USCIS Certification on Release of Controlled Technology or Technical Data

The U.S. Citizenship and Immigration Service’s requirement for “Certification Regarding the Release of Controlled Technology or Technical Data to Foreign Persons in the United States” will go into effect on February 20, 2011.

The certification applies to employers submitting petitions under the visa categories H-1B (specialty occupation), H-1B1 (specialty occupation professionals from Singapore or Chile), L-1 (intra-company transferees) or O-1A (extraordinary ability). The requirement will impact universities, as well as aerospace, defense, high-tech, and advanced manufacturing businesses and organizations, regardless of size.

The certification requirement was to go into effect on December 23, 2010, but has been delayed for 2 months. The so-called “Part 6” certification is found on Form I-129 (Petition for a Nonimmigrant Worker) and is aimed at enforcing the “deemed export” rule. A “deemed export” refers to the release of technology or technical data that is subject to either the U.S. Department of Commerce Export Administration Regulations (EAR) or the U.S. Department of State International Traffic in Arms Regulations (ITAR). The release of such information to a foreign national inside the U.S. is considered to be a “deemed export” to the foreign national's country of residence or, in some instances, to that person’s country of birth. A “deemed export” may be subject to an export license requirement. Making a “deemed export” without a required license is a violation of the EAR or the ITAR and is subject to administrative, civil, and even criminal penalties.

A “deemed export” can occur in many forms, including visual inspection (such as providing technical specifications, schematics, blueprints, etc.), a verbal exchange of the technology or technical data, or when the information is made available through business practices. Business meetings, conference calls, videoconferences, PowerPoint presentations, trade shows, and email exchanges all present instances in which a “deemed export” could occur.

As of February 20, employers submitting an I-129 petition under one of the covered visa categories will have to certify that: 1) it has reviewed the EAR and the ITAR; and either a) it has determined that an export license is not required for the release of technology or technical data to the beneficiary; or b) if an export license is required, that the beneficiary will not have access to the information until the employer obtains the required license.

Employers should plan now for the additional time needed to assess whether foreign national employees will have access to technology or technical data controlled under the EAR or the ITAR, determine whether an export license is required and, if so, submit a license application. In addition, employers should fully document the decision-making process so that it can be relied upon should questions arise. Failing to take these necessary steps and properly certify the I-129 petition will likely lead to entity-level administrative and civil penalties, as well as the possibility of entity-level and individual criminal penalties being imposed. If an employer becomes concerned that a violation may have already occurred, it should seek assistance to determine whether to make a voluntary self-disclosure (VSD) to all involved agencies.

Former NASA Employee in Ohio Charged with ITAR Violation

A former employee of the NASA Glenn Research Center in Cleveland has been charged with one count of violating the Arms Export Control Act (AECA) and the International Traffic in Arms regulations (ITAR).

An Information filed in the U.S. District Court for the Northern District of Ohio alleges that between 2000 and 2005, the defendant violated the AECA and the ITAR by knowingly and willfully exporting defense articles to South Korea without an export license obtained from the Department of State. The Information alleges that the defendant did not obtain a license prior to exporting infra red focal plane array detectors and infra red camera engines, which are on the U.S. Munitions List (USML). A second count of filing a false tax return was also included.

The charges against the former NASA employee come less than a week after the Sixth Circuit Court of Appeals (which has jurisdiction over cases from the federal courts in Kentucky, Michigan, Ohio, and Tennessee) upheld the conviction of former University of Tennessee professor John Roth on multiple counts of violating the AECA and the ITAR. The court of appeals rejected Roth’s argument that the jury in his trial should have been instructed that he could be convicted only if it found that “he knew the data and items he allegedly exported were listed on the United States Munitions List.” The court held that a conviction under the AECA does not require such evidence, but only that the defendant had “knowledge that the underlying action is unlawful.”

The court also rejected Roth’s contention that the ITAR-controlled plasma actuator testing data that he transferred to foreign nationals was not a defense article or defense services. The court ruled that the ITAR export controls extend to “all stages of defense projects that are covered by the [AECA], not just the final stages when military devices are directly involved.” The court noted that “technical data” and “defense articles” recognize that research is performed in multiple stages and that the ITAR applies to each stage. The court found that Roth’s argument ignored “the fact that the final goal of Phase II was to incorporate plasma actuators on military drone aircraft.”

The Roth decision is now the backdrop against which the recently charged former NASA employee must attempt to defend himself. While his actions appear to have been unknown to NASA, the case is yet another reminder for aerospace and defense companies and their employees to be knowledgeable about the ITAR regulations and that proper internal controls, starting with a written and enforced compliance policy, are in place to avoid even unknowing violations.

Brokers Beware! Nike Goes for Slam Dunk

Last week a federal court judge in Savannah, Georgia denied the request by a Houston-based customhouse brokerage to transfer a case from Savannah to Atlanta, where the broker maintains an office that prepared entry documentation for an import that arrived at the Port of Savannah. While the denial of that motion to transfer seems irrelevant enough, the plaintiff in the case is Nike, Inc. And the case does not involve an error or omission that the broker made when entering a shipment for Nike. Instead, the lawsuit against the broker is for trademark infringement and counterfeiting.

Nike filed its lawsuit earlier this year, seeking a preliminary and permanent injunction, damages, costs, and attorney fees due to the broker’s alleged infringing conduct. According to the complaint, the broker received a call from a person identifying himself as a vice president of an importing company that did not do any prior business with the broker. The broker received a signed POA from that person, who actually was not a representative of the supposed importer. The POA lacked a notary or corporate seal. Based on the POA, the broker filed an entry for what was described as “ladies cotton woven pants.” The shipment, as it turned out, actually consisted of more than 4,000 pairs of counterfeit Nike shoes valued by CBP at over $180,000. The shipment also included more than 5,000 counterfeit Chanel, Coach, and Louis Vuitton handbags.

Nike alleges that the broker filed fraudulent entry documents and that in order to file any entry documents, the broker had to show that it had a “sufficient interest” in the goods and that it had exercised due diligence in obtaining the POA. The lawsuit alleges that the broker did not confirm with the supposed importer that it was aware of the entry or that it had a vice president by the name of “Michael Mai.” The broker also did not confirm that the supposed importer used a generic yahoo.com email account that it received from “Michael Mai” before attempting to enter the shipment in the Port of Savannah. In other words, the broker failed to use “reasonable care” in its handling of the shipment.

In the lawsuit, Nike requests injunctive relief, as well as monetary damages under the Lanham Act that could include between $1,000 and $200,000 per trademark per type of goods sold, and up to $2,000,000 if the court finds the broker’s “use” of the counterfeit mark was willful.

Whether Nike gets a slam dunk judgment in the case remains to be seen. But Nike is certainly sending a strong message to customs brokers – pay attention and exercise the same reasonable care that legitimate importers are required to exercise or Nike will sue the cotton woven pants off of you.

Bureau of Industry and Security Seeks Comments from SMEs on Export Controls

On October 6, the Department of Commerce, Bureau of Industry and Security (BIS) published a Notice of Inquiry in the Federal Register requesting comments from small and medium enterprises (SMEs) about their “understanding of and compliance with export controls maintained pursuant to the Export Administration Regulations (EAR).

SMEs will now have an opportunity to offer comments and concerns about the EAR’s administration and enforcement against the backdrop of the President’s National Export Initiative (NEI) which calls for U.S. companies to double exports over the next 5 years.

BIS expects the input will “help it administer and enforce export controls in a manner consistent with U.S. national security” while potentially increasing exports from SMEs. All exporting companies favor and support predictability. SMEs particularly need predictability as they begin to slowly emerge from the depths of the Great Recession.

Continuing outreach efforts and programs like The Export Legal Assistance Network, www.exportlegal.org, can assist exporting companies to understand and comply with their obligations under the EAR. When compliance falls short, consistent enforcement and predictability of penalties would be of great benefit, particularly since the maximum administrative civil penalty level is $250,000 per violation. Perhaps a penalty regime similar to the Administrative Monetary Penalty System (AMPS) used by the Canada Border Services Agency (CBSA) can be adopted for SMEs. Or perhaps BIS can issue warnings, without a monetary penalty, for first-time offenders when a violation of the EAR occurred during a prior time when management was not fully appreciative of the need for compliance or the company did not have the resources to implement a more robust compliance program.

The Notice of Inquiry should cause SMEs to feel empowered to "speak" to BIS on these important issues, whether through trade associations, chambers of commerce, or as single companies.

Comments to BIS are due by December 6, 2010. They should be identified in the subject line as "Notice of Inquiry—SME," and can be delivered by e-mail at publiccomments@bis.doc.gov. Comments can also be faxed to +1.202.482.3355. When faxing, please call the Regulatory Policy Division, at +1.202.482.2440. Comments can also be mailed or sent by courier to: Sheila Quarterman, U.S. Department of Commerce, Bureau of Industry and Security, Office of Exporter Services, Regulatory Policy Division, 14th Street & Pennsylvania Avenue, NW., Room 2705, Washington, DC 20230, Attn: "Notice of Inquiry—SME."

Consultant Representing Foreign Government not “Public Official” Under FCPA

The Department of Justice (DOJ) has issued its third Foreign Corrupt Practices Act Opinion Procedure Release this year. In 2009, the DOJ only issued one Opinion Procedure Release.

The Requestor was a U.S. limited partnership involved in development of natural resources trading and infrastructure. The Requestor was interested in working with a foreign government regarding an approach to particular natural resources infrastructure development. Because the approach was relatively new and the market is dominated by a group of the well-established companies, the Requestor decided it required assistance when entering into discussions with the foreign government.

The Requestor wanted to contract with a Consultant and its sole owner to assist it. The Consultant is a U.S. partnership and an agent of a foreign government, registered under the Foreign Agents Registration Act (FARA). The Consultant has extensive business contacts in the foreign country, and has represented the foreign government before. The Consultant was to be paid a signing bonus by the Requestor at the time the consulting agreement was signed, but the major payment to the Consultant would be in the form of success fee.

Because the Consultant had already represented the foreign government, and because it would continue representing the government at the same time as working with the Requestor, precautionary measures were taken to avoid a conflict of interest between the Consultant’s representation of the Requestor and the Consultant’s independent representation of the foreign government. While consulting for the Requestor, the Consultant’s duties would be limited to the terms of the proposed contract between them.

The DOJ stated that it would not be taking any enforcement action against the Requestor because of the payments made to the Consultant. Even though the Consultant was an agent of the foreign government, because local law permitted the relationship and the Consultant took precautionary steps to avoid the full disclosure of the relationship to the relevant parties, it was determined that the Consultant would not be acting on behalf of the foreign government. Accordingly, the Consultant was not a “foreign official” as defined by the FCPA. The DOJ also made clear that if a violation of the FCPA occurred during the performance of the consultancy, it reserved the right to enforce the law, regardless of the Opinion.

At a time of increased enforcement and ongoing investigations, this Opinion Procedure shows that companies must carefully consider and screen their business dealings that bring them into contact with foreign governments, whether those contacts are direct or indirect. It also shows that in addition to a robust compliance program, publicly-traded and privately-held companies can use proper planning to avoid potential FCPA violations and the severe civil and criminal penalties that can follow.

CBP “Clarifies” Impact of Forms 28/29 on Prior Disclosures

In response to a February 24, 2010 request from the American Association of Exporters and Importers (AAEI), U.S. Customs and Border Protection (CBP) has attempted to clarify whether a CBP Form 28 (Request for Information) and CBP Form 29 (Notice of Action) affect an importer’s ability to make a valid prior disclosure.

In the response, CBP referred to T.D. 98-49 (63 Fed. Reg. 29126, May 28, 1998) in which it disagreed with a commenter that CBP Forms 28 and 29 could not be considered written evidence of commencement of a formal investigation. In T.D. 98-49, CBP explained that it would consider “the substance of the information contained” in the 28/29s and that it would treat each matter on a case-by-case basis, examining the specific facts and circumstances of each case.

CBP’s response to AAEI’s request made clear that as “a matter of law” CBP Forms 28/29 “may be considered a ‘commencement document’ for prior disclosure purposes.” It went on to state that, as a matter of policy, Form 29 will be used as evidence that a formal investigation has been commenced and giving notice to the importer of the investigation. CBP further stated that, as a matter of policy, Form 28 “alone should not be routinely considered a ‘commencement document’” under the prior disclosure regulations. CBP also stated it would be issuing clarifying guidelines setting out the circumstances under which a Form 28 may be used as a “commencement document.”

In its response, CBP clarified that importers should never treat a Form 28 lightly. Instead, as this firm has always advised, importers receiving a CBP Form 28 should stop, analyze, investigate, and thoroughly consider what information is being requested and assess the importer’s potential entire exposure before responding. In this way, the importer and its counsel can determine whether a valid prior disclosure can be and should be made to CBP.

In light of CBP’s response to the AAEI’s request, importers should be even more cautious when receiving CBP Forms 28/29 and more deliberative in the response and decision of whether to submit a prior disclosure.

New York Court Narrowly Reads Arbitral Forum Provision

Many foreign companies do business with companies in New York. Often those companies have cross-border agreements of some form (commercial agent, distributorship, joint venture) that calls for arbitration in the event of a dispute. Frequently, U.S. companies prefer arbitration under the commercial rules of the American Arbitration Association (AAA), so this posting should be of interest to both U.S. and foreign companies that use arbitration provisions in New York.

A New York state appeals court has ruled it is proper to compel non-AAA arbitration, despite a contract provision referring to proceedings pursuant to the American Arbitration Association’s commercial rules.

In a brief and unanimous decision, the Appellate Division, First Department, found that a contract clause calling for arbitration “in accordance with the commercial rules of the American Arbitration Association” does not require the arbitration to be administered by the AAA. The court is an intermediate appellate court having jurisdiction over cases from New York City and the Bronx. The case is Nachmani v. By Design, LLC, 901 N.Y.S.2d 838 (1st Dep’t. 2010).

According to the decision, the petitioner in the case demanded arbitration but not before the AAA, despite this contractual provision. The non-AAA arbitral body was not identified in the decision. For unknown reasons, the respondent waited 4 months before demanding that the arbitration proceed before the AAA. Before doing so, the respondent had already filed a counterclaim and designated its arbitrator.

While some commentators have questioned the decision, it appears that the court viewed the matter as a waiver issue because the respondent began participating in the non-AAA arbitration proceedings before demanding AAA arbitration. The court agreed with the petitioner that the contract clause was properly construed as a choice of law, not a forum selection clause, meaning that the non-AAA arbitral body would apply the AAA commercial rules to its proceedings. The court also pointed out that the respondent that AAA arbitration would not provide the respondent with “any greater assurances of arbitrator impartiality,” indicating that it saw no qualitative difference in which arbitral body administers the arbitration on the issue of impartiality.

The case should put parties on notice that the best practice is to carefully draft international arbitration clauses so their intentions as to which arbitral body will administer the arbitration are stated clearly. In addition, once arbitration is demanded, respondents should promptly decide their strategy to either participate in the proceedings before the body selected by the petitioner or challenge the forum selected or risk waiving those challenges.