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On April 20, 2023, the Department of Commerce’s Bureau of Industry and Security (BIS) announced that it had imposed a $300 million civil penalty — the largest standalone administrative penalty in BIS history — against Seagate Technology LLC of Fremont, California and Seagate Singapore International Headquarters Pte. Ltd. of Singapore (Seagate), for 429 violations of the Export Administration Regulations (EAR) involving the company’s sale of 7.4 million units of foreign origin hard drives (HDD), valued at approximately $1.1 billion, to Huawei Technologies Co. Ltd. (Huawei), a party in China that is on the BIS Entity List. 

The $300 million monetary penalty in this case is more than twice what BIS estimates to be the company’s net profits for the unauthorized exports to or involving Huawei. The penalty is notable not only for its size, but also because it highlights BIS’s commitment to enforcing the foreign direct product rule (FDPR), which has been expanded in recent years to extend the reach of U.S. export regulations to address foreign policy concerns involving China and Russia. See 15 CFR 734.9. The settlement also includes a multi-year audit requirement and a five-year suspended denial order.

As background, parties are prohibited from exporting, reexporting, or transferring (in-country) any item subject to the EAR, even certain foreign-produced items, to an entity on the Entity List or where the designated entity is a party to the transaction. In this case, Seagate sold Huawei foreign origin HDDs that were subject to the EAR under the FDPR. Specifically, as described in the order, settlement agreement, and proposed charging letter in this case, Seagate’s hard drives were subject to the EAR under the FDPR for Huawei Entity List parties (Entity List FDPR), which provides that a foreign-produced item is subject to control if it meets certain product scope and end user scope requirements. See 15 CFR 734.9(e)(1). As relevant here, the transactions involving the Seagate HDDs satisfied the end user requirements of the Entity List FDPR because listed Huawei entities acted as the purchaser in the transactions, and therefore Seagate had “knowledge” that Huawei was a party to the transaction. Seagate’s HDDs satisfied the product scope requirement because they were made using certain foreign origin production and testing equipment that was itself subject to the EAR because it was a direct product of U.S. origin ECCN 3E991 technology and was considered a “major component” of Seagate’s foreign HDD plants. The equipment was a “major component” because it was “essential” to the production of Seagate’s HDDs and, as explained in the settlement agreement, any equipment subject to the ECCNs specified the Entity List FDPR (including ECCN 3E991) that is involved in any production stage (including product engineering, manufacture, integration, assembly mounting, inspection, testing, quality assurance) is considered “essential,” and therefore a “major component.” 

The settlement agreement describes a number of additional facts and circumstances that may have acted as aggravating factors in this case, and therefore may be instructive to others in their compliance efforts:

• After BIS established the Entity List FDPR in August 2020, two of the three companies capable of making HDDs for Huawei promptly and publicly stated that they had ceased sales to Huawei, and indicated that they required authorization from BIS to resume sales. By contrast, Seagate continued HDD sales and transactions involving Huawei for another year, until September 2021.

• In January 2021, one of Seagate’s suppliers of production equipment notified Seagate that its equipment was subject to U.S. export controls, and certain equipment used in the Seagate HDD manufacturing process was made from U.S. origin ECCN 3E991 technology, which is one of the ECCNs listed in the Entity List FDPR product scope. Nonetheless, Seagate continued to ship HDDs to Huawei for another eight months after receiving this notice. 

• During the period from August 2020 through September 2021, Seagate entered into strategic partnership and cooperation agreements with Huawei reflecting Seagate’s intent to cooperate in new technology co-development, provide Huawei with Seagate’s newest and most advanced technologies, and generally support the business relationship between Huawei and Seagate. During this period, Seagate also extended Huawei multiple temporary credit lines of over a billion dollars.

This case is a reminder that the FDPR’s jurisdictional arm is long, especially when certain Entity List parties are involved. U.S. and foreign companies manufacturing abroad must therefore take great care to closely analyze (or re-analyze) their manufacturing processes as well as the recipients and/or destinations of their products to properly determine if the FDPR might impose a license requirement. This is, clearly, of particular concern when considering business dealings with parties on the Entity List and subject to the Entity List FDPR.

The settlement agreement in this case also reflects the enforcement policy changes that BIS published in June 2022, specifically BIS’s commitment to using its regulatory and statutory authorities to ensure that the most serious administrative violations result in commensurately serious penalties and its elimination of “no admit, no deny” settlements. Whereas Seagate may have had the option of settling this matter without admitting to violations of the EAR in the past, in this case Seagate admitted to committing the conduct described in the proposed charging letter and agreed not to dispute or deny, directly or indirectly, the allegations contained in the proposed charging letter or order, or take any position contrary thereto in any public statement.

For more information or advice regarding compliance with the FDPR, contact Partner Daniel Goren in Wiggin and Dana’s International Trade Compliance Practice Group, at dgoren@wiggin.com, or Counsel Sean Koehler, at skoehler@wiggin.com.