The New "Uniquely Required" Standard of U.S. Export Licensing Policy for SMIC

Orrick, Herrington & Sutcliffe LLP

On December 18, 2020, the Bureau of Industry and Security (“BIS”) announced the addition of 77 new entities, including Semiconductor Manufacturing International Corporation (“SMIC”), to the Entity List.  In support of its action, BIS cited “evidence of activities between SMIC and entities of concern in the Chinese military industrial complex.”  Exports, reexports and transfers (in-country) to listed entities of items subject to the Export Administration Regulations (“EAR”) require export license authorization, and availability of license exceptions is generally limited.

National security concerns trigger tighter license review policies for exports to SMIC

For exports to SMIC and its affiliates only, BIS announced a presumption-of-denial policy for license applications for items “uniquely required” for production of semiconductors at technology nodes of 10 nanometers and below.  Exports of other items to SMIC will be subject to a case-by-case license review policy as it pertains to an entity engaged with a military end user.

The differentiation based on the parameter of 10 nanometers or below suggests that BIS, and, likely, other U.S. government agencies, have special national security concerns about exporting to SMIC technology and manufacturing systems that fall within this parameter.  It is unlikely that exporters will be able to secure licenses for items “uniquely required” for production of semiconductors at 10 nanometers or below.

The new “uniquely required” standard

The new “uniquely required” standard appears to be directed at meeting the specified parameter – production of semiconductors at advanced nodes (10 nanometers or below) – and does not appear to target any particular semiconductor manufacturing systems or technology.

In the absence of a definition for “uniquely required” in the BIS announcement or elsewhere in the EAR, exporters are left to construe the meaning of the new standard on their own.

The plain meaning of the words is a useful starting point.  The word “required” is commonly used to mean “needed” or “necessary to meet certain requirements.”  The word “unique” connotes an item that is “one of a kind” or “exclusive.”

The EAR, however, has its own definition of “required” as it relates to technology.  This definition of required is much narrower than the commonsense definition. 

Required technology under the EAR is necessary or essential technology, but only that portion of essential technology that is also peculiarly responsible for achieving or exceeding specified parameters.  Peculiarly responsible, however, would not seem to extend as far as exclusively or uniquely responsible.  Instead, under the EAR definition, required technology would be specially responsible for meeting a particular parameter but also could be specially responsible for meeting other parameters as well. 

In contrast, “uniquely required” would be needed exclusively to meet a given parameter and would not be able to meet any other parameters.  The use of the word “uniquely” further and distinctly narrows the meaning of the term “required.”

Accordingly, the “uniquely required” standard would reasonably appear to cover items that (i) are peculiarly responsible for the production of the semiconductors at advanced nodes (10 nanometers and below), and (ii) are able to produce semiconductors at such nodes and not at any other nodes.

A hypothetical example of a car that can travel 300 miles per hour (“mph”) can readily illustrate the relevant distinctions.  To travel 300 mph, many items are required: tires, fuel, engine, and so forth.  Under the EAR definition of required, however, only the engine is required because it is peculiarly responsible for the ability of the car to travel 300 mph.  And this is true even if the engine can make a car travel at many other speeds, both above and below 300 mph.  

The “uniquely required” definition is tighter than the EAR definition of merely “required.” The engine is uniquely required to go 300 mph when it is peculiarly responsible for achieving that speed and only that speed.  In other words, the engine has one speed and no other.  Such an engine is uniquely and exclusively required to go 300 mph. 

There may be other engines that can enable the car to go 300 mph and go at many other speeds as well.  These engines would not be uniquely required for the 300-mph parameter.  These engines under the EAR would be required to meet the 300-mph parameter but not uniquely required.  Indeed, if such engines were also to qualify under the “uniquely required” standard, the word “uniquely” would be redundant and have no meaning.

BIS’s informal guidance

In light of the new “uniquely required” standard and the many inquiries of exporters, Commerce officials undertook to provide informal guidance to semiconductor industry representatives as to the meaning of the new standard.  According to a senior BIS official, an item used for production of semiconductor nodes both above and below 10 nanometers would not be caught under the presumption of denial; instead, the case-by-case review policy would be applicable.  On a different occasion, however, the same BIS official stated that “uniquely required” means the items that can be used to get to 10 nanometers and below nodes but can also be used at larger nodes. 

BIS officials claimed they intended to catch only a very limited set of chokepoint semiconductor manufacturing technologies, but their guidance has been unclear and contradictory.

The significance of the “uniquely required” standard

There is no indication so far whether BIS or other agencies of the U.S. government may support or reject any particular interpretation of the “uniquely required” standard. Other agencies could conclude, independently of BIS, that all exports to SMIC should be subject to a presumption of denial policy or simply reject the license applications for SMIC on a case-by-case basis. 

At the same time, the “uniquely required” standard may have implications beyond export licenses.  For example, the U.S. government may use the “uniquely required” standard for defining “foundational technologies” or formulating new controls generally.  

In light of the unfettered discretion of U.S. officials to construe their own policy statements and the national security concerns expressed about SMIC, exporters can have little confidence U.S. officials would accept or reject the most reasonable definition of the “uniquely required” standard.  Nevertheless, given its potentially broader implications, the new “uniquely required” standard warrants careful attention by the exporters.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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