Another problem with the arms brokering regulations proposed by the Directorate of Defense Trade Controls (“DDTC”) is their jurisdictional scope, which is impossibly vague and far exceeds the scope of permissible regulation under the Brokering Amendment which was passed by Congress and which permitted DDTC regulation of arms brokers in the first place.

So let’s start with vague. Under the current rules, the rules’ requirements of registration and approval apply to foreign brokers “subject to U.S. jurisdiction.” Normally this would mean foreign persons with sufficient contacts with the U.S. so as to permit jurisdiction over them consistent with the due process clause. DDTC has been arguing that this should also include any foreign person who has any contact with U.S.-origin defense articles. The new rules would codify this remarkable and extraordinary claim for the permissible scope of U.S. jurisdiction. stating that its requirements cover activities of:

any foreign person located outside the United States involving a U.S.-origin defense article or defense service.

Notwithstanding the numerous ways that U.S.-origin can be defined the proposed rules are completely silent on what constitutes a U.S.-origin defense article. Is a tank with one lugnut made in Grand Rapids a U.S.-origin article. Or is there a requirement that U.S. parts constitute at least 50 percent of the value of the item? Or does it require that a substantial transformation or tariff classification shift occur in the United States. The new rules provide absolutely no guidance, largely because, I suppose, DDTC sees the United States as having unlimited jurisdiction over foreign persons, and therefore, the agency intentionally wishes to keep this concept vague.

Whether or not the U.S. has such broad jurisdiction, it is quite clear that when Congress passed the Brokering Amendment which authorized these rules in the first place, it didn’t intend to confer such broad jurisdiction. As I detailed in this article (subscription required) back in 2006 in Export Practitioner, the House Report on the Brokering Amendment makes it crystal clear that Congress only intended to cover “U.S. persons (and foreign persons located in the U.S.).” It does not authorize DDTC to try to exert jurisdiction over foreign persons outside the United States that may have some connection to a defense article that has one U.S. part in it.

On Monday we talked about the lump of coal the Directorate of Defense Trade Control (“DDTC”) is delivering to export lawyers for Christmas in the proposed new brokering rules that appear to require export lawyers to register as brokers and to get permission from DDTC to provide certain legal services to their clients. But the difficulties don’t stop there and extend to something of even more concern to exporters: their employees. Under the proposed rules, your employees are brokers, and all part-time and many full-time employees will all need to be registered as brokers, and you may need to get prior approval from DDTC before many of them can work on export projects.

Employees are not considered brokers under the current rules because the rules make clear that brokers are persons that provide brokering activities “as an agent for others.” Even under the absurdist position taken by certain DDTC employees that a subsidiary acting for a parent is acting “for others,” there was never even a peep from the agency that an employee working for a company might be working “for others” even though the employee and the company were legally distinct entities.

The new definition eliminates the requirement that a brokering activity be as “an agent for others.” It simply states:

Broker means any person (as defined by § 120.14 of this subchapter) who engages in brokering activities.

And brokering activities are simply defined as:

any action to facilitate the manufacture, export, reexport, import, transfer, or retransfer of a defense article or defense service.

The new section 129.2(e) provides some exemptions from the definition of brokering activities but the only “employees” exempted are U.S. government employees. The new section 129.2(e)(3) exempts certain clerical and administrative tasks from brokering activities and would cover some clerical and administrative employees.

There is also an exemption of sorts for employees in the proposed section 129.3(b)(3) which states that “bona fide and full-time regular employees” of manufacturers registered under Part 122 of the ITAR (as manufacturers) are exempt from the requirement of registration and prior approval in two situations. This exemption does not cover part-time employees and does not clearly cover temporary employees working a full-time schedule.

The two conditions may also be problematic for full-time employees. Those conditions to exemption from registration and prior approval are:

brokering activities [which] (A) involve only such registered persons’ defense articles or defense services that are currently subject to an export approval under this subchapter obtained by the part 122 registrant or will require such an approval prior to their export, or (B) are on behalf of the part 122 registrant and involve only defense articles and defense services that are located and obtained from a manufacturer or source in the United States for export outside the United States under an export approval under this subchapter.

Both of these conditions require a prior export license, meaning that even full-time employees will need to be separately registered and obtain prior approval to work on the item to be exported if that work occurs prior to obtaining an export license.

What these convoluted new regulations mean are that non-clerical part-time and full-time employees working on items not yet approved for export will need to register and to obtain prior approval their employment by DDTC unless their involvement with exports fits within the narrow exemptions in the new section 129.7, which I discussed on Monday — e.g., NATO+4 only, FMS and non-SME equipment for foreign governments.

If this regulation stands as written, many manufacturers of defense articles might seriously consider whether it would be safer and easier for them to switch their production facilities to making some item over which DDTC has no arguable jurisdiction whatsoever, such as malted milk balls or shower curtain rings.

As a reminder, comments are due on February 17, 2012.

The Directorate of Defense Trade Controls (“DDTC”) finally released its much anticipated (or dreaded, depending on your point of view) new proposed rules on brokering of defense articles and defense services. Although I intend to look at these proposed rules in more detail in subsequent posts, I wanted to talk first about one issue of particular concern to me.

Naturally I first looked at how the new rules handled export lawyers who provide advice to defense manufacturers. The language of the old rules was broad enough that arguably all export lawyers were brokers and needed to register under part 129 of the International Traffic in Arms Regulations (the “ITAR”) because brokering was defined to include any action that facilitated the manufacture or export of defense articles. Notwithstanding the breadth of that language, lawyers and law firms have not been registering under Part 129, using the well-accepted principal of statutory construction: hic lex non comprehendo mihi. And DDTC had not been rattling any sabers about their not registering.

The proposed rule now specifically exempts “activities by an attorney that do not extend beyond providing legal advice to a broker.” This exemption would seem to require the conclusion that all export lawyers need to register unless they are only providing advice to brokers, although it’s hard to imagine this is what DDTC actually intends.

But it gets worse. Not only will law firms with export lawyers have to file a registration application and pay the annual registration fee, but they also will have to obtain prior approval from DDTC prior to providing many legal services to defense manufacturers. The new rules require prior approval for all brokering activities unless they are specifically exempted from that requirement in the new section 129.7, which exempts brokering (a) conducted for a government agency, (b) brokering of certain defense articles (excluding, for example, night vision) wholly within NATO countries, Japan, New Zealand, Australia or South Korea, or (c) brokering of defense articles that are not “Significant Military Equipment” (“SME”) for end use by foreign governments or international organizations. So, if a law firm provides advice to a defense manufacturer about exporting night vision to France, the law firm will need DDTC approval before providing that advice.

This, of course, is either pernicious policy or unbelievable sloppy drafting by DDTC. The agency takes great pains to exclude banks, insurance companies and freight forwarders from the scope of the new brokering rules but leaves them fully applicable to law firms and requires law firms to obtain agency permission to provide legal services. I cannot think of another instance (other than cases involving blocked parties) where federal agency permission is needed as a precondition to the provision of legal services to clients.

Comments are due on February 17, 2012.