First Final USML-CCL Rule Features New Specially Designed Definition

The State and Commerce Department’s concurrent final rules detailing the first moves in Export Control Reform feature a revised “specially designed” definition, covering items on both the U.S. Munitions List and the Commerce Control List. The rule, published April 16, keeps the “catch and release” format for specially designed from the June 2012 proposed rule (see 12061802).

“It is clear to [the Bureau of Industry and Security] and other agencies involved in export controls that there is no ‘natural’ definition or interpretation of ‘specially designed,’ and that this has led to competitive disparities for similarly situated organizations,” BIS said in its final rule. One single regulatory definition is the “only way” to address the variety and inconsistency in interpretations of “specially designed,” the rule said.

BIS will continue to evaluate comments on the proposed rule and, where feasible, develop or specify proposals for describing certain “components” on the CCL, the rule said. The agency will also conduct outreach and develop tools to help the public’s review and use of the term, it said.

The rule is broken into two main paragraphs: (a), which identifies specially designed items, and (b), which identifies specially designed exclusions. The definition is organized so that the paragraphs work together, a series of simple yes/no questions applicants can answer to decide whether an item falls into the specially designed category. The final rule includes new introductory text, simplified from the proposed rule. The introduction states that when applying the definition, follow the sequential analysis set forth within it. It also adds a reference to a new CCL Supplement No. 4 to Part 774. That supplement was added for guidance on applying “specially designed,” the rule said. After the introduction, the rule is broken into two main paragraphs:

The Catch

Paragraph (a)(1) captures commodities or software if, as a result of development, it “has properties peculiarly responsible for achieving or exceeding the controlled performance levels, characteristics or functions described in the relevant U.S. Munitions List paragraph.” In the Commerce rule, BIS said keeping the “peculiarly responsible” standard was necessary because it covers items that may not be sophisticated in and of themselves, but are essential for the operation of a USML or CCL-controlled item, and therefore warrant control.

The final rule eliminates one section of paragraph (a) from the proposed rule, instead adding “accessories” and “attachments” to paragraph (a)(2), which covers parts, components, accessories, attachments or software “for use in or with a commodity or defense article enumerated or otherwise described on the CCL or the USML.” State’s final rule also made changes to its accompanying section -- ITAR 120.41(a)(1) -- including wording changes to clarify that the definition does not apply solely to commercial off-the-shelf items with no changes in form or fit.

Paragraph (a)(2) is meant to be broad enough to catch all defense articles that would be specially designed. But, in practice, it “would capture a larger set of parts, components, accessories, attachments and software than is intended,” the rule said. Hence the inclusion of paragraph (b):

The Release

The second part of the specially designed definition codifies the International Traffic in Arms Regulations principle that a commodity should not be controlled if it has a “predominant civilian application” or has a performance equivalent to a commodity used for civil applications. It lists objective criteria so industry can decide which items are excluded from the specially designed definition.

Paragraph (b)(1) serves as a reminder that any part, component, accessory or attachment enumerated on the USML is subject to ITAR. That paragraph -- not in Commerce’s proposed rule -- also addresses the treatment of previous Commodity Jurisdiction and Commodity Classifications Automated Tracking System determinations. It grandfathers in items already determined, through a CJ, to be on the CCL other than as specially designed. These items will remain under that classification and not be caught under the new definition. It also allows State, Commerce and the Defense Departments to determine whether certain items -- possibly perceived to be insignificant -- warrant control due to national security interests. These determinations will be made through the CJ process or the new CCATS interagency process also included in the final rule.

In paragraph (b)(2), which covers parts common across all product lines that should be excluded, BIS made some wording changes to the proposed rule, to confirm that form and fit variations do not exclude parts or minor components from the definition, and to reduce the scope slightly by removing “other fasteners” and “basic hardware.” State also revised its definition of “form” and “fit” in the final rule.

Paragraph (b)(3) excludes commodities and software equivalent to existing commodities and software used in the production of items that are not on the USML or CCL. It does not require a design intent analysis, and fluctuations in sales to military applications will also not lead to change in an item’s classification status, BIS said. The final rule adds the word “equivalent” to address public comments about insignificant changes to form or fit, BIS said. The final rule also adds and makes revisions to the Notes for the paragraph, defining the following: equivalent, form, fit, performance capabilities and function.

The rest of paragraph (b) covers development exclusions. BIS did incorporate aspects of design intent into these paragraphs (4,5 and 6). Market share of an item, however, does not impact the applicability of paragraphs 4 and 5, BIS said. Developers and manufacturers would generally be the users of these exclusions, according to State. They require a “knowledge” of the original design intent, demonstrated by documents “contemporaneous with ‘development.’” Replacing “reasonable expectation” with “knowledge” was one of the wording changes BIS made to the final rule, as a way of simplifying the overall definition.

Paragraph (b)(6) is new to the final rule. It excludes specially designed parts, components, accessories, attachments and software, where there is knowledge that it would be for use in or with ECCNs controlled for AT-only reasons or EAR99 commodities or software..

Read Commerce’s final rule (here) and State’s final rule (here). See future issues of ITT for more information on the rules.