On March 14, 2017, the United States Court of Appeals for the District of Columbia Circuit issued its decision in Matthew A. Goldstein, PLLC v. United States Department of State, 851 F.3d 1 (D.C. Cir. 2017). For those unfamiliar with the case, the plaintiff was a practicing attorney who sued the State Department, seeking declaratory and injunctive relief from the brokering requirements of Part 129 of the International Traffic in Arms Regulations (ITAR). The appellate court affirmed the lower court's decision to dismiss Mr. Goldstein's case, finding he lacked standing to bring a pre-enforcement challenge because he faced no credible threat of enforcement.
The case focused on certain types of legal services and whether providing such services could be construed as a brokering activity. While seemingly limited to the language addressing attorney activities, the case illustrates the broader fact that determining whether an activity constitutes brokering does not always yield a clear cut answer. Indeed, there are valuable lessons to take away from the State Department's arguments and the court's analysis on what activities may rise to the level of ITAR-controlled brokering.
case, the plaintiff was a U.S. person, thereby satisfying the first element of the brokering analysis. Remember that under the current brokering regulations, the first question is always whether the person engaging in the activity could be considered a "broker." The ITAR in section 129.2(a) defines a "broker" as any of the following persons who engage in the business of brokering activities: (1) any U.S. person wherever located; (2) any foreign person located in the United States;
any foreign person located outside the United States where the foreign person is owned or controlled by a U.S. person.
If none of the above criteria apply, the person is not a broker and is not subject to the brokering regulations of Part 129. The analysis can stop there.
If, however, any of the above criteria are present, the definition of "broker" is met and the analysis must continue to determine whether the proposed activity constitutes a brokering activity. The ITAR section 129.2(b) defines "brokering activities" as "any action on behalf of another to facilitate the manufacture, export, permanent import, transfer, reexport, or retransfer of a U.S. or foreign defense article or defense service, regardless of its origin." 22 C.F.R. § 129.2(b) (emphasis added). This verbiage may seem straight forward, but it is often the case that details of a transaction aren't so clear. It is frequently difficult to determine whether a party is engaging in an action that may be captured as brokering under the ITAR.
In the oral arguments for the Goldstein case, the State Department explained that when an attorney acts as a "finder" to identify or locate foreign counter-parties for a transaction, that action would constitute brokering. The State Department presented the following example to illustrate when an attorney might venture into brokering:
"[F]or example, if someone comes to an attorney and they want to sell [ITAR-]controlled explosives, and they ask the attorney to draft a general sales contract, that would be legal advice, [and] it would not constitute brokering. But if the same person came to the attorney, asked them to draft a general sales contract and the attorney happens also to represent a buyer in Pakistan and knows the buyer would want to buy these controlled explosives, and so the attorney recommends that the contract be translated into Urdu knowing that this is going to be the only likely buyer in the area, then the attorney might have used non-legal knowledge and tried to steer the seller towards the particular buyer even though he was engaging in legal advice." Goldstein at 6 n.2.
While this example may seem to stretch the definition of "brokering activities," it does illustrate the breadth of activity the State Department may consider ITAR-controlled. This broad application would not be limited to attorney activities. Take for example hypothetical Company A, a domestic U.S. manufacturer of defense articles. Company A asks U.S. Company B if it could help identify potential foreign buyers for Company A's products. Company B then contacts a few foreign companies with which it regularly works and inquires whether any are interested in procuring Company A's products. Foreign Company C expresses an interest, so Company B proceeds to introduce Company A and Foreign Company C. That introduction results in the export of Company A's defense articles. The actions of Company B to help Company A "find" a customer, would likely be considered brokering under ITAR Part 129.
In this hypothetical, how would the answer change if in response to Company A's inquiry, Company B merely named several different foreign companies it knew of from engaging only in arms-length sales transactions, did not make any contact with those foreign companies on behalf of Company A, and did not arrange any introductions for Company A? Would that action still be considered brokering under ITAR Part 129? By identifying multiple possible customers, is Company B "finding" anything for Company A? What if Company B later assists A in drafting and negotiating a sales contract because of its experience with dealing with the foreign party? Does it matter whether a sales contract is ultimately executed? Does it matter whether Company B is paid by anyone for its services? These are all variables that likely change the analysis and the conclusion as to whether a particular activity amounts to brokering.
When the State Department revised the brokering regulations in 2013, it included examples of activities that constitute brokering. Specifically, ITAR section 129.2 (b)(1) cites the following as examples of action on behalf of another that constitute a brokering activity: financing, insuring, transporting, or freight forwarding defense articles or defense services; or soliciting, promoting, negotiating, contracting for, arranging, or otherwise assisting in the purchase, sale, transfer, loan, or lease of a defense article or defense service. Conversely, section 129.2(b)(2) cites examples of activities that would not be considered brokering. These include: (i) activities by a U.S. person limited exclusively to U.S. domestic sales or transfers; (ii) activities by employees of the U.S. Government acting in an official capacity; (iii) activities by "regular employees" (ITAR Section 120.39) acting on behalf of their employer (except in cases involving a defense article or service originating in or destined for any proscribed country, area or person identified in ITAR 126.1); (iv) activities that do not extend beyond administrative services (the section includes examples, but it should be noted that even with the examples, if the activity extends beyond administrative services, the ITAR may be triggered); (v) activities performed by an affiliate (defined in ITAR 120.40) on behalf of another affiliate; and (vi) activities by persons, including regular employees (defined in ITAR 120.39) that do not extend beyond acting as an end-user of a defense article or defense service exported under a license or other ITAR approval, or subsequently acting as a reexporter or retransferor of such article or service under such license or approval or under a separate reexport or retransfer approval.
As the above examples illustrate, determining whether a particular activity rises to the level of ITAR-controlled brokering is case specific and will not always yield an easy yes or no answer. In any sales transaction, it is important to to do adequate due diligence to completely understand the roles and responsibilities of each party to a transaction. Such due diligence is also necessary to determine whether a party's action or role in a transaction triggers the brokering provisions of the ITAR.