At the end of August, the U.S. State Department reached a settlement agreement with Meggitt-USA, Inc. (“Meggitt”) regarding violations of the Arms Export Control Act and International Traffic in Arms Regulations (ITAR). Meggitt, a holding company owned by a UK firm, alerted the State Department to the violations via voluntary disclosure. The disclosure named numerous Meggitt subsidiaries (component and sub-system manufacturers all) as culprits, and showed deference to the principle of successor liability by confessing violations that occurred both before and after Meggitt acquired the entities.
While the violations the State Department ultimately charged Meggitt with were numerous and varied (67 in total), the lion’s share involved failures to fully comply with manufacturing license agreements. Under the ITAR, a manufacturing license agreements (or “MLA”) is an agreement whereby a U.S. person authorizes a foreign person to manufacture defense articles abroad. MLAs generally contemplate ongoing technical data exchanges, thus making them preferable to one-off licensing for each individual information transfer. Such agreements must be approved by the State Department, which often imposes restrictions and requirements in the form of provisos.
Meggitt’s subsidiaries ran afoul of the ITAR by, among other things, consistently violating the provisos in their MLAs. The most common violation was failing to obtain required non-disclosure agreements from sub-licensees. Others included disclosing technical data and providing defense services to parties that did not sign onto the agreements, manufacturing articles valued in excess of what the agreements allowed, failing to reference the MLAs on other license applications, and providing inaccurate sales reports to the State Department. The State Department also noted that the MLAs’ end-users repeatedly retransferred technical data and provided related defense services without agency authorization.
These charges illustrate an important point: simply obtaining an MLA does not grant the parties to it blanket authority to do as they please with the defense articles, technical data, or services under contemplation. As with any contract, an MLA is a binding agreement with defined behavioral allowances and expectations. And as in any contractual relationship, failure to honor those expectations can result in a breach and consequent penalties. In Meggitt’s case, those penalties amounted to $25 million, $22 million of which the State Department suspended on the condition that Meggitt spend that amount on remedial compliance measures. This was after the agency considered several mitigating factors, including the case’s successor liability element and that Meggitt initiated the proceedings with a voluntary disclosure.
Keeping Meggitt in mind, those seeking the flexibility afforded by MLAs would do well to remember that obtaining one is only the beginning of a larger ITAR compliance process. Ensuring that all parties understand and are abiding by an agreement’s provisos is an ongoing effort, and one not to be taken lightly.
For more information about the contents of this newsletter, or about Kelley Drye's International Trade Practice, please contact practice group chair Kathleen Cannon or partner Paul Rosenthal, who acts as editor of this publication.