On August 17, 2020, the US Commerce Department’s Bureau of Industry and Security (“BIS”) issued a final rule (“Final Rule”) (i) expanding the Export Administration Regulations (“EAR”) General Prohibition Three (the foreign-produced direct product rule, or the “FPDP Rule”) to further restrict Huawei Technologies Co. Ltd. and its affiliates designated on the BIS Entity List (collectively, “Huawei”) from acquiring foreign-produced semiconductors that are the direct product of certain US software and technology, (ii) removing the Temporary General License (“TGL”) previously authorizing certain transactions with Huawei, and (iii) adding thirty-eight additional affiliates of Huawei to the Entity List.  These changes became effective August 17, 2020.  Concurrently with the Final Rule, BIS issued another rule clarifying that the Entity List’s licensing requirements apply when any party on the Entity List (not just Huawei entities) acts as a purchaser, intermediate consignee, ultimate consignee, or end user in a transaction involving items subject to the EAR.

Below we highlight some of the key elements of these rules.  For further details, including the parameters of the applicable savings clauses, a comprehensive review of the rules is recommended.

The Further Expanded FPDP Rule

In May 2020, BIS expanded the FPDP Rule to restrict Huawei from acquiring foreign-made semiconductors produced or developed from certain US technology or software.  Please see our prior blog post here regarding the May 2020 expansion of the FPDP Rule.  The Final Rule introduces a number of changes to the FPDP Rule that build upon the May 2020 expansion of the FPDP Rule.

Under the Final Rule, the expanded FPDP Rule prohibits the reexport, export from abroad, or transfer (in-country) of (i) certain “foreign-produced items” controlled under the amended footnote 1 to the Entity List (“New Footnote 1”) when there is (ii) “knowledge” of certain circumstances, the scope of which were also expanded.

Broader Universe of “Foreign-Produced Items”

The universe of “foreign-produced items” subject to New Footnote 1 captures any item that is:

  • A direct product of technology or software subject to the EAR and specified in certain Export Control Classification Numbers (ECCNs) in Categories 3, 4, and 5 of the Commerce Control List (the “Covered ECCNs,” listed below); or
  • A direct product of a plant or major component of a plant located outside the United States, when the plant or major component of a plant (whether made in the United States or a foreign country) itself is a direct product of US-origin technology or software subject to the EAR and specified in the Covered ECCNs.

Paragraph (a) previously included language also requiring that items be “produced or developed by an entity with a footnote 1 designation on the Entity list” to fall within the scope of the expanded FPDP Rule.  Similarly, Paragraph (b) previously included language also requiring that items be “a direct product of ‘technology’ or ‘software’ produced or developed by an entity with a footnote 1 designation on the Entity list” to fall within the scope of the expanded FPDP Rule.  Broadly speaking, the previous footnote 1 captured foreign-produced items, such as chips, that were the product of Huawei-produced or -developed software or technology (e.g., design specifications).  The New Footnote 1 is more expansive, and can capture foreign-produced items produced or developed by any party – with no input from Huawei – if there is “knowledge” of Huawei’s involvement in a transaction, as discussed further below.

The list of Covered ECCNs remains unchanged from the May 2020 FPDP Rule, and continues to include the following ECCNs: 3D001, 3D991, 3E001, 3E002, 3E003, 3E991, 4D001, 4D993, 4D994, 4E001, 4E992, 4E993, 5D001, 5D991, 5E001, and 5E991.

Broader Scope of Circumstances Subject to the “Knowledge” Standard

Under the Final Rule, “knowledge” (defined under the EAR to include actual knowledge and reason to know) of a broader range of circumstances triggers the licensing requirements with respect to the “foreign-produced items” controlled under the New Footnote 1.  This expansion captures a wider range of transactions involving Huawei.  Specifically, the expanded FPDP Rule applies to the “foreign-produced items” controlled under New Footnote 1 when there is “knowledge” that:

  • The foreign-produced item will be incorporated into, or will be used in the production or development of any part, component, or equipment produced, purchased, or ordered by any entity with a footnote 1 designation; or
  • Any entity with a footnote 1 designation is a party to any transaction involving the foreign-produced item, e.g., as a purchaser, intermediate consignee, ultimate consignee, or end-user.  

The previous May 2020 FPDP Rule only required “knowledge” that the foreign-produced item is destined for Huawei entities.   

Additional License Review Policy

The Final Rule also establishes an additional license review policy (in Note to introductory paragraph to New Footnote 1) for foreign-produced items that are “capable of supporting the ‘development’ or ‘production’ of telecom systems, equipment and devices at only below the 5G level (e.g., 4G, 3G, etc.),” which BIS would review on a case-by-case basis for licensing decisions, rather than under a presumption of denial.  This new note further states that “[s]ophistication and capabilities of technology in items” is a factor in BIS’s license application review.

Removal of the Huawei TGL

The Final Rule removes the Huawei TGL, which authorized certain transactions involving the export, reexport, and transfer (in-country) of items subject to the EAR to Huawei.  In doing so, BIS decided to preserve the TGL’s cybersecurity research and vulnerability disclosure authorization, and implemented that decision by adding a new footnote 2 to the Entity List, and revising the Huawei-related Entity List entries to refer to that new footnote.

Please see our prior blog posts on the issuance of the original TGL on May 20, 2019 here; on the TGL updates issued on August 19, 2019 here; and on BIS’s previous extensions of the TGL here, here, and here.

Addition of Additional Non-US Affiliates of Huawei to the Entity List

The Final Rule also adds thirty-eight additional non-US affiliates of Huawei to the Entity List and revises four existing Huawei entries, which impact Huawei affiliates in twenty-one different jurisdictions.  The Final Rule lists Huawei entities located in Hong Kong under the Entity List heading for Hong Kong, which BIS describes as consistent with the Executive Order 13936 of July 14, 2020 revoking preferential trade treatment for Hong Kong.  Please see our prior blog post on that development here.

Please see our prior blog posts on the initial designation of Huawei and sixty-eight of its non-US affiliates to the Entity List on May 16, 2019 here; on the designation of forty-six additional non-US affiliates of Huawei to the Entity List on August 19, 2019 here; on BIS’s publication of Huawei-related FAQs on September 9, 2019 here; on BIS’s authorization of the release of certain technologies to Huawei entities on the Entity List in connection with standards-development activities on June 15, 2020 here.

Clarification of Entity List-related Restrictions

Concurrently with the Final Rule, BIS issued another rule clarifying that the Entity List’s licensing requirements apply when any party on the Entity List acts as a “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end user” (as defined under the EAR) in a transaction involving items subject to the EAR.  This applies to all circumstances where the Entity List’s licensing requirements are triggered, not just when Huawei entities are involved or the expanded FPDP Rule is applicable.  Prior to this rule, Section 744.11 of the EAR, pursuant to which BIS adds parties to the Entity List, stated that a license is required (as specified on the Entity List) to export/reexport or transfer (in-country) any item subject to the EAR to an entity designated on the Entity List.

Author

Ms. Lis has extensive experience advising companies on US laws relating to exports and reexports of commercial goods and technology, defense trade controls and trade sanctions — including licensing, regulatory interpretations, compliance programs and enforcement matters. She also has advised clients on national security reviews of foreign investment administered by the Committee on Foreign Investment in the United States (CFIUS), including CFIUS-related due diligence, risk assessment, and representation before the CFIUS agencies.

Author

Eunkyung advices clients on various regulatory compliance and trade issues, concentrating on the US export controls such as the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR), economic and trade sanctions, US customs and import laws, the US Foreign Corrupt Practices Act (FCPA), and foreign anti-bribery laws.

Author

Daniel Andreeff’s practice focuses on US economic and trade sanctions, including those targeting Iran, Russia, Cuba, Syria, and North Korea, export controls, and anti-boycott laws. He represents clients in national security reviews before the Committee on Foreign Investment in the United States (CFIUS), and has experience in federal court litigation and congressional investigations. His pro bono practice includes providing sanctions and export control advice to a global humanitarian NGO. * Admitted in New York only. Practice in the District of Columbia is under the supervision of a member of the District of Columbia Bar.