On April 28, 2022, Covington convened experts across our practice groups for the Covington Robotics Forum, which explored recent developments and forecasts relevant to industries affected by robotics. The global robotics market has been experiencing a significant transformation, with robotics growing beyond traditional industrial uses and taking on an ever-increasing amount of new roles, such as personal assistants, surgical assistants, connected and automated vehicles, delivery vehicles, lawnmowers, and autonomous aircraft. In 2021, the global robotics market was valued at $55.8 billion—by 2026, it is expected to grow to $91.8 billion.
David Fagan, Co-Chair of Covington’s Cross-Border Investment and National Security Practice Group, and Steve Bartenstein, Partner in Covington’s International Trade Controls Practice Group, discussed the national security issues raised by foreign investments in robotics transactions, highlights of which are captured here. A full recording of the Robotics Forum is available here until May 31, 2022.
CFIUS Reviews of Robotics and Artificial Intelligence Transactions
As a quick primer, the Committee on Foreign Investment in the United States (“CFIUS”) is an interagency committee chaired by the U.S. Department of Treasury charged by statute with reviewing foreign investments in U.S. businesses to determine any impairment to U.S. national security. CFIUS includes nine executive branch agencies that are full-time voting members and several other agencies in advisory or ex officio capacities. Historically, CFIUS review is triggered if a “foreign person” acquires “control” over an existing “U.S. business” and there is a nexus to “U.S. national security.” “National security” is not precisely defined, and CFIUS decides it on a case-by-case basis. Amendments in 2018 expanded CFIUS’s authority over certain types of non-controlling but non-passive investments in certain U.S. businesses, which can include emerging technology areas such as robotics and AI. All transactions are now being examined by CFIUS through the lens of U.S.-China military and industrial competition and how that impacts U.S. national security, and CFIUS is actively monitoring transactions in the robotics and AI areas in particular.
In our experience, the following technologies are of particular interest in CFIUS reviews:
- Autonomous vehicles (on-road, off-road, aerial);
- Industrial robots;
- Service robots;
- Industrial automation (warehousing and packaging); and
- Supporting technologies, including software (AI, decision-making, and sensor integration) and hardware (control systems, sensors, motors, actuators, and power systems).
Within these areas, CFIUS is likely to focus on whether the transaction implicates any of the following issues (in addition to considering whether the transaction presents any nexus to a country of concern):
- Technology Transfer – whether the U.S. business at issue includes technology that is sensitive from a U.S. national security standpoint, including taking into consideration that “robotics” has been identified as an area of emerging technology that could be subject to enhanced export control protections under the Export Control Reform Act of 2018 (“ECRA”), companion legislation to the 2018 CFIUS reform legislation.
- Protection of Data – whether the transaction includes intellectual property that was developed jointly with the U.S. government or funded in part by the U.S. government, and similarly whether there is any customer data, including data from government customers, that could be sensitive from a national security standpoint.
- Industrial Policy/Security and Supply Chain – the extent to which the transaction includes capabilities in the United States that are important to U.S. national security, and how the government can maintain access to those capabilities in the United States, while denying those capabilities to potential adversaries.
- Supply Assurance – whether the U.S. business is an important supplier to the U.S. government or government contractors, and whether it is necessary to seek commitments to maintain that supply.
Trade Controls and Robotics
Robotics companies operating globally face a range of trade control risks, including:
- Existing export control restrictions on certain robotics-related hardware, software, and technology;
- New emerging technology controls on the horizon for robotics, AI/ML, and IC technologies;
- Broad restrictions on access to U.S. technologies for end-users and end-uses of concern (military applications and parties on the Entity List); and
- Increasing use of sanctions, which create compliance challenges.
It is important for companies to be attentive to these risks, including but not limited to the context of M&A and investment transactions. In the M&A/investment context, trade controls due diligence by buyers and investors can reduce compliance risks (including successor liability), and identify issues that may be “deal-killers” or impact transaction value. Trade controls may also impact post-closing integration and technology transfer efforts and other business activities. Monitoring these issues creates an opportunity to identify and correct ongoing compliance issues.