Chip Firm Sues Over Designation as Chinese Military Company

Chinese semiconductor equipment maker Advanced Micro-Fabrication Equipment (AMEC) sued the Pentagon last week for wrongly designating the firm as a Chinese military company. AMEC claimed that its designation violates the Administrative Procedure Act, the National Defense Authorization Act for Fiscal Year 2021 and the U.S. Constitution (Advanced Micro-Fabrication Equipment v. United States, D.D.C. # 24-02357).

The Pentagon added the company in January to its 1260H List, which identifies companies the agency said have ties to China's military (see 2402010018). Although the Defense Department didn't initially say why it added AMEC to the list, the agency later issued a "short report" that pointed to the fact that AMEC received a "Manufacturing Single Champion Product award" from the Chinese government related to a chip manufacturing project.

AMEC argued in the D.C. district court that the Pentagon's decision "lacked the most fundamental information necessary to make a reasonable determination of AMEC’s status" in violation of the APA and the NDAA. The company said the report didn't "explain what the Award was," how it created an affiliation with the Chinese government or how a one-time award in 2019 stood as a basis for "ongoing affiliation" in 2024.

Had "any investigation into the Award" taken place, DOD would have seen that it was "merely a recognition for Chinese companies that have excelled in manufacturing a 'single' product segment," the brief said. The company didn't receive any financial benefit from the award, nor "any sort of joint production project or other relationship with [the Chinese Ministry of Industry Information and Technology]."

As a result, AMEC said DOD had no "reasonable basis" for the designation and "have no reasonable basis to willfully ignore the facts, while AMEC suffers growing and continuing harm to its business." The company said the 2024 designation wasn't the first time the company "has been unfairly and unlawfully targeted by" DOD "based on confusion about its independence from the Chinese military," since it was added to a previous version of the Pentagon list in 2021 (see 2101150006). This designation was removed after filing suit in federal court.

In the present suit, AMEC said its designation violates the APA as being unsupported by "adequate justification" and not made in conjunction with the specific procedures for designation Congress established in the NDAA. DOD had to submit to Congress a list of all Chinese military companies in "both classified and unclassified forms," publish the unclassified portion in the Federal Register and send a copy of both the unclassified and classified list to the heads of each appropriate federal agency.

"Defendants, however, did not follow any of these procedures," the complaint said. AMEC added that DOD violated the APA by unreasonably delaying in removing the company from the list.

The manufacturer also made a host of constitutional claims against both its designation and Section 1260H of the NDAA. AMEC said it received no notice of its designation, which deprived it of its "property and liberty rights, including current and future revenue from its U.S. business partners, business relationships with U.S. suppliers, the ability to effectively operate its chosen business, and reputation and professional goodwill."

AMEC also called Section 1260H "unconstitutional" because "it fails to give any designated entity the opportunity to be meaningfully heard." In addition, the company claimed that the section is unconstitutionally vague, given that it provides no entity "fair notice of what conduct is proscribed and inviting arbitrary enforcement by the Department."

AMEC said the designation also violates the U.S. Constitution's ex post facto law, which bars Congress from passing a law that punishes as a crime "an act previously committed, which was innocent when done." DOD here penalized "an honorary recognition lawful at the time of its receipt" in designating the company.

A Pentagon spokesperson didn't respond to a request for comment. AMEC filed its suit one day after media reports said the Defense Department planned to remove Hesai Technology, the largest Chinese lidar company by sales, from the 1260H List (see 2408130022). Government lawyers had reportedly expressed concerns about whether the listing would hold up in court.