NIST issues final rules to prevent improper use of CHIPS Act funding

The CHIPS and Science Act (Act) established guardrails to prevent funding recipients from using the money to support the development of semiconductor manufacturing and technology in foreign countries of concern, including North Korea, China, Russia, and Iran. On September 25, 2023, the CHIPS Program Office CPO published the final rules for preventing improper use of CHIPS Act funding. The guardrails in the legislation include the Expansion Clawback and the Technology Clawback. The Expansion Clawback restricts recipients from using CHIPS funding for material expansion of manufacturing capacity in a foreign country of concern; the Technology Clawback limits recipients from engaging in joint research or technology licensing with a foreign entity of concern.

The final rules clarify some points that were raised during the comments period about the clawbacks.

Changes in the final rule

The final rule defines terms and further explains and clarifies Expansion and Technology Clawbacks, including:

• Removal of the term Affiliates as a defined term: CPO removed the defined term “affiliate” from the final rule to avoid inconsistencies. They articulate the meaning of this term for each clawback. Expansion Clawback refers to the term affiliated group, “as is defined in 26 U.S.C. 1504, which generally establishes an 80 percent ownership of stock or voting power threshold.” Technology Clawback refers to the provision that "if any entity related to the covered entity engages in joint research or technology licensing that would violate the Technology Clawback if engaged in by the covered entity, the Secretary may take appropriate remedial measures, including requiring mitigation agreements or recovering up to the full amount of the Federal financial assistance provided to a covered entity … For purposes of this final rule, a related entity is any entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the covered entity."
• Changes to the list of semiconductors critical to national security: These changes include the removal of  “FD–SOI semiconductors that relate to semiconductor packaging operations with respect to semiconductors of a 28-nanometer generation or older.”

Expansion Clawback-Specific Changes

• Whether or not a semiconductor qualifies as a legacy semiconductor is clarified in the final rule. This section of the final rule adds semiconductors packaged using 3D integrations, 28-nanometer generation or older technologies, to the list of legacy semiconductors.
• CPO has modified the definition of material expansion to refer to adding cleanroom or other physical space.

Technology Clawback-Specific Changes

• In the final rule, the definition of "Members of the Affiliated Group" has been directly incorporated into the definition of foreign entity of concern and now clarifies that it applies to persons who are citizens, nationals, or residents of North Korea, China, Russia, or Iran and who are in one of those countries.
• There are numerous clarifications regarding joint research. The rules now allow joint research related to standards and any research and development conducted exclusively between employees of a covered entity or related entities of the covered entity. They also permit warranty, service, and customer support performed by the covered entity or associated entities and outsourcing for fabrication and packaging.
• CPO asserted that patent licensing should not be subject to the Technology Clawback because patents are, by definition, already public documents. In the final rule, patents have been excluded from the scope of technology licensing.

What did not change

The Technology Clawback applies to items not subject to the U.S. Export Administration Regulations (“EAR”). Although commenters pointed out that some restrictions in the final rules went further than those in EAR, CPO asserted that the Technology Clawback is intended to be broader in reach. The final rules state, “The Act creates a financial assistance program, the goal of which is to incentivize investment in facilities and equipment in the United States to provide a secure supply of semiconductors for national security and critical infrastructure and to support the technology leadership of the United States. The goals of the Act are more expansive than just mitigating national security threats posed by the export of technology.”

Technology Clawback applies to sharing fundamental research: CPO stated in the final rules, "While the underlying technology or information is publicly available, additional advancements in the technology or its use may be made through joint research and development to the benefit of the foreign entity of concern.”

The prohibition of significant renovations for remaining a legacy manufacturer: CPO notes, “Without the concept of significant renovations, covered entities could evade the expansion prohibition simply by significantly expanding an existing facility rather than constructing a new facility.”

There will be no flexibility in the application of the Technology Clawback. CPO notes that the Act “directs that where a covered entity engages in prohibited joint research or technology licensing activity such that the Technology Clawback is triggered, the Secretary ‘shall recover the full amount of an award.’”