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For the first time in nearly two decades, China is revamping its export control regime and issuing its first unified Export Control Law, which combines concepts from more than a dozen existing Chinese laws and related regulations. This alert summarizes the most significant changes from current Chinese export control practice, highlights what may be included in the pending Export Control Law, and comments on anticipated impact on businesses operating in China. We also provide some recommended approaches for companies with China operations (or rely on third parties in China) to consider in advance of implementation of the Export Control Law.

On August 28, 2020, China’s Ministry of Commerce (“MOFCOM”) and Ministry of Science and Technology released an Amendment to the Catalogue of Technologies Prohibited or Restricted from Export by China (“2020 Export Control Catalogue”).  The original catalogue was released along with the Regulations on the Administration of the Import and Export of Technology effective on January 1, 2002 (“Import and Export Regulations”, amended twice in 2011 and 2019).

In addition to the 2020 Export Control Catalogue, the Chinese government is also in the process of finalizing the draft of the Export Control Law. On December 28, 2019, the Standing Committee of the National People’s Congress (“NPC”) released the draft Export Control Law, a revised version of an earlier draft first published by MOFCOM on June 16, 2017. On July 3, 2020, the NPC published a further revised draft. With three rounds of draft being released, the Export Control Law will likely be finalized and published soon. This will be the first comprehensive national export control legislation in China, and China’s first step towards a unified export control regime.

What are the major changes under the 2020 Export Control Catalogue?

A total of 53 categories of technologies have been deleted, revised, or added to the 2020 Export Control Catalogue. Major changes include:

  • Removing 4 items from prohibited list, including 1) microbial fertilizer technology, 2) caffeine production technology, 3) riboflavin (VB2) production process, and 4) vitamin production.
  • Removing 5 items from restricted list, including 1) new city epidemic vaccine technology, 2) natural pharmaceutical production technology, 3) bioactive functional polymer material preparation and processing technologies, 4) chemical synthesis and semi-synthetic drug production technology, and 5) information security firewall software technology.
  • Adding 23 items to restricted list. Among others, several here captured attention, including “computer service” and “software industry”. For instance, technologies relating to AI are listed, including speech synthesis, voice recognition, interactive understanding technology, print scanning and identification, handwriting photographing and identification, and “personalized information push service technology based on data analysis”. These items, particularly the last one, could have potential impact for multinational clients seeking to leverage the Chinese consumer base. For example, e-commerce or app based business models that rely on data analytics could be covered by the restricted list. This might include international push marketing tools that use market intelligence from Chinese consumers to suggest products for purchase. Similarly, cloud or app-based tools that multinational companies use to analyze marketing and sales data as part of determining the right product mix to sell to Chinese companies could be impacted. In addition, technologies relating to cybersecurity, including cryptographic chips design, implementation technology, quantum cryptography technology have also been added and are now subject to restriction.

What is new under the upcoming China Export Control Law?

Based on the latest draft released on July 3, 2020, the highlights include:

  • Scope of controlled items
    This will cover tangible goods (such as dual-use items, military products, nuclear) and key related technologies and services.
  • Blacklist management system for national security purposes
    For the purpose of “national security interests”, this will include authorization to prohibit export of certain controlled items to any specific destination, country, region, or to any specific entities or individuals. This covers authorization on an ongoing basis to assess destinations, determine the level of risk, and what corresponding control measures are appropriate.
  • Internal Compliance Review System
    This will encourage exporters to establish an internal compliance review system, which once adopted can support the success of their license applications for controlled items.
  • Exporter’s social credit record
    China has imposed a “social credit” system on individuals that grades their contribution to Chinese society. It has extended this concept to companies operating in China across multiple Chinese government agencies. The social credit system helps the Chinese government determine how compliant any given company is to Chinese government regulation, perhaps in a more coordinated manner when compared to other governments. The Export Control Law establishes that companies operating in China will be examined and graded according it its level of compliance or “social credit record.” It authorizes reliance by the export control authorities on “relevant credit records of the exporter”.  A company’s rating can determine, among other things, the level and intensity of the need for government oversight and scrutiny. In this case, it is expected that the export control authorities will also consider the social credit records of the license applicant available in the Chinese social rating systems of other agencies, such as China Customs, foreign exchange, tax and market/competition.
  • Extraterritorial jurisdiction enforcement
    In cases that endanger national security and interests, this will authorize extraterritorial jurisdiction and enforcement. Additional guidance will be needed to answer critical strategic questions, such as how China intends to enforce activity in other countries, such as the United States or UK and EU.

What kinds of activities will be defined as technology export?

According to the Import and Export Regulations, the term “technology export” refers to the transfer of technology from China abroad, through trade, investment, or economic and technical cooperation, including patent assignment, transfer of patent application rights, patent licensing, transfer of trade secrets, technical services, and “other forms of technology transfer”.

The Import and Export Regulations define “technology export” broadly and indicate that the examples of technology export provided above are illustrative and are not meant to be exclusive. We note that the catch-all nature of the definition, (i.e., “other forms of technology transfer”) is vague and provides the Chinese authorities with broad discretion to determine if any given activity would be regulated. Theoretically, the catch-all definition could include disclosing and disseminating technical information to any individuals or organization in any form overseas. Furthermore, it is not clear currently how far China’s jurisdiction will reach. For example, it is not clear how the definition of “technology export” (and exceptions thereto) impacts transfers between and among non-China affiliates or subsidiaries. Similarly, the definition’s impact on the transfer of technology to non-Chinese individuals, whether in China or abroad remains subject to further clarification.

In similar situations, we generally encourage clients to seek additional guidance and determine the relevant Chinese authority’s posture on any given activity. For example, technology that is public, widely-known or of non-Chinese origin could fall under the catch-all definition. It would be prudent in such circumstances to seek input from the relevant Chinese authorities to determine if the Import and Export Regulations would apply.

What are the export control procedures for technology transfer?

Technology is classified into three categories under the draft Import and Export Regulations and each category is subject to different levels of scrutiny.

  • Permitted (free export) Technology
    Permitted technology is eligible for export, subject only to the exporter’s contract registration with the Foreign Economic and Trade Department of China’s State Council (“FETD”). After completing the registration, the exporter may proceed with relevant foreign exchange, banking, tax, and China Customs procedures to effectuate an underlying export transaction by presenting a technology export contract registration certificate issued by FETD. Such registration, however, is not a prerequisite for the exporter to enter into any underlying contract with a non-Chinese buyer.
  • Restricted Technology
    Restricted technology (pursuant to the existing 2020 Export Control Catalogue) cannot be exported before obtaining approval through an application to FETD in what is a two-part process. If the application is approved, the exporter will receive a letter of licensing intent for technology export contract (“LOI”). The exporter may not undertake substantive negotiation or enter into any technology export contract with any overseas party before receiving a LOI. Once a technology export contract has been signed, the exporter must submit an application for a Technology Export License. The technology export contract will become effective when FETD grants the corresponding Technology Export License.
  • Prohibited Technology
    Prohibited Technology (pursuant to the 2020 Export Control Catalogue) is strictly prohibited from export in any way. Violations are subject to warning, confiscation of illegal gains, monetary fines, revocation of foreign trade permit, and even criminal liability.

How should multinational corporations prepare for compliance with the new law?

Given the newly released 2020 Export Control Catalogue which is now in force, and the upcoming Export Control Law, our recommendations for companies with operations in China:

  • Closely monitor ongoing developments in the export control catalogue and implementation rules or industrial guidelines that might be released by the Chinese government;
  • Consider establishing an internal export control review program with an appropriate compliance officer;
  • In the event a company has an affiliate or subsidiary in China contemplating a technology export transaction
    • Establish or strengthen established risk assessment and identification processes for your current products and technology, and classify them into categories of permitted, restricted, and prohibited items;
    • Seek informal opinions or clarifications from Chinese export control authorities during the transaction planning process when any forms of technology transfer are involved;
    • Go through contract registration with FETD for permitted technology even though it is not a prerequisite for an underlying technology export contract to take effect, as the actual enforcement of export control measures might differ from the literal meaning of the law;
    • Provide export control training to employees and add export control related clauses to template export contracts, user terms, and other relevant legal documents as needed.

Over recent years, the use of lithium ion batteries has become widespread in consumer products such as laptops, smartphone, hoverboards, electric scooters and bicycles, and power banks.  Unfortunately, many companies have been forced to recall their products over thermal events involving those products’ lithium ion batteries.

Manufacturers can mitigate their risks of fire hazards with lithium batteries by carefully choosing the right supplier, ensuring that batteries meet expected global industry standards and care is taken to ensure that the batteries are properly integrated into the products with appropriate battery management systems to mitigate the risk of thermal runaway.  The latest revision of UL 2272 (Standard for Electrical Systems for Personal E-Mobility Devices) provides a good example of attention not just to the manufacturing and design of the battery but all aspects of the product and the manner in which the battery and motor operate together in the product.  Emphasizing the effectiveness of UL 2272, the CPSC stated in its April 2020 report that despite numerous fires in products that were not compliant with UL 2272, including two fatalities, it was not aware of known substantial fires associated with products certified to the voluntary standard.

Despite best efforts, thermal issues do arise with lithium batteries.  Proper storage and handling practices can also mitigate the likelihood of thermal events.  There is no mandated regulation for lithium ion battery storage; just guidance and recommended best practices from various agencies.  The following guidelines for battery storage were derived based on numerous sources, including but not limited to, guidance from the Occupational Safety and Health Administration  and the National Fire Protection Association:

  • When storing, remove the battery from the equipment.
  • Batteries should be segregated from other materials in a warehouse and stored in a non-combustible, well-ventilated structure with sufficient clearance between the walls and the battery stacks. There should be clearance between the batteries to allow air to circulate.
  • Avoid extreme heat and freezing temperatures; avoid storage under direct sunlight or in front of a heating system, stove or other heat source.
  • Keep lithium-ion batteries cool and dry during storage. Be sure not to expose the battery to condensation, excessive humidity or water.
  • Lithium-ion must be stored in a charged state, ideally at 40 percent and between 30% and 50%.
  • Batteries should be stacked in a manner as to prevent short circuits; avoid storing the batteries in the places exposed to static electricity.
  • Batteries should not be opened, destroyed nor incinerated since they may leak or rupture and release in the environment the ingredients they contain.

Executing an effective product recall requires meticulous planning and navigating a plethora of thorny issues, including, but not limited to, reverse logistics.  This is especially so when either the recalled or replacement product involves a product with a lithium ion battery.

The transportation of recalled defective lithium batteries presents a challenge, not only under CPSC’s regulations, but also under the U.S. Department of Transportation (DOT) regulations.  In fact, the CPSC typically informs companies recalling products with these batteries that “a recall cannot be considered acceptable to CPSC staff if it does not comply with DOT regulations regarding transportation of hazardous materials.”  Therefore, some alignment of CPSC expectations and DOT requirements, specifically the Pipeline and Hazardous Materials Safety Administration (PHSMA), is typically necessary to ensure that all rules are followed and necessary permits are procured.

The following is high-level overview of the issues that companies recalling products with lithium ion batteries will face.

Lithium ion batteries and lithium metal batteries are regulated as hazardous materials under U.S. and international transportation regulations and standards, whether shipped alone, packed with equipment, or contained in equipment.  Defective lithium batteries are more likely to ignite during transportation, and may go into thermal runaway, generating intense heat.  Accordingly, DOT prohibits air shipment of lithium batteries identified as defective for safety reasons, as do international air transportation standards.

While DOT does authorize ground shipments of defective batteries, additional packaging requirements apply.  In addition, such batteries do not qualify for the partial regulatory relief available for shipments of small and medium lithium batteries[1], and must be shipped as fully regulated hazardous materials. This means, among other things, that persons preparing shipments of defective small or medium lithium batteries for transportation or transporting such shipments must have received hazardous material transportation training.  Also, many carriers charge a hazardous materials surcharge for fully regulated shipments.  Other carriers, such as FedEx Ground, state that they will not accept defective batteries that pose a safety risk.

In order to eliminate some of these difficulties, several companies have developed special packaging specifically for the transportation of defective lithium batteries and have obtained special permits from DOT for this packaging.  The special permits provide relief from some regulations for any shipment in these packagings.  Companies will find however that these packagings are expensive and can contain no more than a small number of lithium batteries. A company may also develop its own packaging and obtain a special permit from DOT for its use.

The transportation of lithium batteries continues to garner significant attention and regulations are unlikely to become more lenient. Companies facing a recall of defective lithium batteries need to consider transportation issues at the outset when developing a recall strategy. Attention also needs to be given to the plan for destruction of recalled batteries, which must be shared and approved by the CPSC when the recall falls within their jurisdiction, and may even be witnessed by agency personnel.  Best practices for lithium battery destruction include:

  • Dispose in accordance with the applicable regulations in country and state.
  • Disposal should be performed by permitted, professional disposal firms knowledgeable in federal, state or local requirements of hazardous waste treatment and hazardous waste transportation.
  • Incineration should never be performed by battery users, but eventually by trained professional in authorized facility with proper gas and fume treatment.
  • Battery recycling should be done in authorized facility.

Advance planning and communication with the right regulatory bodies should smooth some of the potential pitfalls when conducting such a recall.

[1] Small lithium metal batteries have a lithium content of ≤ 1 gram (g) of lithium content per cell and ≤ 2 g per battery, and small lithium ion batteries have a Watt-hour (Wh) rating of ≤ 20 Wh per cell and ≤ 100 Wh per battery. For medium batteries, these limits increase to 5 g lithium content per cell and 25 g per battery and 60 Wh per cell and 300 Wh per battery respectively.

Global Trade Talks is a podcast that shares brief perspectives on key global issues on international trade, current events, business, law and public policy as they impact our lives.

In the latest episode, hosts Nicole Simonian and Ambassador Robert Holleyman interview Fred Hochberg, former Chairman and President of the Export-Import Bank of the United States. In addition to his roles in government service and academia, he spent nearly two decades as an executive at the Lillian Vernon Corporation earlier in his career.  They discuss his recent book, Trade is Not a Four-Letter Word, as well as his perspectives on trade now and where it might be going.  To listen to the episode, click here.

U.S.-China trade relations and economic policy are highly politicized within the United States, and are key issues in the campaigns of both President Donald Trump and the Democratic nominee, former Vice President Joe Biden. A theme has emerged in the campaign messaging battles, with neither candidate ceding any ground on their “tough on China” bona fides. But as divergent as Trump and Biden are on many policy issues, when it comes to China and trade, there is some overlap between Trump’s executive actions and Biden’s campaign agenda.

Aggressive U.S. policymaking to call-out and sanction interests within China has strong bipartisan support among Washington officials. The expansion of national security laws in Hong Kong, the treatment of the Uyghurs in Xinjiang, China’s trade practices and industrial policies, the COVID-19 pandemic, and South China Sea have all converged to put China into the spotlight of the U.S. elections, even more so than in 2016. It can be expected that a challenging U.S.-China relationship will continue regardless of who wins the White House in November. For global businesses, these growing geopolitical and regulatory challenges do not present a static ‘new normal’ to adjust to, but rather an increasingly dynamic environment, requiring more nimble and proactive strategic planning, sourcing, policy, and compliance efforts.

Continue Reading Election 2020: U.S.-China Tensions Will Remain Regardless of Who Wins the White House

This article was originally published in Automotive World.

The future of the mobility is dependent on AI, but without greater understanding among consumers, trust could be hard to build.

The mobility sector is keen to realise the full benefits of artificial intelligence (AI), not least to open up the revenues which data-driven connected services could offer. But moving forward, it must balance these opportunities with the rights of drivers, passengers and pedestrians. A number of concerns have already surfaced, all of which will become more pressing as the technology is further embedded into vehicles, mobility services and infrastructure.

Privacy and liability are two of the major challenges. As Christian Theissen, Partner, White & Case explains, mobility has become inherently connected to consumer habits and behavioural patterns, much like the e-commerce and social media industries. “The access, ownership, storage and transmission of personal data, such as driving patterns, must be taken into consideration by both lawmakers and companies gathering and using data,” he says. Meanwhile, in a world of AI-powered self-driving, at what point do regulators start blaming the machine when something goes wrong?

Automakers must build knowledge

Part of the challenge in considering these issues is that as things stand, there is limited understanding among consumers around what rights there are. “Consumers appreciate AI,” says Cheri Falvey, Partner, Crowell & Moring, “and in particular the ease with which navigational apps help guide them to their destination. Whether they appreciate how their data is accumulating and developing a record of their mobility patterns, and what their rights are in respect to that data, is another question.”

There is often little precedent for regulators to rely on when making new policy in this arena, so it’s a good time to create a proactive regulatory strategy that invites discussion and collaboration from the start

This is in part because it is not always clear when AI is at work. A driver may register when a car’s navigation system learns the way home, but won’t necessarily realise that data on how a car is driven is being collected for predictive maintenance purposes, or that their data is being fed into infrastructure networks to manage traffic flow.

Continue Reading Automakers and Regulators Must Educate Consumers on Mobility AI

In the wake of the COVID-19 pandemic, product manufacturers and distributors—many of whom have pivoted to create PPE-related products for the first time—are now faced with a veritable morass of guidelines and requirements to navigate from a variety of governmental agencies. Recent enforcement actions by federal agencies have only highlighted the importance of understanding exactly how a product must be produced, advertised, labeled, and sold.  This begs the important question: who is the regulator and what is the rule?

Our product risk management team has been speaking to several trade associations in September 2020 about how to navigate the alphabet soup of federal agencies supervising COVID-19 product distribution.  The biggest takeaway:  How a product is advertised for sale plays a critical role in how it is regulated and by which agency .  The regulatory profile can mean the difference between required manufacturing registration or specific requirements as to product labeling.

This article outlines a few of the major players involved in regulating products designed to mitigate or prevent COVID-19—specifically, the Food and Drug Administration (“FDA”), Federal Trade Commission (“FTC”), and Environmental Protection Agency (“EPA”)—and discusses high-level considerations for entities who find themselves caught up in the regulatory alphabet soup.

Continue Reading Who is the regulator? What is the rule?: Navigating the Alphabet Soup of COVID-19 Product Requirements       

Recalls in Review: A monthly spotlight on trending regulatory enforcement issues at the CPSC.

Electric scooters have taken American cities by storm as micromobility companies expand to meet consumer demand for more convenient transportation options. As with bicycles, scooters have become a go-to option for consumers who are seeking socially distant activities and modes of transportation amid the COVID-19 pandemic.

The regulation landscape for powered scooters is still being charted. Although a federal safety standard which addresses electrical systems and lithium-ion batteries in personal e-mobility devices (ANSI/CAN/UL 2272) exists, there is no corresponding safety standard for regulating the overall operational, mechanical, or electrical safety aspects of powered scooters. Additional standards may be promulgated in the near future, however. The American Society for Testing and Materials (ASTM) Consumer Products Subcommittee on Powered Scooters and Skateboards (F15.58) has begun developing a proposed standard intended to minimize the common hazards associated with use of commercial electric-powered scooters by adults.

Given the lack of a mandatory federal safety standard for powered scooters, it is unsurprising that recalls of powered scooters were infrequent in in the first two decades that the products were on the market. The Commission has conducted 34 total recalls of powered scooters. Only nine of the recalls occurred between 1996 and 2015. The small enforcement “spike” in 2005 corresponds with CPSC efforts to track emergency-room visits related to powered scooters. At least 10,015 emergency room-treated injuries occurring between July 2003 and June 2004 were related to powered scooters. Recalls increased dramatically as hoverboards (also referred to as “self-balancing” electric scooters) were introduced to the market. Fourteen recalls of powered scooters were conducted in 2016 alone, closely followed by another ten recalls in 2017.

Continue Reading Recalls in Review: Electric- and Gas-Powered Scooters

Mopeds fall within NHTSA’s jurisdiction when they can go over 20 mph and are meant to be used primarily on roads.  They’re considered “motor-drive cycles,” which are a subset of motorcycles.  In NHTSA’s world, a motorcycle is “a motor vehicle with motive power having a seat or saddle for the use of the rider and designed to travel on not more than three wheels in contact with the ground.”[1]  A motor-drive cycle is “a motorcycle with a motor that produces 5–brake horsepower or less.”[2]  Since these mopeds are regulated by NHTSA, they cannot be imported into or sold in the United States without complying with the FMVSS.[3]

Since NHTSA is focused on vehicles meant for road use, one might wonder whether the use of bike paths changes NHTSA’s jurisdiction over mopeds.  Ultimately, though, NHTSA is focused on speed.  According to NHTSA’s published interpretations of its regulations, the agency “believe[s] that vehicles with speeds of over 20 mph are capable of on-road operation,” and therefore fall within their purview.  NHTSA makes classifications for vehicles in interstate commerce.  The classifications are meant to be as applicable in California as they are in Tennessee or Maine.  Some cities may have ample bike lanes such that it would be reasonable for the bikes to never be used on roads, but most do not. NHTSA’s classifications will not change from location to location.

Continue Reading NHTSA versus CPSC Jurisdiction Over Certain Micromobility Products

In light of the recent COVID related wave of bankruptcies affecting fashion brands such as John Varvatos and True Religion, the article explores the trends and implications since the one-year anniversary of ‘Mission Product Holdings v. Tempnology.’

It is no secret that the fashion industry has been steering against a headwind of challenges. Beginning with the rise of e-commerce and the layering on of significant amounts of debt, the current global pandemic might be said to have simultaneously exacerbated these vulnerabilities while also posing new obstacles, such as unforeseen inventory, vendor and supply chain issues.

In the span of five months, apparel companies such as True Religion, John Varvatos, Lucky Brands, and Brooks Brothers have filed Chapter 11 cases, some hoping to reorganize but, more often than not, ultimately pursuing strategic sales of their assets or opting for wholesale liquidations.

These unprecedented challenges are not without opportunities for acquirers and investors as well as licensees of brands. Notably, the wave of bankruptcies also coincides with the one-year anniversary of the Supreme Court’s decision Mission Product Holdings, Inc. v. Tempnology, LLC, a ruling that has a direct impact on the rights of a trademark licensee following the bankruptcy of a debtor-licensor.

Continue Reading Surge of Retail Bankruptcies Coincides With the Anniversary of ‘Tempnology’

On August 14, 2020, California Attorney General Becerra announced that the Office of Administrative Law approved final regulations under the California Consumer Privacy Act (CCPA). The approved regulations, which became effective immediately, guide businesses and consumers on the CCPA.  The final regulations can be found here.

Even before final approval of the regulations, the California Attorney General’s Office announced that it had already begun enforcing the CCPA in California. By July 10, 2020, the Office had issued warning notices to online businesses for failure to comply with the CCPA. The businesses receiving these notices will have 30 days to comply with the CCPA, or they risk a lawsuit being filed against them by the Attorney General’s Office. It is expected that in the future the AG will no longer issue warning letters and proceed with enforcement.

Continue Reading California Attorney General Begins Enforcement of CCPA Even Ahead of Regulations’ Approval