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Contract Accord 7: Export Control

Accord Revision Date: November 2019
Page Updated: January 2020
©2020 University-Industry Demonstration Partnership (UIDP). Please refer to the copyright and disclosure statement for UIDP Contract Accords usage and rights.

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OVERVIEW AND BACKGROUND

Most U.S.-based UIDP members are subject to U.S. export laws and regulations. Among the numerous U.S. agencies with oversight responsibilities for export controls, UIDP members are primarily concerned with the U.S. Department of Commerce and the U.S. Department of State. The U.S. Department of Commerce is responsible for items and technologies with both military and commercial applications, as well as less sensitive military items, and administers its authority through the Export Administration Regulations (EAR).¹ The Department of State is responsible for primarily military items, which it controls via the International Traffic in Arms Regulations (ITAR).² Additionally, the Department of Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions, including the embargoed country and restricted entity list. While Universities strive to conduct research in an unrestricted academic environment and broadly publish their research results, most industrial organizations strive to gain competitive advantage by restricting access to information, technologies, and product characteristics and maximize revenues. All parties must balance these cultural differences and comply with their respective obligations under the export control laws and regulations. It is a goal of UIDP to assist its members in meeting these obligations in a spirit of cooperative compliance.

An export control reform initiative that began in August 2009 has resulted in a significant migration of controlled items from the ITAR Munitions List (USML) to the EAR Commerce Control List (CCL). While a goal of the reform initiative was to achieve greater harmonization of the control lists, significant differences remain between EAR and ITAR, and it is important to recognize the distinctions. Moreover, the treatment of the Department of Defense (DoD) “covered defense information”³ under DoD contracts and subcontracts poses particular challenges from an export control compliance standpoint.4 Export controlled information is one category of controlled unclassified information (CUI). Increased government concern about cybersecurity and the protection of CUI is likely to result in similar restrictive security controls for export-controlled information resulting from contracts from other federal agencies in the future.5

FUNDAMENTAL RESEARCH EXCLUSION

Fundamental research, as defined by the regulations, is excluded from EAR and ITAR.6,7,8 As defined in EAR, part 734.8 (c), “fundamental research means research in science, engineering, or mathematics, the results of which are published and broadly shared within the research community, and for which the researchers have not accepted restrictions for proprietary or national security reasons.” Under ITAR part 120.11 (8), fundamental research is included in the public domain exclusion. It is limited to “research in science and engineering at accredited institutions of higher learning in the U.S. where the resulting information is published and broadly shared in the scientific community.” It does not apply if the University accepts restrictions on publications. It also does not apply, if the research is funded by the U.S. Government and specific access and dissemination controls are applicable.

The Fundamental Research Exclusion (FRE) generally permits U.S. Universities to allow members of their communities who are not U.S. citizens or permanent residents to participate in research projects on campuses in the U.S. where research will be made publicly available.9 The FRE avoids the need to secure a deemed export license in order to participate in fundamental research activities or to have access to  fundamental research results generated during the course of the project. However, an export license may still be required in order to provide a foreign person with proprietary information or controlled technical data utilized in the conduct of the fundamental research.10 It is important to note that the FRE applies only to the research results and not to export controlled technical data related to equipment or information that is used in conducting the project.

The FRE essentially incorporates the provisions of the National Security Decision Directive (NSDD) 189 issued in September 1985 and reaffirmed most recently in 2010.11 The Directive states:

“[i]t is the policy of this Administration that, to the maximum extent possible, the products of fundamental research remain unrestricted. It is also the policy of this Administration that, where the national security requires control, the mechanism for control of information generated during federally-funded fundamental research in science, technology, and engineering at colleges, Universities, and laboratories is classification.”

Further, “[n]o restriction may be placed on the conduct or reporting of federally-funded fundamental research that has not received national security classification, except as provided in applicable U.S. Statutes.” In a memorandum entitled “Fundamental Research, for Secretaries of Military Departments,” issued May, 2010, the DoD issued clarifying guidance to ensure that the department would not restrict disclosure of the results of fundamental research unless such research efforts were classified for reasons of national security or otherwise required by applicable statutes, regulations, or executive orders, and to ensure that DoD grants, contracts, and negotiations with the research community were fully compliant with NSDD 189.12 This memorandum extended earlier guidance to include subcontracts.

According to the DoD memorandum, contracted fundamental research includes research performed under grants and contracts that are (a) funded by DoD budget category 6.1 (Basic Research), whether performed by Universities or Companies, or (b) funded by budget category 6.2 (Applied Research) and performed on-campus at a University.

“This means that DoD awards for the performance of contracted fundamental research should not involve classified items, information, or technology other than in exceptional circumstances. Furthermore, unclassified contracted fundamental research awards should not be structured, managed, or executed in such a manner that they become subject to controls under U.S. statutes and regulations, including U.S. export control laws and regulations. The performance of contracted fundamental research also should not be managed in a way that it becomes subject to restrictions on the involvement of foreign researchers or publication restrictions. There may be exceptional cases in which these guidelines should not be applied…but these cases will be extremely rare…”13

It is important to note that while budget Categories 6.1 and 6.2 are called out as fundamental research, there is no prohibition on the use of other DoD funding mechanisms to support fundamental research activities.

Not all research conducted at U.S. Universities qualifies for the FRE, including the examples below:

  • research that is funded by a subcontract that includes flow down clauses restricting publication of results, participation of foreign nationals, or requiring an export license;
  • export-controlled inputs to the research, such as information shared under a confidentiality agreement, or to the physical export of items produced during the course of the research; and
  • projects involving the movement of personnel from Universities to Companies. Depending upon the regulations that apply, this may result in the loss of the FRE and may require a license for certain activities, such as outside consulting, participation in SBIR/STTR funded projects, student and intern placements, or use of visiting scientists.

PUBLICATION

The FRE is a vital organizing principle that reflects global collaboration among scholars and the international nature of graduate education. Freedom to publish is a requirement for protecting the FRE. The FRE enables the timely submission of scholarly publications, graduate theses, and dissertations.

University-based non-proprietary research conducted by scientists, engineers, or students normally will be considered fundamental research when there are no publication or foreign national restrictions and when conducted without any dissemination controls. This exclusion may not apply to collaborative research with foreign entities.

LOSS OF ABILITY TO CLAIM FRE

To ensure balance between the parties’ strategic, research, and organizational objectives, it is important that the contractual relationships between Universities and Companies recognize and respect the different compliance obligations and exemptions permitted under the export control laws and regulations. Companies need to recognize that Universities are designed to favor open research environments. As a result, Universities may not be able to conduct research under agreements that include the following conditions:

  • the research requires incorporation of export-controlled information or materials into the research results;
  • the terms restrict publication by requiring the sponsor’s approval of publications or release of research results; or
  • the project limits researcher participation by foreign nationals, i.e., requires U.S. citizenship or permanent residency.

Compared to Companies, Universities obtain relatively few, if any, export licenses due to their desire to maximize use of the FRE. Universities also adhere to policies that require freedom to publish research outcomes and that do not permit restrictions to research participation according to citizenship.  University research facilities are generally open to the entire research community, making the management of export-controlled research difficult and impracticable. Most Universities rely on their Company partners, sponsors, collaborators, or vendors for classification under the USML or CCL of the items they regularly export. Properly understood, compliance with the export control regulations allows Universities and Companies to work collaboratively in the best interests of both.

Examples of key clauses under federal contracts that present potential loss of the ability to claim the fundamental research exclusion include:

PRINCIPLES

  1. Companies and Universities have an obligation for export control compliance and should designate a responsible official or point of contact (POC). This person is normally not the technical POC or principal investigator. Most Universities engaged in research have a designated office or individual with responsibility for the management of compliance with export control laws. It is recommended that all parties working on a research award that could be related to export controls include the export compliance offices in the review and negotiation process.
  2. The primary mission of Universities in the U.S. is to create and disseminate new knowledge. That unique mission is recognized by export control laws and regulations.
  3. A primary mission of Companies is to develop products or services that generate revenue for the Company and shareholders.
  4. Under certain conditions, Companies may also claim the FRE under EAR; however, this would not apply to projects for which the results or data are not going to be published or otherwise publicly available. The need to innovate, develop, manufacture, sell products and services, and compete worldwide presents challenges for Companies in complying with the export control regulations, particularly when collaborating with Universities.
  5. Ultimately, each party is responsible for its compliance with U.S. export regulations.
  6. As early as possible and throughout the project, all parties should identify and disclose any export control issues, especially where the parties share confidential or proprietary information with one another.
  7. Universities should engage in conversations early on in the collaborative relationship so the Company can work with its federal sponsors to request flow-down clauses14 that will permit the parties to claim the benefit of the FRE, particularly at the University. (For more information, see UIDP Federal Flow-Down Reference Guide.) It is important that the parties discuss flow-down clauses and make any necessary adjustments to the project to give the Company the opportunity to approach their federal agency sponsor before they accept a federal award.
  8. If the parties transfer export-controlled items or information (software, equipment, technology, materials, background IP, etc.), the providing party should notify the receiving party if the item is controlled by EAR or ITAR. If EAR controlled, the Export Control Classification Number (ECCN) should be provided; if ITAR regulated, the United States Munitions List (USML) category should be provided. The providing party should be responsible for categorizing and marking the materials before sending them as part of their cooperative compliance effort and ensure that notification to the other parties’ contract representatives is made prior to the transfer of the export-controlled items.
  9. If the involved parties identify a potential export control violation, they should work collaboratively to submit simultaneous voluntary self-disclosures, as appropriate.15
  10. All parties should prohibit informal side deals between one of the parties and individual employees of the other, which may result in loss of the ability to claim the FRE and make activities subject to export control.
  11. Prior to providing access to export-controlled projects or information, each party should ensure that individuals who are not their employees will be properly vetted for relevant nationality or citizenship restrictions, and also will be screened against the denied parties/entities lists. This should include the use and documentation of restricted party screening. 16

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