As part of the National Defense Authorization Act (“NDAA”) for Fiscal Year 2019, Public Law No: 115-232, Congress enacted the Export Controls Act of 2018 (“ECA”).1 A principal purpose of the legislation is to enhance protection of U.S. technology resources by imposing greater restrictions on transfer to foreign persons – particularly through exports to China -- of certain key emerging and foundational technologies and cybersecurity considered critical to U.S. national security, including technical capabilities, specifications and related knowledge, including through joint ventures. ECA reflects evolving U.S. national security concerns over the importance of critical technology and infrastructure, makes significant changes to U.S. export controls largely in response to perceived challenges presented by China, and by linking national security and emerging technologies, broadens U.S. policy to protect a wider scope of national security interests.
ECA establishes permanent statutory authority for current U.S. export controls on commercial and dual-use items – those with both civilian and military applications – enforced by U.S. Department of Commerce (“DoC”) Bureau of Industry and Security (“BIS”) through the Export Administration Regulations (“EAR”). ECA repeals and replaces the Export Administration Act of 1979, which was the statutory authority for dual-use export controls until it lapsed in 1994, and which has been continued every year since by Executive Order of the President under the International Emergency Economic Powers Act (“IEEPA”).
ECA largely continues the current BIS controls on the export, reexport and in-country transfer (collectively, “export”) of items subject to U.S. jurisdiction for national security and foreign policy concerns. ECA provides that all existing BIS regulations, orders, determinations, licenses or other administrative actions remain in effect until specifically modified, superseded, set aside or revoked under the authority of ECA. Under ECA, the DoC may not impose export controls on currently exempt items such as humanitarian aid and some informational materials.
Key Changes in Export Controls
1. Export controls are established for “emerging and foundational technologies”
ECA authorizes the DoC to establish interim and permanent controls on the export of “emerging and foundational technologies,” which are sensitive and innovative technologies not currently subject to export controls but deemed important for commercial and economic security.
a. Interagency process to define covered technologies
Under ECA, “emerging and foundational technologies” are those that are essential to the national security of the U.S., but not already subject to export controls (i.e., they are not already “critical technologies” under the United States Munitions List or the Commerce Control List (“CCL”) under the EAR). “Emerging and foundational technologies,” which are not identified in ECA, will be determined by a new interagency group that will consider both public and classified information, as well as information and recommendations provided by CFIUS. The interagency process will include a notice and comment period allowing public input on items to be included as emerging and foundational technologies.
b. Factors for defining covered technologies
In identifying emerging and foundational technologies, the interagency process must consider:
- The development of emerging and foundational technologies in foreign countries.
- The effect export controls may have on the development of such technologies in the U.S.
- The effectiveness of export controls on limiting the proliferation of emerging and foundational technologies in foreign countries.
Although ECA does not specify particular technologies, those potentially subject to new export controls include cybersecurity, artificial intelligence, machine learning, autonomous vehicles, 3D printing, augmented virtual reality, gene editing, financial technology, semiconductors, robotics, nanotechnology and biotechnology.2 Given the challenges involved in identifying new and evolving technologies, the interagency group may well take an expansive approach in defining technologies and transactions subject to new controls. It is important that stakeholders monitor and consider participating in the notice and comment process for defining these technologies.
c. Revised export controls for emerging and foundational technologies
Once the interagency process has identified emerging and foundational technologies, ECA authorizes the DoC to establish interim and permanent controls on the export of those technologies. In determining the appropriate level of export control, the DoC must consider the potential end-uses and end-users of the technology, and countries to which exports from the U.S. are restricted (e.g., embargoed countries). While the DoC has discretion to set the level of export controls, at a minimum it must require a license for the export of emerging and foundational technologies to countries subject to a U.S. embargo, including those, such as China, that are subject to an arms embargo.
The DoC’s review of license applications for emerging and foundational technologies must consider intelligence “regarding any threat to the national security of the United States posed by the proposed export, reexport, or transfer” of the technology. Depending on how this standard is implemented, it could represent a seismic shift in controls for exporting new technologies to China and any other controlled destination. And given that this will be a new license application standard, it could result in additional delays in BIS license application processing for covered items.
For license applications involving “a joint venture, joint development agreement, or similar collaborative arrangement,” the DoC is authorized to issue new regulations requiring the applicant to identify any foreign person participating in the arrangement, and any foreign person with “significant ownership interest in a foreign person participating in the arrangement.” This new disclosure requirement could represent a significant expansion of the individual and corporate information required in export license applications.
ECA provides numerous potential exceptions to the new export controls on emerging and foundational technologies, the specifics of which are to be determined by the DoC. In general, the exceptions distinguish ordinary commercial transactions from those that could transfer fundamental technical knowledge to foreign persons. Exceptions include:
- Ordinary course commercial activities such as the export of a finished item and the provision of associated technology and related services that generally are made available to customers, distributors, or resellers.
- The export of equipment and the provision of associated technology to operate the equipment if the transfer could not result in a foreign person using the equipment to produce critical technologies.
- The procurement by a U.S. person of goods or services, including manufacturing services, from a foreign person, if the foreign person has no rights to exploit any technology contributed by the U.S. person other than to supply the procured goods or services.
- Any contribution and associated support by a U.S. person to industry standard-setting organizations, including any license of or commitment to license intellectual property.
2. Interagency review of license requirements for exports to countries subject to arms embargoes
Under ECA, the DoC and other relevant federal agencies must review the license requirements for the export of items for military end-uses and military end-users in countries subject to comprehensive arms embargoes (e.g., China). The review will also include the export of some items on the CCL that do not currently require licenses for export to countries subject to a comprehensive U.S. arms embargo. This section of ECA is not detailed, but the review could result in new controls on additional items exported to China and other embargoed countries. Any changes to license requirements as a result of the review must be implemented within 270 days of enactment of ECA. Because of the potentially broad scope of review under this requirement, stakeholders should monitor potential new license requirements and consider participating in the notice and comment process.
3. Review impact to the defense industrial base in license applications
ECA requires the DoC to consider the impact of a proposed export on the U.S. “defense industrial base” when reviewing a license application, and deny any request that would have a “significant negative impact” on the defense industrial base. License applications will be required to include information to address the impact on the defense industrial base, such as whether the purpose or effect of the transaction is to allow for significant production of items outside the U.S. The DoC will consider factors including the potential reduction in:
- The availability of a U.S. item that is likely to be acquired by the U.S. Department of Defense (“DoD”) or another national security-related department or agency.
- U.S. production of an item that resulted from government-funded research and development.
- Employment of U.S. persons with the knowledge and skills required for continued production of an item likely to be acquired by DoD or another national security-related department or agency.
Like much of ECA, the potential impact of this requirement is unclear, but certainly potentially broad given the sheer size of DoD and the scope of its activities, and the possible restrictions to be applied to items resulting from government-funded research and development.
4. Potential implications for foreign investors, joint ventures and licensing agreements
Even in advance of adoption of the implementing regulations and all parts of FIRRMA and ECA becoming effective, it is important that both U.S. and foreign companies include consideration of these new laws in formulating their strategies regarding export of technology from the U.S., and investment and M & A activities involving the U.S. We will not know the full impact of ECA on foreign joint ventures and licensing agreements until new regulations are issued, but the potential implications are broad, particularly as to China transactions involving both exports and technology transfers via joint ventures, licensing agreements, and other commercial arrangements.
The definition of emerging and foundational technologies, coupled with the license requirement for countries subject to U.S. embargoes (including China), could limit the ability of U.S. companies to transfer technologies in foreign joint ventures, or through licensing agreements with foreign customers and business partners. While obtaining licenses for such transactions may be possible, given the purpose of ECA it is unclear when, whether and under what standard of review such licenses may be granted. And in such license applications, foreign entities involved in joint ventures and other collaborative arrangements will have to provide new, and potentially onerous, ownership disclosures. In addition, a new license application process and standards could result in longer BIS application processing times, and thus additional delays in consummating business transactions involving covered technologies. These changes will also significantly impact the rights and treatment of U.S. and foreign persons under the amended CFIUS regulations. See our detailed advisory here.
5. Penalty codification and increases
ECA codifies the civil and criminal penalties that were established under the IEEPA. Civil penalties will slightly increase to up to the greater of $300,000 or twice the value of the applicable transaction, along with potential revocation of an export license and denial of export privileges. Criminal penalties for willful violations will not change, at up to $1,000,000 per violation or twice the value of the gain or loss from the transaction, whichever is greater, and, for individuals, imprisonment of up to 20 years.
6. Export compliance programs
Under ECA, the DoC, in consultation with other appropriate agencies, must publish and update “best practices” guidelines to assist in the development of effective export control programs. As with existing BIS enforcement practice, implementation of an effective export compliance program and a “high quality overall export compliance effort” would ordinarily be given weight as mitigating factors in a civil enforcement action under the ECA.
7. Effective date
ECA does not establish a single effective date, instead extending export controls, licenses, authorizations, and other administrative actions in effect on August 13, 2018 until they are modified, superseded, set aside, or revoked under the authority granted by ECA. There are deadlines for implementation of some of the mandatory changes, as noted above.
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ECA inaugurates new and more rigorous export controls affecting emerging and foundational technologies. Together with companion changes to the scope, authority and practices of CFIUS, these changes require that all U.S. and foreign persons engaged in the export of goods, services and technologies from, or investment in, the United States pay increased attention to compliance with these evolving and increasingly onerous controls.
FOOTNOTES1 The NDAA includes both the ECA and the Foreign Investment Risk Review Modernization Act (“FIRRMA”), which is intended to expand the powers of the Committee on Foreign Investment in the United States (“CFIUS”) to review foreign investments in the U.S. See our detailed advisory here.
2 Numerous areas of concern are discussed in the Department of Defense report “China’s Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable A Strategic Competitor to Access the Crown Jewels of U.S. Innovation” (Jan. 2018), https://admin.govexec.com/media/diux_chinatechnologytransferstudy_jan_2018_(1).pdf