BIS Imposes $300 Million Penalty for Violation of Huawei Foreign Direct Product Rule

On April 19, the Department of Commerce’s Bureau of Industry and Security (BIS) imposed a $300 million civil penalty—the largest standalone administrative penalty in BIS history—against Seagate Technology LLC of Fremont, California, and its Singaporean subsidiary, Seagate Singapore International Headquarters Pte. Ltd. (collectively, Seagate).The basis for the penalty was Seagate’s alleged violation of the Export Administration Regulations (EAR), by selling hard disk drives (HDDs) to Huawei Technologies Co. Ltd. (Huawei) in violation of the Foreign Direct Product Rule (FDPR). BIS estimates that this $300 million penalty is more than double Seagate’s profits from its alleged illegal exports to and involving Huawei. BIS also imposed a multi-year audit requirement and a five-year suspended Denial Order.

As readers of Enforcement Edge may know, BIS added Huawei and some of its non-U.S. affiliates to the Entity List for its involvement in “activities contrary to the national security or foreign policy interests of the United States” in May 2019, and added more of its non-U.S. affiliates to the Entity List in August 2019 and August 2020.An Entity List designation results in license requirements for exports, reexports, and transfers of items subject to the EAR to the designated entity. In addition to the Entity List designations, BIS also amended the FDPR to create a Huawei-specific rule, which resulted in additional controls on the export, reexport, or transfer of foreign-produced items when Huawei and its designated affiliates are involved. As a result, additional categories of foreign-produced items that are “direct products” of certain software or technology subject to the EAR (or plant or major component of a plant that itself is a direct product of certain U.S.-origin software or technology) become subject to the EAR when Huawei or one of its designated affiliates is involved.(We have previously written on the Huawei-specific FDPR here and here.)

According to the BIS press release and settlement documents, Seagate continued to do business with Huawei even after BIS implemented significant export control measures targeting export transactions with Huawei, and despite two of Seagate’s competitors (and multiple other companies) publicly announcing their decisions to stop their sales to Huawei. The BIS Order states that from August 17, 2020 to September 29, 2021, Seagate engaged in prohibited conduct involving Huawei entities on the Entity List on 429 occasions, resulting in the transfer of 7,420,496 foreign-produced HDDs valued at approximately $1,104,732,205. In 2021, Seagate Technology LLC also extended lines of credit to Huawei totaling more than $1 billion, resulting in increased sales and shipping volume.

This settlement represents BIS’s first major enforcement action involving violations of the Huawei FDPR, but it is likely not the last. John Sonderman, Director of the Office of Export Enforcement, shared: “Those who would violate our FDP rule restrictions are now on notice that these cases will be investigated and charged, as appropriate.”

Companies, including those who may have transactions involving Huawei or its affiliates, should carefully review the FDPR.FDPR analysis is complex, in part because the regulations alone do not clearly indicate how “direct” the foreign-produced item should be to be considered a “direct product” of controlled software or technology—in other words, how far down the production chain the FDRP reaches. For example, according to the BIS Order, Seagate apparently incorrectly interpreted the FDPR to require evaluation of only the last stage of its manufacturing process rather than the entire process, which resulted in the violations at issue.

For questions about the Huawei FDPR or other export controls or sanctions matters, contact the authors or any of their colleagues in Arnold & Porter’s White Collar Defense & Investigations or Export Control & Sanctions practice groups.

*Junghyun Baek contributed to this blog. Mr. Baek is a graduate of Harvard Law School and is employed at Arnold & Porter’s Foreign Legal Consultant Office as a Law Clerk.

© 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.