Commerce Department Plan To Nix

Those who have been waiting to see how exactly the United States Department of Commerce will distinguish and ultimately control "emerging" and "foundational" technologies may not get an answer after all. Specifically, on May 23, 2022, the Bureau of Industry and Security (BIS) announced, as part of an otherwise routine proposed rule controlling several marine toxins, a new approach to identifying certain "critical technologies" as defined under the Foreign Investment Risk Review Modernization Act (FIRRMA) and required under Section 1758 of the Export Control Reform Act (ECRA)—a shift that discards the "emerging" and "foundational" technologies distinction altogether and introduces a new categorization of "Section 1758 technologies."

Key Takeaways

BIS will abandon its attempts to determine which technologies subject to new export controls under ECRA are "emerging" or "foundational" and instead identify all such technologies together as "Section 1758 technologies."
BIS hopes this change will speed up efforts to identify technologies significant to U.S. national security that should be subject to export controls under ECRA, eliminating the apparent difficulty of deciding whether a technology is "emerging" versus "foundational" and simplifying the interagency review process.
The change could lead to an uptick in designations of such technologies and, in turn, more transactions could trigger mandatory filings with the Committee on Foreign Investment in the United States (CFIUS).

Background

Ushering in a new era for CFIUS, FIRRMA introduced the concept of mandatory CFIUS filings for the first time. Now, as opposed to the pre-FIRRMA CFIUS landscape, parties are required to submit a filing to CFIUS for certain transactions involving foreign investment in a U.S. business that produces, designs, tests, manufactures, fabricates, or develops "critical technologies" for which a U.S. regulatory authorization (e.g., an export license) would be required for the export, re-export, or transfer to the foreign investor or acquirer. By statutory definition, these technologies include "emerging and foundational technologies" controlled under Section 1758 of ECRA, in addition to technologies controlled under export control regimes such as the Export Administration Regulations (EAR).

Section 1758 requires the Secretary of Commerce to impose appropriate controls under the EAR on technologies identified through an interagency process as "emerging and foundational technologies" essential to U.S. national security. Up until May 23, BIS had publicly stated that it intended to define and identify "emerging" and "foundational" technologies separately. A working definition appeared to be that "emerging" technologies were those that were not controlled with an export control classification number (ECCN) in the EAR's Commerce Control List (CCL), while "foundational" technologies might be those currently assigned an ECCN but warranting stricter controls.

BIS has been deliberate in identifying "emerging" and "foundational" technologies. In November 2018, BIS issued an advance notice of proposed rulemaking (ANPR) listing nearly 50 broad technological categories and subcategories within which there may be specific technologies that potentially warrant control under the "emerging" label. To date, BIS has identified and added to the CCL the following 38 "emerging technologies":

May 2019: discrete microwave transistors, EMP-hardened continuity of operation software, post-quantum cryptography algorithms, underwater acoustic transducers, and air-launch platforms for space vehicles
June 2020: 24 chemical weapons precursor chemicals and single-use cultivation chambers with rigid walls
October 2020: hybrid additive manufacturing/computer numerically controlled tools, computational lithography software for extreme ultraviolet lithography masks, technology for the production of integrated circuits of specified feature size, certain digital forensic tools, certain telecommunications monitoring software, and sub-orbital aircraft
January 2021: software for automated geospatial imagery analysis (designation extended for another year in January 2022)
October 2021: software for nucleic acid assemblers and synthesizers

BIS also issued a brief ANPR on "foundational" technologies in August 2020, but has not yet identified any such technologies.

Members of Congress have criticized BIS for its slow pace and a June 2021 report from the U.S.-China Economic and Security Review Commission accused BIS of "fail[ing] to carry out its responsibilities" under ECRA. Moreover, Rep. Michael McCaul, the Ranking Member of the House Foreign Affairs Committee, criticized the planned change to "Section 1758 technologies" shortly after it was announced. McCaul fears that if BIS abandons its focus on identifying "foundational" technologies in particular, such technologies will escape proper export control. McCaul notes that, in the negotiation of FIRRMA, members of Congress agreed to drop legislative language that would have given CFIUS jurisdiction over outbound joint ventures in exchange for export control legislation assigning the Secretary of Commerce (and thus BIS) the responsibility of identifying and controlling "emerging" and "foundational" technologies. Congress is again actively considering giving the executive branch such jurisdiction over outbound investments.

New Approach

As part of a May 23 proposed rule to impose export controls on four marine toxins, BIS announced it will abandon its efforts to distinguish between "emerging" and "foundational" technologies in establishing controls. Going forward, BIS will instead identify all such technologies together as "Section 1758 technologies." BIS asserts that "categorization of the technologies has sometimes delayed the imposition of controls," and now hopes that jettisoning the distinction will speed up the process of identifying and establishing controls on sensitive technologies. BIS points out that ECRA does not mandate that either term be defined nor require that the two categories be treated differently.

BIS argues that the four marine toxins it seeks to control—brevetoxin, gonyautoxin, nodularin, and palytoxin—demonstrate the challenge of trying to classify technologies as either "emerging" or "foundational." One characteristic of a "foundational" technology, BIS suggests, is that it constitutes "an iterative improvement on technology already in production," whereas an "emerging" technology is "only in the 'development' stage" and not yet in use. The marine toxins, which are naturally occurring but could be used to make biological weapons, could fall into either category: "foundational" in the sense that they already exist, but also "emerging" in that they must be isolated and purified with novel synthesis methods and equipment to be weaponized.

It remains to be seen whether this change facilitates timelier implementation of appropriate controls on emerging and foundational technologies, or helps prompt Congressional action, such as outbound investment controls.

Nicholas Weigel and Maryrose McLaughlin, summer associates in Morrison & Foerster's D.C. office, contributed to this alert.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.