Foreign Direct Product Rule Guidance
Jan. 11, 2021
By: Michael N. Coopersmith
On December 18, 2020 the BIS published a long-awaited FAQ guidance document in the hopes of clarifying recent changes to the Foreign Direct Product Rule (“FDP rule”). The FDP rule is found in General Prohibition Three of the EAR at 15 C.F.R. § 736.2(b)(3) and places certain items within the scope of the EAR that at first glance may not otherwise appear to be. Under the FDP rule items produced outside of the U.S. that do not contain a greater than de-minimis amount of controlled U.S.-origin content or technology may still be subject to the EAR, nonetheless.
Under the expanded FDP rule two general categories of items are subject to the EAR:
1) Foreign produced items that are the direct product of certain U.S.-origin technology or software subject to the EAR themselves if there is knowledge that the foreign produced item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by a footnote 1 designated entity, or such entity is a party to any transaction involving such product(s).
2) Items that are produced by any plant or a major component of a plant that is located outside the United States, when the plant or a major component of the plant is a direct product of certain U.S.-origin technology or software are subject to the EAR if there is knowledge that the foreign produced item will be incorporated into or used in the production or development of any part, component, or equipment produced, purchased, or ordered by a footnote 1 designated entity, or such entity is a party to any transaction involving such product(s).
It should be noted that the BIS has recently added a “footnote 1” to the Entity List. At this time the only Entity List entries tagged with a “footnote 1” designation are Huawei along with each of its Entity List designated affiliates.
As industry grapples with building and implementing effective compliance programs ready to meet the requirements of the expanded FDP rule, understanding the scope of scenario two (outlined above) has proven to be particularly challenging. While the updates to the FDP rule have been largely aimed at limiting Huawei’s access to critical U.S. technology needed for its in-house semiconductor production, the December 18, 2020 FDP rule guidance document states definitively that a “plant” as described in the FDP rule is not limited to semiconductor wafer foundries and test facilities, stating that the rule instead covers all foreign items produced with covered equipment. Any product meeting the requirements of either scenario, regardless of product type, must now be handled with extreme care.
While BIS guidance is certainly welcome, it unfortunately has not yet provided crystal clear answers to all common questions. Identifying what qualifies as a major component of a plant pursuant to the expanded FDP rule, for example, remains a fact-intensive and challenging endeavor. While the BIS is on record stating that it will not provide a list of specific types of equipment it considers to be a major component of a plant, the agency has now given a few general examples. The BIS has now made it clear that covered equipment includes not only equipment needed for any stage of production but test equipment as well, indicating the agency intends to cast a wide net when analyzing FDP rule applicability.
All facts considered, a general first step to understanding your responsibilities under the expanded FDP rule is to first ensure you are familiar with all parties to all potential transactions. As stated above, a required element of the expanded FDP rule is that a Footnote 1 designated entity must be a party to a transaction for that transaction to be in scope of the FDP rule. If it is determined that a footnote 1 designated entity is a party to a transaction a deeper analysis should then be undertaken to better understand your responsibilities under the expanded FDP rule.
If you have any questions about The Foreign Direct Product Rule please contact an attorney at Barnes, Richardson & Colburn, LLP.