April 23, 2019

April 23, 2019

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April 22, 2019

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Department of Commerce to Establish New Export Controls on Emerging Technologies: The Little Regulation That Will Make a Big Change in How You Do Business

Key Takeaways:

  • Emerging technology sectors will soon be subject to new export controls.

  • Affected sectors include Biotech, computing, artificial intelligence, positioning and navigation, data analytics, additive manufacturing, robotics, brain-machine interface, advanced materials, and surveillance.

  • New export controls on these sectors will likely require companies to obtain a license to export products to China and other destinations, and impose restrictions on sharing information with foreign nationals.

  • These sectors will also be added the list of industries subject to enhanced foreign investment scrutiny by the U.S. Committee on Foreign Investment in the United States (CFIUS).

  • The U.S. government has invited comments on the criteria to be used to establish new controls. The deadline for comments is December 19, 2018.

Export controls and other regulations often lag a step or two behind the times. That trend has accelerated with the pace of technological advancement. As a result, for many years, technical know-how in many cutting-edge technical fields has not been subject to export controls. This has meant that many commercial technical innovations could be freely exported without significant restrictions. As long as they were not designed for a military application, and no encryption or cryptographic technology involved, many new ideas developed in the United States were simply unaccounted for in the U.S. Export Administration Regulations (EAR).

But the U.S. Department of Commerce, Bureau of Industry and Security (BIS) is about to make up a lot of ground in a single, large leap.

The Controls

On Monday November 19, 2018, BIS published an invitation to comment on the criteria for establishing new export controls on what it calls “emerging and foundational technologies.” The new controls are authorized in the Export Control Reform Act of 2018 (ECRA) and the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA). The list of technology fields targeted for review is as follows:

  1. Biotechnology

  2. Artificial intelligence (AI) and machine learning technology

  3. Position, Navigation, and Timing (PNT) technology

  4. Microprocessor technology

  5. Advanced computing technology

  6. Data analytics technology

  7. Quantum information and sensing technology

  8. Logistics technology

  9. Additive manufacturing

  10. Robotics

  11. Brain-computer interfaces

  12. Hypersonics

  13. Advanced Materials

  14. Advanced surveillance technologies

The Implications for your Business

If your company creates technology or products in an emerging technology sector, new export restrictions will not only limit who can receive your exports, but will also restrict the disclosure of technology to foreign nationals even within the United States.

If the controls are implemented in the pattern of most EAR controls, the export of products and the disclosure of related technology and know-how will require a license based on the destination, end-user, and end-use of the product or information.

Implications for Collaboration

Depending on the criteria BIS develops for these controls, persons who are not U.S. citizens or green-card holders may need licenses to participate in researching and developing some of these emerging technologies.

Implications for Exports

As the new regulations are developed, exports of you products, parts, and components in these sectors may require export controls. This goes for final shipments as well as your manufacturing supply chain. For example, if your logistics chain includes fabrication in Mexico, or assembly, testing, and packaging (ATP) in China, you may need to plan for the potential impacts on your manufacturing process.

Implications for Mergers, Acquisitions, and Investments

The new regulations will also affect U.S. national security review of foreign investments in these sectors. Specifically, when the list of “foundational” technologies is finalized, many types of foreign investments in these sectors (including not only outright acquisitions of U.S. companies, but also certain minority investments) will be subject to review by the Committee on Foreign Investment in the United States (CFIUS). As we have detailed here, CFIUS has the power to halt or unwind a deal, and the power to impose restrictions on a foreign acquirer’s access to technology. This development has the potential to radically alter the structuring, timing, and valuation of foreign investments in these sectors.

What you Can Do

            Submit Written Comments

Interested parties may submit public comments on the proposed rule. The deadline for submission is Wednesday, December 19. This is your opportunity to be heard. There is no guarantee that public comment will alter the course of the new restrictions, but it may be worth a try to argue for changes that may help preserve your options for the future. As the philosopher said, “you miss 100% of the shots you don’t take”.[1]

            Prepare for New Restrictions

Recently, we have seen companies caught off guard by the rapid pace of regulatory change in the Trump Administration. This has been the case even when the President and the Administration have clearly signaled policy changes in advance (as in the case of the immigration ban, tariffs on China, and changes to NAFTA).

This announcement by BIS signals a real and substantive movement toward limiting foreign access to leading-edge technologies. Companies in the affected sectors could gain an advantage over their competition if they act early. You may wish to consider adjustments to your research, manufacturing, export, and investment strategies to handle the forthcoming changes.

Conclusion

In our view, this little regulation will have a big impact on U.S. advanced technology sectors. 


[1] Commonly attributed to Wayne Gretzky in his interview for the January 16, 1983 issue of The Hockey News.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Reid Whitten, partner, Sheppard Mullin Law Firm
Partner

Reid Whitten works with clients around the world to plan, prepare, and succeed in global business transactions.

In the areas of U.S. and international sanctions, export and defense export controls, and anti-corruption regulations, he supports clients in detecting and deterring potential compliance issues as well as conducting and defending investigations and enforcements. Mr. Whitten also advises on anti-dumping, anti-money laundering, and anti-boycott regulations.

Mr. Whitten is a thought leader on cross-border business regulations. He teaches a seminar on The Law of...

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