Commerce's Proposed Chips Act Guardrails Carry 'Significant Compliance Risks,' Law Firms Say

The Commerce Department’s proposed guardrails for recipients of Chips Act funding could lead to compliance risks for semiconductor companies, especially as the agency bolsters its enforcement arm, law firms said. They also said companies should carefully review how the proposals intersect with chip export restrictions.

Commerce last month requested feedback on potential restrictions to limit how Chips Act funding can be used and to align those limits with export controls (see 2303210026). Venable said Commerce is “staffing up its team” to ensure compliance with the Chips Act, pointing to testimony last month by Commerce Inspector General Peggy Gustafson before the House Appropriations Committee. Gustafson said Commerce is hiring audit teams, including at least one semiconductor materials and technology expert, to conduct oversight of the Creating Helpful Incentives to Produce Semiconductors, or CHIPS, program.

Venable expects Commerce to emphasize enforcement, especially after reports of “significant fraud and abuse” from the COVID-19 Paycheck Protection Program. “It is reasonable to assume the Inspector General will be motivated to keep close tabs on CHIPS Act funding recipients and to ensure faithful compliance with its requirements and prohibitions,” Venable said, adding that participation in the funding program “carries significant compliance risks for those who are not informed of the Act's underlying policy priorities.”

Ropes & Gray said it doesn’t expect the proposed limits to “impose affirmative compliance obligations writ large on funding recipients,” but it did say they “are another sign that U.S. policymakers continue to use all available tools to address concerns about the transfer of sensitive technology to China.” The firm said the restrictions are “plainly intended to disincentivize U.S. companies from engaging in a broad range of semiconductor-related activities with countries of concern, including China.”

Crowell & Moring noted that the controls are “purposefully” broad, applying not just to funding recipients, but their affiliates and any other “portfolio companies” in an investment fund. The firm said the rules “are wide reaching,” and urged any company considering applying for the funding to first examine how the money “will affect their current operations in China.”

The proposed funding restrictions are partly intended to align with U.S. chip export controls, although they apply to “less advanced logic semiconductors” when compared with the Bureau of Industry and Security's October controls on chip-related exports and activities involving China (see 2210070049), Crowell said. The firm said “28 nm chips are controlled” in the Chips Act guardrails “compared to 16/14 nm chips in the Commerce export controls.” But the firm noted that “the performance parameters identified for controlled memory semiconductors are the same in this proposed rule as with the October U.S. export controls.”

Under its proposal, Commerce also would allow funding recipients to make “limited investments in an ‘existing facility’ for ‘legacy semiconductors,’” Crowell said. And even though Commerce included a definition for “legacy semiconductors,” the firm said, the agency has “discretion to designate certain legacy technologies” as semiconductors that are critical to national security, which could trigger the funding restrictions.