Recent reports suggest that the Administration may declare an emergency under the International Emergency Economic Powers Act (IEEPA) to grant the Committee on Foreign Investment in the United States (CFIUS) authority to review transactions involving the transfer of U.S. technology and intellectual property (IP) to foreign entities, even where there is no transfer of “control” as currently required under existing CFIUS regulations. This executive action would follow a memorandum issued by President Trump directing the U.S. Government to propose possible restrictions on Chinese investment in U.S. companies due to concerns outlined by the Office of the United States Trade Representative (USTR) in connection with its Section 301 investigation. The potential CFIUS review of U.S. technology transfers to foreign entities would mirror one aspect of the pending Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA).
As background, Section 301(b)(1) of the Trade Act of 1974 provides USTR with the authority to investigate and take action in response to unfair trade practices. Section 301 sets out three categories of acts, policies, or practices (APPs) of a foreign country that are potentially actionable, which includes APPs that are unreasonable or discriminatory and that burden or restrict U.S. Commerce. USTR’s findings were released on March 22, 2018 and concluded, among other things, that the Chinese government directs and unfairly facilitates the systematic investment in U.S. companies and assets by Chinese entities in order to obtain cutting-edge technologies and IP and generate largescale technology transfer in industries deemed important by state industrial plans.
In conjunction with the release of USTR’s findings, President Trump directed the Treasury Department to propose executive branch action, as appropriate and consistent with law, and using any available statutory authority, to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States. President Trump’s memorandum requires that the Treasury Department provide a progress report within 60 days, which would be May 21, 2018.
Using IEEPA to address these technology transfer concerns would be unprecedented. In general, IEEPA authorizes the President to take action in response to an unusual and extraordinary threat to the national security, foreign policy, or economy of the United States. This statute often serves as the basis for imposing economic sanctions against foreign countries and individuals. It is possible that President Trump could use the results of the 301 investigation as the basis for determining that there is a “national emergency” with respect to Chinese acquisition of U.S. critical technology. It is unclear whether any action taken would implicate other countries.
The potential restriction on technology transfer tracks one aspect of FIRRMA, which was introduced on November 8, 2017 in both the U.S. House and Senate. We previously described key aspects of FIRRMA here, which includes significant changes to CFIUS and the national security review process. Currently, “covered transactions” subject to CFIUS review include transactions where a foreign person acquires “control” of a U.S. business. However, FIRRMA would change the scope of what is considered a covered transaction by including other activities where there is no transfer of control, including the contribution by a U.S. critical technology company to a foreign person of both IP and associated support through a joint venture or other arrangement.
Since its introduction, there has been growing opposition from industry to this aspect of the bill. Many in industry argue that FIRRMA is overly broad. Including outbound technology transfers within CFIUS’ jurisdiction would fundamentally alter CFIUS’ original purpose, which was to address inbound investment resulting in foreign control of a U.S. company. It would lead to a significant increase in covered transactions without sufficient resources to address the added caseload. CFIUS does not have the technical expertise to review outbound technology transfers, and this expansion of CFIUS’ jurisdiction would be duplicative of the U.S. export control regime. While aspects of FIRRMA may be changed in the coming months, the Administration’s use of IEEPA to address its technology transfer concerns would short circuit this legislative debate and, in effect, impose these controls by fiat. The disruption caused by such an edict would be enormous, not only to foreign investment transactions but also the vast array of technology licensing arrangements between U.S. and Chinese companies.