Foreign Auto Manufacturers Having U.S. Innovation Centers Should Consider U.S. Export Controls

Written by: Brett J. Rosen

Move over Detroit.  Many foreign auto manufacturers (e.g., Honda, Hyundai and Mercedes Benz, to name a few) and first tier suppliers have established automotive innovation centers in Silicon Valley (and elsewhere in the U.S.) to take advantage of the automotive revolution in the areas of autonomous driving, electrification and connectivity.

Employees of those foreign auto manufacturers working in the U.S. and abroad regularly work together to incorporate the latest technologies into the manufacturer’s automobiles.  Communications between those employees could be subject to U.S. export controls, however.  Export controls are laws and regulations that regulate and restrict the release of sensitive technologies and information to foreign countries and foreigners, both within and outside of the United States, for reasons of national security and foreign policy.  U.S. export control laws are often overlooked by companies of all sizes despite the serious repercussions for noncompliance, including hefty fines, criminal penalties and the revocation of export privileges.

A complicated network of federal agencies and inter-related regulations governs exports.  To name just a few, the Export Administration Regulations (EAR) is a set of government regulations enforced by the Department of Commerce on the export and import of most commercial items.  The International Traffic in Arms Regulations (ITAR) is a set of regulations on the export and import of defense related articles and services that is enforced by the Department of State.  The Office of Foreign Assets Control (OFAC) of the Treasury Department administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes.  The Arms Export Control Act (AECA) gives the President of the United States the authority to control the import and export of defense articles and defense services.

Failure to consider U.S. export control laws can be costly.  Most recently, ZTE, the fourth largest telecommunications network equipment in the world, agreed to pay a record penalty of over $1 billion for exporting telecommunications equipment to Iran and North Korea in violation of the U.S. export control regulations (as well as making false claims in connection with the violation).

Generally speaking, export controls may be implicated any time technical data or products are shared with persons outside of the U.S. or foreigners that are located within the U.S., especially if that data or product relates to high performance computing, encryption technology, dual use technologies (technologies with both a military and commercial application), select chemical agents, military or defense articles and services, space technology and satellite, or any other area that would be considered to be strategically important to the U.S. in the interest of national security, economic and/or foreign policy concerns.  The latest automotive technologies can encompass navigation and encryption technology, for example, which could be subject to export controls.

When considering whether an export of data or product will require a license under the EAR, for example, it is necessary to consider at least (i) the underlying data/product that is the subject of the export, and (ii) the destination of the export.

With regard to the underlying data/product, the Commerce Department provides a list of controlled commodities, technology, and software known as the CCL, and the licensing requirements for each.  The underlying product must first be identified on the CCL.  If an item is not listed on the CCL, then that item is designated as EAR 99.  EAR 99 items generally consist of low-technology consumer goods that do not require a license in most situations.

If the underlying product, which is the subject of the communication, is listed on the CCL, then it becomes necessary to consider the destination of the export.  The U.S. government will permit the release of controlled product and related information to certain countries, but not others.  To determine if an export license is required for sharing the technical details of the controlled product (or the product itself) with a particular country, the licensing requirements set forth in the CCL for the underlying product must be cross-referenced against the Commerce Department’s Country Chart.  If an export license is required before sharing the product or its technical details with a citizen of that country, then an export license will be required regardless of whether the recipient is located within the U.S. at the time of receiving the product or information.  The U.S. government restricts the release of controlled information and product to foreign nationals here in the U.S. (referred to as a “Deemed Export”).  Persons with permanent residence status (e.g., green card), U.S. citizenship, and persons granted status as “protected individuals” are exempt from the Deemed Export rule.

Inventions generated at a U.S. innovation center may eventually find their way into the automotive products of a foreign auto manufacturer, and those products will eventually be sold in a host of countries, including Cuba, for example.  Shipping a product incorporating U.S. technology to Cuba could require an export control license under, at least, the EAR depending upon whether the U.S. origin controlled content in that product exceeds a threshold value.  Under the Commerce Department’s de minimus rule, when a non U.S. made product incorporates controlled U.S. original commodities (such as parts or software), the product is subject to EAR if the U.S. origin controlled content exceeds 25% of the value of the product for many foreign countries, including Cuba.  Thus, a product that is subject to EAR and has a U.S. origin controlled content exceeding 25% of the value of the product requires an export license before shipping the same to Cuba.

Export control compliance can be confusing, tedious, and time consuming, especially since the rules and classifications are always changing as technology evolves.  Many corporations lack the personnel or know-how to appropriately address export control, and this is the reason why export controls are often overlooked or ignored entirely.  To avoid hefty fines, criminal penalties and the revocation of export privileges, however, corporations would benefit from preventative planning, e.g., identifying when their activities trigger export controls.  When export controls apply, corporations should consider taking the appropriate steps to obtain any required governmental licenses, monitor and control access to restricted information, and safeguard all controlled materials.