Commerce Publishes Proposed Rule Setting Conditions for Use of CHIPS Funding

On March 21, 2023, Commerce released a Notice of Proposed Rulemaking setting national security "guardrails"—that is, conditions for the CHIPS Incentives Program—requiring applicants to commit to potentially significant conditions, including restrictions on certain international investments as well as joint research and technology licensing activities. Under the proposed rule, Commerce has broadly defined semiconductors that are "critical to national security." This broad scoping has significant implications for companies that are engaged in joint research and technology licensing with countries such as China. 

Restrictions on the Expansion of Manufacturing Capacity

The CHIPS Act requires funding recipients to enter into an agreement with the Secretary of Commerce that bars recipients from engaging in certain "significant transactions" for a period of 10 years, such as those that involve the material expansion of semiconductor manufacturing capacity in "foreign countries of concern" (defined to include China, Russia, Iran, and North Korea). Under the proposed rule, this restriction not only applies to recipients, but also their affiliates, which generally include any subsidiaries, parent entities, or other entities in which the funding recipient's parent entity directly or indirectly holds at least 50 percent of the outstanding voting interest. 

The proposed rule provides a carveout for a funding recipient's existing facilities or equipment that are used to manufacture legacy semiconductors that exist on the date of the CHIPS funding award. It also allows significant transactions that involve the "material expansion" of semiconductor manufacturing capacity that produces legacy semiconductors and "predominantly serves the market" of a foreign country of concern, such that 85 percent of the output of the semiconductor manufacturing facility is incorporated into final products that are used or consumed in that market. However, under the proposed rule, a funding recipient is required to notify Commerce of any plans to expand legacy chip facilities in a foreign country of concern so that Commerce can confirm compliance with its national security requirements. This structure suggests a process of reporting and iterative consultation with the U.S. federal government that may be unfamiliar to some funding applicants.

Notably, under the proposed rule, "significant transactions" are any investments—broadly defined—that are valued at $100,000 or more, or a series of transactions in which the aggregate during the 10-year period is valued at $100,000 or more. Commerce has also broadly defined "material expansion" to include the addition of physical space or equipment that has the purpose or effect of increasing semiconductor manufacturing capacity by more than 5 percent or a series of expansions in which the aggregate, during the 10-year period, exceeds 5 percent of the capacity that existed at the time the agreement was entered into. 

Restrictions on Joint Research and Technology Licensing

Commerce's proposed rule also prohibits funding recipients and their affiliates from "knowingly" engaging in any joint research or technology licensing with a foreign entity of concern that relates to either a technology or product that raises national security concerns during the 10-year period. The knowledge requirement under the proposed rule includes both actual knowledge as well as "an awareness of a high probability of its existence or future occurrence," which can be inferred from evidence of a conscious disregard of facts known or the willful avoidance of such facts. Unlike the CHIPS Act's prohibition on the expansion of semiconductor manufacturing capabilities, which applies to foreign countries of concern, the restriction on joint research and technology licensing is broader, as it applies to foreign entities of concern. As a result, this restriction extends to entities that are, among others: (i) "owned by, controlled by, or subject to the jurisdiction or direction" of China, Russia, Iran, or North Korea; (ii) listed on the Office of Foreign Assets Control's Specially Designated Nationals and Blocked Persons List; or (iii) otherwise determined by the Secretary of Commerce, in consultation with the Secretary of Defense and the Director of National Intelligence, to be engaged in conduct that is detrimental to the national security or foreign policy of the United States.

Commerce's Expansive Definition of Semiconductors That Are Critical to National Security

Commerce's proposed rule classifies the following types of semiconductors as "critical to national security," which subjects these semiconductors to the restriction on engaging in joint research or technology licensing with foreign entities of concern:

• Compound semiconductors; 
• Semiconductor utilizing nanomaterials, including 1D and 2D carbon allotropes such as graphene and carbon nanotubes; 
• Wide-bandgap/ultra-wide bandgap semiconductors; 
• Radiation-hardened by process (RHBP) semiconductors; 
• Fully depleted silicon on insulator (FD-SOI) semiconductors; 
• Silicon photonic semiconductors;
• Semiconductors designed for quantum information systems; and

Semiconductors designed for operation in cryogenic environments (at or below 77 Kelvin).