First Thing We Do, Let’s Register All the Lawyers
Posted by Clif Burns at 11:44 pm on September 11, 2013
Category: DDTC • Part 129
One of the issues that has haunted the efforts by the Directorate of Defense Trade Controls (“DDTC”) to amend its brokering rules has been what to do with lawyers. Are lawyers that assist their clients with transactions involving defense articles brokers or not? Do they need to pony up registration fees? Worse, are there situations where they must get permission from DDTC before counseling clients on defense related transactions?
To be fair about the issue, DDTC is trying to fix an issue that arises from the overly broad definition of brokering services in the current rules. The current definition covers anyone who acts “as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or defense services in return for a fee.” The minute a lawyer calls the lawyers for the other side, the issue arises as to whether the lawyer has become a broker. It’s easy to say that the lawyer isn’t in that case an “agent” for his client in the traditional sense, except for the fact that DDTC has made clear that “agent” here is meant in a very broad sense that goes beyond the notion of an agent under the common law of agency. No lawyers have been registering as brokers, and DDTC has so far never suggested that it had any interest in pursuing lawyers.
The newly released “interim final” rule attempts to address this issue, and by explicitly raising the issue may make the situation even worse than it was when the rules were silent on the issue. The “interim final” rule says that brokering activities do not include “activities by an attorney that do not extend beyond the provision of legal advice to clients.” Not surprisingly, there is no definition of “legal advice” but DDTC tries to clarify it with this comment at the beginning of the Federal Register notice on the “interim final” rule:
The Department has clarified that “activities by an attorney that do not extend beyond the provision of legal advice to clients” is not within the definition, and notes that “legal advice” includes the provision of export compliance advice by an attorney to a client.
Two problems now are posed by the “interim final” rule. First, the exemption applies only to the extent that a lawyer is communicating with his own client. If he or she talks to the other lawyers in a transaction, the lawyer has arguably become a broker. Second, lawyers in a transaction involving defense articles are going to provide legal advice far beyond the “provision of export compliance advice.” Simple advice to the client about whether the contract should include an arbitration clause, or whether the law of New York or California applies. Those might be clear examples of legal advice but what if the lawyer provides his or her thoughts on certain risks that the transaction might pose? Is that business or legal advice? Has the lawyer stepped over the line and become a broker?
And here’s the most terrifying thought. If the transaction involves a “foreign defense article,” then under the “interim final” rule, a lawyer will need State Department approval before advising his or her client on whether to include an arbitration clause or before the lawyer calls opposing counsel to discuss contractual issues. I suspect that many lawyers will ignore these requirements but that is going to be harder to do under the new language in this rule when (and if) it goes into effect on October 25 of this year.
Great post Cliff. Re a previous comment relevant here, at least two trade publications so far advised that a DDTC representative said not all legal services are covered by the exemption. Said that excemtion for legal services does not include attorneys who advise on how to structure defense sales and who are “writing it up.” I don’t see how DDTC can say with a straight face that regulating attorney advisements (i.e., requiring prior approval before an attorney can give advice on U.S. law) is entirely a foreign affairs function exempt from APA rulemaking requirements. What can DDTC claim as a legitimate government concern with attorneys providing advice to clients on how to comply with U.S. law in preparing sales documents and structuring defense sales – especially when attorneys are ethically bound NOT to advise clients on how to violate the law. Are state bar associations okay with lawyers just turning over client records upon DDTC/ICE etc request without impleading files with court and requiring judicial review? This is ripe for an APA action by any member of the Bar!!!!!
That’s a very good point, John, about the absence of any nexus with foreign affairs if the rule attempts to exercise supervision over attorneys who are advising clients as to the tax implications or other non-export issues of a transaction involving defense articles or defense services.
Come to think of it, the impact on US-affiliated foreign lawyers could be problematic, as well. For instance, let’s suppose there is a UK law office that is “owned or controlled by” a US firm (129.2(a)(3)) and that participates in the negotiation of a domestic sale of defense articles from a UK manufacturer to the UK MoD. Under the Interim Final Rule, it might be required to register as a broker with DDTC, although there’s not even an export or import at all, much less any good or service coming from or going through the US.
Now suppose the same UK lawyers representing the same UK manufacturer are involved in a transaction with a foreign customer that doesn’t qualify for an exemption in 129.5, such as the government of Iraq. In that case, the UK law office might also have to get specific brokering approval from DDTC to participate in negotiations, simply by virtue of its US ownership or control. Zowie. And along with that brokering license, couldn’t there possibly come all sorts of ITAR entanglements, such as end-use and nontransfer assurances, re-export restrictions, reporting obligations, etc.? I’m now picturing a UK lawyer having to explain to a UK client and its Iraqi government customer that a transaction is subject to the ITAR–laws of an entirely uninvolved third country–merely because the lawyer’s office is owned or controlled by a US firm.
I can’t even begin to imagine (actually, I just sorta did) all the drama this could cause with foreign lawyers affiliated with US firms, and with all the governments, defense contractors, and bar authorities those lawyers deal with.
Finally and incidentally, I would note, as others have elsewhere, that the registration requirement at 129.3 is not, strictly speaking, limited to the “broker[s]” defined at 129.2(a), such as foreign persons owned or controlled by US persons. Rather, 129.3 applies to “any person”–NOT “broker”–who engages in the various “brokering activities” described at 129.2(b). This language could encompass ANY law offices (or banks, dealers, sales reps, sureties, etc.) around the world involved in either domestic or international military (or certain satellite) transactions, regardless of US ownership or control, or any other nexus to the US for that matter. To be sure, I don’t think this was DDTC’s intent at all. Indeed, as you noted in an earlier post, Clif, the Interim Final Rule’s preface explicitly discusses the laudable goal of retracting and rationalizing the jurisdictional scope of the ITAR’s brokering provisions. But on its face, the binding regulatory text does not do this. Instead, 129.3 as written actually (a) imposes a standard of vast applicability that is certain to be widely unnoticed or disregarded abroad, and (b) is an assertion of limitless extraterritorial jurisdiction that leaves even the effects doctrine in the dust. In other words, whoever decided to make this an “Interim” rulemaking did a Very Good Thing.