On May 15, 2020, the U.S. Department of Commerce, Bureau of Industry and Security (BIS) issued an interim final rule (the Interim Rule) amending the direct product rule under the Export Administration Regulations (EAR) to further restrict Huawei Technologies Co., Ltd. (Huawei) and its affiliates designated on the Entity List from receiving semiconductor and other products produced outside the United States using U.S.-origin software and technology. The changes, which are effective immediately (but subject to two savings clauses), could have a significant impact on the ability of non-U.S. foundries that manufacture semiconductor products for Huawei and its affiliates (e.g., HiSilicon) using U.S.-origin software or technology to continue to do so (and could have a corresponding significant impact on the competitiveness of U.S. semiconductor manufacturing equipment and software). BIS also extended the temporary general license (TGL) that authorizes certain activities subject to the EAR involving Huawei and its affiliates through August 13, 2020.
Amendments to the Direct Product Rule
BIS designated Huawei and its affiliates on the Entity List in May 2019. As a result, U.S. and non-U.S. companies are prohibited from exporting, reexporting, or transferring items “subject to the EAR” to Huawei and its affiliates without a license from BIS. While most items “subject to the EAR” are located in or produced in the United States, foreign-produced items located outside the United States can be considered subject to the EAR if they contain more than a de minimis amount of controlled U.S.-origin content or are considered the direct product of certain types of U.S.-origin software and technology under rules set forth in the EAR. The EAR defines “direct product” as “the immediate product (including processes and services) produced directly by the use of technology or software.” While the direct product rule was previously quite narrow, covering only certain dual-use software and technologies controlled for national security reasons, the Interim Rule greatly expands the scope with respect to Huawei to cover a wide range of semiconductor and other software and technologies subject to lower levels of export controls under the EAR.
Despite these rules, non-U.S. companies that incorporate U.S.-origin content into the products they manufacture or manufacture products using U.S.-origin software or technology have been able to continue to supply those products to Huawei and its affiliates, because their products either do not incorporate more than a de minimis amount of controlled U.S.-origin content or because the U.S.-origin software or technology used to manufacture the products is not subject to the types of controls that trigger the direct product rule. As a result, the U.S. government has been considering ways to further restrict Huawei’s access to products dependent on U.S.-origin software and technology, including lowering the de minimis threshold from the level of 25% controlled U.S.-origin content by value and expanding the direct product rule.
The Interim Rule adds Footnote 1 to the Entity List, imposing additional restrictions on items destined for Huawei or its affiliates (the only entities designated with the footnote) that are (a) produced or developed by a designated entity (e.g., designed by Huawei for manufacture by a third-party foundry) and (b) manufactured using specified U.S.-origin equipment, technology, or software, or equipment, technology, or software that was made using specified U.S.-origin technology. Under the rule, the following foreign-produced items are subject to the EAR (and therefore require a license for any export) if destined for any Huawei affiliate on the Entity List:
- Direct products of technology or software subject to the EAR. Foreign-produced items that (i) are produced or developed by an entity with a Footnote 1 designation and (ii) are the direct product of software or technology subject to the EAR and specified in certain Export Control Classification Numbers (ECCNs) (see below). This would capture designs produced by Huawei using specified U.S.-origin software and technology, restricting their transfer among Huawei entities.
- Direct products of a plant or major component of a plant. Foreign-produced items that are the direct product of: (i) a plant or major component of a plant located outside the United States that is a direct product of U.S.-origin technology or software subject to the EAR and specified in certain ECCNs (see below); and (ii) software or technology produced or developed by an entity with a Footnote 1 designation. A major component of a plant means equipment that is essential to the production of an item, including testing equipment.
The interplay of the two prongs of the Interim Rule is unclear; in particular, it is ambiguous whether and to what extent the use of a Huawei design developed using specified U.S.-origin software or technology could itself render a “major component” of a plant (e.g., a mask for semiconductor fabrication) a direct product of U.S. technology, even if the plant’s equipment is otherwise entirely of non-U.S. origin.
The applicability of the Interim Rule depends on the U.S. export classification applicable to the relevant U.S software or technology. The Interim Rule covers technology or software specified in ECCNs 3E001, 3E002, 3E003, 3E991, 4E001, 4E992, 4E993, 5E001, 5E991, 3D001, 3D991, 4D001, 4D993, 4D994, 5D001, and 5D991. Many of these ECCNs are not subject to national security controls under the EAR, and therefore were not previously subject to the direct product rule, and they cover a wide range of semiconductor technology and software. The controls apply to in-country transfers of items to Huawei (e.g., items produced in China using U.S.-origin software or technology) and to items designed or manufactured by Huawei itself. Although the Interim Rule does not define the term “produced or developed by,” the rule does not appear to prohibit sales of off-the-shelf non-U.S.-origin products to Huawei, even if they are the direct product of specified U.S.-origin software or technology. It also does not appear to prohibit sales of Huawei-designed chips to third parties, even for use with Huawei equipment.
Non-U.S. foundries that rely on specified U.S.-origin technology or software to manufacture semiconductor products designed by Huawei and its affiliates should carefully consider the impact the Interim Rule will have on their ability to continue to engage in such activities without a license from BIS. It will be extremely difficult even to identify controlled equipment; for example, Korean-origin equipment may be controlled under the Interim Rule if the equipment was developed using specified U.S.-origin technology, and only the Korean manufacturer may be in a position to assess that. Moreover, even a single item essential to the production process that is or is the direct product of specified U.S.-origin software, technology, or equipment is sufficient to bring a foreign-produced item within the scope of the Interim Rule.
Given that license applications to supply foreign-produced items considered subject to the EAR under the footnote will be subject to a policy of denial, non-U.S. foundries affected by the new restrictions will need to decide whether to stop using U.S.-origin technology or software to manufacture products or stop supplying products to Huawei. Because many non-U.S. foundries rely heavily on U.S.-origin technology and software to manufacture semiconductor products and because it could be difficult to separate software and technology used to manufacture into U.S.-origin and non-U.S.-origin equipment (especially in light of the rule controlling equipment manufactured outside the United States that is the direct product of U.S.-origin technology), it may well be impossible for most suppliers to continue sales to Huawei in the near term.
The Interim Rule includes two savings clauses providing a very limited transition period for items already in production. The first confirms that the first prong of the test does not apply to foreign-produced items that were in the process of being shipped or exported on May 15, 2020 so long as the items are subject to actual orders. This savings clause likely will have limited applicability. The second, and potentially more applicable to non-U.S. foundries, confirms that the second prong of the test does not apply to shipments of foreign-produced items if production of the items had started prior to May 15, 2020, so long as those items are exported before September 14, 2020.
Comments to the Interim Rule are due July 14, 2020.
Extension of Temporary General License
In conjunction with designating Huawei and its affiliates on the Entity List in May 2019, BIS issued a TGL authorizing certain activities subject to the EAR involving Huawei and its affiliates, including activities that support existing and fully operational networks and equipment. Since then, the TGL has been amended and extended multiple times. Another final rule issued by BIS on May 15 extends the TGL through August 13, 2020.
Of particular note, the original version of the TGL authorized engagement with Huawei relating to the development of 5G standards as part of a duly recognized international standards body. BIS removed that authorization from the TGL in August 2019, which caused some companies to stop any such engagement and resulted in concern from those companies that not being able to engage in the development of 5G standards as part of a duly recognized international standards body in which Huawei participates would cause those companies to fall behind. Despite recent reports suggesting that BIS may soon allow companies to engage in those activities again, the extended TGL does not address the issue.
 On April 28, 2020, BIS imposed additional restrictions on exports, reexports, and transfers of a wide range of semiconductor-related items under the Chinese military end use/end user restrictions under the EAR. For more information about those changes, please see our earlier alert BIS Tightens National Security Export Controls.
 The Interim Rule provides the following example of how this could apply. Huawei produces or develops an integrated circuit design utilizing technology or software, such as Electronic Design Automation software, whether the technology or software is U.S.-origin or foreign-produced and made subject to the EAR pursuant to the de minimis or direct product rule, that foreign-produced integrated circuit design would be subject to the EAR.
 The Interim Rule provides the following example of how this prong could apply. If a foreign company produces integrated circuits outside the United States in a foundry containing U.S.-origin or foreign-produced equipment (which itself is a direct product of specified U.S.- origin technology or software) that is essential to the production of the integrated circuit to meet the specifications of their design, including testing equipment (i.e., a major component of a plant), and the design for the integrated circuit was produced or developed from software or technology by a Huawei entity, whether or not such design is subject to the EAR, then that foreign-produced integrated circuit is subject to the EAR.