Tech innovation is linked to Defense. Mastering the law (AI, quantum, BDU) is vital to protect its sovereignty, its supply chain and its growth in the face of foreign laws.
Innovation, defense and sovereignty: vital control of the regulatory environment
By Frédéric Saffroy, Associate Lawyer, Alerion Avocats
Innovation and defense have always been closely linked. New technologies emerged from the needs of armies and the military was at the origin of numerous innovations. The concrete used by the Roman Legions still fascinates with its solidity and longevity. Mastering these innovations and maintaining a technological edge over adversaries has very early on been a regulatory challenge. In the year 419, Emperor Theodosius II decreed capital punishment for those who transmitted shipbuilding techniques to the Barbarians.
Ancestor of current export control regulations, this decree shows that it is not only raw materials, components or finished products that are controlled, but also technologies. This control has expanded and become internationalized, in connection with the treaties on the limitation of arms and the non-proliferation of nuclear weapons. With the war in Ukraine and the Middle East, tensions between the United States and China and geopolitical instability, States have increased their controls over innovative technologies, particularly rare earths, semiconductors, supercomputers, quantum, artificial intelligence and even space.
For Tech companies, particularly those working with defense, the regulatory environment cannot be neglected, at the risk of threatening their development, and therefore their very existence. It is vital that they analyze their production, their partnerships, their Supply Chain and their markets with regard to these regulations so that their investments do not lead to a dead end or are captured by others.
The basic task is the analysis of their production. Are products, services or software subject to specific regulations, in particular those on dual-use goods (“BDU”) or war materials? Many innovative technologies are classified as BDU and this category is only growing. Thus, after cryptography, certain quantum technologies are now qualified as BDU. European Regulation 2021/821 on the control of BDUs – as well as the American regulation known as “EAR” – added quantum to the list of goods that can only be exported outside the European Union with a license. Depending on their specifications and characteristics, these same goods can be classified as war materials and be subject not only to export controls, but also to a manufacturing and trade authorization (known as “AFC”). This is the case for certain space technologies whose French regulations consider that their “characteristics give them military capabilities”.
This first project is essential, both at the level of the company itself and its suppliers, subcontractors and partners. Because we must secure upstream, both the Supply Chain and industrial or financial partnerships. A supplier or subcontractor whose products or services are subject to export control may be blocked if these elements are subject to prior authorization from a foreign state. Even more so if the regulations of this State have extraterritorial effects. Components (technologies, software) subject to American EAR regulations will thus condition the export of the finished French product to an American license if these components exceed a certain value (De Minimis). China has just implemented similar regulations for rare earths.
Financing and partnerships can also constitute obstacles for the future due to the rights granted to the partner or financier. Thus, obligations of assignment, secrecy, exclusivity, compulsory licensing, rights of first refusal, etc., on the developments resulting from these partnerships (known as “foreground IP”) may complicate, slow down, or even capture the technology. Contracts with major research institutions, particularly in defense, whether French (DGA, AID) or American (DARPA, NASA), all contain clauses allowing the partner/funder to have control over all or part of the technologies developed and thus to control them.
Other constraints, more subtle, darken the picture: the nationality of researchers which may be under international sanctions or lead to export controls; the use of Open Source software whose tree structure we do not control with regard to export controls and sanctions; IT security vulnerable to regulations such as the American Cloud Act, etc.
This mapping, both upstream and downstream, allows the company – and its investors – to ensure they can freely make their innovations and investments bear fruit, while capturing a growing defense market.
