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.