In its continuing efforts to strengthen the United States' hand in its ongoing international economic bout with China, the Biden Administration's Department of Commerce last week issued a Notice of Proposed Rulemaking (NPRM) to further carry out Congress's directives under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act of 2022. The CHIPS Act is a landmark funding opportunity for government contractors aiming to contribute to the United States' mission to increase the competitiveness of its semiconductor supply chain, and thereby challenge Chinese dominance in the industry. This alert briefly reviews the CHIPS Act, the Commerce Department's proposed rules, and how these two items fit into a growing trend toward increased government oversight and enforcement.
The CHIPS Act
As we previously wrote, CHIPS for America funding provides "manufacturing incentives to restore U.S. leadership in semiconductor manufacturing, support good-paying jobs across the semiconductor supply chain, and advance U.S. economic and national security." Through the CHIPS Act, Congress approved over $50 billion to invest in the U.S. semiconductor industry, "including $39 billion in semiconductor incentives."[1] Of course, participation in this incentive program also carries significant compliance risks for those who are not informed of the Act's underlying policy priorities.
With so much at stake, Congress sought to ensure that grants, cooperative agreements, and other funding provided through the CHIPS for America program do not flow to the benefit of China "or any other foreign country of concern"—which includes North Korea, Russia, and Iran—nor to foreign entities of concern that are affiliated with or located within such countries. Specifically, the Act provides that "during the 10-year period beginning on the date of the award, . . . the [awardee] may not engage in any significant transaction . . . involving the material expansion of semiconductor manufacturing capacity in [] any other foreign country of concern."[2] If a grantee/awardee fails to cease or remedy violations of this prohibition, Commerce is empowered to claw back the full amount of the award.[3]
Commerce's Proposed Rule
The Commerce Department's recent proposal, "Preventing the Improper Use of CHIPS Act Funding," further details the specifics of these prohibitions and reflects the significant national security concerns that Congress incorporated into the CHIPS Act before presenting it to the President. According to Commerce, the proposed rule "defines terms used in the [CHIPS] Act (including terms that will be used in required agreements with funding recipients), identifies the types of transactions that are prohibited under the Expansion Clawback and Technology Clawback sections of the Act, and provides a description of the process for notification of transactions to the Secretary."[4] These "national security guardrails are intended to ensure technology and innovation funded by the CHIPS and Science Act is not used for malign purposes by adversarial countries against the United States or its allies and partners."[5]
Among other specifics, the proposed rule
- establishes standards to restrict the expansion of advanced semiconductor facilities in foreign countries of concern. The rule "defines significant transactions based on a monetary level of $100,000 and defines material expansion as increasing a facility's production capacity by five percent. These thresholds are intended to capture even modest transactions attempting to expand manufacturing capacity."[6]
- establishes standards to restrict the expansion of facilities in foreign countries of concern that produce "legacy" semiconductors. The rule "limits the expansion of existing legacy facilities, prohibiting recipients from adding new production lines or expanding a facility's production capacity beyond 10 percent."[7]
- establishes standards for the CHIPS Act's exceptions to the facilities expansion prohibitions. For example, the Act exempts certain "significant transactions involving the material expansion of semiconductor manufacturing capacity that . . . produces legacy semiconductors [and] predominately serves the market of a foreign country of concern." The rule "specifies that predominantly serving a market means at least 85% of the legacy facility's output is incorporated into final products that are consumed in the foreign country of concern where they are produced."[8]
- proposes a list of "semiconductors critical to national security" that cannot be considered "legacy" semiconductors, regardless of the production technology used.[9] This list includes "current-generation and mature-node chips used for quantum computing, in radiation-intensive environments, and for other specialized military capabilities," and "was developed in consultation with the Department of Defense and U.S. Intelligence Community."[10]
- reinforces recently adopted U.S. export controls aimed at preventing China from purchasing and manufacturing certain advanced chips used in military applications. The rule "align[s] prohibited technology thresholds for memory chips between export controls and CHIPS national security guardrails," applying "a more restrictive threshold for logic chips than is used for export controls."[11]
- defines certain prohibited "joint research" and "technology licensing" efforts with foreign entities of concern—which can trigger Commerce's clawback authority—and adds to the Act's list of foreign entities of concern, to include "entities from the [Commerce Department's Bureau of Industry and Security] Entity List, the Treasury Department's Chinese Military-Industrial Complex Companies (NS-CMIC) list, and the Federal Communications Commission's Secure and Trusted Communications Networks Act list of equipment and services posing national security risks."[12]
Moreover, the proposed rule would ensure that "funding recipients . . . maintain records related to significant transactions in a manner consistent with the recordkeeping practices used in their ordinary course of business. This requirement applies to the 10-year duration of the required agreement and for a period of seven years after any significant transaction."[13]
The public has until May 22, 2023, to submit comments on the proposed rule.
Enforcement a Growing Priority for Commerce and Executive Branch
Notably, Commerce is also staffing up its team to ensure CHIPS Act compliance, according to Commerce Inspector General Peggy Gustafson. In testimony last week before the U.S. House Appropriations Committee, Inspector General Gustafson highlighted that the CHIPS Act provides her office with "approximately $25 million over 5 years for CHIPS oversight. . . . [W]e are hiring staff for two audit teams to conduct CHIPS program oversight. We expect the staff will include at least one subject matter expert in semiconductor materials and technology."[14]
The Inspector General stressed that these teams "will be a vital part of OIG's independent, continuous oversight of the program" and highlighted oversight priorities that include ensuring that "eligible entities use the funding received under the program in accordance with established requirements," that "entities receiving financial assistance carry out their commitments to worker and community investments," that "the required agreement has been carried out to give covered entities sufficient guidance about violations of the agreement," that "Congress receives timely notification about violations of the required agreement and how that determination was reached," and that "the Department has sufficiently reviewed any covered entity engaging in a listed exception."[15]
While program oversight is always a claimed priority of agencies, recent reports of significant fraud and abuse of the COVID-19 Paycheck Protection Program—another substantial funding outlay from Congress—will surely remain front of mind for the Commerce Department's Inspector General. Accordingly, it is reasonable to assume the Inspector General will be motivated to keep close tabs on CHIPS Act funding recipients and to ensure faithful compliance with its requirements and prohibitions.
Conclusion
As the CHIPS Act rollout continues, please be sure to follow this page for the latest information and analysis. If you or your organization have questions about the CHIPS Act, are interested in participating in the rulemaking process for the recently published proposed rule, and/or wish to learn more about the various compliance obligations that accompany federal funds, such as those that will be awarded under the CHIPS Act, please contact these Venable authors who stand ready to advise and assist.
[1] U.S. Dept. of Commerce, Biden-Harris Administration Launches First CHIPS for America Funding Opportunity (Feb. 28, 2023), available at https://www.commerce.gov/news/press-releases/2023/02/biden-harris-administration-launches-first-chips-america-funding
[2] 15 U.S.C. § 4652(a)(6)(C)(i).
[3] 15 U.S.C. § 4652(a)(6)(E)(iii).
[4] Preventing the Improper Use of CHIPS Act Funding, 88 Fed. Reg. 17439, 17440 (proposed Mar. 23, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-03-23/pdf/2023-05869.pdf.
[5] National Institute of Standards and Technology, Commerce Department Outlines Proposed National Security Guardrails for CHIPS for America Incentives Program (Mar. 21, 2023), available at https://www.nist.gov/news-events/news/2023/03/commerce-department-outlines-proposed-national-security-guardrails-chips.
[6] Id.
[7] Id.
[8] Id.
[9] Preventing the Improper Use of CHIPS Act Funding, 88 Fed. Reg. 17439, 17441 (proposed Mar. 23, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-03-23/pdf/2023-05869.pdf.
[10] National Institute of Standards and Technology, Commerce Department Outlines Proposed National Security Guardrails for CHIPS for America Incentives Program (Mar. 21, 2023), available at https://www.nist.gov/news-events/news/2023/03/commerce-department-outlines-proposed-national-security-guardrails-chips.
[11] Id.
[12] Id.
[13] Preventing the Improper Use of CHIPS Act Funding, 88 Fed. Reg. 17439, 17442 (proposed Mar. 23, 2023), available at https://www.govinfo.gov/content/pkg/FR-2023-03-23/pdf/2023-05869.pdf.
[14] Testimony of Peggy E. Gustafson, Inspector General, U.S. Dept. of Commerce before the U.S. House of Representatives Committee on Appropriations, Subcommittee on Commerce, Justice, Science, and Related Agencies, at 3 (Mar. 23, 2023), available at https://www.oig.doc.gov/OIGPublications/Inspector%20General%20Gustafson%20Written%20Testimony.pdf.
[15] Id.