United States v. Pascoe

1

UNITED STATES OF AMERICA, Plaintiff, v. PHIL PASCOE 1, SCOTT TUBBS 2, MONICA PASCOE 3, and QUADRANT MAGNETICS, LLC 4, Defendants.

CRIMINAL ACTION No. 3:22-cr-88-DJH

United States District Court, W.D. Kentucky, Louisville Division

July 9, 2024

MEMORANDUM OPINION AND ORDER

DAVID J. HALE, JUDGE UNITED STATES DISTRICT COURT.

Defendants Phil Pascoe, Scott Tubbs, Monica Pascoe, and Quadrant Magnetics, LLC moved to dismiss allegations that they violated export laws and regulations by sending magnet schematics to Chinese manufacturers, arguing that those regulations are unconstitutionally vague as applied to their conduct. (Docket No. 88) Defendants also moved to suppress evidence related to the alleged export violations on the ground that the warrant affidavits were insufficient to establish probable cause to believe that the magnets and schematics were export-controlled. (D.N. 87) The government opposed the motions (D.N. 105; D.N. 111), and the Court heard oral argument on these and other pretrial motions on April 18, 2024. (D.N. 177) Although the motion to dismiss and motion to suppress raise distinct bases for relief, each relies on the same interpretation of a regulatory provision and the Court will therefore resolve both in the same Memorandum Opinion. After careful consideration, the Court will deny the motions for the reasons set out below.

I.

The Second Superseding Indictment alleges that the defendants exported “approximately 70 drawings containing export-controlled technical data to Chinese Company 1 without a license as required by law and in violation of the law, specifically the International Traffic in Arms Regulations (“ITAR”).” (D.N. 73, PageID.455, ¶ 6) The technical data related to magnets that Quadrant produced for defense contractors and the Department of Defense. (Id., PageID.454-55 ¶¶ 1-6) As part of its investigation into the defendants' conduct, the government obtained and executed a search warrant in 2018 (see D.N. 87-1) and four more warrants after the indictment was returned in 2022. (D.N. 87-2; D.N. 87-3; D.N 87-4; D.N. 87-5) These warrants sought evidence of alleged ITAR violations, and the 2022 warrant affidavits largely depended on emails obtained through the 2018 warrant to establish probable cause for export violations. (D.N. 87-1, PageID.650; D.N. 87-2, PageID.701, 736-49 ¶¶ 108(b)-(nnn)) Both the ITAR counts of the Second Superseding Indictment and the probable-cause determinations for the 2018 and 2022 warrants rest, at least in part, upon the operation of the “specially designed” provision of ITAR, explained below.

The Arms Export Control Act (AECA) and its implementing regulations, ITAR, require individuals and businesses to obtain export licenses before exporting defense articles listed on the United States Munitions List (USML), including technical data that is related to defense articles. 22 U.S.C. § 2778(b)(2); 22 C.F.R. §§ 120.1, 120.17, 121.1. Many items are explicitly designated as ITAR-controlled on the USML. See, e.g., § 121.1 Category I(a) (“Firearms using caseless ammunition.”). The USML also lists “[p]arts, components, accessories, and attachments specially designed” for military equipment, including aircraft. § 121.1 Category VIII(h)(1). If parts are specially designed for use in defense articles listed on the USML, then they are also ITAR-controlled. See 22 C.F.R. § 120.41. The parties agree that Quadrant Magnetics' magnets are not enumerated on the USML and are ITAR-controlled, if at all, because they are “specially designed” within the meaning of § 120.41. (D.N. 88, PageID.994 (challenging whether any party “has any reliable means of telling whether [the exported] drawings depict magnets that are ‘specially designed' and thus controlled”); D.N. 111, PageID.1439 (arguing that “Defendant Quadrant Magnetics produced specially designed magnets for use in a host of military items”))

The Department of State has adopted a “catch and release” approach to determining whether a part, component, accessory, or attachment is “specially designed” and thus a defense article on the USML that can only be exported with a license. See Amendment to the International Traffic in Arms Regulations: Initial Implementation of Export Control Reform, 78 Fed.Reg. 22740, 22744 (Apr. 16, 2013). The regulations define any item that is “a part, component, accessory, attachment, or software for use in or with a defense article” as specially designed in § 120.41(a), and then remove items caught under § 120.41(a) from the USML if they meet one of five exceptions set forth in § 120.41(b). Defendants' motions pertain to the third of the five exceptions, which excludes from the USML an item that would otherwise be specially designed if it “[h]as the same function, performance capabilities, and the same or equivalent form and fit as a commodity or software used in or with a commodity that: (i) [i]s or was in production (i.e., not in development); and (ii) [i]s not enumerated on the USML.” § 120.41(b)(3). The parties describe this third exception as applying when there was a “commercial equivalent” to the allegedly specially designed article in production when the article was exported. (D.N. 88 (“a part is ‘specially designed' only if there is no commercial equivalent”); D.N. 111, PageID.1456) As the defendants acknowledge, regulated entities are required to determine whether their items are ITAR-controlled but may apply for a “commodity jurisdiction determination” (CJD) from the State Department if they are unsure whether an item is on the USML. (D.N. 88, PageID.992)

II.

Defendants move to dismiss the ITAR and AECA allegations as unconstitutionally vague as applied to their magnets, arguing that it is too difficult to determine whether the magnets had commercial equivalents and that they were therefore not on notice that the law proscribed their conduct. (D.N. 88, PageID.989-90) They also move to suppress the ITAR and AECA-related evidence obtained through the 2018 and 2022 warrants, arguing that the warrant affidavits were insufficient to establish probable cause for the searches because the affidavits did not include the commercial-equivalent analysis described above. (D.N. 87, PageID.643) Underlying both motions is the assumption that the absence of a commercial equivalent is an element of every ITAR violation under the “specially designed” provision. The Court will address this assumption before considering each motion in turn.

A. Commercial-Equivalent Exception as Element or Affirmative Defense

1. Commercial-Equivalent Exception

The first issue raised by the defendants' motions is whether the absence of a commercial equivalent is an element of the offense or whether the presence of a commercial equivalent is an affirmative defense that a defendant may assert to establish that a component is not specially designed. Having reviewed the applicable case law, the structure of the “specially designed” provision of ITAR, and the practical application of ITAR as a whole, the Court concludes that the commercial-equivalent exception is best understood as creating an affirmative defense.^[1] In the Sixth Circuit, statutory and regulatory exceptions are generally understood to create affirmative defenses. See United States v. Marcinkewciz, 543 Fed.Appx. 513, 516 (6th Cir. 2013) (holding that the ‘practitioner exception' to liability for manufacturing marijuana creates an affirmative defense, noting “the well-established rule of criminal statutory construction that an exception set forth in a distinct clause or provision should be construed as an affirmative defense and not as an essential element of the crime” (quoting United States v. Santos-Riviera, 183 F.3d 367, 370-71 (5th Cir. 1999))); United States v. Mabry, 518 F.3d 442, 446 (6th Cir. 2008) (interpreting Taft-Hartley Act exceptions to the Act's general prohibition of payments by employers to union organizers as creating affirmative defenses to prosecutions for violations of the Act); United States v. Shurelds, 173 F.3d 430 (6th Cir. 1999) (rejecting a vagueness challenge to the Clean Air Act based on an exception, holding that “[e]xceptions from criminal prohibitions are generally construed as affirmative defenses”) (table decision); United States v. Smith, 981 F.2d 887, 891 (6th Cir. 1992) (holding that the antique-firearm exception to carrying a firearm in relation to a crime of violence “is an affirmative defense which must be raised by a criminal defendant” and that the defendant bears the burden of raising the exception before the burden shifts to the government to disprove its application). As in many of the statutes at issue in those cases, the commercial-equivalent exception and the other four exceptions under the “specially designed” provision are found in a distinct subsection separate from the general definition, indicating that they too create affirmative defenses. See Mabry, 518 F.3d at 446.

Other circuits have applied this interpretive principle to provisions of the ITAR and have universally concluded that exceptions to USML definitions constitute affirmative defenses rather than elements of an AECA offense. In United States v. Sun, the Fourth Circuit interpreted a regulatory “scrap exemption” to the USML, which stated that arms and ammunition are no longer on the USML and therefore are under the jurisdiction of the Department of Commerce “if they have been rendered useless beyond the possibility of restoration.” 278 F.3d 302, 310-11 (4th Cir. 2002). The Sun court rejected the defendants' argument that the government was obligated to prove the inapplicability of the scrap exemption, holding instead that the “‘scrap exemption' theory advanced by the Suns and All Ports is an affirmative defense not an element of a charge under...