On February 3, 2022, the Department of Commerce, Bureau of Industry and Security (“BIS”) issued a final rule (the “Final Rule”) revising the organization and substance of the Foreign Direct Product Rules (“FDP”).[1] BIS has consolidated the FDP rules in the previously reserved § 734.9 of the Export Administration Regulations[2] (“EAR”), whereas previously multiple sections had to be referenced to apply the FDP rules. Based on a cursory review of the rule and corresponding BIS comments in the Federal Register, the final rule may appear to have simply reorganized the rules in one place in the EAR for ease of use; however, the final rule may have a significant impact on Huawei and its suppliers.

The Final Rule divides the FDP Rules into four subsections – the National Security FDP Rule, the 9×515 FDP ​​Rule, the “600 Series” FDP Rule, and the Entity List FDP Rule – to more clearly delineate their respective scopes.[3] Under the final rule, the BIS added the term “U.S. origin” before “technology or software subject to EAR” to the text of each FDP rule, except for the Entity List FDP rule, where the BIS removed “American origin” from the rule. provision of production equipment.[4] While the comments accompanying the final rule in the Federal Register explain that the addition of “US-origin” to the first three FDP rules merely clarified, rather than changed, their scope, those comments are silent on the removal of “US-origin”. ” from the entity list FDP rule.[5]

The BRI seems to have ensured that more articles are submitted to the EAR. Therefore, many other items may now require a license for export, re-export, or in-country transfer to listed Huawei entities. Specifically, by removing the “US origin” from the FDP rule from the list of entities relating to production equipment, the BIS has expanded the scope of production equipment subject to this rule. Under the May 19, 2020 rule, the Entity List FDP rule only applied to items produced by a factory or a major component of a factory (located outside of the United States) that was itself a direct product of certain products listed. American origin technology or software subject to the EAR.[6] By removing “US-origin” from the text of the Entity List FDP rule, the EAR now controls the production of a plant or major component of a plant that is the direct product of a technology or software of US or non-US origin. to the EAR and specified in the Export Control Classification Numbers (“ECCN”) listed.[7]

This rule is enforceable because technology or software from a third country may be subject to EAR, even if it is not of US origin, for example where the technology or software contains more than one de minimis amount of content controlled by the United States or is the direct product of US-origin technology or software under the National Security FDP Rule.[8]

For example, the new rule would prohibit a company from owning German or Japanese-made production equipment in its “clean room” that is the direct product of EAR-subject technology or software developed by the company. German or Japanese equipment manufacturer, and classified in one of the listed ECCNs.

The final rule reflects the U.S. government’s ongoing efforts across jurisdictions to limit Huawei’s access to technology and software, regardless of origin, that supports 5G infrastructure. The removal of “US origin” from the FDP rule on the Entity List expands the already wide scope of this rule to include items resulting not only from certain listed technologies or software subject to the EAR, but also from the production of a plant or major component of a plant that is the direct product of certain listed technology or software subject to EAR, regardless of origin.

[1] 87 Fed. Reg. 6022 (February 3, 2022). For example, identifier. at 6024–25 (explaining that the 600-series FDP rule applies to “military products” located and produced outside of the United States, described in Export Control Classification (“ECCN”) number 0A919, which are the direct product of US-origin technology or Software); identifier. at 6023 (clarifying, at § 736.2(b)(3), that BIS generally determines licensing requirements for direct foreign products subject to EAR on a case-by-case basis taking into account classification, destination, end user of each item, and end use).

[2] 15 CFR parts 730–80 (2022).

[3] 87 Fed. Reg. at 6022.

[4] 15 CFR § 734.9(e)(1)(ii) (2022). According to FDP rules, a “major component” is “equipment” that is “essential” to the “production” of an item, including “test” equipment, and equipment is essential if it” is involved in one of the production stages.” Identifier. § 734.9(a); 87 Fed. Reg. at 6023. BRI moved the definition of “major component” from footnote 1 to Supplement no. 4 of EAR Part 744 to EAR 734.9(a) to demonstrate that the definition applies to all FDP rules. 87 Fed. Reg. at 6023.

[5] 87 Fed. Reg. at 6023.

[6] 85 Fed. Reg. 29,849, 29,850 (May 19, 2020).

[7] § 734.9(e)(1)(ii).

[8] § 734.3(a).

© Copyright 2022 Squire Patton Boggs (USA) LLPNational Law Review, Volume XII, Number 48