Cutting-edge technology is often a vital component for businesses seeking to expand their commercial market share. However, investing in research and development to develop a new product line can be costly and time consuming, making it difficult for some companies to reach their goals of advancing their current suite of products or exploring new innovations. To supplement their budgets for research and development, or “R&D” as it is commonly referred to, businesses may elect to pursue funding options available from the U.S. Government.

Federal grants and funding programs can be a great option to initiate a new research project or finalize a project and bring it to a successful commercial market entry. The U.S. budget for federal R&D funding in 2019 was more than $127 billion dollars,[1] and President Trump has proposed a slight increase to approximately $134 billion for R&D in fiscal year 2020.[2]

If your company is fortunate enough to receive federal R&D funding, it is important to remember that these grants do not relinquish responsibility for compliance with trade regulations. Two important points to consider:

• Technology developed under federal funding programs is subject to U.S. export control laws and regulations

A common misconception is that R&D performed by a private entity that benefits from federal funding is exempt from export control laws. Nothing could be further from the truth: neither the Department of State, which administers the International Traffic in Arms Regulations ("ITAR"), nor the Department of Commerce, which administers the Export Administration Regulations ("EAR"), provide a specific exemption or exception for commodities developed in federally funded research and development projects.

On the contrary, the ITAR has explicit controls relating to commodities developed with federal funding, particularly projects funded by the Department of Defense. For example, Category XII of the USML, “Fire Control, Laser, Imaging, and Guidance Equipment,” specifically enumerates at Section (b)(7) that “Developmental lasers or laser systems funded by the Department of Defense via contract or other funding authorization”[3] are controlled under the ITAR. And there are other examples: Section (i) of Category V – Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their Constituents; Section (c) of Category VI – Surface Vessels of War and Special Naval Equipment; and Section (f) of Category VIII – Aircraft and Related Articles, among others.

In most cases, clauses in the project contract also provide direction regarding the applicability of trade controls to the performance of R&D activities pursuant to a federal funding contract, particularly in Department of Defense contracts. The Defense Federal Acquisition Regulations ("DFARS") require certain clauses to be incorporated into federal contracts, some of which specifically address trade controls compliance. For example, DFARS 252.225-7048 “Export-Controlled Items” states, in part:

“(b) The Contractor shall comply with all applicable laws and regulations regarding export-controlled items, including, but not limited to, the requirement for contractors to register with the Department of State in accordance with the ITAR. The Contractor shall consult with the Department of State regarding any questions relating to compliance with the ITAR and shall consult with the Department of Commerce regarding any questions relating to compliance with the EAR.

(c) The Contractor's responsibility to comply with all applicable laws and regulations regarding export-controlled items exists independent of, and is not established or limited by, the information provided by this clause.

(d) Nothing in the terms of this contract adds, changes, supersedes, or waives any of the requirements of applicable Federal laws, Executive orders, and regulations, including but not limited to -

(1) The Export Administration Act of 1979, as amended (50 U.S.C. App. 2401, et seq.);

(2) The Arms Export Control Act (22 U.S.C. 2751, et seq.);

(3) The International Emergency Economic Powers Act (50 U.S.C. 1701, et seq.);

(4) The Export Administration Regulations (15 CFR Parts 730-774);

(5) The International Traffic in Arms Regulations (22 CFR Parts 120-130); and

(6) Executive Order 13222, as extended.”

Clearly, there is no room for doubt that the contractor is wholly responsible for compliance with U.S. regulations, regardless of the source of the contract or funding, and regardless of whether such a clause is present in the contract.

• Controls on foreign national involvement apply to collaborative activity

The very nature of research and development activities often tends toward group collaboration, such as intra-company knowledge transfers among engineering teams and partnering with other businesses or educational institutions, both domestic and abroad. Federally funded R&D projects often involve multinational entities as partners in the contract.

U.S. trade controls pertaining to the export or transfer of controlled information will still apply in these collaborative environments.

Transfers of export-controlled items or data from the U.S. to a foreign national are in fact exports, and thus subject to U.S. export controls. Federal funding grants or contracts for R&D provide no exception. What's more, if your company employs foreign nationals, engages foreign-national contractors or subcontractors, or partners with universities that have foreign-national students and faculty, you must be aware of the export controls that pertain to the specific articles or information that will be made available to these foreign nationals. An export authorization may be required prior to transferring or exporting the controlled items or data to your collaboration partners.

Contract clauses in the funding contract often give direction regarding dissemination of controlled items or data to foreign nationals. Here is one example:

“Export of information contained herein, which includes release to foreign nationals within the United States, without first obtaining approval or license from the Department of State for items controlled by the International Traffic in Arms Regulations (ITAR), or the Department of Commerce for items controlled by the Export Administration Regulations (EAR), may constitute a violation of law.”

Again, there is no question as to the applicability of the U.S. export regulations in collaborative activity or that the obligation for compliance falls squarely on the shoulders of the entities involved in the project.       

The Bottom Line

Federal funding for research and development activities can be a valuable tool to help businesses in moving from concepts to viable, marketable commercial products. As you can see from the proposed federal 2020 budget for R&D funding, more than $130 million is available. Our recommendation: go for it but be sure your windfall does not become a liability.

***

Obviously, there are many considerations and obligations related to federal R&D funding, and we have only touched upon a few here. Careful and detailed review is required to avoid costly violations. Seek advice from a trade professional like the lawyers and trade advisors at Torres Law PLLC, who can help your company manage research and development activities and all aspects of international trade compliance.