As directed by Executive Order 13873, the Commerce Department has proposed a rule for Securing the Information and Communications Technology and Services Supply Chain. Comments on it are due by December 27, 2019.
We previously discussed EO 13873 grant of extraordinarily broad authority to Commerce to investigate any “transaction” that “(i) Involves property in which a foreign country or national has an interest; (ii) includes information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and (iii) poses certain undue risks to critical infrastructure or the digital economy in the United States or certain unacceptable risk to U.S. national security or U.S. persons.” Following an investigation, such transactions may be prohibited, or permitted to proceed only if modified to mitigate the perceived risk.
Commerce Casts its Net Widely
This is remarkably broad jurisdiction, encompassing all products and services in the broadly-defined information and communications technology sectors. Though a foreign “interest” in property is not defined in the proposed rule, I expect it to be applied liberally, based on the approach in other regulatory regimes adopted under the International Emergency Economic Powers Act. In theory, any foreign-made product may be covered, as well as any transaction in which a foreign party has an “interest”, however attenuated.
One trigger for coverage is that the technology or services must have originated with a foreign “adversary” or persons under its ownership, control or jurisdiction. This may not pose much limitation on the rule’s application, however. Transactions entirely between domestic persons in the United States may be snagged if products or any of their components were made in an “adversary” country. This may also be the case if such articles are made in a third country subsidiary of a company based in an “adversary”. Likewise, a U.S. subsidiary of a parent corporation located in an “adversary” country could be included.
The designation of an “adversary” country is within the United States government’s sole discretion. I’m waiting with bated breath to see who gets tagged. Switzerland, anyone?
Process for Investigations
Commerce plans to adopt what it calls “a case-by-case, fact-specific approach” to such situations. It may commence an investigation on its own initiative, or upon a referral from another Federal agency. The proposed process requires notice and an opportunity to comment to the parties engaged in a transaction, and issuance of preliminary and final determinations.
The real kicker is that Commerce’s authority, under the EO and proposed rule, extends retroactively to include any “transaction” that “was initiated, pending, or completed after May 15, 2019, regardless of when any contract applicable to the transaction was entered into, dated or signed, or when any license, permit, or authorization applicable to such transaction was granted.” The agency also can investigate “transactions involving certain ongoing activities”, regardless of when the agreement was entered into.
Because the proposed rule tracks closely to the grant of authority in EO 13873, I don’t expect that the final rule will vary much from it. I also don’t want to paint too dire a picture of how things will play out once the final rule is implemented. At least in theory, however, Commerce will have extraordinary power to involve itself in private transactions in two vital industry sectors.