Month: April 2020

On April 28, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published rules that will modify the Export Administration Regulations (EAR). These new rules largely target exports and re-exports to the People’s Republic of China (PRC), Russia, Venezuela, and other Country Group D:1 destinations.

The new changes, which are effective on June 29, 2020, are as follows:

1. Removal of CIV License Exception from the EAR. The CIV license exception currently allows some exports of national security (NS) controlled items to civilian end users in countries listed in Country Group D:1. See 15 CFR 740.5. BIS has determined that, due to “increasing integration of civilian and military technology development in these countries of concern,” the U.S. government should review all NS-controlled exports to civilian end users in D:1 countries on a case-by-case basis. See 85 FR 23,470 (April 28, 2020).

Beginning on June 29, 2020, the CIV exception in Section 740.5 and all references to the CIV exception on the Commerce Control List (CCL) will be removed. As a result, NS-controlled exports to civilian end users in D:1 countries will require an export license unless another license exception applies. Pursuant to the licensing policy in Section 742.4(b), BIS will review license applications for these exports on a case-by-case basis to determine if the proposed exports would make a significant contribution to the military capabilities of the D:1 destination country.

2. Removal of Country Group D:1 Destinations from APR License Exception in the EAR. The APR license exception currently allows some re-exports of NS-controlled items from Hong Kong and Country Group A:1 countries to Country Group D:1 countries, based on the assumption that the export laws for Hong Kong and Country Group A:1 countries are aligned with the EAR. See 740.16(a)(3)(ii). BIS has determined, however, that Hong Kong and A:1 countries may review licenses for NS-controlled exports to D:1 countries differently from the U.S., particularly with regard to the increasing integration of civilian and military technology development. See 85 FR 23,496 (April 28, 2020). 

Consequently, starting June 29, 2020, companies seeking to re-export U.S. origin NS-controlled items from Hong Kong and A:1 countries to D:1 countries will need to obtain licenses from BIS, even if the relevant foreign jurisdiction have approved the re-export, unless another U.S. license exception applies. These license applications will also be reviewed pursuant to the licensing policy in Section 742.4(b).

3. Expand License Requirements for Exports to the PRC, Russia, and Venezuela to “Military End Users” or for “Military End-Use.” The EAR currently imposes a licensing requirement on the exports of certain items for “military end use” in the PRC or for a “military end use” or “military end user” in Russia and Venezuela. See 744.21. Items that are controlled for military end use reasons are listed in Supp. No. 2 to Part 744 (MEU-Controlled Items). The current rules define military end use as: (1) incorporation into a military item; or (2) for the use, production, or development of military items. See 744.21(f). BIS has determined that expanding the military end use licensing requirements will allow the U.S. government more control over exports and re-exports destined for military end users and end uses in the PRC, Russia, and Venezuela. See 85 FR 23,459 (April 28, 2020).

Consequently, starting June 29, 2020, the EAR’s military end use licensing requirements will expand in three ways:

• Expanded Definition of “Military End Use.” Military end use will include: (1) incorporation into a military item; or (2) any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, ‘development,’ or ‘production’ of military items. It would be prudent for companies to revise End User Statements and Certifications as needed to incorporate this broadened definition of military end use.
• Licenses Will Be Required for Exports of MEU-Controlled Items to Military End Users in the PRC. The licensing requirements will now cover exports of MEU-Controlled Items to the PRC’s: national armed services; national guard; national police; government intelligence or reconnaissance organizations; or any end user whose actions or functions are intended to support military end uses. Again, it would be prudent for companies to revise End User Statements, Certifications, and other due diligence processes to account for this new restriction.
• New ECCNs Added to List of MEU-Controlled Items. Supp. No. 2 to Part 744 will be expanded to include new ECCNs related to materials processing (2A290, 2A291, 2B999, 2D290), electronics (3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991), telecommunications (5B991), information security (5A992, 5D992), sensors and lasers (6A991, 6A996), and propulsion (9B990). Further, the list will include more items that fall under ECCNs 3A992, 8A992, and 9A991.

In addition, starting on June 29, 2020, BIS will review license applications for these exports under a presumption of denial. Altogether, BIS notes that “[t]his expansion will require increased diligence with respect to the evaluation of end users in China, particularly in view of China’s civil-military integration.” 85 FR 23,459.

Once these rules come into effect, companies should continue to flag any proposed exports of MEU-controlled items to the PRC, Russia, or Venezuela. If an export is flagged for this reason, shippers and forwarders should request information regarding the proposed end users and uses, possibly in the form of End User Statements or Certifications. In addition, it would be prudent for shippers and forwarders to review publicly available information on the end-users (e.g., company websites and news articles) to determine if the end-user has a history of working on defense-related projects. If there is any indication that the end users may engage in military end uses, companies should contact their counsel to determine the appropriate next steps. While End User Statements and Certifications may provide additional protection to shippers and forwarders, they will not insulate companies from liability if there are clear indications that the exports are intended for military end use.

Takeaways from U.S. v. National Association for College Admission Counseling

On April 17, 2020, a Final Judgment was entered settling allegations in a complaint filed by the Antitrust Division of the Department of Justice (DOJ) against the National Association for College Admission Counseling (NACAC). In its complaint, the DOJ alleged that three sections of the NACAC Code of Ethics and Professional Practices (CEPP) constituted unreasonable restraints of trade in violation of Section 1 of the Sherman Act. These sections involved mandatory uniform practices regarding college transfer student recruiting, early admission incentives, and first year undergraduate recruiting. As part of the settlement, NACAC agreed to delete the sections of the CEPP challenged by the DOJ, agreed to implement a new and comprehensive antitrust compliance program, and consented to the entry of a Court order subjecting the association to charges of contempt for future violations of the provisions of the final judgment.

For trade associations and professional societies, this case should serve as a red flag that prompts immediate review of their bylaws, ethics codes and antitrust compliance programs. This decision highlights the reality that sometimes longstanding practices and policies that have never been questioned may in fact violate the antitrust rules.

The NACAC was established in 1937 and has more than 13,000 members. One of its main responsibilities is to establish a CEPP identifying basic principles for professional staffs of secondary institutions and colleges to abide by when helping students transition from high school to college. NACAC holds college fairs at which students, parents, education professionals and college representatives discuss the application process and the programs and costs associated with various colleges. In a recent year, more than 675,000 students and parents attended NACAC fairs. All the professionals and school representatives in attendance agreed to be bound by the CEPP, a 15-page public document approved by the NACAC Assembly. There were no allegations of secret agreements to engage in antitrust violations.

It does not appear that NACAC leaders intended to violate the antitrust laws, as it is the DOJ’s policy to sanction individuals who intentionally violate antitrust laws and no individuals were sanctioned in this case. More likely, NACAC simply assumed that its CEPP was consistent with the antitrust laws because they had been in effect for a considerable period of time and had never been challenged. However, legal interpretations of the antitrust laws and government enforcement priorities change over time. The periodic review of association practices, policies, and codes – particularly those intended to apply on an industry-wide basis – is an important component of an effective antitrust compliance program.

The basic antitrust statute, the Sherman Act, was enacted in 1890 and its basic language has not changed in 130 years. The Sherman Act has been interpreted to outlaw “unreasonable” restraints on trade, though what constitutes “unreasonable” has been left to the Courts to decide based on economic analysis. So, as our economy changes, a practice that  was “reasonable” under prior antitrust decisions may become “unreasonable” based not only on economic analysis but also on the enforcement priorities of the DOJ and the manner in which a judge defines what she or he considers “reasonable.”

All trade associations and professional societies should have an antitrust compliance program. The NACAC case demonstrates the need to periodically audit not just the provisions of an association’s antitrust compliance program, but also to review longstanding policies and practices to ensure they remain consistent with the applicable laws. Failure to regularly do so may result in serious consequences, as demonstrated by the NACAC final judgment.

For further information contact Steve Fellman sfellman@gkglaw.com or David Monroe dmonroe@gkglaw.com.

The Export Compliance Committee of the National Customs Brokers & Forwarders Association of America (NCBFAA) has been working hard to keep up with the various governmental requirements pertaining to the export of Personal Protective Equipment (PPE). For those of you who are not members of the NCBFAA, we thought that you might be interested in seeing the latest guidance on this topic.

On April 9, U.S. Customs and Border Protection (CBP) published a memorandum to the ports to provide guidance and clarification on the April 5 Presidential Memorandum regarding the allocation of scarce or threatened health and medical resources, as well on the Federal Emergency Management Agency's (FEMA) Temporary Final Rule (TFR) on the restriction of export of certain PPE.

According to the memo and the FEMA TFR, the PPE that are considered scarce or threatened are: 

• N95 Filtering Facepiece Respirators, including devices that are disposable half-face-piece non-powered air-purifying particulate respirators intended for use to cover the nose and mouth of the wearer to help reduce wearer exposure to pathogenic biological airborne particulates;
• Other Filtering Facepiece Respirators (e.g., those designated as N99, N100, R95, R99, R100, or P95, P99, P100), including single-use, disposable half-mask respiratory protective devices that cover the user's airway (nose and mouth) and offer protection from particulate materials at an N95 filtration efficiency level per 42 CFR 84.181;
• Elastomeric, air-purifying respirators and appropriate particulate filters/cartridges;
• PPE surgical masks, including masks that cover the user's nose and mouth, and provide a physical barrier to fluids and particulate material;
• PPE gloves or surgical gloves, including those defined as 21 CFR 880.6250 (exam gloves) and 878.4460 (surgical gloves), and such gloves intended for the same purposes.

This will be applied to the above PPE valued at $2,500 and above and containing 10,000 units or more, with the following exceptions:

• Exports to Canada or Mexico;
• Exports to U.S. Government entities such as U.S. military bases overseas;
• Exports by U.S. Government agencies;
• Exports by U.S. charities;
• Exports by critical infrastructure industries for the protection of their workers;
• Exports by the 3M Company;
• Express or Mail Parcels that do not meet the commercial quantity definition above;
• In-transit shipments.

CBP will primarily use the Electronic Export Interface (EEI) also known as the Automated Export System (AES) filing to target these shipments, will hold any identified shipments and refer the shipment to FEMA for ultimate disposition. This process is effective immediately.  

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We understand that FEMA sent out a note to companies it deemed to be key business stakeholders last night that provided guidance on facilitating the export process. Among other things, FEMA indicated that exporters should submit letters on their letterhead, along with the AES submissions, attesting to why the proposed export falls within the exclusions and should be exempted from the FEMA determination process. We know that the NCBFAA is continuing to work to make the process as transparent as possible, and we will provide more information on this as soon as it becomes publicly available.

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Finally, the NCBFAA is continuing to send a series of questions to CBP concerning the implementation of the regulations pertaining to the import and export process for PPEs. Once CBP provides answers to those questions, we will pass those along as well.

We hope that this is helpful but would be pleased to try to answer any additional questions you might have.

As has been the case with numerous other agencies, the Federal Maritime Commission (FMC) has undertaken a role to attempt to ameliorate some of the enormously disruptive effects on trade that have been caused by the COVID-19 pandemic. On March 31, 2020, the agency first opened Fact Finding Investigation No. 29 (FF No.29) in an attempt to identify solutions for some of the issues. And, Commissioner Rebecca Dye was appointed as the Fact Finding Officer with authority to establish one or more supply chain innovation teams (Innovation Teams).

As you may recall, the FMC had previously opened a formal investigation in Fact Finding No. 28 (FF No. 28) for the purpose of providing guidance as to what constitutes “just and reasonable practices” with respect to the assessment of demurrage, detention, and per diem charges by vessel operating common carriers and marine terminal operators. At that time, Commissioner Dye and her Innovation Teams were able to develop proposals to address issues surrounding demurrage and detention, which resulted in issuing a proposed interpretive rule on demurrage and detention, 84 Fed. Reg. 50369-50370 (Sept. 13, 2019). A final decision on that is expected shortly.

As was the case with the demurrage/detention investigation, the Innovation Teams will consist of leaders from all commercial sectors of the U.S. international supply chain. On April 6, 2020, the FMC provided notice that Commissioner Dye and her innovation teams intend to convene work this week to identify what actions can provide the shipping industry with immediate relief from the challenges faced due to COVID-19 related disruptions. With that in mind, Commissioner Dye is posing the following questions to each team member:

1. What can the FMC do to provide relief or assistance to mitigate negative impacts on the supply chain related to COVID-19?

2. What can companies involved in ocean cargo delivery do to respond to existing supply chain challenges and bottlenecks?

3. What can supply chain actors do to strengthen the overall performance of the American freight delivery system?

Hopefully, with the teams working together, some solutions may be found to at least temper the most harmful effects of this crisis.

As COVID-19 has greatly affected the shipping industry due to quarantines, travel restrictions, delays in processing cargo, a lack of cargo storage space, and millions of containers laying idle, the FMC has opened this topic up to all industry stakeholders. Accordingly, the NVOCCs, as well as the vessel operators, marine terminal operators, shippers and truckers have the opportunity to provide both comments and suggestions that can and should be considered. It is highly likely, of course, that topics including force majeure, demurrage, detention, customs holds, chassis shortages and delays will be addressed; but given the diverse nature of the problems, the FMC would welcome the participation of as many members of the industry as possible.

This is a great opportunity for you to present information regarding the challenges your company has experienced due to the COVID-19 pandemic. We encourage you to participate and provide comments. Anyone wishing to participate can do so by submitting information and/or comments to Commissioner Dye at the following email address: ff29@fmc.gov.

If you have any questions or wish assistance in drafting comments, please feel free to contact us.

A lot has changed in the business world since the COVID-19 pandemic began sweeping across the United States and the rest of the world. Social distancing requirements, lockdown orders, travel restrictions, mass layoffs, and disrupted supply chains have businesses scrambling to deal not only with a variety of human resource issues caused by a frightening public health crisis, but also with an economy that appears to be in danger of slowly grinding to a halt. Industry trade associations are stepping up to provide members with important advice and guidance on a variety of issues arising from the COVID-19 pandemic. In many cases, these communications are serving as a forum for the exchange of information and discussions of best practices in addressing the current crisis.

Collaborative discussions and cooperation among competitors in the context of trade association meetings can provide significant benefits to members, the industry at large and the public on matters such as health, safety, and legal compliance – particularly in an unprecedented crisis like the current pandemic. It is important to remember, however, that the COVID-19 pandemic provides no justification or defense for anticompetitive behavior. The U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC) have made abundantly clear that the antitrust laws of the United States remain fully in effect during the COVID-19, and both agencies stand ready to sanction businesses that engage in anticompetitive conduct during this time of crisis.

Trade associations and their members should be particularly vigilant to avoid discussions or agreements on topics considered “per se” illegal – i.e., conduct for which the courts will consider no excuse or defense. Agreements relating to (1) the prices that should be charged for products or services (or the wages, benefits or severance arrangements that will be provided to employees); (2) allocation of customers or markets; or (3) restrictions on output are all considered per se illegal conduct. For example, agreements among competitors to set prices, close or restrict the scope of their operations, furlough or limit the hours or wages of their employees, or refrain from hiring one another’s employees during the crisis would all be considered illegal per se violations of the antitrust laws.

In recognition of the unprecedented nature and scope of the COVID-19 crisis, however, DOJ and the FTC recently announced expedited procedures for businesses seeking guidance about collaborative efforts to protect the health and safety of Americans during the COVID-19 pandemic. On April 4, 2020, DOJ issued the first business review letter under the expedited procedures, allowing certain competitors to collaborate in providing medical supplies to federal agencies. The DOJ guidance was issued only five days after the affected companies requested guidance.

Trade associations and their members should consult with antitrust counsel before engaging in discussions between or among competitors on competitively sensitive matters, including those relating to the COVID-19 crisis.

GKG Law has successfully obtained Business Review Letters from DOJ on behalf of both trade associations and corporate clients. If you have questions about antitrust or other matters, please contact David Monroe, Steven Fellman, or another member of our Trade & Professional Associations team.

Non-profit organizations everywhere should be made aware of a little known “secret” — their member lists may constitute a trade secret protectible under the Defend Trade Secrets Act (DTSA). To state a claim under the DTSA, a plaintiff must allege the existence and ownership of a trade secret, and misappropriation of the trade secret. In a recent federal district court case, Brain Injury Association of California v. Yari, 2019 WL 4544419, the United States District Court for the Central District of California ruled that, based on the facts alleged by Brain Injury Association of California (BIACAL), BIACAL’s master list of 100,000 members could constitute a protectible trade secret that may have been misappropriated.

To demonstrate existence of a trade secret, the purported trade secret must meet the following two criteria:

• the information must derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information;
• the owner must have taken reasonable measures to keep the information secret.

BIACAL alleged that it spent significant time and effort amassing a master list that not only contained contact information of 100,000 members, but also contained data such as members’ interests in certain traumatic brain injury topics and speakers (as indicated by “click through” rates in BIACAL emails); historical attendance at traumatic brain injury events; involvement in other community groups; and relationships with other members of the community. BIACAL claimed that this data helped drive a large increase in its 2019 conference attendance and fundraising, which ended up attracting more than 2,000 attendees and raised approximately $500,000. The court found these facts sufficient to demonstrate that the information on the master list was not readily ascertainable and had independent economic value. The court also found that, even though there was a factual dispute as to whether BIACAL limited the defendant’s access to the master list for limited specific purposes, BIACAL still took reasonable measures to keep the information secret by storing the information on a secure database and restricting access to the database to only two BIACAL members, including the defendant.

Misappropriation of a trade secret is defined as the “disclosure or use of a trade secret of another without express or implied consent by a person who … at the time of disclosure or use, knew or had reason to know the knowledge of the trade secret was … acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret.” The court found the alleged facts could meet the requirement of misappropriation of a trade secret because the defendant used a list nearly identical to the master list to attempt to put on a similar competing conference, even though the defendant was given access to the master list specifically for purposes of migrating the information to a new database.

For non-profit organizations, this case provides helpful insights into when a member list could constitute a protectible trade secret. Information that goes beyond mere contact information can help show that a trade secret is not readily ascertainable and has economic value. Non-profit organizations would be well served by keeping data on any events or products that make use of the list, to help show the economic value of the information. Finally, limiting access to the list, having security protections for the list, and instructing those with access as to the information’s confidentiality and specific scope of allowed use of the information are all efforts that should be taken to ensure that reasonable measures are taken to keep the information secret.

It is important to note that this case does not mean that every member list is a trade secret. However, the more your organization can show that the members lists are not readily ascertainable, have economic value, and are treated as confidential, the likelier a court is to find the existence of a protectible trade secret.

For more information, feel free to contact GKG Law Trade & Professional Associations practice group leader Richard Bar at rbar@gkglaw.com or (202) 342-6787.