US expands existing restrictions on exports to Huawei and broadens Entity List scope

The US Department of Commerce, Bureau of Industry and Security (BIS) has published a final rule that strengthens existing restrictions under the Export Administration Regulations (EAR) on exports of items manufactured utilizing US technology or software to Huawei Technologies Co., Ltd. and its affiliates designated on the Entity List.

In short, the final rule: (i) expands the existing prohibition on exporting items manufactured utilizing controlled US technology or software to Huawei to include all such items intended for export to Huawei or for use in a Huawei manufactured device, regardless of whether they are specifically designed by or for Huawei; and (ii) acknowledges the expiration of the Temporary General License (TGL) for Huawei but permanently allows certain limited transactions related to Huawei to continue.

BIS also contemporaneously added 38 non-US affiliates of Huawei to the Entity List and issued a separate final rule expanding the reach of the Entity List restrictions to designated entities, regardless of their role in the transaction. The rules are effective as of August 17, 2020, the date they were first made available for public inspection.

Because US software and technology are critical components in most factories that manufacture semiconductors, the scope of these new restrictions is expected to be extremely broad. For example, semiconductors designed using sophisticated automated software are likely subject to these restrictions as the handful of companies that produce such software are US companies or have US operations.

Moreover, there are only a few toolmakers for semiconductor production, and they too often have a US nexus that would make products manufactured using their tools subject to the new restrictions. At this point, any transaction with a Huawei-affiliated entity should be examined carefully and subjected to a significant amount of due diligence to ensure the transaction does not run afoul of any of these restrictions.

Expanded restrictions on exports to Huawei

As detailed in our prior update, in May 2020, BIS issued an interim rule that modified the foreign-produced direct product (FDP) rule, also known as General Prohibition 3 (15 CFR § 736.2(b)(3)), to restrict the export, re-export, or transfer to Huawei of certain foreign-manufactured items that are produced utilizing US-origin manufacturing or testing equipment or that are based on Huawei designs that are, themselves, a product of US-origin software and technology.

The new final rule expands upon those restrictions by: (i) including, even if not exported, re-exported, or transferred to a Huawei entity, any item that will be incorporated into, or will be used in the production or development of, any item produced, purchased, or ordered by Huawei or that Huawei purchases or receives; and (ii) removing the requirement that the foreign-produced item be produced or developed by Huawei, thereby including commercial off-the-shelf products for the first time. More specifically, the final rule applies to transactions:

1. Where US software or technology is the basis for a foreign-produced item that will be incorporated into, or will be used in the "production" or "development" of any "part," "component," or "equipment" produced, purchased, or ordered by any Huawei entity on the Entity List; or
2. When any Huawei entity on the Entity List is a party to such a transaction, such as a "purchaser," "intermediate consignee," "ultimate consignee," or "end-user."

These new restrictions will apply to a large swath of the electronics industry and require manufacturers of semiconductors to apply for and obtain a license to sell chips that are intended to be used in some way by Huawei, even if those chips were not derived from Huawei's own designs. Such license applications, moreover, will be subject to a general policy of denial, except for transactions involving foreign-produced items that are capable of supporting the development or production of telecom systems, equipment, and devices at only below the 5G level (e.g., 4G, 3G, etc.), which will be subject to a case-by-case review.

Replacement of TGL with a more limited permanent authorization

The final rule also replaces the TGL for Huawei, which the government allowed to expire on August 13, 2020, with a more limited permanent authorization relating to exports, re-exports, and transfers to Huawei for cybersecurity research and vulnerability disclosure, as long as the disclosure is limited to information regarding security vulnerabilities in Huawei items needed for ongoing cybersecurity research to protect existing third-party networks.

Addition of non-US Huawei affiliates to the Entity List

BIS added 38 additional non-US affiliates of Huawei to the Entity List. There are now well over 150 Huawei entities on the List for which the export, re-export, or transfer of items subject to the EAR (including items subject to the new FDP restrictions) are prohibited, absent a license.

Expanded reach of Entity List restrictions

BIS also issued a separate final rule that clarifies that the Entity-List restrictions apply to transactions involving entities on the List, regardless of their role in the transaction. Thus, designated entities are prohibited from acting as the purchaser, intermediate consignee, ultimate consignee, or end-user, as those terms are defined in the EAR. Previously, the rule did not extend to designated entities that were only acting as intermediate consignees or purchasers.

We will continue to monitor these developments closely and will publish additional updates as appropriate.

Special thanks to law clerk Eddie Skolnick, who works under the supervision of Kim Caine and Stefan Reisinger, for his assistance in preparing this content.