On February 3, 2022, the Department of Commerce, Bureau of Industry and Security (“BIS”) published a final rule (the “Final Rule”) reorganizing and clarifying the foreign-direct product (“FDP”) rules.[1]  BIS has consolidated the FDP rules in the previously reserved § 734.9 of the Export Administration Regulations[2] (“EAR”), whereas, before, one was required to reference multiple sections to apply the FDP rules.  Based on a surface-level review of the rule and corresponding comments from BIS in the Federal Register, the Final Rule seems to have merely reorganized the rules in one place in the EAR for ease of use.

The Final Rule divides the FDP rules into four paragraphs—the National Security FDP rule, the 9×515 FDP rule, the “600 series” FDP rule, and the Entity List FDP rule—to delineate their respective scopes more clearly.[3]  Under the Final Rule, BIS added the term “U.S.-origin” before “technology or software subject to the EAR” to the text of each FDP rule, except the Entity List FDP rule, where BIS removed “U.S.-origin” from the rule’s production equipment provision.[4]  While the comments accompanying the Final Rule in the Federal Register explain that the addition of “U.S.-origin” in the first three FDP rules simply clarified, rather than changed, their scope, those comments are silent as to the removal of “U.S.-origin” from the Entity List FDP rule.[5]  In its subsequent rule regarding the Russia-Ukraine conflict, BIS explained that it had unintentionally omitted “U.S.-origin” from the Entity List FDP rule’s production equipment provision (§ 734.9(e)(1)(ii)) in the Final Rule; therefore, BIS reincorporated “U.S.-origin” into § 734.9(e)(1)(ii) to correct that error.  As a result, the Entity List FDP rule’s production equipment provision remains consistent with the version outlined in the May 19, 2020 rule and applies to foreign-made items produced by a plant or major component of a plant (located outside the United States) that is itself a direct product of certain enumerated U.S.-origin technology or software subject to the EAR.[6]

[1] 87 Fed. Reg. 6022 (Feb. 3, 2022).  E.g., id. at 6024–25 (explaining that the 600 series FDP rule applies to “military commodities” located and produced outside the United States, described in Export Control Classification Number (“ECCN”) 0A919, that are the direct product of U.S.-origin technology or software); id. at 6023 (clarifying, in § 736.2(b)(3), that BIS generally determines license requirements for foreign-direct products subject to the EAR on a case-by-case basis by considering each item’s classification, destination, end-user, and end-use).

[2] 15 C.F.R. parts 730–80 (2022).

[3] 87 Fed. Reg. at 6022.

[4] 15 C.F.R. § 734.9(e)(1)(ii) (2022).  Under the FDP rules, a major component “is ‘equipment’ that is ‘essential’ to the ‘production’ of an item, including testing ‘equipment,’” and equipment is essential if it “is involved in any of the production stages.”  Id. § 734.9(a); 87 Fed. Reg. at 6023.  BIS moved the definition of “major component” from footnote 1 to Supplement no. 4 to part 744 of the EAR to § 734.9(a) of the EAR to demonstrate that the definition applies to all FDP rules.  87 Fed. Reg. at 6023.

[5] 87 Fed. Reg. at 6023.

[6] 85 Fed. Reg. 29,849, 29,850 (May 19, 2020).