Profile | Stephen E. Smith, Co-Chairman, Space Law Practice Group, Sherman & Howard

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Disputes occur in any business, but space activity introduces a number of complicating factors. In addition to the huge sums of money involved, options for fixing technical problems once a satellite launcher ignites are necessarily limited. When things go wrong, international law and treaties often come into play, as does arbitration, a process that isn’t always as well understood as it could be.

Stephen Smith has an extensive résumé in space law, having served for more than 15 years as general counsel at Lockheed Martin Space Systems, the world’s largest space company. In that capacity, he negotiated contracts, litigated legal disputes, oversaw compliance with stricter U.S. space export rules imposed a decade ago and helped establish two rocket-related joint ventures, International Launch Services and United Launch Alliance.

Smith, who left Lockheed Martin in February and joined the Denver office of the law firm of Sherman & Howard in October, spoke recently with Space News Editor Warren Ferster.

 

Are U.S. export rules as burdensome as some have made them out to be?

The regulations are unquestionably burdensome, particularly for smaller companies. That said, in my experience, with a few exceptions, such as satellites going to China, once the government and companies learned to work with each other it wasn’t that much of an issue. Export departments of large companies are quite sophisticated in knowing what is and is not possible. Sometimes non-U.S. customers worried about the red tape that U.S. export regulations can cause, but once we understood all the issues and how to work with the U.S. State and Defense departments, we were able to get the necessary approvals.

 

Yet we still hear complaints that the regime is hurting U.S. industry. Has the problem been exaggerated?

I don’t think so. At least one European company is building ITAR [International Traffic in Arms Regulations]-free satellites and that is perceived as a significant competitive disadvantage to U.S. companies. U.S. satellites still cannot fly on Chinese launch vehicles. Because Chinese launch services are significantly less expensive than the others, that enables companies that make ITAR-free satellites to put together deals that are hard for the U.S. companies to match.

 

We hear so much these days about U.S. companies having difficulty in Russia. What was your experience with International Launch Services, the U.S.-Russian joint venture?

I never saw any of that in dealing with Russian space companies. They were commercially minded; they absolutely always kept their commitments — when there were issues like scheduling challenges they were very good to work with. The Russian companies I worked with were subjected to regular audits and reviews, and I never had an issue with respect to whether they were following the law or not.

 

Why did government approval for the United Launch Alliance venture with Boeing take so long?

The government wanted two separate launch systems to provide assured access to space, but there was concern that they couldn’t afford to maintain two separate infrastructures, so the companies were given a lot of encouragement by the Pentagon to merge their launch operations. By the time the deal actually got done — negotiations took a while, as you recall there was some litigation going on — many of the people at the Pentagon who had urged the companies to do this deal had left. It was a new group of leadership and they wanted to assure themselves that going down to one company that would provide all space launch services for large satellites was a good idea. That analytical process took the better part of two years.

 

Was the litigation you mentioned a barrier to getting the deal done?

No, the litigation was a facilitator because it provided an incentive for both companies to get together and do something. The settlement of the litigation occurred on the date the United Launch Alliance deal closed.

 

What is unique about space law?

There aren’t too many comparable situations where once you start something you have no opportunity to fix it. Once you intentionally light a launch vehicle there’s nothing you can do to the vehicle other than blow it up. It either works or it doesn’t. You do have an overlay of both national and international laws that deal with what happens if a satellite fails or a rocket fails, and there’s potential third-party liability. Theoretically launch vehicles can do tremendous damage. So these are dangerous activities, and on the commercial side, typically a large communications satellite can cost upwards of $300 million between the launch service and the satellite, so insurance plays a major part there.

 

What is the typical means of dispute resolution?

In my experience, when there are space-related disputes, they go to international arbitration, and most international arbitrators — there are some exceptions — really don’t know our industry at all and they don’t understand the concept of margin. They don’t understand the concept of having a spec that says a satellite will function a certain way but separately there’s a loss formula that provides a basis for recovery for a customer. Arbitrators ask themselves, “If you’re paying somebody $250 million to produce a satellite that will meet certain specifications when it gets to geostationary orbit, how can you then say, ‘Well if it doesn’t, you’re only entitled to $10 million of that back because that’s what the loss formula says?’”

 

Does international arbitration take too long?

International arbitration should be much faster and more efficient than litigation, but that hasn’t always been the case. There are typically no depositions and limited evidentiary requests. I’ve been quite active in international arbitration circles and I’ve been pushing for steps to make it faster. In fact, the most recent revisions of the International Chamber of Commerce (ICC) rules, which go into effect in January — the ICC is the largest international disputes forum and I serve on its governing body — call for case management conferences and encouraging arbitrators to look at issues early on in the arbitration, not wait until the hearing, which sometimes takes a couple of years, and see if they can deal with certain issues which might result in an early resolution of the dispute. Large disputes sometimes have taken three or four or even five years. They shouldn’t; there’s hardly a dispute I can think of that could not get done in 18 months. But all the parties have to want to get it done. If a disputes clause is not written correctly it can be very problematic. I’ve seen a number of examples where clauses have caused arbitrations to go on a lot longer than they needed to, and it’s very important in a major international contract that the disputes clause gets done right.

 

Do you think Iridium was or is entitled to compensation for the loss of its satellite in a collision with a spent Russian Cosmos craft?

Since under the Outer Space Treaty each launching state has liability for damage caused by articles launched from it, one might think so. But under international space laws a party seeking damages for a collision in space must establish “fault” by the other party. This is an area of law that is developing and we’re going to have to see how it develops, particularly with space debris.

 

Is it desirable or feasible to update the 1967 Outer Space Treaty given all that’s happened in space since then?

I’m not sure changes are necessary. Furthermore, I suspect in terms of major changes we’re going to be in the reactive mode because getting the 100-plus parties to the Outer Space Treaty to agree on anything is extremely difficult. Getting that many people with different legal systems, cultures and languages together on anything is a real challenge.

 

How do you view the space tourism industry from a legal standpoint?

Will these commercial operators be able to write releases with full disclosures that courts will determine are sufficient? Because they’re going to have a hard time insuring these things initially and if there is a catastrophe — and I certainly hope there isn’t — you have to plan for that kind of thing. There would be lawsuits, and so the question will be what standard of care are you dealing with and will the exculpatory clauses be adequate to protect the operators. That’s certainly going to evolve.

 

What are some of the challenges of negotiating international contracts or agreements?

There are different types of laws around the world. We’re a common law country. Much of Europe is civil law, which has some different concepts. Same with Asia. So when you’re negotiating those agreements, which law are you going to choose?

 

What about the language barrier?

Most contracts are written in English, but does a word in English mean the same thing when you translate it to Japanese or Chinese? I handled one dispute with an Asian customer, and the language of the contract was the Asian language, and the question became: What does a particular word mean? This stuff can get very complicated because while you always try when writing a contract to anticipate disputes, so many things can go wrong that it’s almost impossible to think of everything. When you’re dealing with legal systems where words, when translated, mean slightly different things, it is quite a challenge.