BIS Clarifies and Consolidates the Foreign-Made Direct Product Rules

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Feb. 14, 2022

The Bureau of Industry and Security (BIS) has once again made changes to the provisions of the foreign-direct product rules (FDPR). On February 3, 2022, a final rule was published amends the Export Administration Regulations (“EAR”) and consolidates the FDPR in § 734.9. The new revisions also specifically clarify the applicability of the FDPR, clarifies definitions, and makes a correction with respect to the term “U.S.-origin technology and software.”

Generally, under the FDP rule foreign-produced items that may not traditionally be subject to the EAR (e.g., items located in the US or US origin items located aboard) may nonetheless become subject to the EAR if they contain certain types U.S. origin technology or software OR are produced by plants that are a direct product of certain U.S. origin technology or software. Before this new final rule, the FDPR appeared in parts 736 and 744. In new § 734.9, the original FDP rule becomes four direct product rules:

· The National Security FDP rule

·         The 9x515 FDP rule

·         The “600 series” FDP rule

·         The Entity List FDP rule

BIS added double quotation marks to certain FDPR terms that are defined in part 772 of the EAR, e.g., direct product, technology, software, and equipment. In particular, BIS believes that this clarification will provide support for those looking for additional guidance about the scope of production equipment in relation to the Entity List FDP rule. BIS also clarified that in § 736.2(b)(3) of the EAR (General Prohibition Three), the foreign-direct products subject to the EAR are not necessarily subject to a license requirement and that license requirements must be determined based on an assessment of the classification, destination, end user, and end use of the items. The new rule also explains when the “600 series” FDP rule applies to items described in Export Control Classification Number (ECCN) 0A919. The text of ECCN 0A919 states that it includes the foreign direct product of “600 series” technology or software. However, before this new rule, the text of General Prohibition Three did not explicitly include ECCN 0A919 items when describing other aspects of determining applicability of the “600 series” FDP rule.

Finally, BIS also clarified when the FDP rules are intended to apply to the direct product of U.S.-origin technology or software. On May 19, 2020, BIS published a rule that removed the word “U.S.” from the heading of § 736.2(b)(3) (Foreign-Direct Product rule) where it had been placed in front of the words “technology and software.” In removing the term “U.S.” BIS may have inadvertently caused confusion as to whether the revision changed the product scope of all FDP rules, because the term “U.S.” had only been in the heading and not in the other FDP rules' product scope descriptions. For this reason, this new rule from BIS clarifies the EAR by specifically stating in each of the FDP rules that the application of the rule relates to U.S.-origin technology or software.

The FDP rules are complex and require careful reading of the regulations. We have additional articles here and here on the subject. If you have questions relating to the EAR or the FDPR do not hesitate to contact an attorney at Barnes, Richardson & Colburn LLP.