On March 21, 2023, the US Department of Commerce ("Commerce" or the "Department")) released a Notice of Proposed Rulemaking ("NPRM") for the guardrails included in the CHIPS Act's incentive program.1 The CHIPS Act, which was signed into law on August 9, 2022, and discussed in our previous legal alert, "established an incentives program to reestablish and sustain US leadership across the semiconductor supply chain."2 This program provide[s] funding, including via grants, cooperative agreements, loans, loan guarantees, and other transactions, to support investments in the construction, expansion, and modernization of facilities in the US for the fabrication, assembly, testing, advanced packaging, production, or research and development of semiconductors, materials used to manufacture semiconductors, or semiconductor manufacturing equipment.3
The CHIPS Act includes restrictions on funding recipients to ensure "that funding provided through this program does not directly or indirectly benefit foreign countries of concern."4 Those guardrails include "prohibit[ing] recipients of CHIPS incentives funds from using the funds in other countries;" "significantly restrict[ing] recipients of CHIPS incentives funds from investing in most semiconductor manufacturing in foreign countries of concern for 10 years after the date of award;" and "limit[ing] recipients of CHIPS incentives funds from engaging in joint research or technology licensing efforts with a foreign entity of concern that relates to a technology or product that raises national security concerns."5
The NPRM "outlines additional details on and definitions for the national security guardrails."6 Specifically, it establishes standards to restrict advanced semiconductor facility expansion in foreign countries of concern; limit the expansion of legacy semiconductor facilities in foreign country of concern; classify semiconductors as critical to national security; reinforce US export controls; and detail restrictions on joint research and technology licensing efforts with foreign entities of concern.7 We examine each of these in turn.
Establishing Standards to Restrict Advanced Semiconductor Facility Expansion in Foreign Countries of Concern
The CHIPS Act prohibits "significant transactions" involving the "material expansion" of "semiconductor manufacturing capacity" for leading-edge and advance facilities in "foreign entities of concern" for ten years from the data of award. The proposed rule defines these terms. Of note, the NPRM states that "foreign entity":
(a) Means—
(1) A government of a foreign country or a foreign political party;
(2) A natural person who is not a lawful permanent resident of the US, citizen of the US, or any other protected individual (as such term is defined in 18 U.S.C. 1324b(a)(3)); or
(3) A partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country;
(b) Includes—
(1) Any person owned by, controlled by, or subject to the jurisdiction or direction of an entity listed in paragraph (a) . . . ;
(2) Any person, wherever located, who acts as an agent, representative, or employee of an entity listed in paragraph (a) . . .;
(3) Any person who acts in any other capacity at the order, request, or under the direction or control of an entity listed in paragraph (a) . . . or of a person whose activities are directly or indirectly supervised, directed, controlled, financed, or subsidized in whole or in majority part by an entity listed in paragraph (a) . . .;
(4) Any person who directly or indirectly through any contract, arrangement, understanding, relationship, or otherwise, owns 25 percent or more of the equity interests of an entity listed in paragraph (a) . . .;
(5) Any person with significant responsibility to control, manage, or direct an entity listed in paragraph (a) . . .;
(6) Any person, wherever located, who is a citizen or resident of a country controlled by an entity listed in paragraph (a) . . .; or
(7) Any corporation, partnership, association, or other organization organized under the laws of a country controlled by an entity listed in paragraph (a). . . .8
The CHIPS Act already defines "foreign entity of concern" to mean a foreign entity that is
(A) designated as a foreign terrorist organization by the Secretary of State under section 219(a) of the Immigration and Nationality Act . . .;
(B) included on the list of specially designated nationals and blocked persons maintained by the Office of Foreign Assets Control of the Department of the Treasury (commonly known as the SDN list);
(C) owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (as such term is defined in section 4872 of title 10, United States Code);
(D) alleged by the Attorney General to have been involved in activities for which a conviction was obtained under--
(i) . . . the Espionage Act[];
(ii) section 951 or 1030 of title 18, United States Code;
(iii) . . . the Economic Espionage Act of 1996[];
(iv) the Arms Export Control Act . . . ;
(v) section 224, 225, 226, 227, or 236 of the Atomic Energy Act of 1954 . . .;
(vi) the Export Control Reform Act of 2018 . . . ; or
(vii) the International Emergency Economic Powers Act[]; or
(E) . . . determined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the US.9
The proposed rule clarifies that (B) includes "entities for which one or more individuals or entities included on the SDN list, individually or in the aggregate, directly or indirectly, hold at least 50 percent of the outstanding voting interest."10 It also expands (D) by adding entities alleged by the Attorney General to have been involved in activities for which a conviction was obtained under the Atomic Energy Act.11 It then adds three categories to the definition of "foreign entity of concern," thus significantly expanding the definition's scope:
- Entities included on the Bureau of Industry and Security's Entity List;12
- Entities "[i]ncluded on the Department of the Treasury's list of Non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC List), or for which one or more individuals or entities included on the NS-CMIC list, individually or in the aggregate, directly or indirectly, hold at least 50 percent of the outstanding voting interest;"13 and
- Entities "[i]dentified in the Federal Communications Commission's list of Equipment and Services Covered By section 2(a) of the Secure and Trusted Communications Networks Act of 2019 as providing covered equipment or services[.]"14
A "significant transaction" under the proposed rule is one the value of which is more than $100,000,15 while "material expansion" is increasing a facility's "semiconductor manufacturing capacity by more than five percent."16 According to Commerce, its goal with these definitions is to "capture even modest transactions attempting to expand manufacturing capacity." Commerce notes that any funding recipient who violates these restrictions can have their entire funding award "clawed back" by Commerce.17
Limiting the Expansion of Legacy Semiconductor Facilities in Foreign Country of Concern
The CHIPS Act includes exceptions for some transactions involving legacy semiconductor manufacturing in foreign countries of concern, but it also places restrictions on these exceptions. The proposed rule provides additional details on these restrictions, specifying that recipients cannot add "new production lines," nor can they expand a facility's production capacity by more than 10 percent.18 The statute also states that "recipients may only build new legacy facilities if the output of those facilities 'predominately serves' the domestic market of the foreign country of concern where the legacy chips are produced."19 Legacy chip (called legacy semiconductor in the proposed rule), means
(1) A digital or analog logic semiconductor that is of the 28-nanometer generation or older ( i.e., has a gate length of 28 nanometers or more for a planar transistor);
(2) A memory semiconductor with a half-pitch greater than 18 nanometers for Dynamic Random Access Memory (DRAM) or less than 128 layers for Not AND (NAND) flash that does not utilize emerging memory technologies, such as transition metal oxides, phase-change memory, perovskites, or ferromagnetics relevant to advanced memory fabrication; or
(3) A semiconductor identified by the Secretary in a public notice issued under 15 U.S.C. 4652(a)(6)(A)(ii).20
Semiconductors that are critical to national security, as defined in the proposed rule, or semiconductors "with a post-planar transistor architecture (such as fin-shaped field field-effect transistor (FinFET) or gate all around field-effect transistor)" are not legacy semiconductors. In addition, for the purposes of packaging facilities, nor are "semiconductors packaged utilizing three-dimensional (3D) integration."21
For a facility to "predominately serve" their domestic market, "at least 85% of the legacy facility's output" must be "incorporated into final products that are consumed in the foreign country of concern where they are produced."22 The proposed rule further clarifies that any recipient planning to engage in transactions under these exceptions must notify the Department so it can confirm the recipient's compliance with these restrictions.23
Classifying Semiconductors as Critical to National Security
Related to the legacy semiconductor manufacturing exception, the proposed rule identifies certain semiconductors that are critical to national security and thus outside the scope of a "legacy chip."24 These chips are subject to tighter restrictions than other semiconductor chips. Semiconductor chips critical to national security include "current-generation and mature-node chips used for quantum computing, in radiation-intensive environments, and for other specialized military capabilities."25 The specific semiconductor chips that are critical to national security are identified in the proposed rule 15 C.F.R. § 231.120.26
Reinforcing US Export Controls
The proposed rule "reinforces" the export controls that the Bureau of Industry and Security ("BIS") implemented in October of last year.27 The new export controls are intended to prevent the government of China from "purchasing and manufacturing advanced chips that would enhance their military capabilities."28 The proposed rule builds on this goal by "aligning prohibited technology thresholds for memory chips between export controls" and the national security guardrails in the CHIPS Act.29 However, the proposed rule "applies a more restrictive threshold for logic chips than is used for export controls."30
Detailing Restrictions on Joint Research and Technology Licensing Efforts with Foreign Entities of Concern
Finally, the CHIPS Act prohibits recipients from "engaging in joint research or technology licensing efforts with a foreign entity of concern that relates to a technology or product that raises national security concerns."31 The proposed rule provides additional clarity on this restriction. Specifically: it defines 1) "joint research" as "any research and development activity . . . that is jointly undertaken by two or more persons, including any research and development activities undertaken as part of a joint venture,"32 and 2) "technology licensing" as a "contractual agreement in which one party's patents, trade secrets, or knowhow are sold or made available to another party."33
As mentioned earlier, the proposed rule expands the definition of a "foreign entity of concern" from the one provided in the CHIPS Act. In addition, the proposed rule "details the technology, products, and semiconductors that raise national security concerns or are critical to national security, consistent with US export controls and as developed in consultation with the Department of Defense and US Intelligence Community." The technology and products that raise national security concerns are 1) any semiconductors critical to national security (described above); or 2) any item listed in Category 3 of the Commerce Control List and controlled for National Security (NS) or Regional Stability (RS) reasons.34
Comments to the Proposed Rule Welcome
Commerce is accepting public written comments on its NPRM until May 22, 2023.35 In its announcement of the NPRM, Commerce encourages industry, partners, allies, and other interested parties to submit comments, which it says will inform the final rule.36 Commerce expects to publish the final rule later this year.37
To submit a comment, you can search https://www.regulations.gov for docket number NIST-2023-0001, or you can email your comment to guardrails@chips.gov., with "RIN 0693-AB70" in the subject line of the message.38
Footnotes
1. 88 FR 17439, 17439 (Mar. 23, 2023).
2. 88 FR 17439, 17439 (Mar. 23, 2023).
3. 88 FR 17439, 17440 (Mar. 23, 2023).
4. 88 FR 17439, 17439 (Mar. 23, 2023).
5. Press Release, US Dep't Com., Commerce Department Outlines Proposed National Security Guardrails for CHIPS for America Incentives Program (Mar. 21, 2023), https://www.commerce.gov/news/press-releases/2023/03/commerce-department-outlines-proposed-national-security-guardrails [hereinafter DOC Press Release].
6. DOC Press Release.
7. DOC Press Release.
8. 88 FR 17439, 17439 (Mar. 23, 2023).
9. CHIPS Act, 136 Stat. 1635.
10. 88 FR 17439, 17448 (Mar. 23, 2023).
11. 88 FR 17439, 17448 (Mar. 23, 2023).
12. 88 FR 17439, 17448 (Mar. 23, 2023).
13. 88 FR 17439, 17448 (Mar. 23, 2023).
14. 88 FR 17439, 17448 (Mar. 23, 2023).
15. 88 FR 17439, 17448 (Mar. 23, 2023).
16. 88 FR 17439, 17447 (Mar. 23, 2023).
17. DOC Press Release.
18. DOC Press Release.
19. DOC Press Release.
20. 88 FR 17439, 17447 (Mar. 23, 2023).
21. 88 FR 17439, 17447 (Mar. 23, 2023).
22. DOC Press Release.
23. DOC Press Release.
24. DOC Press Release.
25. DOC Press Release.
26. 88 FR 17439, 17448 (Mar. 23, 2023).
27. See our legal alert https://www.mayerbrown.com/en/perspectives-events/publications/2022/11/sweeping-new-us-semiconductor-related-export-controls-on-china for additional information.
32. 88 FR 17439, 17447 (Mar. 23, 2023).
33. 88 FR 17439, 17448 (Mar. 23, 2023).
34. 88 FR 17439, 17448 (Mar. 23, 2023).
35. 88 FR 17439, 17439 (Mar. 23, 2023).
38. 88 FR 17439, 17448 (Mar. 23, 2023).
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