Semiconductors: Legislative and Regulatory Spotlight–2022
There have been a tremendous number of legislative and regulatory developments in 2022 that are important for the semiconductor industry. This Advisory summarizes some key considerations under the CHIPS Act, developments relating to antitrust, export controls, and CFIUS, and potential future developments to look out for in 2023.
On August 9, 2022, President Biden signed the CHIPS and Science Act (CHIPS Act, Pub. L. 117-167) into law. This act, the largest federal investment ever directed at boosting the domestic semiconductor manufacturing sector, is designed to ensure, as President Biden announced at the signing ceremony, that “the future of the chip industry is going to be made in America.” In addition to celebrating the significant expansion of private sector investment in semiconductor research and manufacturing spurred by the legislation, key elements of the bill highlighted by the president include development of domestic supply chains, partnerships with technical and community colleges, training and apprenticeship programs for small- and minority-owned businesses, union wage construction jobs expanded research activities, and corporate restrictions on uses of the funds. The CHIPS Act appropriates $52.7 billion, provides a tax credit worth roughly $24 billion, and authorizes billions more in federal research support.
Following adoption of the legislation, the Department of Commerce (DOC) released an implementation strategy. The strategy noted that DOC anticipates soliciting applications within six months of enactment of the CHIPS Act, or by early February 2023. The process will include a preliminary application stage that will enable applicants to get feedback from DOC before submitting a complete application. Awards and loans will be made on a rolling basis, with initial funding decisions on “low hanging fruit” likely during the second and third quarters of 2023.
Breakdown of Funding
The bulk of the funding for semiconductor manufacturing incentives is allocated over five years, with $19 billion appropriated in 2022 and $5 billion appropriated per year from 2023 to 2026. Based on this funding structure, we expect several funding rounds over the next four years. Out of these funds, the incentive program will be divided into two general categories: approximately $28 billion for large-scale investments in leading edge manufacturing and approximately $10 billion for new manufacturing capacity for mature and current generation chips, new and specialty technologies, and for semiconductor industry suppliers.
In addition, the CHIPS and Science Act appropriated $6 billion for direct loans and loan guarantees, which can be used to deploy up to $75 million in loans. It also included $2 billion for the production of mature technology nodes, with priority given for chips used in critical manufacturing industries. The implementation strategy notes funding awards will be calibrated to provide the minimum federal investment needed to attract “significant private investment to create economically viable projects at sufficient scale.”
As discussed in our previous Advisory, the funding program includes “guardrail” provisions to deter participants from making semiconductor-related investments in China. Specifically, the CHIPS Act requires a covered entity seeking CHIPS Act funding to sign an agreement restricting the entity from engaging in any “significant transactions” involving the “material expansion of semiconductor manufacturing capacity” in China or any other foreign country of concern for a period of ten years from the date of the award. Carved out from this requirement are investments in legacy chips. The CHIPS Act gave the DOC discretion to define the terms “significant transactions” and legacy chips; however, the DOC has yet to provide guidance on how these terms would be defined.
Ahead of the DOC releasing application guidance in the coming weeks, it would be helpful to review the program requirements to ensure potential applicants meet certain criteria, in particular the covered entity rules and the eligibility criteria. Notably, applicants will be required to demonstrate that they have a covered incentive,1 which can take multiple forms and may include: state or local incentives, workforce-related incentives, concessions with respect to real property, and funding for research and development. The implementation strategy provides the following examples of covered incentives:
- Industrial infrastructure investments that support the proposed project, but can also support the broader development of a supplier ecosystem such as shared utility, logistics, and production capacity
- Workforce investment
- Long-term tax credits to ensure that firms continually invest in upgrading and expanding facilities to maintain competitiveness
In addition, the DOC will prioritize funding for proposals that can be implemented quickly, reduce project risk, demonstrate local support and/or regional cooperation, and provide broad-based benefits. The implementation strategy includes the following examples of state and local commitments:
- Expedited processes for environmental, health, and safety reviews and permits
- Liaisons to assist with site selection, supplier discovery, and compliance with local laws
- A systems integrator that works with ecosystem companies to address shared issues like navigating permits, building infrastructure, finding workers, and coordinating incentive applications
- Planning and support for other ancillary investments, such as housing and community development
- Where relevant, partnership with other states and localities to develop regional ecosystems and corridors that encompass multiple jurisdictions
While the DOC will engage in a fair and fact-intensive review of any application, we anticipate that political support will be helpful for any successful application, in addition to meeting the program requirements. Arnold & Porter has a team of professionals that has been engaged on the CHIPS program since 2019, and we stand ready to help clients navigate the CHIPS program.
Key Enforcement Trends in Tech
Antitrust has become the subject of intense public debate, evidenced by an increasing number of government investigations and enforcement actions. Although agency resources are finite, the last year has shown that the tech industry can expect to be a priority in 2023.
- More Litigated Mergers. In 2022, the Federal Trade Commission (FTC) and Department of Justice (DOJ) litigated ten proposed transactions—the FTC filed three times as many lawsuits as it did in 2021. Moreover, the agencies are not afraid to bring the tough or marginal case—as DOJ’s leader, AAG Jonathan Kanter, bluntly put it, they “will not back down from a fight” where they believe a transaction violates the law.2
- Technology Mergers Showcase Aggressive Theories. FTC’s actions notably featured two high-profile technology cases: a suit challenging Meta’s acquisition of virtual reality studio Within Unlimited and a suit to prohibit Microsoft’s proposed acquisition of game developer Activision Blizzard. The Meta/Within claims focus on Meta as a potential competitor in a market for virtual reality apps designed specifically for fitness, and the Microsoft/Activision claims focus on theories that Activision games and development abilities are of such a unique nature that Microsoft could harm console and software developers by denying them access to Activision products post-close.
Winning potential competition and vertical merger cases in court has been a challenge for the agencies of late. Indeed, on February 1, 2023, a federal judge refused to grant a preliminary injunction blocking the Meta/Within transaction. Notably, these two merger challenges were the only enforcement cases that were not unanimously voted out by FTC last year, suggesting that, regardless of the potential legal hurdles, more aggressive theories are being pressed in the technology space in particular—a key factor in considering the likelihood of investigation and closing timelines for any industry deals.
- Conduct Cases Challenge Well-Established Practices. Both agencies have cases pending that allege unlawful monopolization in the technology space and challenge acquisitions that date back a decade or more as part of an unlawful scheme. The FTC’s monopolization lawsuit against Meta challenges its acquisitions of Instagram (2012) and WhatsApp (2014). On January 24, 2023, the DOJ filed suit against Google for unlawfully monopolizing digital advertising technologies through exclusionary conduct and manipulation of digital advertising auctions. Similar to FTC’s allegations, DOJ’s anticompetitive conduct claims include Google’s past acquisition of DoubleClick (2008).
Semiconductor Matters Continue to Focus on Protecting the Vertical Ecosystem: Nvidia/Arm and Looking Ahead to Broadcom/VMware
There were two major semiconductor antitrust matters active in 2022. The first was the FTC’s successful challenge to Nvidia’s proposed acquisition of Arm. The transaction did not present direct “horizontal” competition concerns between Nvidia’s graphics and communications chips and Arm’s CPU designs and architecture.3 Rather, FTC alleged that the transaction would result in Nvidia having the ability and incentive to harm its competitors that are reliant on Arm licensing, particularly competitors in smart NICs, SOCs for automobile driver-assist systems, and Arm-based datacenter CPUs. Additionally, the FTC had concerns about Nvidia gaining access to competitively sensitive information shared by its rivals with Arm and a potential chilling effect on innovation if competitors were to share less with Arm in the future under Nvidia’s ownership. On February 7, 2022, after two months of litigation, Nvidia announced termination of the deal.4
Announced on May 26, 2022, Broadcom’s acquisition of VMWare is the other major semiconductor case and is still in an investigative stage. The FTC5 and European Commission (EC)6 revealed in-depth investigations on July 11 and December 20, respectively. While the subject matter of the FTC’s investigation is not public, the EC specified that it is assessing whether Broadcom could harm competitors for certain hardware components by preventing them from interoperating with VMware’s software. The EC also is examining whether Broadcom’s ownership would hinder innovation in smart NICs or lead to unlawful bundling of VMware’s virtualization software with its own software. In a statement, Broadcom acknowledged the investigations and stated that it continues to expect the transaction to close in fiscal year 2023.7
The vertical nature of these transactions underscores how the close development relationships in the semiconductor landscape can add significant complexity to transactions as the agencies continue to focus on not only foreclosure, but also information sharing and innovation issues.
FTC Calls for Broad Ban on Non-Competes
On January 5, 2023, the FTC issued a sweeping Notice of Proposed Rulemaking that would ban post-termination non-compete clauses and require employers to rescind existing ones, while also significantly limiting deal-based non-compete clauses.8 While some states currently have prohibitions on non-compete agreements for low-wage workers, the FTC’s sweeping proposal lacks exceptions (other than non-competes in conjunction with the sale of a business) and has broad implications, especially in technology markets where protecting investments in training, trade secrets, and corporate best practices is particularly crucial. The agency’s proposed rule would force technology firms to revisit their strategies for recruiting, managing, and retaining talent.
Among the questions specifically posed for comment are whether and to what extent trade secret and confidentiality restrictions are sufficient to protect investments without the burden on labor competition posed by non-competes. The FTC is accepting comments on the proposed rulemaking until March 10, 2023.
Export Control Developments
In his September 16, 2022 remarks, National Security Advisory Jake Sullivan stated that the United States is revising its longstanding premise of maintaining “relative” advantage over competitors in key technology areas through export controls and is now adopting a strategy to “maintain as large of a lead as possible” in key technology sectors, including advanced logic and memory chips. Consistent with this strategic shift, 2022 saw a significant expansion in export control measures with respect to semiconductor items, with a particular focus on China.
Controls on China-Destined Semiconductor and Supercomputer Items
On October 7, 2022, the US Department of Commerce, Bureau of Industry and Security (BIS) issued an interim final rule on “Implementation of Additional Export Controls: Certain Advanced Computing and Semiconductor Manufacturing Items; Supercomputer and Semiconductor End Use; Entity List Modification.” This rule imposed significant export controls on semiconductor and supercomputer items that are destined to China, including:
- Addition of certain semiconductor manufacturing and other semiconductor and advanced computing items to the Commerce Control List (CCL), which are now subject to China-specific regional stability (RS) control
- Expansion of the scope of foreign-produced items subject to the EAR
- Imposition of license requirements on certain China-origin technology exports
- Introduction of new end use controls with respect to semiconductor manufacturing activities and supercomputers in China
- Restriction on US persons’ activities with respect to development or production of certain high-performance integrated circuits (ICs) in China
The US government imposed these rules unilaterally and is reportedly actively negotiating with its key allies and partners, including the Netherlands, Japan, and South Korea, so that they also adopt similar measures on semiconductor items destined to China. Recent media reports indicate that the US government may have reached an agreement with the Netherlands and Japan, though the details remain unclear.10
Entity List and Unverified List
In 2022, BIS added many semiconductor companies to its Entity List and Unverified List. For example, on October 7, 2022, BIS announced the addition of 31 Chinese entities, including semiconductor companies such as Yangtze Memory Technologies Co., Ltd. (YMTC), to its Unverified List, as discussed in our previous Advisory. In addition, on December 15, 2022, BIS announced the addition of 36 entities to the Entity List, most of which operate in the semiconductor sector in China. Among those added to the Entity List on December 15, 2022 was YMTC, which was moved from the Unverified List.
Addition to the Entity List results in a prohibition on export, reexport, or transfer, without a license, of items subject to the Export Administration Regulations. Addition to the Unverified List results in ineligibility to rely on license exceptions, requirements for a “UVL statement,” and certain export reporting obligations. In addition, if BIS is unable to verify the end use within 60 days, BIS may move the applicable entities from the Unverified List to the Entity List, as was done for YMTC.
On August 15, 2022, BIS published an interim final rule implementing multinational controls on the following semiconductor-related items, which are now subject to national security controls and anti-terrorism controls and require a license to export, reexport, or transfer (in-country) to or within many countries, including China:
- Two substrates of ultra-wide bandgap semiconductors (Gallium Oxide (Ga2 O3) and diamond)
- Electronic Computer Aided Design software specially designed for the development of integrated circuits with any Gate-All-Around Field-Effect Transistor structure
In addition, these items were identified as emerging and foundational technologies pursuant to Section 1758 of the Export Control Reform Act (ECRA). As a result, these items may also be potential implications for the Committee on Foreign Investment in the United States (CFIUS) reviews.11 The details of this rule can be found in our previous Advisory.
President Biden’s Executive Order
On September 15, 2022, President Biden signed an Executive Order providing formal direction on the risk factors that the CFIUS should consider when reviewing a covered transaction. Among the factors that CFIUS is directed to review are the covered transaction’s effect on (1) the resilience of critical US supply chains that may have national security implications, including those outside of the defense industrial base, and (2) US technological leadership in areas affecting US national security.
While the Executive Order does not change the jurisdiction of CFIUS, by focusing on specific risk factors, it provides additional insight into which types of transactions trigger heightened US national security concerns, at least with respect to key industries and technologies identified in the Executive Order. Importantly, the Executive Order specifically identifies microelectronics as “manufacturing capabilities, services, critical mineral resources, or technologies that are fundamental to national security.”
For a discussion of the Executive Order, please refer to our previous Advisory.
CFIUS Review of Semiconductor Transactions
Increased attention on the semiconductor industry, however, does not necessarily mean that CFIUS would block all foreign investments relating to semiconductors. For example, CFIUS reportedly approved the acquisition of a US-based semiconductor IP developer OpenFive to an investor with Chinese connections.12 Senator Marco Rubio, who had requested a CFIUS review of the sale in April 2022, criticized CFIUS’s approval.13
Investment Review by Other Countries
Other jurisdictions have also started to rely on their investment review schemes to review and block, where necessary, semiconductor-related foreign investments. For example, as discussed in our previous Advisory, the UK’s Secretary of State for Business, Energy and Industrial Strategy blocked Nexperia BV’s acquisition of Newport Wafer Fab on national security grounds.
Potential Future Developments
We anticipate that the US government will continue to focus on the semiconductor sector in 2023 and beyond. Below, we briefly discuss potential future developments.
As noted above, the funding program for the CHIPS Act has yet to be implemented. We anticipate that BIS will issue guidance or regulations implementing this funding program, including the “guardrail” provisions, in early 2023.
Export Controls Development
We anticipate there will likely be further export controls on semiconductor-related sectors. For example, in November 2018, BIS issued an Advanced Notice of Proposed Rule Making on identifying “emerging technologies.” In so doing, BIS provided a list of categories of technology that it is considering, which included, among others, artificial intelligence (AI) and machine learning technology such as AI chipsets. In addition, it is also possible that BIS may issue additional export control measures directly on semiconductor items.
BIS has also indicated that it will focus on enforcing the expanded semiconductor-related export controls. For example, in discussing the new controls on China-destined semiconductor and supercomputer Items, Matthew S. Axelrod, Assistant Secretary for Export Enforcement at BIS stated in November 2022 that the Office of Export Enforcement at BIS “will be hard at work enforcing the new rules through all resources at our disposal, including classified and open-source reporting, partnerships with US companies, administrative and criminal investigations, and our global end-use check program.”
In 2022, there was an active discussion of creating an outbound investment review scheme, also known as reverse CFIUS. While the exact contours of the scheme have not been finalized, the scheme is intended to ensure that US government reviews US investments in foreign countries of concern (which would include China) for any national security concerns. Given the increased attention on the semiconductor sector, we anticipate that any outbound investment scheme’s focus would include the semiconductor sector.
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Please see Arnold & Porter’s Semiconductor webpage for additional information about legal developments in the semiconductor industry.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
Assistant Attorney General Jonathan Kanter Delivers Keynote Speech at Georgetown Antirust Law Symposium (Sept. 13, 2022), available here.
Complaint, In the Matter of Nvidia Corp., FTC Docket No. 9404 (Dec. 2, 2021), available here.
Press Release, NVIDIA and SoftBank Group Announce Termination of NVIDIA’s Acquisition of Arm Limited (Feb. 7, 2022), available here.
CRN, FTC ‘Second Request’ Investigation of Broadcom-VMware Deal Launches (Oct. 7, 2022), available here.
European Commission, Mergers: Commission opens in-depth investigation into the proposed acquisition of VMware by Broadcom (Dec. 20, 2022), available here.
TechCrunch, EU to probe $61B Broadcom-VMware deal over competition concerns (Dec. 20, 2022), available here.
FTC, FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023), available here.
See, e.g., Ana Swanson, Netherlands and Japan Said to Join US in Curbing Chip Technology Sent to China, NY Times (updated Jan. 30, 2023), available here.
Under CFIUS regulations, emerging and foundational technologies controlled under Section 1758 of ECRA are considered “critical technologies,” and an investment in US companies engaged in such technologies may trigger a mandatory CFIUS declaration requirement.
See Press Release, Senator Rubio, Rubio Slams CFIUS Approval of OpenFive Sale to Chinese-Funded Company (Aug. 29, 2022), available here.