by Owen D. Kurtin

The re-election of President George W. Bush means that a continued heightened governmental focus on the security aspects of the satellite business to the potential detriment of commercial considerations may be expected. The principal flashpoint for security and commerce issues is technology exports. The commercial health of the satellite manufacturing and launch sectors in the U.S. demands access to the international market: the customer market is global and the competitor sellers are multinational. The needs of commerce, however, may conflict with the security concerns that arise when exporting the technology contained in satellite and launch service products.

Although the U.S. does not generally restrict export of technology, it has imposed limits on certain technology exports considered to have security implications, including satellite and launcher technology. Where technology export restrictions apply, sales of equipment to non-U.S. persons or the acquisition of a U.S. company by non-U.S. persons may breach export controls.

The current tension between the needs of commerce and security in the space business began with the October 1998 U.S. military budget bill, which required the Clinton Administration to shift control of satellite technology exports from the Commerce Department to the State Department, thereby supposedly tightening control of technology transfers. The State Department, by law, considers only security issues when reviewing technology transfers, while the Commerce Department is more concerned with business and trade development. Therefore, satellites and launch vehicles are currently subject to the U.S. Department of State Directorate of Defense Trade Controls’ so-called International Traffic in Arms Regulations (ITAR). ITAR requires obtaining export licenses for enumerated products and technologies. Another body of regulation, the Export Administration Regulations (EAR) of the U.S. Commerce Department’s Bureau of Industry and Security (formerly the Bureau of Export Control), restricts the export of other technologies, notably software and encryption technology, which are routinely used in satellites and launch vehicles.

The space technology transfer issue heated up with the January 3, 1999, Report of the Select Committee of the U.S. House of Representatives (the Cox Report), which charged the People’s Republic of China (P.R.C.) with engaging in a systematic campaign of espionage to appropriate U.S. missile and thermonuclear weapon technology.

According to the report, part of the Chinese campaign occurred when U.S. satellite manufacturers Hughes and Loral analyzed three launch failures involving P.R.C.-manufactured Long March rockets and Hughes and Loral-manufactured satellites, and recommended improvements to the rockets without required State Department export licenses and in violation of ITAR. According to the Cox Report, the assistance given by Hughes and Loral had applications for ballistic missile launchings.

Of course, in the wake of the September 11, 2001, terrorist attacks, security concerns have increased. For all that the attacks were not enabled by new technologies, it has been lost on no one that they were carried out with instruments of the aerospace sector and, as heightened as general security preoccupation is in the post-9-11 environment, it is, if anything, disproportionately high in aerospace.

It is important to understand the export restriction scheme to access the international market. Violations of ITAR and EAR carry both civil and criminal penalties. Certain technologies, deemed to be vital to national security or anti-terrorism measures, may be completely restricted in their export to a short list of countries that the U.S. government considers to be engaged in state-sponsored terrorism. Others require an individual exporter’s license for export. Even where a license is not required because a general license is already in place, some technologies are subject to reporting requirements and to governmental review to obtain the necessary export license exemption.

In addition to ITAR and EAR, the United States is a participant in the Wassenaar Arrangement, a multinational arrangement on export controls for conventional weapons and sensitive dual-use goods and technologies. Pursuant to the Wassenaar Arrangement and in part at the urging of the global e-commerce sector, the United States in 1998 began to liberalize its export restriction policy on cryptographic technologies. Current EAR make so-called "mass market" encryption products with symmetric algorithms exceeding 64 bits eligible for export to the 25-member European Union (EU) and certain other countries, including Australia, Japan, New Zealand, Norway and Switzerland, following a 30-day Bureau of Industry and Security review pursuant to a filed "classification request." Encryption products do not require authorization when exported to Canada. There are no post-export reporting or license requirements for such products following the review, meaning that export may proceed without notification of formal approval. Export of "information security" evaluation and production equipment to subsidiaries of U.S. companies outside the U.S., EU governmental and non-governmental end users and other country non-governmental end users is also allowed, with the exception of seven prohibited countries (Cuba, Iran, Iraq, Libya, North Korea, the Sudan and Syria).

Owen Kurtin is a partner in the New York office of law firm Sonnenschein Nath and Rosenthal LLP. He may be reached at 212/768.6700 or by e-mail at [email protected].