Effective May 15, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) imposed additional restrictions on dealings with Huawei under an interim final rule published on May 19. The new restrictions build on last year’s addition of Huawei Technologies Co., Ltd. (Huawei) and 114 of its non-U.S. affiliates to the BIS Entity List. Our alerts on last year’s developments can be viewed here and here.
As a result of last year’s Entity List designations, exports, reexports and transfers (in-country) to the designated entities involving items “subject to the EAR” were prohibited under the Export Administration Regulations (EAR) in the absence of a BIS license. Traditionally, the phrase “items subject to the EAR” has encompassed most U.S.-origin items, items produced outside the United States that contain more than the applicable de minimis level of U.S.-controlled content, and certain foreign-produced direct products of U.S. technology and software. The new revisions to the EAR expand the scope of this “foreign direct product rule” as it applies to exports, reexports or transfers (in-country) to Huawei or its designated affiliates, and lays the foundation for similar restrictions to be applied to other Entity List entities in the future.
Amendments to the Foreign Direct Product Rule
Previously, the rule applied to foreign-produced items that are the direct product of certain technology or software or certain plants or major components of plants that are the direct product of such technology and are subject to national security controls as specified in the export control classification numbers (ECCNs) applicable to the technology, software or foreign-produced item. The rule required authorization in the form of a BIS license for exports, reexports and transfers (in-country) to specified destinations, but this license requirement could be overcome by use of a “license exception” provided in Part 740 of the EAR. These core parameters of the foreign direct product rule have not changed, nor have the rules related to foreign-produced items that contain more than the applicable de minimis levels of U.S.-controlled content.
Rather, the interim final rule expands the rule to cover exports, reexports and transfers (in-country) of items that are the direct product of technology or software specified in certain ECCNs, including some ECCNs not previously captured by the rule, if there is knowledge that the foreign-produced item is destined to an entity with a “footnote 1” designation in the license requirement column of the Entity List. The new rule provides that license exceptions are not available unless the license requirement column so specifies, and that use of any license exception is subject to compliance with the conditions specified in Part 740 of the EAR.
Amendments to the Entity List
The interim final rule amends the Entity List by adding a reference to the new foreign direct product rule requirements and a new footnote 1 to the license requirement column of the entry for each designated Huawei entity.
The new footnote 1 provides that the following foreign-produced items may not be exported, reexported or transferred (in-country) if there is knowledge that the item is destined to an entity with a footnote 1 designation:
- any item produced or developed by a “footnote 1” Entity List entity that is the direct product of technology or software subject to the EAR and specified in certain Category 3, 4 or 5 ECCNs (see interim final rule for complete listing of ECCNs); and
- any item:
- produced by any plant or major component of a plant that is located outside the United States, when the plant or major component of a plant itself is a direct product of U.S.-origin “technology” or “software” that is covered by one of the specified Category 3, 4 or 5 ECCNs; and
- a direct product of “software” or “technology” produced or developed by a “footnote 1” Entity List entity.
For purposes of these requirements, a major component of a plant located outside the United States means equipment that is essential to the production of an item, including testing equipment, to meet the specifications of a design specified in (b)(2) above.
When interpreting the scope of footnote 1, it is important to apply the EAR definitions of the terms "knowledge” and “production.”
“Knowledge” 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.”
“Production” means “all production stages, such as: product engineering, manufacture, integration, assembly (mounting), inspection, testing, [or] quality assurance.”
Although the term “developed” is not defined, the term “development” is defined as relating to “all stages prior to serial production, such as: design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, process of transforming design data into a product, configuration design, integration design, [or] layouts.”
In addition, use of the term “destined” is worth noting – this means that parties must ensure that they conduct appropriate due diligence regarding the identity of the ultimate consignee or end-user of any items within the scope of footnote 1.
Parties dealing with Huawei or any of its Entity List affiliates should promptly review their products and supply chains in light of the new rule to determine its impact on their activities.
Exceptions to the New Restrictions and Request for Comments
Items covered by the interim final rule that were “on dock for loading, on lighter, laden on an exporting or transferring carrier, or en route to a port of export or the consignee/end-user on May 15, 2020,” may proceed under the previously applicable rules.
In addition, items in production before May 15, 2020 may be exported, reexported or transferred (in- country) to Huawei or its designated affiliates without a license until Sept. 14, 2020.
Interested parties may submit comments to the address specified in the interim final rule. The deadline for submitting comments is July 14, 2020.
Extension of the General License
On May 15, 2020, BIS also extended a temporary license authorizing certain activities involving Huawei and its Entity List affiliates, including those necessary for operation of existing networks and equipment and support of existing mobile services. Rather than expiring on May 15, 2020, as previously planned, the temporary license will now expire on August 13, 2020. The narrow scope of the general license is described in our prior alerts and in previous Federal Register notices that can be viewed here and here.