Overview
On May 19, the US Department of Commerce's Bureau of Industry and Security (BIS) published a new interim final rule, retroactively effective on May 15, amending the Foreign-Produced Direct Product Rule (FPDP) under the US Export Administration Regulations (EAR). The new rule expands the jurisdictional scope of the EAR and restricts the non-US supply of semiconductor chips to Huawei Technologies and its affiliates on the Commerce Department Entity List (Supplement No. 4 to 15 C.F.R. Part 744 (the Entity List), hereinafter "Huawei."
Some aspects of the rule are subject to a "savings clause" or delay in application of the new restrictions. BIS will be accepting comments regarding the interim final rule until July 14.
New FPDP Rule Summary
The new FPDP rule amends General Prohibition 3 of the EAR,[1] which contains the original FPDP rule, by adding a new subsection (vi), along with adding a new footnote 1 to the Entity List.
The new subsection (vi) under the FPDP rule reads as follows:
(vi) Criteria for prohibition relating to parties on Entity List. You may not reexport, export from abroad, or transfer (in-country) without a license or license exception any foreign produced item controlled under footnote 1 of Supplement No. 4 to part 744 (Entity List) when there is "knowledge" that the foreign-produced item is destined to any entity with a footnote 1 designation in the license requirement column of the Entity List.
In addition, footnote 1 to the Entity List (FN1) was added to the License Requirement section of the Entity List. Currently, only Huawei and its named affiliates are included in FN1 (FN1 Entity) and are subject to the restrictions based upon the expanded jurisdictional scope of the EAR set out in this new rule.
Under FN1, when there is "knowledge"[2] that an item is destined for a FN1 Entity, the new rule prohibits reexport, export from abroad, or transfer (in-country) of foreign produced items, without a license, if either (a) or (b) discussed below apply:
a. The item is produced or developed by a FN1 Entity and is a direct product of "technology" or "software" subject to the EAR and specified in the Export Control Classification Numbers (ECCNs) listed below:
3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; 3E991, 4E992, 4E993, or 5E991; or ECCN 3D991, 4D993, 4D994, or 5D991;[3]
The Federal Register notice provides this example regarding an interpretation of (a):
"For example, if an entity with a footnote 1 designation on the Entity List produces or develops an integrated circuit design utilizing specified Category 3, 4 or 5 'technology' or 'software' such as Electronic Design Automation software, whether the 'technology' or 'software' is U.S.-origin or foreign-produced and made subject to the EAR pursuant to the de minimis or foreign-produced direct product rule, that foreign-produced integrated circuit design is subject to the EAR." (emphasis added)
b. The item is produced by any plant or major component of a plant (i.e., "equipment that is essential to the 'production' of an item, including testing equipment, to meet the specifications of a design specified" in connection with production or development by a FN1 Entity), when:
- The plant or major component of a plant is:
i. Located outside the United States; and
ii. A direct product of any of the following:
US-origin "technology" or "software" classified in ECCNs: 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; US-origin "technology" that is specified in ECCN 3E991, 4E992, 4E993, or 5E991; or US-origin "software" that is specified in ECCN 3D991, 4D993, 4D994, or 5D991.
and
- The item is a direct product of "software" or "technology" produced or developed by a FN1 Entity.[4]
The Federal Register notice provides this example regarding an interpretation of (b):
"For example, if a foreign company produces integrated circuits outside the United States in a foundry containing U.S.-origin or foreign-produced equipment (which itself is a direct product of U.S.-origin 'technology' or 'software' in specified Category 3, 4, or 5 ECCNs) that is essential to the 'production' of the integrated circuit to meet the specifications of their design, including testing equipment (i.e., a major component of a plant), and the design for the integrated circuit was produced or developed from 'software' or 'technology' by an entity specified in footnote 1 to the Entity List, whether or not such design is subject to the EAR, then that foreign-produced integrated circuit is subject to the EAR." (emphasis added)
Background on the FPDP Rule
Prior to May 15, foreign produced items (i.e., commodities, software, or technology) could become "subject to the EAR" if they:
- Were exported from the territorial jurisdiction of the United States or otherwise released to foreign persons in the United States;
- Contained more than a "de minimis" proportion of controlled US-origin content; or
- Were (a) located outside of the United States; (b) classified under an ECCN on the Commerce Control List for which National Security (NS) controls applied; (c) the "direct product" of (i) US-origin "software" or "technology" that requires either a written assurance as a supporting document for a specific license or as a pre-condition for use of License Exception Technology and Software, Restricted (TSR) or (ii) of a foreign-located "plant or major component of a plant" that itself was the direct product of such US origin technology; and (d) being reexported to a destination in Country Group D:1 through D:5 and E:1 and E:2 of Supplement No. 1 to Part 740 of the EAR.
Notably, the amendments expand the application of the FPDP rule for items being supplied to designated Entity List entities by (a) extending the controls to items produced from technology and software "subject to the EAR" (as opposed to "US origin" technology and software) that fall within specified ECCNs that are not controlled for NS reasons. Consequently, the EAR now applies to and controls (i.e., requires a license for) a broader array of foreign-produced items when destined to Huawei.
Effective Date
As noted above, the rule was effective on May 15. The savings clause included in the rule provides that any reexport and transfer (in country) shipments already in transit (e.g., at the dock for loading, en route, etc.) on May 15, may proceed without applying the new licensing obligations imposed by this new rule. In addition, BIS stated that items subject to part (b) of the new rule, discussed above, which started "production" prior to May 15, will not be subject to the rule change provided they are exported, reexported, or transferred (in-country) or otherwise released before midnight on September 14.
Conclusion
As discussed above, the new FPDP rule is highly nuanced and requires a fact-specific approach. BIS has requested comments and may issue clarifications in the future.
[1] See Section 736.2(b)(3) of the EAR.
[2] "Knowledge" is defined in Part 772 as "[k]nowledge of a circumstance (the term may be a variant, such as 'know,' 'reason to know,' or 'reason to believe') includes not only positive knowledge that the circumstance exists or is substantially certain to occur, but also an awareness of a high probability of its existence or future occurrence. Such awareness is inferred from evidence of the conscious disregard of facts known to a person and is also inferred from a person's willful avoidance of facts" (emphasis added).
[3] See footnote 1, subsection (a) to Supp. No. 4 to Part 744 of the EAR.
[4] See footnote 1, subsection (b) to Supp. No. 4 to Part 744 of the EAR.
