On March 21, 2023, the Department of Commerce (“Commerce”) published a Notice of Proposed Rulemaking (the “Commerce Proposed Rule”) to implement certain provisions of the CHIPS and Science Act of 2022 (“CHIPS Act”) that place restrictions on certain activities of businesses receiving federal funding pursuant to the CHIPS Act (“Commerce Guardrails”).  On the same day, the Department of the Treasury (“Treasury”) also published a Notice of Proposed Rulemaking (together with the Commerce Proposed Rule, the “Proposed Rules”) to implement the Advanced Manufacturing Investment Credit (“ITC”), including its own restrictions on certain activities that, in broad strokes, parallel the Commerce Guardrails (together with Commerce Guardrails, “CHIPS Guardrails”) (Covington alert).  

The Proposed Rules are relevant to companies that are considering applying for Section 9902 funding under the CHIPS Act or planning to take advantage of the ITC.  They are also potentially relevant to companies that do business with such parties.  As described below, CHIPS Guardrails will impose meaningful constraints on the types of activities or investments into which affected parties can enter.  The Proposed Rules also may contain hints with respect to the general direction of U.S. government policy, articulating concepts and definitions that could be applied in other regulatory regimes, including potential regulation of outbound investments. 

Commerce and Treasury have requested public comments on the Proposed Rules by May 22, 2023. Further, Commerce has specifically requested comments on the “extent and nature of . . . pre-existing arrangements” relating to joint research or technology licensing, presumably to evaluate the issue of retroactive application for activities that predate CHIPS Guardrails but will be ongoing after its enactment.

We offer the following high-level comments:

  • The “affiliate” definition would expand the universe of entities subject to CHIPS Guardrails well beyond the funding or ITC recipient (“Recipient”).  The proposed definition would sweep in remote entities within the Recipient’s corporate family that may be several degrees of separation from the Recipient, as long as they are under common control.  Thus, if a U.S. subsidiary of a foreign corporation accepts CHIPS Act funds or takes advantage of the ITC, it would bring the foreign parent corporation and all of its controlled subsidiaries globally within the scope of the CHIPS Guardrails restrictions.  This definition of “affiliate” may be subject to challenge under the Administrative Procedure Act because the statute provides for a higher threshold of an 80% ownership to be considered an affiliate, but the Commerce Proposed Rule lowered this threshold to 50%.[1]
  • Restrictions apply to transactions with “foreign entities of concern” located anywhere in the world.  The Proposed Rules restrict Recipients from engaging in certain transactions (i.e., transactions involving joint research or technology licensing relating to a technology or product that raises national security concerns, as determined by the Secretary) with “foreign entities of concern.”  This term is defined to include a broad range of individuals and entities, including Chinese nationals located in China, companies organized under the laws of China (including for example Chinese subsidiaries of U.S. companies), and non-Chinese companies 25% or more of whose voting interests are directly or indirectly owned by the Chinese government.  “Foreign entity of concern” even includes the Recipient’s subsidiaries organized under the laws of China and its Chinese employees located in China.
  • However, the Proposed Rules still leave meaningful room for Recipients to engage in semiconductor-related activities and expansion of manufacturing in foreign countries of concern.  First, “material expansion in . . . manufacturing capacity” is defined purely in quantitative terms, measured in wafer starts per month for semiconductor fabrication facilities.  Consistent with this definition, Commerce’s commentary accompanying the Commerce Proposed Rule affirmatively states that the rule “would also allow recipients to upgrade technology at existing foreign facilities (in compliance with export controls) if overall production capacity is not increased.”  Second, the Proposed Rules bifurcate the restriction on material expansion for legacy semiconductors and non-legacy semiconductors and provide greater flexibility to expand capacity for legacy semiconductors.  Whereas the Proposed Rules permit only up to a 5% increase in output for leading edge and current generation technologies, they allow up to a 10% increase in output of legacy semiconductors manufactured at either an existing facility or a new facility that predominately serves the market of a foreign country of concern.
  • Key Open Questions:  Key issues that may require clarification through the comments process include:
    • Scope of “Foreign Entities of Concern”:  The statutory term “foreign entities of concern” includes any foreign entity that is “[o]wned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (as defined in 10 U.S.C. 4872(d)).”  The Proposed Rules arguably expanded the scope of this term beyond what the statute contemplates.  First, the agencies interpret the term “entity” to include a natural person.  Second, the Proposed Rules’ interpretation of the above phrase to include all entities organized under the laws of China is quite broad.  This phrase “subject to the jurisdiction or direction of a government” could be interpreted more narrowly as requiring some affirmative government influence, as discussed here.
    • Affiliated vs. Unaffiliated Foreign Entities of Concern:  The Proposed Rules do not differentiate between affiliated foreign entities of concern (e.g., a Recipient’s own subsidiaries in China) and unaffiliated foreign entities of concern.  As a result, a Recipient’s own, wholly-owned subsidiaries in China would be treated in the same manner as a Chinese state-owned entity for purposes of the Guardrails restrictions.
    • Scope of Technology Clawback:  The Proposed Rules include a technology clawback provision that restricts Recipients from knowinglyengaging in joint research or technology licensing efforts with a foreign entity of concern that relates to a “technology or product that raises national security concerns.”[2]  As currently drafted, “technology licensing” is defined broadly to include patent licensing and sharing of “know-how,” which may include such intellectual property provided in connection with products being sold.  Further, the Proposed Rules suggest that even technology or products for which a party has obtained an export license under the U.S. Export Administration Regulations may be subject to these restrictions, if the technology “raises national security concerns” as defined in the Proposed Rules.  In other words, these rules do not contemplate a carve out for ancillary intellectual property or existing export licenses.

Covington has been involved in advising on and shaping the legislation for clients since its original draft was introduced in April 2021, and we stand ready to advise on its contents and specific opportunities for individual clients.  If you have any questions concerning the material discussed in this post, please contact the members of our CFIUS, Public Policy, Government Contracts, and Tax practices.


[1]  For the ITC, there was no statutory prohibition against activities of an affiliate, but Treasury adopted the affiliate prohibition from the Commerce Proposed Rule. 

[2]  Unlike the Commerce Proposed Rule, Treasury’s proposal for the ITC further requires that this joint research or technology licensing materially expand the semiconductor manufacturing capacity of the Recipient or its affiliates.

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Photo of Jonathan Wakely Jonathan Wakely

Jonathan Wakely practices at the intersection of national security and the private sector, advising clients on a range of significant international trade, cross-border investment, national security, supply chain security, and public policy matters.

Mr. Wakely has been recognized by Chambers USA for his…

Jonathan Wakely practices at the intersection of national security and the private sector, advising clients on a range of significant international trade, cross-border investment, national security, supply chain security, and public policy matters.

Mr. Wakely has been recognized by Chambers USA for his leading expertise in securing national security-related regulatory approvals for foreign investments. He regularly represents clients before the Committee on Foreign Investment in the United States (CFIUS), the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector (better known as “Team Telecom”), and the Defense Counterintelligence and Security Agency (DCSA) in proceedings related to the mitigation of foreign ownership, control, or influence (FOCI). He was deeply involved on behalf of clients in the development of the Foreign Investment Review Modernization Act of 2018 (“FIRRMA”), which reformed CFIUS’s authorities, and its implementing regulations.

Mr. Wakely has advised on transactions with an aggregate value in excess of $250 billion across virtually all sectors, including semiconductors, telecommunications, financial services, software, IT services, energy, and real estate. His recent representations include successfully defending Qualcomm against the attempted hostile takeover by Broadcom, securing approval for the acquisition of Genworth Financial by China Oceanwide, and representing Ford Motor Company in connection with a $2.6 billion investment by Volkswagen in Ford’s autonomous driving subsidiary, Argo AI. He has negotiated and advised companies on compliance with many of the most significant, complex, and sensitive national security agreements of the past decade.

Mr. Wakely also regularly advises clients on public policy and government relations matters involving international trade, cross-border investment, and national security. He has represented trade associations, Fortune 100 companies, and sovereign states before Congress and the executive branch, including by designing and executing government relations campaigns to achieve policy, regulatory, and legislative goals.

Mr. Wakely is an adjunct professor at the Georgetown University Law Center, where he teaches a course on national security and the private sector. He has also published extensively on matters related to the regulation of foreign investment; his articles have appeared in the Harvard National Security Journal, The International Lawyer, and the Global Trade and Customs Journal. Before joining Covington, he served as a political analyst with the Central Intelligence Agency (CIA), where he provided strategic analysis to the President and other senior policymakers.

Photo of Michael Wagner Michael Wagner

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government…

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government investigations, including False Claims Act cases. He has particular expertise representing individuals and companies in suspension and debarment proceedings, and he has successfully resolved numerous such matters at both the agency and district court level. He also routinely conducts internal investigations of potential compliance issues and advises clients on voluntary and mandatory disclosures to federal agencies.

In his contract disputes and advisory work, Mr. Wagner helps government contractors resolve complex issues arising at all stages of the public procurement process. As lead counsel, he has successfully litigated disputes at the Armed Services Board of Contract Appeals, and he regularly assists contractors in preparing and pursuing contract claims. In his counseling practice, Mr. Wagner advises clients on best practices for managing a host of compliance obligations, including domestic sourcing requirements under the Buy American Act and Trade Agreements Act, safeguarding and reporting requirements under cybersecurity regulations, and pricing obligations under the GSA Schedules program. And he routinely assists contractors in navigating issues and disputes that arise during negotiations over teaming agreements and subcontracts.

Photo of David Fagan David Fagan

David Fagan co-chairs the firm’s top ranked practices on cross-border investment and national security matters, including reviews conducted by the Committee on Foreign Investment in the United States (CFIUS), and data privacy and cybersecurity.

Mr. Fagan has been recognized by Chambers USA and…

David Fagan co-chairs the firm’s top ranked practices on cross-border investment and national security matters, including reviews conducted by the Committee on Foreign Investment in the United States (CFIUS), and data privacy and cybersecurity.

Mr. Fagan has been recognized by Chambers USA and Chambers Global for his leading expertise on bet-the-company CFIUS matters and has received multiple accolades for his work in this area, including twice being named Dealmaker of the Year by The American Lawyer for 2016 and 2019. Clients laud him for providing “excellent advice,” “know[ing] everything there is to know about CFIUS” and being “extremely well regarded” by key regulators. (Chambers USA)

In the foreign investment and national security area, Mr. Fagan is known for his work on matters requiring the mitigation of foreign ownership, control or influence (FOCI) under applicable national industrial security regulations, including for many of the world’s leading aerospace and defense firms, private equity firms, and sovereign investors, as well as telecommunications transactions that undergo a public safety, law enforcement, and national security review by the group of agencies known as “Team Telecom.”

Mr. Fagan’s practice covers representations of both foreign and domestic companies before CFIUS and related national security regulators. The representations encompass matters in which the principal assets are in the United States, as well as those in which there is a smaller U.S. nexus but where solving for the CFIUS issues – including through proactive mitigation and carve-outs – is a critical path for the transaction. Mr. Fagan is also routinely called upon to rescue transactions that have run into challenges in CFIUS, and to negotiate solutions with the U.S. government that protect national security interests, while preserving shareholder and U.S. business interests.

Reflecting his work on U.S.-China investment issues and his experience on complex U.S. national security matters intersecting with China, Mr. Fagan is regularly engaged by multi-national companies, including the world’s leading technology companies, to advise on strategic legal projects, including supply chain matters, related to their positioning in the emerging competition between the U.S. and China. Mr. Fagan also has testified before a congressional commission regarding U.S. national security, trade, and investment matters with China.

In the privacy and data security area, Mr. Fagan has counseled companies on responding to some of the most sophisticated documented cyber-based attacks on their networks and information, including the largest documented infrastructure attacks, as well as data security incidents involving millions of affected consumers. He has been engaged by boards of directors of Fortune 500 companies to counsel them on cyber risk and to lead investigations into cyber attacks, and he has responded to investigations and enforcement actions from the Federal Trade Commission (FTC) and state attorneys general. Mr. Fagan has also helped clients respond to ransomware attacks, insider theft, vendor breaches, hacktivists, state-sponsored attacks affecting personal data and trade secrets, and criminal organization attacks directed at stealing personal data, among other matters.

In addition, he routinely counsels clients on preparing for and responding to cyber-based attacks on their networks and information, enhancing their supply chain and product development practices, assessing their security controls and practices for the protection of data, developing and implementing information security programs, and complying with federal and state regulatory requirements. He also frequently advises clients on transactional matters involving the transfer of personal data.

Photo of Brian Kim Brian Kim

Brian Kim is an associate in the firm’s Washington, DC office and a member of the CFIUS Practice Group. He advises clients on the U.S. national security review process administered by the Committee on Foreign Investment in the United States (CFIUS) and related…

Brian Kim is an associate in the firm’s Washington, DC office and a member of the CFIUS Practice Group. He advises clients on the U.S. national security review process administered by the Committee on Foreign Investment in the United States (CFIUS) and related reviews conducted by the interagency working group known as Team Telecom. Brian also advises clients on sensitive national security investigations and compliance matters, including mitigation agreements with CFIUS and issues under the National Industrial Security Program (NISPOM) and the Defense Counterintelligence and Security Agency (DCSA) in proceedings related to the mitigation of foreign ownership, control, or influence (FOCI). Brian regularly advises on matters involving China and the region, supply chain security, and other U.S.-China policy issues.

Photo of Jamin Koo Jamin Koo

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His…

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His expertise includes taxation of debt instruments, derivatives, and other financial instruments, and he has been providing tax advice related to digital assets to a number of clients.

Most recently, with his background in engineering and environmental science, Jamin has been advising clients in a number of industries on various issues involving tax credits and other tax provisions of the Chips & Science Act and the Inflation Reduction Act and drafting comments to Treasury and the IRS.