Legislation that would substantially overhaul the law governing the Committee on Foreign Investment in the United States (CFIUS) received unanimous committee approvals in the House and Senate today. The proposed legislation (known as “FIRRMA,” for the Foreign Investment Risk Review Modernization Act of 2018) was initially introduced last fall. Its major provisions include enhancements to CFIUS’s enforcement authorities and a particular focus on high-tech sectors and “critical technologies.”
The new versions of the bill in the House and Senate have removed one of the more controversial portions of the legislation, which would have given CFIUS the authority to review certain contributions by U.S. “critical technology companies” of their intellectual property to foreign companies through arrangements such as joint ventures. Although that provision has now been removed, FIRRMA may still restrict certain outbound transactions by U.S. companies through new provisions strengthening the U.S. export controls regime. The legislation could be passed by Congress and signed by the president as early as this summer.
Revisions of CFIUS Provisions
The previous version of FIRRMA would have expanded the definition of a “covered transaction” (i.e., a transaction that is subject to CFIUS review) to include “[t]he contribution (other than through an ordinary customer relationship) by a United States critical technology company of both intellectual property and associated support to a foreign person through any type of arrangement, such as a joint venture,” subject to further regulations. This provision drew significant opposition from U.S. businesses, including General Electric and IBM, which were concerned that the law would give CFIUS broad authority to block outbound investments and business ventures by U.S. companies.
A new draft of the FIRRMA legislation, just approved yesterday in the Senate Banking, Housing, and Urban Affairs Committee, has removed this provision. A similarly revised bill was also approved yesterday in the House Financial Services Committee. As such, a U.S. company’s contribution of its intellectual property to a company overseas will not by itself be considered a covered transaction.
The revised legislation still includes the other provisions described in our previous Client Alert, many of which strengthen CFIUS’s authority to review inbound investments. Notably, the Senate version of FIRRMA would still expand the definition of a covered transaction to include not only a transaction through which a foreign company could obtain “control” of a U.S. company, but also “[a]ny other investment (other than passive investment) by a foreign person in any United States critical technology company or United States critical infrastructure company that is unaffiliated with the foreign person.” As such, CFIUS would have authority to review inbound foreign investments in U.S. critical technology and critical infrastructure companies even when those investments do not result in the foreign company obtaining control of the U.S. company. The Senate version of FIRRMA also contains provisions refining the definition of a passive investment.
Both versions of the revised FIRRMA legislation contain detailed new provisions to define “critical technology,” a term that businesses had warned was too vague in earlier drafts. Broadly speaking, “critical technologies” are defined as “technology, components, or technology items that are essential or could be essential to national security.” The term includes items that are subject to existing export controls, as well as “[e]merging and foundational technologies identified pursuant to” an interagency process established in a separate section of the law. As described below, that process will identify critical technologies for the purpose of imposing new export controls.
Expanded Export Controls Authority
Both the House and Senate versions of FIRRMA contain a separate section that would require the President, in coordination with the Secretaries of Commerce, Defense, Energy, and State and the heads of other relevant agencies, to undertake an ongoing interagency process to identify “emerging and foundational technologies” that “are essential to the national security of the United States.” It is widely expected that such technologies will include those related to artificial intelligence, autonomous vehicles, navigation, and robotics, many of which currently are not subject to any specific export licensing requirements. The process for designating these technologies will take into account a range of information, including:
- Public sources;
- Classified intelligence;
- Information relating to CFIUS reviews;
- The development of emerging and foundational technologies abroad; and
- The impact that export controls could have on the development of these technologies in the U.S.
The designation process will have a notice and comment period, meaning the government must provide public notice of a pending designation and industries must be given an opportunity to provide comments.
The Secretary of Commerce, as head of the agency primarily charged with enforcement of the Export Administration Regulations (EAR), in consultation with other relevant agencies, will determine the levels of control and export licensing requirements for the identified emerging and foundational technologies. At a minimum, a license will be required to export these technologies to countries subject to an arms embargo (including China and Russia); other country-specific licensing requirements could also be imposed. In considering license requests, the Department of Commerce is directed to take into account intelligence “regarding any threat to the national security of the United States posed by the proposed export, reexport, or transfer” of the technology. In processing export license applications that involve “a joint venture, joint development agreement, or similar collaborative arrangement,” the Department of Commerce may require the applicant to identify foreign persons participating in the arrangement as well as “any foreign person with significant ownership interest in a foreign person participating in the arrangement.”
FIRRMA would bar the Department of Commerce from imposing export controls on certain items that are already exempt from sanctions controls, such as donations of humanitarian aid and certain types of information materials. The Senate version of FIRRMA also clarifies that the Department of Commerce is not required to impose licensing requirements for certain types of transactions, including:
- Ordinary course commercial activities, such as the export of finished items and the provision of associated technology and related services that are generally made available to customers, distributors, or resellers;
- The export of equipment and the provision of associated technology if the transfer could not result in a foreign person using the equipment to produce critical technologies;
- The procurement by a U.S. company of goods or services, including manufacturing services, from a foreign entity, so long as the foreign person has no rights to exploit this technology apart from using it to provide the procured goods or services; and
- Contributions and associated support to industry standard-setting organizations, including licenses and commitments to license intellectual property.
By relying on the export control regime rather than CFIUS to protect U.S. national security interests with respect to U.S. technology exports, FIRRMA would build upon the existing regulatory regime of the EAR and the expertise of the Department of Commerce (in consultation with other relevant agencies) to evaluate licensing considerations. The specific identification and listing of “emerging and foundational technologies” and rules governing the licensing process would be set forth in regulations prescribed by the Department of Commerce.
If the revised legislation is signed into law, the regulatory process designating critical technologies is likely to be hotly contested; such designations could potentially take months or even years. As for FIRRMA itself, the new drafts were approved by a vote of 25-0 yesterday in the Senate Banking, Housing, and Urban Affairs Committee, and by a vote of 53-0 in the House Financial Services Committee. The U.S. Chamber of Commerce and other leading business interest groups have also announced their support. The bills would, of course, need to be made consistent with one another and approved in both houses of Congress before FIRRMA is signed into law. Although passage of the legislation is not a certainty, most reporting indicates that the law could be enacted as soon as this summer.