functionality and performance material and when do they represent merely differences in form and fit? Is the item general purpose or multipurpose in that it is suitable for use in a variety of different applications? Is the item in normal commercial use?

The new definition will not by itself make it any easier for exporters to determine whether an item is subject to ITAR jurisdiction. It will, however, provide an opportunity for the State Department to be more systematic and less arbitrary in reaching its ITAR determinations. It could facilitate the articulation of the rationale for any particular ITAR determination. And finally, it could lead to the establishment of precedents that can be reasonably applied by industry.

All of this would be to the good, but it remains to be seen if it will improve industry’s ability to self-classify parts and components with respect to the ITAR.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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