Effective May 15, 2020, an Interim Final Rule has expanded the scope of the U.S. Department of Commerce’s Export Administration Regulations (EAR) to cover certain items destined to Huawei and many of Huawei’s affiliates. The Interim Final Rule amends the EAR’s so-called “foreign direct product rule” to inhibit Huawei’s ability to obtain and design chips and semiconductors from non-U.S. manufacturers if manufacturing equipment, software, or technology subject to the EAR is involved. Under the Interim Final Rule, qualifying commodities manufactured outside of the United States may now be subject to the significant U.S. export controls restrictions in place on Huawei.

Given this change, companies worldwide that supply Huawei or make products or technology that may be supplied to Huawei should evaluate how the Interim Final Rule may apply to their business.

Broadening of the Foreign Direct Product Rule Specifically Targeted at Huawei

Under the “foreign direct product rule,” items that are the direct product of certain U.S.-origin technology or software controlled for “national security” reasons are subject to the U.S. export licensing jurisdiction under the EAR, even if the items are manufactured outside of the United States. The Interim Final Rule expands the scope of the foreign direct product rule to include specific additional items – mainly related to chipsets, microprocessors, and related telecommunications equipment components – and requires U.S. government export licenses when these commodities are destined for Huawei or any of the 114 Huawei affiliates named on the Department of Commerce’s Entity List. The move is aimed at restricting Huawei’s use of U.S. technology and equipment in its supply chain. Pursuant to the Interim Final Rule, the foreign-manufactured commodities now subject to the EAR and requiring a license if destined for Huawei or any of its affiliates named on the Entity List now include the following two categories:
 

The Interim Final Rule strategically targets Huawei and its affiliates by utilizing the Entity List designations already in place and further described below. Specifically, the Bureau of Industry and Security (BIS) has designated entities on the Entity List – namely, Huawei and many of its affiliates – with a specific footnote indicating that licensing requirements apply for the export, reexport, or in-country transfer of the foreign-produced items described above. License applications for Huawei and its 114 affiliates named to the Entity List are generally met by BIS with a presumption of denial.

A more detailed breakdown of the parameters provided above as well as relevant examples of their potential application follows.
 

Paragraph a) expands the scope of the EAR to capture items that are produced or developed by Huawei and that are the direct products of certain technology or software that are subject to the EAR, particularly those frequently used in the production of integrated circuits, microprocessors, telecommunications equipment, and digital computers.¹  These foreign-produced items are now subject to export licensing requirements (applications for which are subject to a presumption of denial) if destined for Huawei or the Huawei affiliates designated on the Entity List.

The Interim Final Rule provides the example that if Huawei “produces or develops an integrated circuit design” utilizing Electronic Design Automation software subject to the EAR, that foreign-produced integrated circuit design is subject to the EAR and would require a license if destined for Huawei. This is true regardless of whether the integrated circuit design is foreign-produced or whether it would otherwise be subject to the EAR under the foreign direct product rule or the de minimis rule, as further described below.
 

Paragraph b) applies to items that are the direct product of a plant or major component of a plant, located outside of the United States, when the manufacturing plant or components such as testing equipment or manufacturing equipment are themselves the foreign direct product of listed U.S.-origin technologies or software.² Paragraph b) expands the scope of the EAR to include such items if they are the direct products of technology or software produced or developed by Huawei. Where there is knowledge that such items are destined for Huawei or its designated affiliates, a BIS export license is required (again, for which applications are subject to a presumption of denial by BIS). The Interim Final Rule provides by example that paragraph b) applies to integrated circuits, produced by a foreign company outside of the United States, in a foundry using equipment essential to the production of the integrated circuits that is:
 

 Importantly, items that were in production prior to May 15, 2020, that would newly be subject to the EAR due to the second part of the Interim Final Rule may be exported, reexported or transferred (in-country) to Huawei or its designated affiliates without a license before Sept. 14, 2020.

Entity List Designations and Other Restrictions on Huawei

The Interim Final Rule targets Huawei and follows prior regulatory actions aimed at the Chinese company, as further described in our GT Alert on May 30, 2019, and GT Alert on April 29, 2020. These actions include certain bans on use of Huawei equipment by U.S. government contractors or by certain companies that do business with the U.S. government, as well as recent letters from the Federal Communications Commission (FCC) directing Huawei and other Chinese telecom companies to explain why their authorizations to provide services should not be revoked. Perhaps most consequential has been the addition of Huawei, along with a significant number of Huawei’s non-U.S. affiliates, to the BIS Entity List.

Inclusion on the Entity List prohibits businesses worldwide from exporting or reexporting any goods, technology, or software subject to the EAR to entities named to the Entity List. All commodities, including goods, technology, and software, manufactured in the United States or exported from the United States are subject to the EAR for the life of the commodity, and even commodities manufactured outside the United States are subject to the EAR if they contain more than a de minimis amount of controlled U.S. content (the “de minimis rule”) or are covered by the foreign direct product rule.

It has been reported that many companies, and in particular makers of semiconductors and microchips, continued to supply Huawei by shifting production to non-U.S. factories and taking care to produce items that were not subject to the EAR because they did not meet the relevant thresholds under the de minimis or foreign direct product rules. The changes in the Interim Final Rule, at least in part, appear designed to address this shift and more comprehensively cut off Huawei’s access to its supply chain.

Temporary General License

BIS has again extended the Temporary General License (TGL), permitting companies to continue supplying Huawei and its listed affiliates with certain commodities subject to the EAR. The extended TGL is set to expire Aug. 13, 2020. The TGL was first issued on May 22, 2019, has already been extended several times and, as amended, is designed to allow users of Huawei devices and telecommunications providers, particularly those in rural U.S. communities, to continue operating Huawei devices and network equipment while moving to alternative suppliers.

The TGL continues to be limited in scope, and parties that wish to continue supplying EAR-controlled commodities to Huawei on a temporary basis must carefully analyze each transaction to confirm whether it remains authorized under the TGL. Though the TGL has been extended several times, the BIS press release announcing the most recent extension indicates that future extensions of the TGL in its current form are unlikely and that companies relying on the TGL should plan accordingly.

Careful Review of Foreign Manufacturing with Potential Nexus to Huawei Required

Whether foreign manufactured commodities are captured under the Interim Final Rule is fact-specific. Companies directly or indirectly involved in Huawei’s supply chain will need to review their products carefully to determine whether the Interim Final Rule triggers new licensing requirements.