One-sided contract term of the day (6): export controls

We continue our series highlighting IP Draughts’ “favourite” one-sided provisions in contracts.  These provisions are often found in contracts where there is an imbalance of power between the parties, and where the party with the power (let us call him the “Patron”) seeks to reduce a sometimes theoretical risk by imposing it on the other party (the “Supplicant”).

Today’s one-sided term is:

The Supplicant agrees that the technology subject to this Agreement is subject to the export control laws and regulations of the United States, including but not limited to the Export Administration Regulations (“EAR”) and undertakes to comply with these laws and regulations. Without limiting the foregoing, the Supplicant will not, without a U.S. Bureau of Industry and Security license or license exception, export, re-export, or transfer any technology subject to this Agreement, either directly or indirectly, to any national of any country in breach of such laws and regulations.

For the purpose of this discussion, let us assume that the above clause is included in a research collaboration agreement where the Supplicant is based outside the US, eg is a UK university.

Mrs Tappin brings her husband's case to the attention of the Home Affairs Select Committee of the UK House of Commons

In passing, it is worth mentioning that US export control laws are currently very newsworthy in the UK, in view of the extradition to the US a week ago of retired UK businessman Christopher Tappin.  Having lost his application for bail, Mr Tappin is now an inmate of Ontero County Prison, New Mexico awaiting trial for alleged breaches of arms control laws by exporting batteries. However, that case has very little relevance to the contract drafting issues discussed below, other than as a reminder of what can happen if US laws are alleged to be breached.

A clause of this kind is frequently seen in agreements that originate in the US.  IP Draughts’ experience is that the clause is treated as boilerplate, albeit boilerplate that the US party is often very reluctant to change.  The relative bargaining power of the parties seems to make very little difference on this issue: the clause seems to be regarded as a “must have” by many US negotiators.

From the perspective of a UK university (and similar considerations would apply to any other legal entity located in the UK, and probably to entities located in other countries), there are so many issues with the above wording that it is difficult to know where to start.  Here are a few of those issues, in no particular order:

  1. If export controls are a real issue, they should be addressed more explicitly by the parties than just having a standard clause buried among boilerplate at the end of the contract.  Similar comments could be made about other clauses dealing with regulatory issues in an unthinking way, eg those dealing with EU data protection laws.
  2. If the clause is to apply to anything, it should apply to technology generated by the US party.  It should not apply to technology (eg data, results, software, biological materials) generated by the UK party in the collaboration.
  3. A UK university is highly unlikely to have in-house expertise in US export control laws, or to be prepared to invest in US legal advice in relation to a routine research agreement.  The principal investigator may have no idea how wide-ranging such laws are, extending to so-called re-exports, eg an export of technology from the UK to another country, and not to the US.
  4. The UK party should not agree that US laws apply to its activities.  Agreeing to such a provision may prejudice the UK party if prosecuted, and may undercut a potential defence argument that US laws do not apply to that party.
  5. Having said that, one of the more controversial aspects of US export control laws is that they do seek to apply worldwide.  This has long been a source of tension between the UK and US Governments.
  6. The clause completely fails to address UK export control laws.  If US laws are an issue, why are UK laws not also an issue?

The head of the UK Export Control Organisation accepts the Better Regulation Award in November 2010

On this last point, many years ago IP Draughts was an in-house lawyer for a technology-based company, one of whose activities was the design of ships.  Ships can, of course, be used for military purposes.  On several occasions, IP Draughts was responsible for applying for UK export licences for software and technical reports, and recalls how wide-sweeping and complex the legislation was.  The process must have improved in recent years.  In 2010, the UK Export Control Organisation won the Better Regulation Award for operating a licensing regime that is, in the words of BAe Systems “the most industry-friendly export licensing system of any major Western country”.

The best that may be achievable in negotiations over a US export control clause, in the absence of lengthy investigation and discussion, may be to water it down a bit to state that US laws “may” apply, and that the non-US party agrees to comply with  any laws that are binding on that party.  This quick fix is not ideal, but avoids an expensive debate over an issue that may be more theoretical than real.  Of course, if export control laws are likely to be relevant, a more considered approach will need to be taken, and appropriate legal advice obtained.

3 Comments

Filed under Contract drafting, General Commercial

3 responses to “One-sided contract term of the day (6): export controls

  1. Interesting responses. I agree that in the case of a licence of some clearly identified US technology it may be inevitable to see such a clause. What concern me are situations that are much more nebulous, eg a research collaboration where both parties contribute to the output, and where an export control regime is of marginal relevance. Neither of the above responses really engage with my point about an overseas party being asked to agree contractually that US export control laws DO apply, when the reality may be that:
    1. They are not relevant to the technology and the clause has been included unthinkingly “to be on the safe side”.
    2. They don’t apply to all the technology because some originates outside the US.
    3. They don’t apply because the US doesn’t have jurisdiction over the overseas party.
    My other point is that these clauses seem to have become part of the boilerplate of US contracts it situations where non-US export control laws (eg those of the UK) have equal application (eg it is very unlikely that either laws will be relevant) and overseas contract templates do NOT include such a clause as standard.
    If US parties are really concerned about this issue (rather than just including the clause as boilerplate) then why are they not investigating, during the course of negotiations, whether export control laws in the other party’s jurisdiction might be relevant to technology disclosed by that other party to the US party? In practice, this is just one-side boilerplate where the US party is so used to including the boilerplate that they don’t even recognise that it is, in fact, one-sided.
    At this point, I will retreat behind my desk and not come out until my secretary confirms that it is safe to do so.

  2. Vance Koven

    This is one area in which I disagree fairly strongly with your contention that the clause (as opposed to the regulatory system that motivates it) is unnecessarily oppressive. There is, indeed, some awkwardness in the drafting, especially in the last clause, which could easily be deleted since the reference to the license should cover the matter. However, on your more substantive points, I should note the following:

    1. Technology export controls are a very real issue for any licensor in the US, including its subsidiaries and agents abroad. A consequence of this ubiquitous concern is that the clause covering the matter becomes boilerplate; it’s not really subject to much negotiation from the licensor’s standpoint, so why shouldn’t it be in the same subcellar of the contract that holds the choice of law clause, which is at least as important?

    2. Technology generated by an overseas party that is not commingled somehow with the US technology would not be subject to US export controls, and therefore would not need a license, so the general exemptive provision of the text should cover the matter.

    3. I should imagine that any entity that routinely engages in technology transfers would or ought to have enough in-house knowledge about the export controls applicable to international technology transfer that pleading ignorance should not be tolerated. The truth of the matter is that the US export control regime is, despite its jurisdictional breadth, relatively benign in application: very few technologies and very few destinations require any specific licensing by the US, they are merely subject to blanket licenses. The real issues arise, in my experience, with encryption technology and exports to a handful of the “usual suspect” rogue states (a happily dwindling list). Transactions that include places like that, in the phrase beloved of our Securities and Exchange Commission, “bespeak caution.”

    4. If the technology subject to the agreement originates in the United States, you can bet your bottom euro that US law does apply to its export. If there were no such technology involved, why are you doing an agreement? Chances are, of course, as detailed above, that US law would not prohibit the export/re-export, but that’s a different matter. If it makes your client happier to have “may be” inserted instead of “is,” then by all means argue for it.

    5 (to your point 6). From a US perspective (and here I speak from a safe hiding place beneath my desk in anticipation of retaliatory brickbats), any export control regime that wins awards for being business-friendly, while inherently commendable, is safely ignorable for these purposes–unless you can identify aspects of UK controls that are more stringent than their US counterparts.

  3. ct

    The clause appears to be boilerplate from a domestic U.S. contract, where similar clauses are common. It was clumsily applied to an international contract, and your points are well-taken. However, in the specific case of a U.S. licensor and a U.K. licensee, a clause on this point (albeit better drafted) is virtually inevitable.

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