On March 23, 2023, the National Institute of Standards and Technology (NIST) released a Notice of Proposed Rulemaking (proposed rule) that sets forth the national security guardrails for funding under the CHIPS and Science Act (CHIPS). The proposed rule is titled “Preventing the Improper Use of CHIPS Act Funding” and, as that name implies, its purpose is to ensure CHIPS-funded technology and innovation is not used by adversarial countries against the interests of United States or its allies and partners.
Companies that intend to apply for CHIPS funding (the first Funding Opportunity Announcement was described in our client alert last month) should review and understand the proposed prohibitions that are tied to CHIPS funding, as these prohibitions will be attached to any CHIPS funding award. If a funding recipient engages in activity prohibited by CHIPS, the full amount of funds received under the CHIPS award is subject to clawback by the government.
The proposed rule sets forth two types of clawbacks: the “Expansion Clawback” and the “Technology Clawback,” both explained below. Both can be triggered by actions taken by a CHIPS funding recipient or its “affiliates.” Under the proposed rules’ definitions, an “affiliate” includes a funding recipient’s subsidiaries and parent entities (specified as any entity with a direct or indirect 50 percent or greater voting interest). It also includes any other entity in which a parent entity owns (directly or indirectly) 50 percent or greater voting interest. This means that an entity over which a funding recipient has no control could engage in a transaction that could trigger one or both of the Expansion and Technology clawbacks.
Under the “Expansion Clawback,” funding recipients and their affiliates are prohibited (subject to limited exceptions1) for 10 years from the date of the CHIPS award from engaging in any significant transaction2 involving the material expansion3 of semiconductor manufacturing4 capacity in a foreign country of concern.5
Under the “Technology Clawback,” funding recipients and their affiliates are prohibited, during the term of a CHIPS award, from engaging in joint research6 or technology licensing7 efforts with a foreign entity of concern8 that relates to a technology or product that raises national security concerns.
Funding recipients are required to notify the Secretary of Commerce of any planned significant transaction involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern (including those that may meet the criteria of one of the exceptions).9 The proposed rule provides details on the process by which funding recipients notify the Secretary of planned significant transactions, the specific information regarding the transaction that must be included, and the way in which transactions will be considered by the Secretary, including potential mitigations. Where the Secretary of Commerce concludes a transaction is prohibited, it must cease or be abandoned—if it is not, the CHIPS funds received are subject to clawback by the government. The Secretary of Commerce can also place conditions on any such proposed expansion.
NIST is accepting comments to the proposed rule until May 22, 2023. If you have any questions regarding the proposed rule or CHIPS, please contact Joshua Gruenspecht, Barath Chari, Seth Cowell, or other members of the firm's national security, technology transactions, or strategic risk and crisis management practices.
[1] The prohibition includes exceptions for existing facilities/equipment located in a foreign country of concern where the facility/equipment is for manufacturing legacy semiconductors or the “significant expansion” of manufacturing capacity to produce legacy semiconductors that predominately serves the market of a foreign country of concern.
[2] A “significant transaction” includes (among other transactions) a merger, acquisition or ownership interest, consolidation, joint venture, long-term lease or concession arrangement, or formation of a subsidiary where the value of the transaction (or a series of related transactions in the aggregate) is $100,000 or greater.
[3] A “material expansion” is the addition of physical space or equipment (individually or in the aggregate) that has the purpose or effect of increasing semiconductor manufacturing capacity of a facility by more than five percent over the existing capacity at the time the CHIPS funding agreement was entered into.
[4] Broadly speaking, “semiconductor manufacturing” means semiconductor fabrication or semiconductor packaging.
[5] The “foreign countries of concern” are China, Russia, North Korea, and Iran. This list of countries is subject to expansion.
[6] Joint research means any research and development activity as defined at 15 U.S.C. 638(e)(5) that is jointly undertaken by two or more persons, including any research and development activities undertaken as part of a joint venture, as defined at 15 U.S.C. 4301(a)(6).
[7] Technology licensing means a contractual agreement in which one party's patents, trade secrets, or know-how are sold or made available to another party.
[8] In addition to any entity that is owned, controlled by or subject to the jurisdiction/direction of a foreign country of concern – which can include individual citizens of those countries, entities organized under the laws of those countries, or entities at least 25% owned by the government of those countries, among other persons – a “foreign entity of concern” also includes (among other entities) any foreign entity that is:
- included on the Bureau of Industry and Security’s Entity List
- included on the Department of the Treasury’s list of Specially Designated Nationals and Blocked Persons
- identified in the Federal Communications Commission’s list of Equipment and Services Covered By section 2(a) of the Secure and Trusted Communications Networks Act of 2019 as providing covered equipment or services
[9] The proposed rule does not establish a process for pre-approval of joint research or technology licensing but does set forth a process for the Secretary of Commerce to review suspected violations of the activities prohibited under the Technology Clawback provisions of the proposed rule.
