Wednesday, January 10, 2018

China, intellectual property drive hearing on CFIUS

By Mark S. Nelson, J.D.

The House Financial Services Subcommittee on Monetary Policy and Trade held its second hearing in a month regarding the need to update the law governing operations of the Committee on Foreign Investment in the United States (CFIUS). Much of this latest hearing focused on how CFIUS could do more to focus attention on U.S. investments by private and state-owned Chinese firms. Many of the perceived threats from China and elsewhere also involve the acquisition of U.S. intellectual property. The subcommittee last considered making changes to the law governing CFIUS in December.

China’s efforts to acquire U.S. technology. The headline threat addressed at the hearing was the evolving effort by China to acquire sensitive U.S. technologies, although other threats exist, such as Russian companies seeking access to offshore oil drilling technologies that can be used in cold water, as noted by Rep. Al Green (D-Tex).

But the subtext of the hearing was how to tweak the Foreign Investment Risk Review Modernization Act of 2017 (H.R. 4311), sponsored by Rep. Robert Pittenger (R-NC), which offers the largest re-write in over a decade of Section 721 of the Defense Production Act of 1950, as amended by the Foreign Investment and National Security Act of 2007 (Public Law No. 110–49). The bill posits that foreign investment in the U.S. is generally beneficial and that the U.S should welcome such investments if they are “consistent with national security.”

But the bill would urge the president to do more to persuade U.S. allies and partners to adopt CFIUS-like procedures. The bill also urges the president to enhance multilateral export controls around the world with respect to “certain countries of special concern.” The bill would define “country of special concern” to mean a country that poses a significant national security threat to U.S. interests. CFIUS, however, would not have to keep a list of such countries.

Dr. Derek M. Scissors, resident scholar at the American Enterprise Institute, testified that he had concerns about language in the bill regarding “country of special concern” because the emphasis should specifically be on China. Scissors views Chinese private firms and Chinese state-owned enterprises as different economically, but not so different legally. He also noted that while Chinese investment in the U.S. was down 50 percent in 2017 over 2016 levels, the global trend for Chinese investment is one of growth, especially in Europe.

By contrast, Dr. Scott Kennedy, director of the Project on Chinese Business & Political Economy at the Center for Strategic & International Studies, said a focus on countries of special concern is appropriate, but legislation should not expand CFIUS’s mandate to include outward U.S. investments. Kennedy described China’s technology policy as having evolved under China’s President Xi Jinping from “techno-nationalism” into a policy that seeks to serve both economic and national security interests. He also said that, overall, China’s technology policy is inefficient, but nevertheless effective.

Still, CFIUS does have some blind spots under current law. Rod Hunter, partner at Baker & McKenzie LLP and former special assistant to the President and senior director on the National Security Council, observed that existing definitions in the law applicable to CFIUS do not account for real assets that have no commercial activity and, thus, no business, for CFIUS to examine. He cited the example of a foreign investor who acquires land near a sensitive U.S. government site.

Meanwhile, Theodore W. Kassinger, partner and O’Melveny & Myers LLP and former deputy secretary at the Department of Commerce, urged lawmakers and regulators to observe three principles as they mull re-writing CFIUS’s founding statute: (1) continue to welcome foreign investment in the U.S.; (2) ensure that any statutory or regulatory changes for CFIUS focus on predictability, transparency, and efficient procedures; and (3) follow the process employed during the last round of statutory and regulatory amendments, which he said had produced good results after a year-long process.

Intellectual property. The Pittenger bill also would address a range of issues centered on intellectual property transfers. “Covered transaction” would be defined in a more detailed manner and include transfers of intellectual property by a U.S. critical technology company of intellectual property and associated support to a foreign person through joint ventures or other arrangements. The bill would allow CFIUS to define “intellectual property.” The bill also would include new language regarding “critical infrastructure,” “critical materials,” “critical technologies,” and “malicious cyber-enabled activities.”

Admiral Dennis C. Blair, co-chair of The Commission on the Theft of American Intellectual Property and former Director of National Intelligence, told the subcommittee that not only should Congress enact a modernization of the CFIUS law, lawmakers also should add a provision that makes clear that foreign companies that steal U.S. intellectual property cannot invest in the U.S.

In reply to several sets of questions posed by Rep. Denny Heck (D-Wash), Blair explained China’s recent evolution as a military power. Representative Heck had asked Blair to describe advances by China’s armed forces in the last decade and whether those advances were materially advanced by the theft of intellectual property. Blair said China’s armed forces had evolved from a defensive, light infantry force in the 1990s into an advanced force with the ability to project power within Asia. Blain said China had acquired its technology by both “fair” and “foul” methods. Representative Heck then asked about the role of outbound investment by U.S. firms doing business in China. Blair said the primary threat now is that China seeks to penetrate U.S. sources, such as the defense industry. Blair explained that much of the outbound technology is “second rate” and China would prefer to acquire better technology directly.

Some lawmakers asked about the possibility of giving CFIUS authority with respect to technology controls. Baker & McKenzie’s Hunter noted in both his testimony and prepared remarks that CFIUS is ill-suited to handle technology transfer issues. He said that uncertainty could arise over CFIUS determinations, partly due to CFIUS lacking sufficient resources, such that companies’ resource and development activities could migrate from the U.S. to other countries. Hunter urged lawmakers to adhere to the separate export control regime for dealing with technology transfer issues.