Recently, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced the issuance of a $300 million penalty against Seagate Technology LLC and its Singapore affiliate, Seagate Singapore International Headquarters Pte. Ltd., (collectively, “Seagate”) to resolve apparent violations of the Huawei foreign direct product rule (the “Huawei FDP Rule”). BIS stated this case represented “the largest standalone administrative penalty in BIS history.”
According to BIS, Seagate committed 429 violations of the U.S. Export Administration Regulations (“EAR”) by selling more than 7 million controlled hard disk drives (“HDDs”) to Huawei and its affiliates between August 2020 and September 2021. The U.S. government has long sought to restrict Huawei’s access to U.S. technology based on its determination of reason to believe the company is engaged in activities contrary to U.S. national security or foreign policy interests.
Based on this determination, BIS added Huawei to its Entity List in May 2019. A year later, BIS also enacted its original Huawei FDP Rule (15 C.F.R. § 734.9) in May 2020, and amended in August 2020, aimed specifically at cutting off Huawei’s access to foreign items produced abroad using U.S. technology or software. Huawei’s original Entity List designation prohibited exports, reexports and transfers (in country) to Huawei of all items “subject to the EAR”, which generally applied to items of U.S. origin (wherever located), items physically present in or transiting through the U.S. and items featuring incorporated controlled U.S. origin content in excess of the EAR’s de minimis thresholds. However, the Huawei FDP Rule extended these same restrictions to items manufactured outside the U.S. through the use of certain U.S. origin software or technology or production equipment which was itself the product of certain types of U.S. origin software or technology. Husch Blackwell has published previous blog posts discussing Huawei’s Entity List designation and the Huawei FDP rule here, here, here and here.
A review of the facts in this case provide insight as to why BIS likely sought the record fine that it did. After BIS imposed the Huawei FDP Rule, Huawei’s only two other suppliers, and Seagate’s only two competitors, publicly announced they had ceased selling to Huawei. However, according to BIS, Seagate proceeded to enter into a three-year “Strategic Cooperation Agreement” with Huawei to be named its “key strategic supplier.” Shortly after the amended Huawei FDP Rule took effect, a Seagate executive stated at an industry conference that the company did not see any particular restrictions on their ability to continue supplying to Huawei.
BIS stated Seagate “incorrectly interpreted the [Huawei FDP Rule] to require evaluation of only the last stage of its HDD manufacturing process rather than the entire process.” Seagate manufactures its HDDs in China, Singapore, Thailand, Malaysia, Northern Ireland, and the U.S, using equipment manufactured by another company that was subject to the EAR and the Huawei FDP Rule. Seagate continued exporting to Huawei even after the manufacturer of this controlled equipment informed Seagate in January 2021 that the items procured were subject to U.S. export controls. Huawei ordered two million more HDDs shortly after the manufacturer’s notification.
According to BIS, this controlled production equipment included a “fully automated laser-based surface inspection system,” as well as Ion Beam Etch, Ion Beam Deposition and Physical Vapor Deposition equipment, which were all classified under Export Control Classification Number (“ECCN”) 3B992 and were also the direct product of U.S.-origin ECCN 3E991 technology. BIS stated this equipment was “essential, i.e. a major component, of the Seagate HDD plants,” and therefore Seagate required a license to export the foreign-produced HDDs to a listed Huawei entity or to engage in a transaction involving the foreign-produced HDDs where a listed Huawei entity was a party.
In August 2020, BIS issued a Proposed Charging Letter to Seagate. As part of its settlement agreement, Seagate admitted to the conduct in the Proposed Charging Letter.
The $300 million penalty is more than twice what BIS estimates to be Seagate’s net profits for the alleged illegal exports related to Huawei. In addition to the fine, Seagate is required to undergo a multi-year audit. The audit will include two internal audits and an external audit to be performed by an independent, third-party consultant retained by Seagate with expertise in U.S. export control laws.
BIS’s full announcement can be found here. The settlement agreement can be read here.
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