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Emerging Technologies Export Controls Are Designed to Protect U.S. Technological Innovation. They Could Have the Opposite Effect.

By Hdeel Abdelhady | November 28, 2018

A few years ago, corporate inversions were big news, and controversial. According to the Treasury Department, a corporate inversion occurs when a “U.S.-based multinational corporation restructures itself so that the U.S. parent is replaced by a foreign parent and the original U.S. company becomes a subsidiary of the foreign parent.” The objective of such an inversion is to reduce the corporation’s U.S. tax burden. Or, stated differently, to escape U.S. tax laws and regulations.

Just as certain tax obligations apply entirely or more stringently to U.S. corporations (and individuals), so do many other U.S. laws and regulations, including those governing U.S. technology transfers to foreign persons within or outside of U.S. territory (e.g., by physical or electronic transmission outside of the United States or by “deemed export” to foreign persons within the United States).

Restrictions on transfers of emerging technologies, recently strengthened by law and now in further development by regulation may– depending on the content of regulations and the manner of their enforcement– give rise to another kind of inversion: technology inversions. A technology inversion (which is not (yet) a “thing,” to my knowledge) would not necessarily entail expatriation or restructurings of corporate entities. Rather, a technology inversion might involve the relocation of specific projects or loci of development to facilitate cross-border flows of technological information, services, and goods where international exchanges and other collaborations are needed to build emerging technologies within desired time, cost, and other resource parameters.

Regulation of Emerging Technology Transfers: Export Control Reform Act of 2018

2018 has been a big year in year in the regulation and control of transfers of emerging and foundational U.S. technologies to foreign parties. Two key laws enacted in August established stricter standards for transfers of cutting-edge U.S. technology within and outside of the United States, together capturing transfers accomplished by foreign investment, other commercial transactions, and by exports. The Foreign Investment Risk Review and Modernization Act (FIRRMA) and the Export Control Reform Act of 2018 (ECRA), both passed as part of the National Defense Authorization Act for Fiscal Year 2019 (NDAA), respectively expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS) to review foreign investments and ventures involving U.S. technology of national security significance and mandated the controls of exports of emerging and foundational technologies by the Department of Commerce. Examples of technologies having or potentially having national security significance for CFIUS review or export control purposes include artificial intelligence, robotics, nanotechnology, and semiconductors. A policy objective of these laws is to maintain the United States’ technological leadership. It remains to be seen whether forthcoming regulations of emerging technologies exports will advance or undermine this policy goal.

Department of Commerce Emerging Technologies Rulemaking: Statutory Requirements, Regulatory Discretion 

On November 19, the Department of Commerce took an early and important step in satisfying its obligations under ECRA to identify emerging technologies essential to national security and potentially requiring of export control (see this MassPoint Regulatory Update for a detailed discussion of Commerce’s Advance Notice of Proposed Rulemaking (ANPRM)). The ANPRM lists 14 categories (with sub-categories) of “representative” emerging technologies of interest to Commerce and invites public comment to help the agency establish criteria for identifying emerging technologies requiring export control regulation.

As the rulemaking process is in its early phases, it is not yet known how and to what extent Commerce might impose export controls on emerging technologies. Nor is it known how Commerce might enforce any such export controls generally or in specific cases. However, some of ECRA’s provisions suggest that any new export controls on emerging technologies would likely infuse the export licensing process with new complexity. For example, ECRA requires Commerce to consider, as part of an ECRA-mandated licensing procedure, the impact of a “proposed export . . . on the United States defense industrial base.” ECRA sets the outer criteria for defense industrial base impact assessments, such as whether an item’s export would result in a “reduction” in the United States of the availability of an item “likely to be acquired by the Department of Defense” or other federal department or agency. ECRA leaves the determination of specifics (such as what constitutes an actionable “reduction” and whether “likely to be acquired” means pursuant to procurement arrangement that predates an export licensing application) to Commerce in establishing and implementing licensing procedures.

ECRA also allows Commerce to require prospective exporters to provide information about foreign parties having a “significant ownership interest” in foreign parties with whom a U.S. export license applicant has a “collaborative arrangement” in relation to or on behalf of which the proposed export is to be made (see more on this here). The provision vests Commerce with discretion, on a case-by-case basis, to seek foreign ownership information from U.S. parties to “collaborative arrangements” (which are not defined with certainty). It is not clear if Commerce’s forthcoming rulemaking (interim or final) on emerging technologies will set forth parameters as to how Commerce might exercise this discretion.

Overly Burdensome Regulation May Have Unintended Consequences

At this early stage of rulemaking, it is not clear whether and to what extent Commerce will impose export controls on emerging technologies. Nor is it known how Commerce will exercise its discretion with respect to those technologies. Given the scope of the regulatory process, new export controls on emerging technologies could be burdensome, depending on the content of regulations and the manner of their enforcement. If the new regulatory regime is burdensome to the point that it prohibits (legally or practically) some emerging technology transfers to foreign parties, companies and others involved in emerging technologies– particularly their development–may seek arrangements, without evading or otherwise violating ECRA or applicable regulations, to ease collaborations and other engagement with foreign parties, including by some form of technology inversion.


Post Author: MassPoint PLLC

MassPoint PLLC is a boutique law and strategy firm that works with diverse clients to meet legal, strategy, and risk management needs in a globalized, complex world.