With the flood of new and emerging U.S. technologies entering the market, the Department of Commerce is fast-tracking efforts to identify and establish export controls on “emerging technologies” to determine which ones should be controlled for purposes of national security.
The Commerce Department’s Bureau of Industry and Security (BIS) has begun a process to establish new controls on the export, re-export, or transfer of emerging technologies that have the potential for use in foreign weapons manufacturing, the proliferation of weapons of mass destruction, intelligence gathering, acts of terrorism, or activities which could cause interference with or disruption of critical infrastructure, or those activities which pose a serious security threat to the U.S. or its allies.
BIS is currently reviewing comments received from the science, technology, engineering, and manufacturing sectors (in response to a Federal Register Advance Notice of Proposed Rulemaking (ANPRM) issued on November 19) to properly define and identify emerging technologies and to determine the degree to which they are essential to national security. BIS said these national security-sensitive technologies will be identified by an interagency process that will consider both public and classified information, as well as input from the Emerging Technology Technical Advisory Committee and the Committee on Foreign Investment in the U.S. (CFIUS).
Once the emerging technologies deemed essential to U.S. national security have been identified, the Commerce Department will impose licensing requirements, subject to control under the Export Administrations Regulations (EAR).
The effort is being led by House Foreign Affairs Committee Chair Ed Royce (R-CA) and Ranking Member Eliot Engel (D-NY), who co-sponsored the Export Control Reform Act of 2018, and is in response to a provision set forth in the National Defense Authorization Act of 2019, which directed the president to create an interagency process for establishing export controls on “emerging and foundational technologies.” The export control reforms are being driven by concerns that certain countries are exploiting current weaknesses in the U.S. legal infrastructure to methodically obtain strategically important, cutting-edge technologies.
The Commerce Department also plans to issue a separate notice seeking public comment regarding “foundational technologies”, another category that may be critical to U.S. national security interests.
Potential Emerging Technologies Slated for Protection
|Emerging Technology||Representative Examples|
|Artificial Intelligence (AI) and Machine Learning Technology||
|Position, Navigation, and Timing (PNT) Technology|
|Advanced Computing Technology||
|Data Analytics Technology||
|Quantum Information and Sensing Technology||
|Advanced Surveillance Technologies||
While it isn’t fully clear year which technologies will fall under the new protections, the government mandated that several new “emerging technologies” be covered under the national security law which was updated last August. On November 19, the Commerce Department released a Federal Register Notice which listed the following list of technologies that are being considered for inclusion in the new definition of emerging technologies:
We can expect the Commerce Department to finalize the list of affected emerging technologies early this year. Once the finalized list has been released, U.S. companies producing those technologies will face new limitations under the export control laws. There will be limits put in place on not only on who can buy the products, but also who works for or invests in the company.
Implications for Business
If your technology is deemed to be affected by these changes, new export restrictions will not only limit who you can export your product to, but will also restrict the disclosure of information or technology to foreign nationals even within the United States.
The export of products and the disclosure of related technology and information will require licenses and export classifications, dependent upon the destination, end-user, and end-use of the product or information.
Companies exporting emerging technology should also ensure legal advisors are fluent in export control laws and regulations.
Persons who are not U.S. citizens or green-card holders may require licenses to participate in the research and develop efforts of some of these emerging technologies.
New export controls on these sectors will impose restrictions on sharing information with foreign nationals, known as a “deemed export”. An export of information, technology, or source code (except encryption source code) is ‘deemed’ to take place when it is released to a foreign national within the United States. Information or technology is ‘released’ for export when: it is available to foreign nationals for visual inspection (such as reading technical specifications, plans, blueprints, etc.); when exchanged orally; or when technology is made available by practice or application under the guidance of persons with knowledge of the technology.
Exports of your parts, components, or products may require export controls, such as creating a compliance program and procedures to reduce your risks and ensure you don’t do business with any Specially Designated Nationals (SDNs), or restricted persons or entities, or those in embargoes places.
New export controls will likely require companies to obtain a license to export products to China and other destinations, whether you are exporting a final product or moving your goods throughout your manufacturing supply chain.
Mergers, Acquisitions, and Investments
The new regulations will also affect foreign investments in these sectors. Specifically, many types of foreign investments (including not only outright acquisitions, but also minority investments) will be subject to review by the CFIUS. CFIUS has the power to stop or unravel a deal and can impose restrictions on a foreign acquirer’s access to the technology.
Furthermore, if your business has or will have any foreign ownership and that foreign ownership is involved in the design, development, testing, manufacture, production or fabrication of a critical technology related to any of the targeted industries, that information must be filed with the CFIUS if the foreign entity has:
- Control of the company;
- Membership, appointment, or observer rights on the board;
- Involvement in decision-making regarding the use, development, acquisition, or release of critical technology; or
- Access to any “Material Nonpublic Tech Information” of the U.S. business.
U.S. Government Imposes Pilot Regulations
In the meantime, the U.S. Department of the Treasury has issued a set of pilot regulations, which went into effect on November 10, to protect critical technology and intellectual property from potentially harmful foreign acquisitions. These temporary regulations apply to 27 types of companies, identified by their respective North American Industry Classification System (NAICS) code, and covers critical technologies such as optical equipment, radio and television broadcasting, wireless communications equipment, nanotechnology, and biotechnology. These sectors will also be subject to enhanced scrutiny on foreign investment by CFUIS.
Treasury Secretary Steven T. Mnuchin said “These temporary regulations address specific risks to U.S. critical technology while informing the development of final regulations that will fully implement FIRRMA.” FIRRMA, the Foreign Investment Risk Review Modernization Act of 2018, authorizes CFIUS to conduct pilot programs to implement provisions that did not take effective immediately upon enactment of the legislation. It is anticipated that full implementation of FIRRMA will occur no later than February 2020.