Source: http://www.millerchevalier.com/Publications/MillerChevalierPublications?find=102606
Timestamp: 2016-10-22 13:24:18
Document Index: 739786356

Matched Legal Cases: ['art 774', 'art; 2', 'arts 120', 'arts 730', '§722', 'art 774']

A Primer on the New Specially Designed Definition - Miller & Chevalier
PublicationsOverviewMiller & Chevalier PublicationsPublished ArticlesSearch PublicationsRelated PeopleLarry E. ChristensenBarbara D. LinneyRelated PracticesCustoms & Import TradeExport Controls & Economic SanctionsFCPA & International Anti-CorruptionInternationalA Primer on the New Specially Designed DefinitionInternational Alert05.31.13Featured in This Edition
The Paragraph (a)(1) Catch: Peculiarly Responsible
The Paragraph (a)(2) Catch: For Use in or with USML or CCL Items
The Paragraph (b)(1) Release: CJs or CCATS
The Paragraph (b)(2) Release: Select Parts
The Paragraph (b)(3) Release: Production
The Paragraph (b)(4) Release: Simultaneous Development for Civil Application
The Paragraph (b)(5) Release: General Purpose Development
The Paragraph (b)(6) Release: Development Solely for EAR99 and AT-Controlled Items
On April 16, 2013, the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC") and the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") issued long-awaited final rules (the "Final Rules") related to the Administration's effort to reform the U.S. export control system.1 BIS's final rule ("BIS Final Rule") can be accessed here and DDTC's final rule ("DDTC Final Rule") can be accessed here. The Final Rules, which will become effective on October 15, 2013, formally begin the transition of certain items2 from the International Traffic in Arms Regulations3 (the "ITAR") to the Export Administration Regulations4 ("EAR").
A significant aspect of the Final Rules is implementation of a formal, harmonized definition for the term "specially designed" -- a term not previously defined in the ITAR or EAR but used in the ITAR's U.S. Munitions List (the "USML") and the EAR's Commerce Control List (the "CCL") to identify items subject to an export license requirement.5 The definition is intended to clarify that term, better enabling exporters, reexporters, and transferors to determine more easily whether an item is specially designed. Upon the effective date of the Final Rules, "specially designed" will replace the term "specifically designed" in Categories VIII and XIX of the USML and interpretation of the former term, as used in both the ITAR and EAR (including the new "600 series" Export Control Classification Numbers ("ECCN") added into the CCL by BIS's Final Rule), will be governed by the new definition.6
This Miller & Chevalier Alert gives an introductory summary of the new specially designed definition. It is not intended to serve as a comprehensive analysis. The definition is long and complex, leading to many interpretive questions and, ultimately, some uncertainty. These questions are beyond the scope of this Alert, which instead aims to highlight key features necessary to understand how the definition applies in a real-world context. In doing so, we hope to demystify the definition's complexity to the extent possible, ultimately enabling you to determine whether one or more of your company's products is specially designed.
The specially designed definition is composed of several paragraphs. This Alert presents a paragraph-by-paragraph analysis of the definition as implemented in the ITAR and EAR, with links to a side-by-side comparison of the ITAR and EAR versions. The Alert describes the categories of items covered by each paragraph, followed by a substantive analysis and illustrative example of how the paragraph operates. It also concludes with a short, "bottom line" summary of the paragraph.
Before analyzing each paragraph, several guiding principles should first be examined to help understand the specially designed definition:
Harmonized Specially Designed Definition: Although the specially designed definition is "harmonized" between the ITAR and EAR, slight textual variations do exist between the two. Those variations are mostly attributable to inherent differences between the two regulatory schemes. Material variations are identified in this Alert. Other Definitions: The specially designed definition contains many other regulatory terms of art that also are defined in the ITAR and/or EAR. Consistent with the overall reform effort, the definitions for many of those terms -- such as "production," "development," "form," "fit," and "function" -- will be harmonized between the ITAR and EAR. In addition, some of those terms may have been absent from one set of regulations and will be incorporated into the other as part of the reform effort and Final Rules. Definitions for certain terms are provided in our substantive analysis. Notes: Both in the ITAR and EAR, the specially designed definition includes many notes, some of which apply to the entire definition and others that apply to only one or more paragraphs. These notes are critical to a full and accurate understanding of the definition. Applicable notes are presented below this Alert's side-by-side comparison of the paragraph. "Catch and Release": The Final Rules characterize the specially designed definition as adopting a "catch and release" approach: the paragraphs in subsection (a) may catch an item as specially designed and, if so, the paragraphs in subsection (b) may release that item from being specially designed. Subsections (a) and (b) are thus inextricably linked and both generally should be reviewed together when trying to determine if something is specially designed. If, however, something is not caught by subsection (a), it is not necessary to proceed to subsection (b). Conversely, if something is released by subsection (b), it is not necessary to determine if it is caught by subsection (a). End Items and Materials: Paragraph (a)(1), one of the catch provisions, applies to all types of items, including end items and materials. In contrast, paragraph (a)(2), the other catch provision, applies only to parts, components, attachments, accessories, and/or software. Thus, if the item at issue is an end item or material not caught by paragraph (a)(1), the item is not specially designed; in this situation, the item cannot be caught by paragraph (a)(2) because it is not a part, component, attachment, accessory, or software. Similarly, all of the paragraphs under subsection (b), the release provisions, apply only to parts, components, attachments, accessories, and/or software. Thus, if the item is an end item or material caught by paragraph (a)(1), the item is specially designed; in this situation, the item cannot be released by subsection (b) because, again, the item is not a part, component, attachment, accessory, or software. Technology: The specially designed definition does not apply to "technology," as that term is used in the EAR, or "technical data," as that term is used in the ITAR (except for software, which constitutes a subset of technical data under the ITAR).7 Separate rules apply to those types of items. Under the EAR, for instance, technology is subject to the "required" standard in the General Technology Note in Part 774, Supp. 2 of the EAR, which employs certain aspects of the specially designed definition. Given the scope of the definition, the term "items" throughout this Alert refers to all types of items subject to the EAR and ITAR, except technology and technical data, respectively.8 Actual Use v. Intended Use: The specially designed definition is intended to apply objective criteria by relying in large part on an item's characteristics and/or current, actual use. However, certain paragraphs retain some aspects of the subjective military design intent standard in the current version of ITAR Section 120.3 (which will be superseded on October 15, 2013 by the new ITAR Section 120.3 in DDTC's Final Rule), despite the agencies' initial attempt to keep it out of the new specially designed definition. That standard rests in large part on whether the item was designed for military application. This Alert explains the extent to which each paragraph of the specially designed definition rests on design intent. Jurisdictional Principles: Beyond design intent, the specially designed definition codifies many principles that have long-existed under the current version of the ITAR. For instance, the current ITAR Section 120.3 technically requires, in part, lack of predominant civil applications for an item to be controlled under the ITAR. The specially designed definition borrows that concept to some extent by, for instance, generally releasing parts, components, accessories, attachments, and software if they are identical or equivalent to a part, component, accessory, attachment, or software used in a produced item having predominant civil application. These principles give context to many aspects of the specially designed definition and thus should be relied upon to fully understand the definition. Order of Review: The specially designed definition has not altered the traditional ITAR-EAR export jurisdiction hierarchy. Thus, absent certainty that the item is subject to the EAR, parties must first determine whether an item is subject to the ITAR before determining its classification under the EAR. The "order of review" provisions in the Final Rules outline the proper approach for determining whether an item is captured by the ITAR and, if not, determining its classification under the EAR.9 In general, for each of those regulations, parties should: 1) first identify categories within the USML or CCL that are potentially relevant to the item; 2) determine whether the item is positively identified; and 3) if not positively identified, determine whether the item falls within any USML or CCL entry containing the term "specially designed," which requires application of the specially designed definition.10 More detailed rules apply under each set of regulations. For instance, under the EAR, the above process must be undertaken twice for the CCL, first under just the 600 series ECCNs and then under all other ECCNs. Again, parties should read the order of review provisions to ensure they are proceeding with the classification process correctly. When to Apply the Specially Designed Definition: At the risk of stating the obvious, the specially designed definition applies only to the term "specially designed." Thus, as a practical matter, the definition applies only if the item at issue is potentially classified in a CCL or USML entry containing that term. Enumerated v. Described: The terms "enumerated" and "described" are used throughout the specially designed definition. The meaning of those terms is critical to understanding how the definition operates, particularly in the context of subsection (b). The term "described," although used in the definition, does not have a formal definition and simply refers to anything in the CCL or USML that is identified, referenced, or the like.11 Note 1 to the EAR specially designed definition gives helpful examples of "described" items. The term "enumerated" refers to a much smaller subset of "described" items. The ITAR's specially designed definition states that the term refers to any article on the [USML] or [CCL] and not in a 'catch-all' paragraph."12 The EAR's definition states that "enumerated" refers to any item (i) on either the USML or CCL not controlled in a 'catch-all' paragraph and (ii) when on the CCL, controlled by an ECCN for more than Anti-Terrorism [("AT")] reasons only."13 For both the ITAR and EAR definitions, a "catch-all paragraph" is one that that does not refer to specific types of ''parts,'' ''components,'' ''accessories,'' or ''attachments'' but rather controls non-specific ''parts,'' ''components,'' ''accessories,'' or ''attachments'' because they were ''specially designed'' for an enumerated item.14 Although excluded from the definition of enumerated, catch-all items are still described items because they are identified, referenced, or the like. However, items classified as EAR99 are neither described nor enumerated because, although constituting an entry on the CCL, the items falling under that entry are not identified, referenced, or the like.
1. The Paragraph (a)(1) Catch: Peculiarly Responsible
Text: The full text of paragraph (a)(1), the first of two catch provisions in the specially designed definition, is available here. Item Scope: Paragraph (a)(1) applies to all items, except technology. Thus, it applies to end items, materials, parts, components, accessories, attachments, and software. Overview: Paragraph (a)(1) catches an item developed with properties for achieving or exceeding the performance levels, functions, or characteristics described in the applicable CCL or USML entry, i.e., the description that precedes or follows the term "specially designed." Two key factors limit the ability of paragraph (a)(1) to catch an item. First, the item must have properties "peculiarly responsible" for achieving or exceeding the applicable performance level(s), characteristic(s), or function(s). At least in the context of the EAR, peculiarly responsible is described as having a "direct and proximate causal relationship that is central or special for achieving or exceeding the [applicable] performance levels, 'functions,' or characteristics." Thus, it is not sufficient that the part, component, accessory, attachment, or software has properties of a controlled item, can be used in or with a controlled item, or is merely capable of achieving or exceeding the applicable performance level(s), characteristic(s), or function(s). Second, the peculiarly responsible properties must have resulted from "development," which is defined as "related to all stages prior to serial production, such as: design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, process of transforming design data into a product, configuration design, integration design, [and] layouts."15 It is important to recognize that, for certain types of items, paragraph (a)(1) is not the sole analysis; as discussed in further detail below, if the item is a part, component, to accessory, attachment, or software and is not captured by paragraph(a)(1), it is necessary to proceed to paragraph (a)(2) to determine whether it is captured. Paragraph (a)(1) codifies the principle that an item warrants control as specially designed if, stated simply, someone did something during the item's development in order to achieve or exceed a performance level, characteristic, or function of national security significance. If a part, component, accessory, attachment, or software does so but nevertheless warrants de-control, it likely would be released by subsection (b). Paragraph (a)(1) focuses on product characteristics to determine whether a part, component, accessory, attachment, or software is caught as specially designed. Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 [metric tons ("mt")] per axle…or greater and specially designed parts." A rubber gasket used in the engine of on-highway tractors with tandem rear axles rated at 10 mt per axle is not caught by paragraph (a)(1) because it does not have properties peculiarly responsible for achieving or exceeding the applicable performance level and characteristic, i.e., tandem rear axles rated for 9 mt per axle or greater. Although the gasket is a part used for an item in an ECCN, it is located in the engine and, thus, it is highly unlikely that it causes the axles to achieve or exceed a rating of 9 mt or greater. (Even assuming that it did, the gasket's properties would need to be central to or special for achieving or exceeding that performance level and characteristic and would need to result from development.) 16 Bottom Line: Look to the item's properties and determine whether any, as a result of development, are central to or special for causing the item to achieve or exceed the performance level(s), characteristic(s), or function(s) described in the applicable CCL or USML entry. If so, then the item probably is caught by paragraph (a)(1). 2. The Paragraph (a)(2) Catch: For Use in or with USML or CCL Items
Text: The full text of paragraph (a)(2), the second of two catch provisions in the specially designed definition, is available here. Item Scope: Paragraph (a)(2) applies only to parts, components, accessories, attachments, and software; it does not apply to end items, materials or technology. Overview: If a part, component, accessory, attachment, or software is not caught by paragraph (a)(1), then it must be examined under paragraph (a)(2). A part, component, accessory, attachment, or software is caught by paragraph (a)(2) if used in or with: 1) a defense article, when examining it under the ITAR's specially designed definition; or 2) an item enumerated or otherwise described in the CCL or USML, when examining it under the EAR's specially designed definition. Although paragraph (a)(2) applies to narrower types of items than paragraph(a)(1), i.e., only parts, components, accessories, attachments, and software, it sets the bar much lower to catch those items because: 1) mere use in or with an item described in the CCL or USML is sufficient (as opposed to having properties peculiarly responsible for the item to achieve or exceed a performance level, function, or characteristic); and 2) such use need not result from development. Thus, as a practical matter, paragraph (a)(2) generally catches any part, component, accessory, attachment, or software that could fall within a CCL or USML entry containing "specially designed." BIS has acknowledged that the paragraph is very broad and applies regardless of the perceived insignificance of the part, component, attachment, accessory, or software at issue, while noting that many items caught by the paragraph are released by subsection (b). Notwithstanding the breadth of paragraph (a)(2), several key factors do limit its ability to catch an item. First, as highlighted above, a part, component, accessory, attachment, or software is caught only if potentially classified under a CCL or USML entry containing "specially designed." Second, the part, component, accessory, attachment, or software at issue must be "for use" with another item. The term "for use" is not defined in the Final Rules. Although ordinary usage of the term may also imply an element of intent, Administration officials have indicated that paragraph (a)(2) does not turn on intended use. In addition, the term most likely does not mean mere capability for use in or with another item. Rather, inherent in the term is actual use with an item, whether past, current, or future. With that said, a single use with a defense article (ITAR) or an item described in the USML or CCL (EAR) is sufficient for a part, component, accessory, attachment, or software to be captured under paragraph (a)(2). Of course, parties may not be aware of all uses for a part, component, accessory, attachment, or software. In cases of uncertainty, parties may simply assume that the part, component, accessory, attachment, or software is caught by paragraph (a)(2) and determine whether it is released by subsection (b); a determination under subsection (b) may be easier to make -- perhaps substantially easier in some cases -- than a subsection (a) determination. The agencies have stated that such an approach is appropriate. In the alternative, parties may seek guidance from BIS or DDTC. Finally, a part, component, accessory, attachment, or software for use solely in or with an EAR99 item is not caught by paragraph (a)(2) because EAR99 items are not enumerated or described in the CCL or USML. Paragraph (a)(2) codifies the principle that a part, component, accessory, attachment, or software may not be sophisticated or significant by itself but may, for example, be essential to the repair or operation of an item having national security significance, thereby warranting control as specially designed. To the extent that a part, component, accessory, attachment, or software qualifies as such but nevertheless does not warrant control, it likely would be released by subsection (b). Paragraph (a)(2) focuses on use to determine whether a part, component, accessory, attachment, or software is caught as specially designed. Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle…or greater and specially designed parts." A rubber gasket used for on-highway tractors with tandem rear axles rated at 10 mt per axle is caught by paragraph (a)(2) because: 1) it constitutes a part; 2) it is used in an item described on the CCL, i.e., "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle…or greater[;]" and 3) the applicable CCL entry, i.e., ECCN 9A990.c, contains the terms "specially designed."17 Bottom Line: Determine whether the part, component, accessory, attachment, or software potentially falls within a CCL or USML entry containing "specially designed" and is used in or with an item described in the CCL or USML. If so, then it is probably caught by paragraph (a)(2).
3. The Paragraph (b)(1) Release: CJs or CCATS
Text: The full text of paragraph (b)(1), the first of six release provisions in the specially designed definition, is available here. Item Scope: Paragraph (b)(1) applies only to parts, components, accessories, attachments, and software; it does not apply to end items, materials, or technology. Overview: If the part, component, accessory, attachment, or software at issue is caught by paragraph (a)(1) or (a)(2), then paragraph (b)(1) releases it if: 1) under the ITAR's specially designed definition, a commodity jurisdiction ("CJ") determination establishes that it is subject to the EAR; or 2) under the EAR's specially designed definition, a CJ or classification ("CCATS")18 determination classifies it as EAR99 or in an ECCN not containing "specially designed," ("non-specially designed ECCN"). It is important to note that Paragraph (b)(1) applies to CJ and CCATS determinations differently: CJ Determinations: Paragraph (b)(1) applies to past and future CJ determinations.19 In other words, it "grandfathers" past CJ determinations and "safe harbors" future ones that establish: 1) EAR jurisdiction, under the ITAR's definition of specially designed; or 2) an EAR99 or non-specially designed ECCN classification, under the EAR's definition of specially designed. In addition, under the EAR, paragraph (b)(2) cannot be relied upon for release if a CJ determination omits classification information; in that situation, submission of a new CCATS request is required.20 CCATS Determinations: Paragraph (b)(1) applies only to future CCATS determinations, i.e., those issued on or after October 15, 2013.21 Thus, for a part, component, accessory, attachment, or software examined under the EAR, a new CCATS request must be submitted, even if a favorable CCATS determination was previously issued for the same part, component, accessory, attachment, or software. The request must be submitted pursuant to a new process -- informally referred to as the "CDOGS" process by BIS -- created to address classification questions involving the specially designed definition, as set forth in EAR Section 748.3(e).22 The submission must analyze the part, component, accessory, attachment, or software at issue against the standard in paragraph (b)(3), which is described in further detail below.23 Pursuant to the new process, the request would be reviewed by the Departments of Commerce, State, and Defense. Release under paragraph (b)(1) would require consensus among those agencies that the part, component, accessory, attachment, or software is classified as EAR99 or in a non-specially designed ECCN. The process is intended to mirror DDTC's CJ process in the context of the EAR. As explained above, the specially designed definition applies only when examining a CCL or USML entry containing "specially designed." Thus, if the part, component, accessory, attachment, or software at issue is not potentially classified in a CCL or USML entry containing that term, then it would not be caught by paragraph (a)(2). Parties need not rely on the CJ or CCATS process for making that threshold determination. Stated differently, parties may rely on a self-classification when the issue is whether the part, component, accessory, attachment, or software is even potentially classified in a specially designed entry. Of course, if parties are uncertain of the classification and a reasonable possibility exists that it could be classified as such, then parties should file a CJ or CCATS request. Paragraph (b)(1) codifies the principle that a part, component, accessory, attachment, and software does not warrant control as specially designed if insignificant to the functioning of the corresponding item or otherwise having little national security significance, as reflected by a formal consensus determination among all relevant agencies. It is intended to focus primarily on use and product characteristics to determine if a part, component, accessory, attachment, or software is released from the specially designed definition. Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle (20,000 lbs.) or greater and specially designed parts." For the reasons described above, a rubber gasket used in on-highway tractors with tandem rear axles rated at 10 mt per axle is captured by paragraph (a)(2). DDTC issued a CJ determination establishing that the gasket is not subject to the ITAR and is classified as EAR99 (a fact invented solely for purposes of this hypothetical example). Because a CJ determination exists establishing that the gasket is an EAR99 item, the gasket is released by paragraph (b)(1). Bottom Line: Determine whether a CJ or CCATS determination exists. A part, component, accessory, attachment, or software is released if: 1) a past or future CJ determination establishes EAR jurisdiction (ITAR); or 2) a past or future CJ determination or a future CCATS determination establishes an EAR99 or non-specially designed ECCN classification (EAR). 4. The Paragraph (b)(2) Release: Select Parts
Text: The full text of paragraph (b)(2), the second of six release provisions in the specially designed definition, is available here. Item Scope: Paragraph (b)(2) applies only to parts; it does not apply to components, accessories, attachments, software, end items, materials, or technology. Although the paragraph does not explicitly limit itself to parts, all of the types of items it identifies are parts. Overview: If the part at issue is caught by paragraph (a)(1) or (a)(2) and is not released by paragraph (b)(1), then paragraph (b)(2) releases it if it is a fastener (e.g., screw, bolt, nut, nut plate, stud, insert, clip, rivet, pin), washer, spacer, insulator, grommet, bushing, spring, wire, or solder. It does so regardless of form or fit. Thus, if the form or fit of the fastener, washer, space, insulator, grommet, bushing, spring, wire, or solder was altered to accommodate the corresponding item, it still qualifies for release under paragraph (b)(2). Paragraph (b)(2) is narrow in one sense but broad in another. Paragraph (b)(2) applies only to the types of parts it identifies and not any other type of part. However, it releases an identified type of part even if its form or fit is unique to an item described in the EAR or ITAR. Because paragraph (b)(2) establishes perhaps the clearest basis for release relative to other paragraphs of the specially designed definition, companies should first attempt to rely on paragraph (b)(2) whenever a fastener, washer, spacer, insulator, grommet, bushing, spring, wire, or solder is at issue. Paragraph (b)(2) codifies the principle that certain parts inherently have little national security significance and thus do not warrant control as specially designed, even when the form or fit has changed somewhat. It focuses on product characteristics to determine whether a part is released from the specially designed definition. In doing so, the paragraph eliminates the risk of unwarranted control based solely on design intent or actual use and the difficulties associated with the lack of design intent information. Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle (20,000 lbs.) or greater and specially designed parts." For the reasons described above, a rubber gasket used in on-highway tractors with tandem rear axles rated at 10 mt per axle is captured by paragraph (a)(2). It is not released by paragraph (b)(2) because it is not a fastener (e.g., screw, bolt, nut, nut plate, stud, insert, clip, rivet, pin), washer, spacer, insulator, grommet, bushing, spring, wire, or solder.24 Bottom Line: Determine if the part is a fastener (such as a screw, bolt, nut, nut plate, stud, insert, clip, rivet, pin), washer, spacer, insulator, grommet, bushing, spring, wire, or solder. If so, then it is released by paragraph (b)(2), even if its form or fit is unique to the corresponding item. 5. The Paragraph (b)(3) Release: Production
Text: The full text of paragraph (b)(3), the third of six release provisions in the specially designed definition, is available here. Item Scope: Paragraph (b)(3) applies only to parts, components, accessories, attachments, and software; it does not apply to end items, materials, or technology. Overview: If the part, component, accessory, attachment, or software at issue is caught by paragraph (a)(1) or (a)(2) and is not released by paragraph (b)(1) or (b)(2), then paragraph (b)(3) releases it if: 1) under the ITAR's specially designed definition, it is used in or with an item in production and not on the USML or described only in a USML paragraph that contains the term "specially designed" ("specially designed USML paragraph") or has the same function, performance capability, form, and fit as another part, component, accessory, attachment, or software used in or with such an item; or, 2) under the EAR's specially designed definition, it is used in or with an item in production and classified only in a specially designed USML paragraph, in an ECCN containing "specially designed" ("specially designed ECCN"), in an ECCN controlled solely for antiterrorism reasons ("AT-only ECCN"), or as EAR99, or has the same function, performance capability, form, and fit as another part, component, accessory, attachment, or software used in or with such an item. The form and fit of the part, component, accessory, attachment, or software may be different, but only if the form was modified to fit it for the corresponding produced item. The agencies have stated that the term "equivalent" must be interpreted narrowly.25 Paragraph (b)(3) entails a two-step process that requires parties to: 1) compare the part, component, accessory, attachment, or software at issue with another part, component, accessory, attachment, or software; and 2) determine the jurisdiction and/or classification of the item that uses the latter part, component, accessory, attachment, or software. As a practical matter, the comparison to another part, component, accessory, attachment, or software is straightforward if the two are identical. In this case, a single use of that part, component, accessory, attachment, or software in an eligible item is sufficient to enable release under paragraph (b)(3). Several features of paragraph (b)(3) are noteworthy. First, if the function or performance capability of the part, component, accessory, attachment, or software at issue is different from that of the comparable part, component, accessory, attachment, or software, then it does not qualify for release under the paragraph. Second, the comparable part, component, accessory, attachment, or software must be used in or with an item that is or was in "production," which is defined as "all production stages, such as: product engineering, manufacture, integration, assembly (mounting), inspection, testing, quality assurance."26 In other words, the item cannot solely be in development when serving as a reference under paragraph (b)(3). Recognizing how most items are subject to updates and improvements, development activities after production would not preclude use as a reference so long as the item's basic performance or capability does not change. Thus, enhancements or improvements only in the item's reliability and maintainability, whether in the form of quality improvements, cost reductions, and feature enhancements, generally are permitted and would not automatically disqualify the item. Finally, all CCATS submitted pursuant to the new process in EAR Section 748.3(e) must include an analysis of the part, component, accessory, attachment, or software at issue against the standard in paragraph (b)(3). This may signal that the test in paragraph (b)(3) is the primary, if not sole, standard for releasing items via the formal CCATS process. However, the agencies are probably open to advisory requests on the interpretation of the specially designed definition, even if interpretation is sought for a classification issue. Moreover, the pre-existing CCATS procedure remains available for classification issues that do not implicate the specially designed definition. Paragraph (b)(3) codifies the principle that a part, component, accessory, attachment, or software has little national security significance and thus do not warrant control as specially designed when utilized in or with an item having little national security significance or having performance equivalence to a part, component, accessory, attachment, or software used in or with such an item. It focuses on actual use and product characteristics to determine whether a part, component, accessory, attachment, or software is released from the specially designed definition. In doing so, the paragraph eliminates the risk of unwarranted control based solely on design intent or the difficulties associated with the lack of design intent information. The agencies have confirmed that paragraph (b)(3) is intended to ensure that commercial off-the-shelf parts, components, accessories, attachments, and software are released from the specially designed definition, even when the form or fit has changed somewhat for use in or with a controlled item with national security significance. Finally, because paragraph (b)(3) is not limited to enumerated items that are U.S.-origin, it may release a part, component, accessory, attachment, or software based on the foreign availability of a comparable part, component, accessory, attachment, or software. Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle (20,000 lbs.) or greater and specially designed parts." A rubber gasket is used in on-highway tractors with tandem rear axles rated at 10 mt per axle and a gas-powered push lawnmower. The gasket used in the former is identical in all relevant respects to the one used in the latter, except for form because, although both have an identical shape, the one used in the lawnmower is smaller due to fit requirements. In addition, the lawnmower is an EAR99 item that has been in production for decades. The gasket, although captured by paragraph (a)(2), is released by paragraph (b)(3) because: 1) it has the same function and performance capabilities and equivalent fit and function between the two items; and 2) is used in a produced item that is not enumerated on the CCL. Bottom Line: Determine if the part, component, accessory, attachment, or software has the same function, performance capabilities, form, and fit as another part, component, accessory, attachment, or software used in or with a produced item that: 1) is not on the USML or is described only in a specially designed USML paragraph (ITAR); or 2) is classified only in a specially designed USML paragraph, in a specially designed ECCN, in an AT-only ECCN, or as EAR99 (EAR). The form and fit may be different but only if the form was modified for fit. If the part, component, accessory, attachment, or software meets these tests, then it is released by paragraph (b)(3). 6. The Paragraph (b)(4) Release: Simultaneous Development for Civil Application
Text: The full text of paragraph (b)(4), the fourth of six release provisions in the specially designed definition, is available here. Item Scope: Paragraph (b)(4) applies only to parts, components, accessories, attachments, and software; it does not apply to end items, materials, or technology. Overview: If the part, component, accessory, attachment, or software at issue is caught by paragraph (a)(1) or (a)(2) and is not released by paragraphs (b)(1) through (b)(3), then paragraph (b)(4) releases it if knowingly developed for use in or with: 1) under the ITAR's specially designed definition, both an item enumerated in a USML paragraph and an item not on the USML; or 2) under the EAR's specially designed definition, both an item described in the CCL and an item classified only in a specially designed USML paragraph, in a specially designed ECCN, in an AT-only ECCN, or as EAR99. In essence, any part, component, accessory, attachment, or software is released by paragraph (b)(4), even if developed for use in or with anything described in the USML or CCL, so long as it also was or is developed for use in or with something not positively identified on the USML (ITAR) or developed for use in or with something not positively identified on the CCL or something positively identified in an AT-only ECCN (EAR). Unlike paragraph (b)(3), paragraph (b)(4) does not require comparison of the part, component, accessory, attachment, or software at issue to another part, component, accessory, attachment, or software used in a produced item. Rather, the paragraph requires examination of only the part, component, accessory, attachment, or software at issue and the corresponding development history. In doing so, it is more akin to the design intent standard in the current ITAR Section 120.3. Thus, under paragraph (b)(4), the first and subsequent uses of the part, component, accessory, attachment, or software at issue are technically irrelevant. It is important to note that a knowledge standard applies in the context of paragraph (b)(4). That standard is met only if documents contemporaneous with development establish that, at the time of development, the developer knew or had reason to know that the part, component, accessory, attachment, or software would be used in or with items establishing eligibility for release under the paragraph. For a party not involved in the original development, the standard requires obtaining such documents from the developer. Beyond the documentation requirement, a challenge posed by the knowledge standard is the probability that, as a practical matter, all uses are not known at the time of development. Against this background, it is more critical than ever for parties to identify and record all potential uses during development and to maintain such records indefinitely. Paragraph(b)(4) codifies the principle that parts, components, attachments, accessories, and software have little national security significance and thus do not warrant control as specially designed when knowingly developed for items with little national security significance, even if also used in or with items with national security significance. It focuses on intended use to determine whether a part is released from the specially designed definition. In doing so, the paragraph eliminates the risk of unwarranted control based solely on actual use. Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle (20,000 lbs.) or greater and specially designed parts." A rubber gasket developed for on-highway tractors with tandem rear axles rated at 10 mt per axle also is developed for gas-powered push lawnmowers. Records contemporaneous with development demonstrate that it was developed for use in or with both items. The gasket, although captured by paragraph (a)(2), is released by paragraph (b)(4) because it was knowingly developed for use in or with both an item described in the CCL and an EAR99 item, as proven by records contemporaneous with its development. Bottom Line: If the part, component, accessory, attachment, or software was or is developed for use in or with anything described in the USML or CCL, determine whether it also was or is developed for use in or with something not positively identified on the USML (ITAR) or developed for use in or with something not positively identified on the CCL or something positively identified in an AT-only ECCN (EAR). If such use is demonstrated by records contemporaneous with development, then it is released by paragraph (b)(4). 7. The Paragraph (b)(5) Release: General Purpose Development Text: The full text of paragraph (b)(5), the fifth of six release provisions in the specially designed definition, is available here. Item Scope: Paragraph (b)(5) applies only to parts, components, accessories, attachments, and software; it does not apply to end items, materials or technology. Overview: If the part, component, accessory, attachment, or software at issue is caught by paragraph (a)(1) or (a)(2) and is not released by paragraphs (b)(1) through (b)(4), then paragraph (b)(5) releases it if developed as a general purpose item. To qualify, no knowledge must exist at the time of development that the part, component, accessory, attachment, or software would be used in or with any particular item or type of item. Paragraph (b)(5) is analogous to paragraph (b)(4) by focusing on development history and establishing knowledge by reference to documents contemporaneous with development. Several distinctions are worth noting, however. First, while release under paragraph (b)(4) primarily hinges on development for use in or with certain items, release under paragraph (b)(5) primarily hinges on whether the part, component, accessory, attachment, or software at issue is developed as general purpose, i.e., no particular use. Second, while paragraph (b)(4) requires existence of knowledge for use in or with particular items, paragraph (b)(5) requires the absence of such knowledge. Paragraph (b)(5) codifies the principle that parts, components, attachments, accessories, and software not specific to any particular item have little national security significance and thus do not warrant control as specially designed, even if used in or with items having national security significance. It focuses on intended use to determine whether a part is released from the specially designed definition. In doing so, the paragraph eliminates the risk of unwarranted control based solely on actual use. Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle (20,000 lbs.) or greater and specially designed parts." A rubber gasket is used in on-highway tractors with tandem rear axles rated at 10 mt per axle. Records contemporaneous with development show that it was not knowingly developed for use in or with any particular item, in part because the developers sought to manufacture the gasket in many different sizes. The gasket, although captured by paragraph (a)(2), is thus a general purpose part released by paragraph (b)(5). Bottom Line: Determine whether the part, component, accessory, attachment, or software was or is developed as a general purpose item (i.e., no knowledge for any particular item or type of item). If such status is demonstrated by records contemporaneous with development, then it is released by paragraph (b)(5).
8. The Paragraph (b)(6) Release: Development Solely for EAR99 and AT-Controlled Items
Text: The full text of paragraph (b)(6), the final release provision in the specially designed definition, is available here. Item Scope: Paragraph (b)(6) applies only to parts, components, accessories, attachments, and software; it does not apply to end items, materials, or technology. In addition, because paragraph (b)(6) is not included in the ITAR's specially designed definition, it applies only to parts, components, accessories, attachments, and software subject to the EAR. Overview: If a part, component, accessory, attachment, or software subject to the EAR is caught by paragraph (a)(1) or (a)(2) and is not released by paragraphs (b)(1) through (b)(5), then paragraph (b)(6) releases it if knowingly developed for use: 1) in or with both items classified as EAR99 and items described in an AT-only ECCN, or 2) exclusively in or with EAR99 items. Like paragraphs (b)(4) and (b)(5), paragraph (b)(6) focuses on development history and requires knowledge to be established by documents contemporaneous with development. Unlike those paragraphs, however, paragraph (b)(6) examines the part, component, accessory, attachment, or software at issue solely in the context of AT-only ECCNs and EAR99. Furthermore, unlike paragraph (b)(5) but like paragraph (b)(4), paragraph (b)(6) requires the existence of knowledge that the part, component, accessory, attachment, or software was or is developed for items establishing eligibility under the paragraph. Paragraph (b)(6) codifies the principle that parts, components, attachments, accessories, and software have little national security significance and thus do not warrant control as specially designed if developed for use in or with items having little national security significance, i.e., AT-only ECCN and EAR99 items. It focuses on intended use to determine whether a part is released from the specially designed definition. In doing so, the paragraph eliminates the risk of unwarranted control based solely on actual use.27 Example: ECCN 9A990.c controls "on-highway tractors...with single or tandem rear axles rated for 9 mt per axle (20,000 lbs.) or greater and specially designed parts" and is subject to only AT1 and AT2 controls. Records contemporaneous with development show that the gasket was developed for use in or with on-highway tractors with tandem rear axles rated at 10 mt per axle and gas-powered push lawnmowers. The gasket, although captured by paragraph (a)(2), is released by paragraph (b)(6) because it was knowingly developed for use in or with an item described in an AT-only ECCN and an EAR99 item, as proven by records contemporaneous with its development. Bottom Line: Determine whether the part, component, accessory, attachment, or software was or is knowingly developed for use in or with an item described in an AT-only ECCN and an item classified as EAR99 or for use exclusively in or with an item classified as EAR99. If such use is demonstrated by records contemporaneous with development, then it is released by paragraph (b)(6). Conclusion
As shown above, the specially designed definition is complex, requiring meticulous analysis of the item at issue against the definition to determine whether it qualifies as specially designed under the EAR or ITAR. To make matters more complex, many aspects of the definition raise additional questions, leaving several gaps in the precise scope of the definition. The agencies, to their credit, have made clear their commitment to fill those gaps, welcoming input from industry in helping them do so. With that said, the current definition, as analyzed above, will serve as the foundation of the specially designed concept for years to come. Thus, parties must ensure that they gain a basic understanding of the new specially designed definition. Given the definition's complexity, parties should not be discouraged if that understanding is not gained after a first read of the definition (or even a second or third one).
At a minimum, parties should recognize that a part, component, accessory, attachment, or software potentially classified in a USML or CCL entry containing the term "specially designed" generally has a good chance of not being specially designed if: 1) a CJ or CCATS determination exists establishing that it is not specially designed; 2) it is a mundane part, such as a fastener; 3) it is used in or with a produced item subject to limited controls; or 4) is developed, as proven by records, for use in or with an item subject to limited controls or as a general purpose item. If any of these preliminary conditions are met, parties should further examine the part, component, accessory, attachment, or software against the definition to confirm release from the definition.
Finally, parties should keep in mind that, even if the specially designed definition may not capture an item or may release an item, nothing prevents the Administration from asserting control over an item by explicitly enumerating the item on the USML or CCL if the Administration deems that control is warranted. 1. Amendment to the International Traffic in Arms Regulations: Initial Implementation of Export Control Reform, 78 Fed. Reg. 22,740 (Dep't State April 16, 2013) (final rule) ("DDTC Final Rule"); Revisions to the Export Administration Regulations: Initial Implementation of Export Control Reform, 78 Fed. Reg. 22,660 (Dep't Commerce April 16, 2013) (final rule) ("BIS Final Rule"). 2. The items controlled under the ITAR are formally referred to as defense articles. Throughout this article, the term "item" refers to both defense articles and items subject to the EAR, unless a specific reference is made to "defense articles."
3. Code of Federal Regulations, Title 22, Parts 120-130 (2013). 4. Code of Federal Regulations, Title 15, Parts 730-780 (2013). 5. DDTC Final Rule at 22,754 (definition to be codified in ITAR Section 120.41 upon the effective date of DDTC's Final Rule); BIS Final Rule at 22,728 (definition to be codified in EAR Section 772.1 upon the effective date of BIS's Final Rule). The term "specially designed" has been defined in the EAR, but only for items covered by the Missile Technology Control Regime. See 15 C.F.R. §722.1.6. As the reform effort progresses, "specially designed" will replace "specifically designed" in all categories of the USML, eventually eliminating the latter term from the ITAR entirely. DDTC's Final Rule also re-issued USML Categories XVII (Classified Articles, Technical Data, and Defense Services Not Otherwise Enumerated) and XXI (Articles, Technical Data, and Defense Services Not Otherwise Enumerated). No material changes were made to Category XVII, while slight changes were made to Category XXI.7. DDTC Final Rule at 22,746, 22,754 (definition of specially designed at Note 2 to paragraph (a)); BIS Final Rule at 22,684-85. 8. Throughout this Alert, the term "technology" is generally used to describe both EAR technology and ITAR technical data. 9. See DDTC Final Rule at 22,755 (revised ITAR Section 121.1 ("General. The United States Munitions List"); BIS Final Rule at 22,735 (new Supplement No. 4 to EAR Part 774 ("Commerce Control List Order of Review")). 10. See id. 11. See BIS Final Rule at 22,728 (definition of specially designed at Note 1). 12. DDTC Final Rule at 22,754 (definition of specially designed at Note 1 to paragraph (a)). 13. BIS Final Rule at 22,728 (definition of specially designed at Note 1). 14. id. (definition of specially designed at Note 2); DDTC Final Rule at 22,754 (definition of specially designed at Note to paragraph (b)). 15. EAR Section 772.1; DDTC Final Rule at 22,754 (definition of specially designed at Note 2 to paragraph (b)(3)). 16. The following example demonstrates how an item is captured under the peculiarly responsible standard of paragraph (a)(1) (and because the item in the example is an end item, it cannot be released under subsection (b)): ECCN 2B007.d controls "'Robots'...[s]pecially designed to operate at altitudes exceeding 30,000 [meters]." A robot developed with lightweight components and a physical frame built with extra support to withstand high air pressure, which are properties not commonly associated with many other robots, is captured by paragraph (a)(1). The lightweight components and physical frame are properties responsible for achieving or exceeding the applicable performance level and characteristic, i.e., to operate at altitudes exceeding 30,000 meters. Those properties are central or special for achieving or exceeding that performance level and characteristic because, absent those properties, the robot cannot operate at altitudes exceeding 30,000 meters. In addition, those properties resulted from development. 17. Even though ECCN 9A990.c is subject to only AT controls, items in that ECCN are "described" under the EAR's specially designed definition. 18. This acronym formally stands for "Commodity Classification Automated Tracking System," which is the BIS system used to submit classification requests. 19. BIS Final Rule at 22,686-87. 20. Id. 21. Id. 22. BIS Final Rule at 22,686-87, 22,724 (EAR Section 748.3(e)). 23. See BIS Final Rule at 22,724 (EAR Section 748.3(e)). 24. However, a screw used in the same on-highway tractor and captured by subsection (a) would be released by paragraph (b)(2) because it is an item identified in that paragraph. 25. BIS has provided the following examples as modifications that are eligible as equivalent: a gasket cut solely to fit a particular engine and a steering column extended solely to fit an armored vehicle. The CCATS process under EAR Section 738.4(e) should be relied upon to resolve any doubt regarding the application of the equivalent standard. 26. EAR Section 772; DDTC Final Rule at 22,754 (Note 1 to paragraph (b)(3)). 27. For a part, component, accessory, attachment, or software used in or with an item classified in an AT-only ECCN, the requirement that it also be used in or with an EAR99 item seems inconsistent with BIS's policy of releasing such parts, components, accessories, attachment, and software from the specially designed definition. Even when used solely in or with items classified in an AT-only ECCN, the part, component, accessory, attachment, or software would seem to have little national security significance, especially because AT-only ECCNs are subject to minimal control. Nevertheless, this is the literal requirement of paragraph (b)(6), although is a policy issue worthy of further consideration by BIS.
For more information, please contact: Larry E. Christensen, lchristensen@milchev.com, 202-626-1469 Barbara D. Linney, blinney@milchev.com, 202-626-5806 David T. HardinRelated FilesRelated LinksThe information contained in this newsletter is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information about these issues, please contact the author(s) of this newsletter or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.