(Source: Vinson & Elkins LLP, 14 Aug 2018.)
By: David R. Johnson, Esq., drjohnson@velaw.com, +1 202-639-6706; and Daniel J. Gerkin, Esq., dgerkin@velaw.com, +1 202-639-6654. Both of Vinson & Elkins LLP.
The President has signed the National Defense Authorization Act of 2019 (“NDAA”), which, in addition to expanding the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”) to review foreign direct investment,1 implements the Export Control Reform Act of 2018 (“ECA”), which sharpens the focus of the U.S. government on emerging and foundational technologies that are deemed not to have been adequately addressed by the prevailing U.S. export control regimes. The NDAA also places limits on the procurement of equipment and services from certain Chinese entities, though certain Members of Congress had adamantly advocated for much more stringent restrictions.
Please find a more detailed discussion of certain of the key aspects of the ECA, as well as the procurement-related restrictions set forth in the NDAA, below.
Export Controls Act of 2018
Permanent Statutory Authority for U.S. Export Controls. With limited exceptions, the ECA repeals the Export Administration Act of 1979, which lapsed several years ago and has been statutorily authorized each year since pursuant to Executive Orders issued under the International Emergency Economic Powers Act (“IEEPA”). Accordingly, the ECA now serves as the permanent statutory authority for the U.S. Export Administration Regulations (“EAR”), which generally govern the export, reexport, and in-country transfer of commercial and dual-use commodities, software and technology, and which are administered by the Bureau of Industry and Security, U.S. Department of Commerce (“BIS”).2
Treatment of Emerging and Other Types of Critical Technologies. In addition to ensuring permanent statutory authority for the existing commercial and dual-use export controls regime, the ECA directs the President, in coordination with the Departments of Commerce, Defense, State, and Energy to develop a “regular and robust process to identify the emerging and other types of critical technologies of concern and regulate their release to foreign persons as warranted regardless of the nature of the underlying transaction.” Specifically, these agencies are tasked by the ECA with identifying “emerging and foundational technologies” that are essential to the national security of the United States, but which are not currently controlled for export purposes.3
The process for identifying such technologies will be informed by publicly available information, classified information, information arising out of the CFIUS review process, and information generated by the various BIS advisory committees, and will take into account the development of such technologies in foreign countries, the effect export controls might have on continuing U.S. development efforts, and the effectiveness of export controls with respect to limiting the proliferation of such technologies to foreign countries.
The identified technologies will, following a notice and comment period, be subjected to enhanced U.S. export controls, possibly to include licensing requirements, and will be proposed for inclusion in multilateral export control regimes. At a minimum, licenses will be required for countries subject to a U.S. embargo, including those that solely are arms embargoed, such as China.4 Please note that license applications submitted by or on behalf of a joint venture, joint development agreement, or similar collaborative arrangement may require the identification of any foreign person with a significant ownership interest in a foreign person participating in the arrangement.
The following activities will be excepted from any licensing requirements:
- The sale or lease of a finished item and the provision of associated technology if such items and technology are generally made available to customers, distributors, or resellers;
- The sale or license to a customer of a product and the provision of integration or similar services if such services generally are made available to customers;
- The transfer of equipment and provision of associated technology to operate the equipment if the foreign person could not use the equipment to produce critical technologies;
- The procurement by a U.S. person of goods or services, including manufacturing services, from a foreign person if the foreign person has no rights to exploit any technology contributed by the U.S. person other than to supply the procured goods or services; and
- Contributions and associated support provided by a U.S. person to an industry organization related to a standard or specification, whether in development or declared, including any license of, or commitment to license, intellectual property in compliance with the rules of any standards organization.
The ECA requires reporting to Congress and to CFIUS every 180 days regarding actions taken to identify and control emerging and foundational technologies.
Changes to Licensing Process. The ECA mandates that applications for licenses address “the impact of a proposed export of an item on the United States defense industrial base” and an assessment of whether “the denial of an application for a license or a request for an authorization of any export that would have a significant negative impact on such defense industrial base.” By significant negative impact, the ECA means:
- “A reduction in the availability of an item produced in the United States that is likely to be acquired by the Department of Defense . . . for the advancement of the national security of the United States, or for the production of an item in the United States for the Department of Defense . . . for the advancement of the national security of the United States.”
- “A reduction in the production in the United States of an item that is the result of research and development carried out, or funded by, the Department of Defense . . . to advance the national security of the United States, or a federally funded research and development center.”
- “A reduction in the employment of United States persons whose knowledge and skills are necessary for the continued production in the United States of an item that is likely to be acquired by the Department of Defense . . . for the advancement of the national security of the United States.”
Criminal and Civil Penalties. Like the IEEPA, the ECA authorizes criminal penalties of up to $1 million and imprisonment for not more than 20 years. However, the ECA increases the current inflation-adjusted maximum civil penalty to the greater of $300,000 or twice the value of the underlying transaction. These also are the criminal and civil penalties set forth in the Anti-Boycott Act of 2018.
Treatment of Certain Chinese Telecommunications Equipment Manufacturers and Service Providers
Over the objections of Sen. Marco Rubio, among others, the NDAA ultimately did not reimpose sanctions on Chinese telecommunications equipment manufacturer and service provider, Zhongxing Telecommunications Equipment Corporation (“ZTE Corporation”), and certain of its affiliates, which were subject to a BIS denial order arising out of U.S. export control violations stemming from transactions involving Iran and North Korea. That denial order was terminated, effective July 13, 2018.
The ECA does, however, prohibit federal agencies from procuring or obtaining, or entering into contracts with entities using, equipment, systems, or services that, in turn, use Chinese-origin telecommunications equipment or services deemed to be a “substantial or essential component of any system” or “critical technology as part of any system.” The targeted Chinese-origin telecommunications equipment or services are:
- Telecommunications equipment produced by Huawei Technologies Company or ZTE Corporation or any subsidiary or affiliate of such entities;
- For the purpose of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes, video surveillance and telecommunications equipment produced by Hytera Communications Corporation, Hangzhou Technology Company, Dahua Technology Company, or any subsidiary or affiliate of such entities;
- Telecommunications or video surveillance services provided by any of the above-named entities or using the above-described equipment; and
- Telecommunications or video surveillance equipment or services produced or provided by an entity reasonably believed to be owned or controlled by, or otherwise connected to, the Chinese government.
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1 The changes to the CFIUS review process are discussed in greater detail at http://www.velaw.com/insights/president-signs-sweeping-expansion-of-cfius-review-of-foreign-direct-investment/.
2 The EAR also encompass the regulations that govern the participation of U.S. persons in unsanctioned foreign boycotts. These regulations now are permanently authorized by the Anti-Boycott Act of 2018.
3 Please note that the EAR currently allow for the imposition of temporary controls on items in accordance with their interim classification within Export Control Classification Number 0Y521.
4 The ECA also requires a review of the current controls on exports, reexports, and in-country transfers for military end uses and military end users in U.S. and United Nations arms-embargoed countries, as well as a review of the Commerce Control List of items that currently are not subject to any licensing for U.S. arms-embargoed countries.