Trade Archives - The National Law Forum

Recent Federal Strike Force Prosecutions Serve as Warning to U.S. Manufacturers and Other Exporters

The recent enforcement activities of the newest federal strike force serve as a warning to U.S. manufacturers and other businesses involved in the export of products that the government is doubling down on prosecuting trade violations. The expressed mission of the multi-agency Disruptive Technology Strike Force (Strike Force) is “to counter efforts by hostile nation states to illicitly acquire sensitive U.S. technology to advance their authoritarian regimes and facilitate human rights abuses.” The latest Strike Force criminal indictments focus on technology such as:

Aerospace and defense source code,
Aircraft components,
Microelectronic components used in unmanned aerial vehicles (UAVs),
Laser welding machinery.

There is every reason to expect that the Department of Justice’s (DOJ) future targets will extend beyond the kind of individual defendants who have been the focus of the 24 criminal indictments to date and include legitimate companies whose compliance program deficiencies allow the illicit exports to occur. Ensuring that a company’s trade compliance program meets or exceeds the expressed standards of the DOJ and the Department of Commerce (DOC) is now more essential than ever.

Compliance Keys

Exposure Risk for Manufacturers and Distributors. The export-diversion schemes prosecuted to date share a common element—a bad actor sought to exploit innocent U.S. manufacturers and distributors by misrepresenting their identity and end-use plans or by seeking to compromise the manufacturer’s computer systems. As U.S. export controls (particularly those aimed at Russia and China) have expanded over the past several years, schemes like those alleged in these indictments have proliferated. Failing to be alert for the warning signs of such schemes may expose a company to becoming a victim of sanctions evaders or, worse, an enforcement target for ignoring red flags. The Export Administration Regulations prohibit companies from engaging in a transaction with the knowledge that a violation has occurred or will occur. “Knowledge” is not limited to actual knowledge; it can also be inferred from turning a blind eye to red flags in a transaction. As a result, having personnel trained to identify and respond appropriately to red flags suggesting that diversion could be occurring can be crucial to avoiding export violations.
Precautions to Detect and Prevent Imposter Schemes.
- First, a written risk-based export control compliance plan can be a valuable aid in detecting diversion schemes and other illicit behavior. Such plans detail procedures employees must follow for conducting diligence on new and existing customers and transactions, evaluating when export licenses are required for a transaction, and detecting and responding to red flags. They provide clear guidance on when and how to escalate potential issues. Such a compliance plan gives employees the tools to help them identify when their company may be facing a diversion scheme and how to respond appropriately before a transaction is executed.
- Second, companies can emphasize conducting “know your customer” (KYC) diligence on transactions. The importance of such diligence is heightened when new customers are involved, when business with an existing company is expanding to new products, or to involve new product destinations. The DOC has published extensive guidance on KYC diligence (often in conjunction with other U.S. government agencies and with enforcement authorities in allied countries). This week, the DOC and export control authorities from the other G7 countries issued new guidance that identifies items most likely to be the subject of diversion efforts by Russia, lists common red flags suggesting potential export control and sanctions evasion in a transaction, and suggests some diligence best practices to prevent diversion and evasion. This new guidance echoes similar guidance issued by U.S. and allied government agencies over the last two years for detecting diversion schemes in the current environment of export controls and sanctions regarding Russia and China. (For example, our summary of the joint guidance issued last year by export-control authorities in the United States, the United Kingdom, Canada, Australia, and New Zealand addressing 45 types of goods at high risk for diversion and recommended KYC diligence steps can be found here.) Companies should be tracking and incorporating, as appropriate, these guidance updates
- Third, companies can be knowledgeable about the potential uses of their products and technology. This knowledge informs when and where a company may face diversion risk. Products and technology with permissible uses could be a target for diversion where they can be used for purposes the U.S. government restricts. For example, in one of the recent Strike Force cases, U.S. v. Postovoy, the alleged diversion scheme targeted a company whose microelectronic components could be used in drones and UAVs. Keeping U.S.-origin components out of such vehicles used by Russia in the war with Ukraine has been a major U.S. export control policy priority. Similarly, in another Strike Force case, U.S. v. Teslenko, the alleged diversion scheme targeted a company whose laser welders had applications that could aid Russia’s nuclear weapons program. Knowing the market for illicit uses for a company’s products and technology helps a company tailor its compliance efforts by identifying what products may be attractive to bad actors and what specific red flags may be of most concern regarding the company’s products and technology.
Cybersecurity Vigilance to Prevent Technology Theft. Another case announced alongside the Strike Force cases, U.S. v. Wei, is a reminder that U.S. manufacturers of sensitive technology face a multifront effort by foreign malign actors to gain access to that technology. In addition to ensuring up-to-date export controls and sanctions compliance programs, U.S. manufacturers should consider measures to protect their technology from misappropriation through cyber intrusion by implementing appropriate processes and tools to prevent and detect such activity by these actors. These processes and tools can include:
- Regularly sharing cyber hygiene tips and training on current phishing schemes and conducting phishing tests to increase employee awareness of these risks,
- Maintaining system hygiene by regularly scanning systems for vulnerabilities and unauthorized accounts, monitoring access logs for suspicious activity, and prohibiting automatic email forwarding to external addresses to prevent data leakage,
- Installing a secure email gateway to filter out spam, malware, and phishing attempts and employing email authentication techniques (e.g., SPF, DKIM, and DMARC),
- Tracking and monitoring all endpoints and mobile devices to detect suspicious activities and regularly auditing access logs to identify violations or attempted violations of access policies, and
- Restricting administrative and privileged account access to minimize potential damage and limiting remote access to critical data and functions.

The Indictments

The six most recent indictments relating to the Strike Force’s efforts confirm that export control and sanctions compliance, particularly concerning Russia, China, and Iran, is a significant enforcement priority for the DOJ and other government agencies. As one Strike Force member stated, the DOJ, “through the work of the Strike Force, will continue to do all [it] can to prevent advanced technologies from falling into the hands of our adversaries and protect our national security.” These indictments and a related indictment announced simultaneously highlight the risks of manufacturers and distributors falling victim to schemes like those alleged in the indictments or becoming the focus of enforcement efforts for committing export control violations.

U.S. v. Postovoy. A Russian citizen living in the United States was indicted for conspiring to violate the Export Control Reform Act (ECRA), to smuggle, launder money, and defraud the United States. After Russia invaded Ukraine, the individual used a series of companies he owned around the world to obtain and unlawfully export microelectronic components that could be used in drones and UAVs from the United States to Russia. The individual concealed and misstated end-user and destination information in communications with U.S.-based distributors.

U.S. v. Song. A Chinese national was indicted for wire fraud and aggravated identity theft in connection with attempts to obtain software and source code from the National Aeronautics and Space Administration (NASA), research universities, and private companies. Over several years, the individual “spear phished” individuals at NASA, the Air Force, Navy, Army, and Federal Aviation Administration; research universities; and aerospace companies in an attempt to obtain code to which the individual suspected the victims had access. At all relevant times, the individual, who assumed the identities of persons known to the victims, was an employee of a Chinese state-owned aerospace and defense contractor.

U.S. v. Teslenko. A U.S. resident and a Russian national were indicted for smuggling and conspiracy to violate the ECRA, smuggle, and defraud the United States. For approximately six years, the individuals exported laser welding machines from one’s employer in the United States to a Russian company involved in Russia’s nuclear weapons program. The individuals falsified export documentation to conceal the end user.

U.S. v. Goodarzi. A dual U.S. and Iranian citizen was charged with smuggling UAV components to Iran from the United States. For four years, the individual obtained U.S.-originated parts and either transshipped them, typically through the United Arab Emirates or transported them in his own checked luggage during trips to Iran. The individual had acknowledged in numerous emails with U.S. suppliers that the parts could not be transferred to Iran because of sanctions. The individual also lacked the proper export license to send these items to a sanctioned country like Iran.

U.S. v. Nader. A dual U.S. and Iranian citizen was indicted for violating U.S. economic sanctions and other federal laws in connection with procuring U.S.-originated aircraft components for Iran’s armed forces. Customers in Iran placed orders with the individual, who, in turn, directly or through others, contacted U.S. companies for the components. The individual falsely identified himself or his U.S.-based company as the end user of the components. The individual attempted to export the components, including transshipment to Iran, on several occasions; however, DOC agents detained each export.

U.S. v. Wei. In addition to the above criminal cases brought through the work of the Strike Force, the DOJ announced the indictment of a Chinese national on charges of fraud, conspiracy, computer intrusion, and aggravated identity theft for unlawfully accessing the computer network of a U.S. telecommunications company. The individual—a member of the People’s Liberation Army—and co-conspirators accessed the company’s systems in 2017 and stole documents relating to communications devices, product development, testing plans, internal product evaluations, and competitive intelligence. The individual attempted to install malicious software to maintain access to the company’s systems; his access continued for approximately three months.

FTC Staff Issue Report on Multi-Level Marketing Income Disclosure Statements

On September 4, 2024, the Federal Trade Commission announced that it has issued a report that details findings from a review of income disclosure statements from 70 different multi-level marketers (MLMs).

Staff reviewed income disclosure statements in February 2023 that were publicly available on the websites of a wide array of MLMs, from large household names to smaller, less well-known companies, according to FTC attorneys. “These statements are sometimes provided to consumers who are considering joining MLMs, and often purport to show information about income that recruits could expect to receive.”

According to the report, FTC staff found a number of issues with the statements they reviewed, including that most omit key information when calculating the earnings amounts they present. Specifically, the report notes that most of the reviewed statements do not include participants with low or no earnings in their display of earnings amounts and also don’t account for the expenses faced by participants, which can outstrip the income they make. The report notes that these omissions are often not plainly disclosed in the income statements.

The report also notes that most statements emphasize the high earnings of a small group of participants, and many entirely omit or only inconspicuously disclose key information about the limited earnings made by most participants. In addition, the staff report notes that most of the disclosure statements staff reviewed present earnings information in a potentially confusing way, “like giving average earnings amounts for groups that could have very different actual incomes, or using annual income figures that aren’t based on what an actual group of participants made for the year.”

The report also notes based on staff’s analysis of data in the income disclosure statements, including information included in fine print, that many participants in those MLMs received no payments from the MLMs, and the vast majority received $1,000 or less per year—that is, less than $84 per month, on average.

“The FTC staff report documents an analysis of 70 publicly available income disclosure statements from a wide range of MLMs — big and well-known to smaller companies. The report found that these income disclosure statements showed most participants made $1,000 or less per year — that’s less than $84 dollars per month. And that may not account for expenses. In at least 17 MLMs, most participants didn’t make any money at all.”

As referenced above, the staff report documents (and provides numerous examples of) how most of the publicly available MLM income disclosure statements used all the following tactics:

Emphasizing the high dollar amounts made by a relatively small number of MLM participants.
Leaving out or downplaying important facts, like the percentage of participants who made no money.
Presenting income data in potentially confusing ways.
Ignoring expenses incurred by participants — even though expenses can, and in some MLMs often do, outstrip income.

The BR International Trade Report: September 2024

Welcome to this month’s issue of The BR International Trade Report, Blank Rome’s monthly digital newsletter highlighting international trade, sanctions, cross-border investment, geopolitical risk issues, trends, and laws impacting businesses domestically and abroad.

Recent Developments

BIS issues export controls targeting GAAFET, quantum, additive manufacturing, and other emerging technologies.
On September 5, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued new export controls covering gate all-around field effect transistor (“GAAFET”) technology, quantum computing items, advanced semiconductor manufacturing equipment, additive manufacturing equipment, and aerospace coating systems technology. The BIS rule establishes an export licensing requirement for the export of any such covered item to any destination in the world, as well as a new license exception authorizing export to certain specified “like-minded” countries that have implemented similar controls. See our alert.

Canada announces 100 percent tariff on Chinese EVs, while China retaliates with probe into imports of Canadian canola.
Canada’s electric vehicle (“EV”) tariff follows similar measures by the United States and the European Union, based on claims that China subsidizes its EV industry and thus has an “unfair advantage,” in the words of Canadian Prime Minister Justin Trudeau. Following the announcement of the tariff, China announced an antidumping investigation regarding imports of Canadian-origin canola.

BIS proposes rule establishing reporting requirements for AI developers and cloud providers.
On September 9, BIS issued a notice of proposed rulemaking outlining new requirements for developers of powerful AI models and computing clusters to report certain information to the U.S. government. Reportable information would include development activity, cybersecurity measures, and results of “red-team” testing to identify capabilities for illicit uses such as cyberattacks and development of chemical, biological, radiological, or nuclear weapons. The deadline for comments on the proposal is October 11.

United States implements AUKUS through ITAR exemptions for Australia and the United Kingdom.
On August 16, 2024, the U.S. Department of State announced a broad exemption from export licensing requirements under the International Traffic in Arms Regulations (“ITAR”) for most defense trade involving “authorized users” in the United States, Australia, and the United Kingdom. The ITAR relief was the linchpin of implementation of the AUKUS security pact between the three defense partners. See our alert.

Canada seeks public input on United States-Mexico-Canada Agreement (“USMCA”).
Canada has asked for public input on what Canadian priorities should be in the upcoming trilateral review of the USMCA in 2026. Unlike the previous North American Free Trade Agreement, the USMCA provides for a review at least every six years to assess how the agreement is doing and whether it should continue. Canada is inviting input on key areas that “are working well and potential areas for improvement.” Comments are due by October 31, 2024.

United States to dispute Canadian Digital Services Tax in USMCA.
The United States will challenge Canada’s new tax on digital services in a dispute under the USMCA. Canada imposes a tax on online revenues from companies that have a large global presence (€ 750 million in revenues) as well as Canadian digital revenue of $20 million (US$15 million). The U.S. claims that the tax unfairly discriminates against U.S. businesses. The first step will be consultations between the U.S. and Canadian governments. If a resolution cannot be reached, the U.S. may then request a formal dispute resolution panel. Governments have also been negotiating for years at the Organization for Economic Cooperation and Development (“OECD”) for an agreed regime to govern these taxes, and those negotiations are ongoing.

Xi Jinping touts U.S.-China “traditional friendship.”
In a meeting with U.S. National Security Advisor Jake Sullivan on August 29, Chinese leader Xi Jinping spoke of China’s interest in preserving stability in U.S.-China relations, referred to the “traditional friendship” between the two countries, and asked Sullivan to pass on his regards to President Biden. Sullivan reported after the meeting that he reassured Xi that the United States seeks to maintain stable ties, but also pressed the issues of de-escalation in the South China Sea and concerns over U.S. election interference.

The Netherlands adopts new export controls on semiconductor manufacturing equipment (“SME”), while Japan anticipates robust SME sales to China.
The Dutch government announced new controls on exports of certain advanced SME on national security grounds, reportedly bringing Dutch law in line with U.S. restrictions, a move that China blamed on U.S. “coercion.” Meanwhile, reports indicate that Japanese SME companies are counting on significant revenue from Chinese customers, even amidst heightened U.S. export controls, based on sales of SME for less advanced legacy chips that are used in cars and not in smartphones or advanced AI applications.

Huawei reportedly planning to unveil AI chip.
Reports indicate that Chinese telecom giant Huawei is nearing a release of an artificial intelligence chip, the Ascend 910C, that supposedly is comparable to high-end U.S. AI chips. The potential development comes as intense U.S. export controls aim to restrict the flow to China of advanced semiconductors that power the AI technology stack, and likely will prompt calls by Congress and national security thought leaders to consider continued calibration of U.S. policy in addressing technology-related national security challenges.

Federal study recommends that Pentagon engage with commercial chipmakers.
A report by the National Academies of Sciences, Engineering, and Medicine found that the U.S. Department of Defense (“DoD”) “currently lacks an overarching microelectronics strategy.” The report recommends that the DoD work more closely with the semiconductor industry, as it did in the latter half of the 20^th century, and partner with civilian agencies such as the U.S. Department of Commerce in order to ensure a reliable supply of semiconductors for national defense.

China implements new export controls for antimony and revises controls for drones.
China recently updated its export controls amidst escalating volleys of trade controls between the United States and China. First, China issued restrictions on exports of antimony, a key input in military items such as missiles, nuclear weapons, night vision goggles, and ammunition. Furthermore, China is adjusting its export controls over drones to lift temporary export controls over certain consumer drones, adjust standards for other controlled items, and add certain high-precision measurement equipment to its control list.

Biden Administration crafting plan for a U.S. sovereign wealth fund (“SWF”). National Security Advisor Sullivan reportedly is working on a proposal for a U.S. SWF that would support investments in emerging technologies and critical minerals, in an effort to keep pace with countries like China and Singapore, which have invested aggressively through SWFs. The plan is similar to a recent proposal by former President Trump, suggesting there could be bipartisan support for the measure.

United States considers price support for critical minerals projects.
Reports indicate that the Biden Administration is considering price support for certain U.S. critical minerals projects, in response to an influx of less costly Chinese lithium, nickel, and other minerals, and delays and cancellations of several U.S. minerals processing projects. Specifically, the administration reportedly is considering the establishment of a price floor for a limited time, with the U.S. Department of Energy paying the difference when market prices fall below the floor. The mechanism would be intended to assure investors and customers that domestic suppliers can thrive.

OFAC extends recordkeeping requirements from five to 10 years.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an interim final rule extending the recordkeeping requirement under economic sanctions regulations from five years—which had been the requirement for decades—to 10 years. The measure is consistent with the recent extension of the statute of limitations for sanctions violations from five years to 10 years. See our prior alerts.

BIS expands export controls against Russia and Belarus.
BIS issued measures on August 23 that (i) expanded the scope of the Russia/Belarus Military End User and Procurement Foreign Direct Product rule; (ii) added 123 entities to the Entity List; (iii) added four high-diversion risk addresses to the Entity List to target diversion through shell companies; and (iv) issued new guidance to exporters on contractual language restricting exports to Russia and Belarus.

United States International Trade Commission (“USITC”) proposes quota on textile materials.
The four commissioners of the USITC unanimously recommended that the President impose a four year tariff-rate quota on imports of fine denier polyester staple fiber (“PSF”), to address serious injury to the U.S. domestic industry. Fine denier PSF is used in the production of textiles and other products such as diapers, baby wipes and coffee filters. The USITC recommends that a number of countries be excluded from this quota, primarily free trade partners of the United States. The President has the final decision on whether or not to impose a tariff-rate quota.

In Case You Missed It…

DDTC Issues Long-Awaited Rule Implementing AUKUS: Five Key Takeaways
On August 16, 2024, the U.S. Department of State announced a broad exemption from export licensing requirements for most defense trade between and among “authorized users” in the United States, Australia, and the United Kingdom, thereby issuing much-anticipated export control relief in implementation of the AUKUS security pact. Read More >>

BIS Issues New Export Controls Targeting GAAFET, Quantum, and Additive Manufacturing, and Ushers in New Age of Plurilateral Export Controls: 5 Key Takeaways
The U.S. Department of Commerce’s Bureau of Industry and Security recently issued an interim final rule under the Export Administration Regulations imposing licensing requirements for exports to all destinations worldwide of certain gate all-around field effect transistor technology, quantum computing items, advanced semiconductor manufacturing equipment, additive manufacturing equipment, and aerospace coating systems technology. Read More >>

Deep in the Heart of Texas: Court Blocks FTC Non-Compete Rule

On August 20, 2024, the United States District Court for the Northern District of Texas invalidated the FTC’s rule banning most non-compete agreements. Ryan LLC et al v. Federal Trade Commission, WL 3297524 (08/20/2024). In its highly anticipated opinion, the Court determined the FTC exceeded its authority in promulgating the rule and that the rule is arbitrary and capricious. This decision was not limited to the parties before the Court and blocks the rule from becoming effective nationwide on September 4, 2024. As a result, existing non-compete agreements may still be valid and enforceable when permitted under applicable law.

Ryan, LLC (“Ryan”) filed its lawsuit on April 23, 2024, arguing the FTC did not have rulemaking authority under the Federal Trade Commission Act, that the rule is the product of an unconstitutional exercise of power, and that the FTC’s acts and findings were arbitrary and capricious. Several plaintiffs, including the U.S. Chamber of Commerce, intervened in the lawsuit to challenge the rule.

In July, the Court enjoined the FTC from implementing or enforcing the rule. That ruling, however, was limited in scope and only applied to Ryan and the intervening plaintiffs. Shortly thereafter, all parties filed motions for summary judgment. Plaintiffs asked the Court to invalidate the FTC’s rule, and the FTC sought dismissal under the theory it has express rulemaking authority under the FTC Act.

The Court first examined the FTC’s statutory rulemaking authority and determined the rulemaking provisions under the FTC Act do not expressly grant the FTC authority to promulgate substantive rules. The Court reasoned that although the Act provides some rulemaking authority, that authority is limited to “housekeeping” types of rules. The Court concluded “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition…” As a result, the Court held the FTC exceeded its statutory authority in promulgating the rule.

Next, the Court considered whether the rule and the promulgation procedure was arbitrary and capricious. The Court was unconvinced by the studies and other evidence relied on by the FTC in promulgating the rule and found that the FTC failed to demonstrate a rational basis for imposing the rule. The Court also noted that the FTC was required to consider less disruptive alternatives to its near complete ban on non-compete agreements. Although the FTC argued it had “compelling justifications” to ignore potential exceptions and alternatives, the Court concluded the rule was unreasonable and the FTC failed to adequately explain alternatives to the proposed rule. Ultimately, the Court opined the rule was based on flawed evidence, that it failed to consider the positive benefits of non-compete clauses and improperly disregarded substantial evidence supporting non-compete clauses.

As a result of this ruling, the FTC’s rule will not become effective on September 4, 2024, short of any additional orders or rulings from a higher court reversing or staying the decision. For the time being, the existing laws governing non-compete agreements will remain in place. In Michigan, employers may enforce non-compete agreements that are reasonable in duration, geographical area and type of employment or line of business. In Illinois, they are regulated by the Illinois Freedom to Work Act, which imposes a stricter regulatory scheme. This should come as a relief for employers who can generally avoid—at least for now—analyzing complex issues regarding the impact that the FTC’s rule would have had on executive compensation arrangements tied to compliance with non-compete agreements, especially in the tax-exempt organization context.

by: D. Kyle Bierlein, Brian T. Gallagher, Barry P. Kaltenbach, Brian Schwartz of Miller Canfield

For more news on the Federal Court Ruling Against the FTC’s Non-compete Rule, visit the NLR Labor & Employment section.

Congress Extends Statute of Limitations for Sanctions Violations

What Happened:

On April 24, 2024, President Biden signed into law the Fentanyl Eradication and Narcotics Deterrence (FEND) Off Fentanyl Act, as part of a national security legislative package, which, among other things, amended the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) to extend the statute of limitations for the enforcement of sanctions violations from five years to ten years (the Amendment). The ten-year statute of limitations applies to civil and criminal enforcement for all sanctions programs.

The Bottom Line:

The Amendment changes the lookback period for sanctions compliance from five years to ten years, impacting how sanctions compliance is treated internally at companies with international touchpoints, as well as counterparty diligence in corporate transactions. Companies will need to update their compliance programs to account for the extended period.

The Full Story:

IEEPA authorizes the President of the United States to impose economic sanctions by declaring a national emergency in response to any unusual or extraordinary threat to the national security of the United States that originates outside of the United States. IEEPA authorizes both civil enforcement actions and criminal prosecution against persons found to have violated US sanctions and previously established a five-year statute of limitations on enforcement.

As part of a broader national security package, President Biden signed into law the FEND Off Fentanyl Act on April 24, 2024. The Act requires the President to, among other things, impose sanctions under IEEPA on any person involved in the trafficking of Fentanyl through a forthcoming Fentanyl sanctions regime and amends IEEPA to extend the statute of limitations on enforcement to ten years. Critically, the extended statute of limitations under the Amendment applies not only to the forthcoming Fentanyl sanctions regime, but to almost all sanctions programs administered by the US Department of Treasury’s Office of Foreign Assets Control (OFAC). The Amendment also impacts other programs authorized under IEEPA, including some programs administered by the US Department of Commerce’s Bureau of Industry and Security (BIS), such as the Information and Communications Technology and Services (ICTS) Program, as well as other programs administered by the Department of Justice and Department of the Treasury.

The Amendment impacts compliance obligations for US companies and others seeking to comply with US sanctions. For example, OFAC regulations implementing US sanctions include record-keeping requirements for financial institutions with respect to certain transactions that currently track the previous five-year limitations period under IEEPA and it is likely that OFAC will amend its regulations to increase record-keeping requirements to ten years. Similarly, OFAC guidance on effective sanctions compliance has pegged recommended record retention periods to the five year limitations period. For example, the “safe harbor” for service providers under the prohibition on maritime services for Russian oil under the Russian oil price cap sanctions requires that persons retain records for five years. It is likely that OFAC will update its guidance to reflect the new ten-year limitations period following the Amendment and companies should carefully consider updates to sanctions compliance programs accordingly.

The Amendment does not address retroactive application. Retroactive criminal prosecution (i.e., for conduct currently beyond the prior five year limitations period) raises constitutional concerns. It is currently unclear whether OFAC will seek to bring civil enforcement actions for conduct already beyond the five-year limitations period.

The new ten-year limitations period should also be considered in conducting sanctions diligence on external counterparties. Companies will need to consider the longer lookback period when evaluating potential mergers and acquisitions and when seeking or providing representations and warranties involving sanctions compliance.

Design Patent vs. Trade Dress: Strategic Considerations for Protecting Product Designs

Product designs often serve as the cornerstone of a brand’s identity, evoking instant recognition and loyalty among consumers. From the iconic silhouette of Coca-Cola’s glass bottle to the distinctive shape of Gibson guitars, the visual appeal of product designs can be a critical asset in the competitive marketplace. However, protecting a product design requires careful consideration and strategic planning. Two forms of IP protection are the most common – design patents and trade dress.

1. Design Patents

Design patents offer a streamlined and cost-effective means of protecting the ornamental appearance of product designs. The allowance rate is extremely high – over 95% – and is usually complete within 18 months. The result is that a design patent is significantly easier and less expensive to obtain as compared to conventional utility patents. This might explain the growing popularity of design patents for protecting product designs across various industries.

Design Patents Filed by Industry¹

Enforcing design patents can sometimes be more streamlined as compared to utility patents. For example, a design patent can be quickly enforced on the Amazon Brand Registry and other e-commerce platforms against copycat products sold on the platform. While Amazon does offer a procedure for utility patent enforcement, it tends to be more expensive and unpredictable.

However, design patents are not always an option. For example, a design patent can protect a functional article, but the protection only applies to the ornamental appearance of that article. So, a design patent on Crocs footwear does not protect the overall idea of a ventilated shoe. Instead, the protection only extends to the overall ornamental appearance of the shoe. And this protection only lasts for 15 years after the patent issues.

A design patent risks being overly narrow if its drawings contain too many solid lines. To counter this, a common practice involves converting unnecessary solid lines into dashed lines to broaden the patent’s scope and enhance its exclusionary effect. An example is below – the dashed lines do not narrow the design and are only provided to show the environment in which the design exists.

Is the End of Crocs Really Upon Us? Not So Fast. - The Fashion Law

Figure from Crocs Design Patent – U.S. Design Patent No. D517,789

2. Trade Dress

Trade dress is a form of trademark that protects the commercial look and feel of a product. Like all trademarks, trade dress indicates or identifies the source of the product and protects against consumer confusion in the marketplace. A classic example is the Coca-Cola bottle and how its shape and design immediately connect a consumer to the Coca-Cola brand:

A black and white drawing of a bottle Description automatically generated

Coca-Cola Bottle Trade Dress – U.S. Registration No. 696,147

Trade dress protection offers several advantages. It can sometimes be considered broader than a design patent because it attaches to any confusingly similar design. Additionally, trade dress protection is not limited to a 15-year term, like a design patent, and can continue for as long as the trade dress is used commercially in the marketplace.

So why not protect every product design as trade dress? First, product trade dress is not protectable unless it has “acquired distinctiveness” in the minds of consumers.
The Coca-Cola bottle serves as an example; its distinctive shape immediately invokes consumer association with the brand, demonstrating its acquired distinctiveness. However, proving acquired distinctiveness can be difficult and usually requires consumer survey evidence or other more costly endeavors. As a result, trade dress protection is less common than design patent protection for product designs.

Second, trade dress protection does not extend to any functional aspect of the product. The functionality requirement of trade dress protection is stricter than that of design patents – anything that is “essential to the use or purpose of the product or [that] affects the cost or quality of the product”² cannot be protected as trade dress. Many product designs include functions that cannot be separated from their branded “look and feel” and this disqualifies the design from trade dress protection.

Determining the optimal form of protection for a product design hinges on the specific attributes of the design and its commercial significance to the company. Navigating the path to protection demands meticulous attention to crafting intellectual property rights that are expansive yet defensible.

Footnotes

[1] This chart reflects the top ten owners of design patents over the past five years.

[2] Inwood Laboratories, Inc. v. Ives Laboratories, Inc.,456 U.S. 844 (1982).

For more news on product design protections, visit the NLR Intellectual Property section.

Understanding How U.S. Export Controls Affect Manufacturers’ Hiring Practices

The U.S. government has adjusted export control regulations in an effort to protect U.S. national security interests. The revisions primarily affect export of electronic computing items and semiconductors to prevent foreign powers from obtaining critical technologies that may threaten national security. As manufacturers are facing increased demand for their products and critical labor shortages, they may find themselves seeking to hire foreign national talent and navigating U.S. export control and immigration and anti-discrimination laws.

Export Control Laws in United States

The primary export control laws in the United States are the International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR). Under these regulations, U.S. Persons working for U.S. companies can access export-controlled items without authorization from the U.S. government. U.S. Persons include: U.S. citizens, U.S. nationals, Lawful permanent residents, Refugees, and Asylees. Employers might need authorization from the appropriate federal agency to “export” (in lay terms, share or release) export-controlled items to workers who are not U.S. Persons, which the regulations call foreign persons. Employers apply for such authorization from either the U.S. Department of State or the U.S. Department of Commerce, depending on the item.

The release of technical data or technology to a foreign person that occurs within the United States is “deemed” to be an export to the foreign person’s “home country.” Whether an export license is required for a particular release may depend on both the nature of export controls applicable to the technology or technical data (including whether it is subject to the ITAR or EAR) and the citizenship of the foreign person.

Recent revisions to the EAR cover controls on advanced computing integrated circuits (ICs), computer commodities that contain such ICs, and certain semiconductor manufacturing items, among other controls. These revisions particularly affect semiconductor and chip manufacturers and exporters.

Intersection With Immigration and Anti-Discrimination Laws

The U.S. Immigration and Nationality Act (INA) and Title VII of the Civil Rights Act 1964 prohibit discrimination based on protected characteristics.

The INA prohibits discrimination based on national origin or citizenship, among other characteristics. Title VII prohibits discrimination based on race and national origin, which typically includes discrimination based on citizenship or immigration status. Furthermore, the INA prohibits “unfair documentary practices,” which are identified as instances where employers request more or different documents than those necessary to verify employment eligibility or request such documents with the intent to discriminate based on national origin or citizenship.

The intersection of export control laws, immigration, and anti-discrimination laws can create a confusing landscape for employers, particularly manufacturers or exporters of export-controlled items. Manufacturers and exporters, like all employers, must collect identity and employment authorization documentation to ensure I-9 compliance. At the same time, however, they must collect information relating to a U.S. Person in connection with export compliance assessments. To address these areas of exposure for employers, the U.S. Department of Justice’s Civil Rights Division released an employer fact sheet to provide guidance for employers that includes best practices to avoid discrimination.

Implications

To ensure compliance under these rules, employers should separate the I-9 employment authorization documentation process from the export control U.S. Person or foreign person identification process. Employers should implement or revisit internal procedures and provide updated training to employees.

The export rule revisions highlight the challenges for employers in avoiding discrimination when complying with export control laws. Manufacturers and exporters should review their compliance practices regarding U.S. export control, immigration, and anti-discrimination laws with experienced counsel. Employers should implement policies and procedures reasonably tailored to address export control compliance requirements while not engaging in discrimination on the basis of citizenship or national origin.

by: Maurice G. Jenkins , Kimberly M. Bennett of Jackson Lewis P.C.

For more news on Export Control Laws, visit the NLR Antitrust & Trade Regulation section.

Third Time’s a Charm? SEC & CFTC Finalize Amendments to Form PF

On February 8, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) jointly adopted amendments to Form PF, the confidential reporting form for certain registered investment advisers to private funds. Form PF’s dual purpose is to assist the SEC’s and CFTC’s regulatory oversight of private fund advisers (who may be both SEC-registered investment advisers and also registered with the CFTC as commodity pool operators or commodity trading advisers) and investor protection efforts, as well as help the Financial Stability Oversight Council monitor systemic risk. In addition, the SEC entered into a memorandum of understanding with the CFTC to facilitate data sharing between the two agencies regarding information submitted on Form PF.

Continued Spotlight on Private Funds

The continued focus on private funds and private fund advisers is a recurring theme. The SEC recently adopted controversial and sweeping new rules governing many activities of private funds and private fund advisers. The SEC’s Division of Examinations also continues to highlight private funds in its annual examination priorities. Form PF is similarly no stranger to recent revisions and expansions in its scope. First, in May 2023, the SEC adopted requirements for certain advisers to hedge funds and private equity funds to provide current reporting of key events (within 72 hours). Second, in July 2023, the SEC finalized amendments to Form PF for large liquidity fund advisers to align their reporting requirements with those of money market funds. And last week, this third set of amendments to Form PF, briefly discussed below.

SEC Commissioner Peirce, in dissent:

“Boundless curiosity is wonderful in a small child; it is a less attractive trait in regulatory agencies…. Systemic risk involves the forest — trying to monitor the state of every individual tree at every given moment in time is a distraction and trades off the mistaken belief that we have the capacity to draw meaning from limitless amounts of discrete and often disparate information. Unbridled curiosity seems to be driving this decision rather than demonstrated need.”

Additional Reporting by Large Hedge Fund Advisers on Qualifying Hedge Funds

These amendments will, among other things, expand the reporting requirements for large hedge fund advisers with regard to “qualifying hedge funds” (i.e., hedge funds with a net asset value of at least $500 million). The amendments will require additional disclosures in the following categories:

Investment exposures, borrowing and counterparty exposures, currency exposures, country and industry exposures;
Market factor effects;
Central clearing counterparty reporting;
Risk metrics;
Investment performance by strategy;
Portfolio, financing, and investor liquidity; and
Turnover.

While the final amendments increase the amount of fund-level information the Commission will receive with regard to individual qualifying hedge funds, at the same time, the Commission has eliminated the aggregate reporting requirements in Section 2a of Form PF (noting, in its view, that such aggregate information can be misleading).

Enhanced Reporting by All Hedge Funds

The amendments will require more detailed reporting on Form PF regarding:

Hedge fund investment strategies (while digital assets are now an available strategy to select from, the SEC opted not to adopt its proposed definition of digital assets, instead noting that if a strategy can be classified as both a digital asset strategy and another strategy, the adviser should report the strategy as the non-digital asset strategy);
Counterparty exposures (including borrowing and financing arrangements); and
Trading and clearing mechanisms.

Other Amendments That Apply to All Form PF Filers

General Instructions. Form PF filers will be required to report separately each component fund of a master-feeder arrangement and parallel fund structure (rather than in the aggregate as permitted under the existing Form PF), other than a disregarded feeder fund (e.g., where a feeder fund invests all its assets in a single master fund, US treasury bills, and/or “cash and cash equivalents”). In addition, the amendments revise how filers will report private fund investments in other private funds, “trading vehicles” (a newly defined term), and other funds that are not private funds. For example, Form PF will now require an adviser to include the value of a reporting fund’s investments in other private funds when responding to questions on Form PF, including determining filing obligations and reporting thresholds (unless otherwise directed by the Form).
All Private Funds. Form PF filers reporting information about their private funds will report additional and/or new information regarding, for example: type of private fund; identifying information about master-feeder arrangements, internal and external private funds, and parallel fund structures; withdrawal/redemption rights; reporting of gross and net asset values; inflows/outflows; base currency; borrowings and types of creditors; fair value hierarchy; beneficial ownership; and fund performance.

Final Thoughts

With the recent and significant regulatory spotlight on investment advisers to private funds and private funds themselves, we encourage advisers to consider the interrelationships between new data reporting requirements on Form PF and the myriad of new regulations and disclosure obligations being imposed on investment advisers more generally (including private fund advisers).

The effective date and compliance date for new final amendments to Form PF is 12 months following the date of publication in the Federal Register.

Robert Bourret also contributed to this article.

As Three Recent Settlements Demonstrate, Whistleblowers Are the Key to Enforcement of Section 301 Tariffs

The Section 301 tariffs on Chinese-made goods—at the time, known as the Trump Tariffs, although President Biden has embraced them as well—were put in place in 2018. Only recently, more than five years later, have enforcement efforts begun to show up publicly. And, as is often the case, whistleblowers are the tip of the enforcement spear. In particular, over the course of two weeks at the end of 2023, the U.S. Department of Justice (“DOJ”) announced settlements of three qui tam cases, brought under the False Claims Act, that alleged evasion of Section 301 tariffs. These are the first such settlements to be made public, but likely signal the beginning of a wave of settlements or litigation in the coming years.

Starting in July of 2018, and pursuant to Title III of the Trade Act of 1974 (Sections 301 through 310, 19 U.S.C. §§ 2411-2420), titled “Relief from Unfair Trade Practices,” and often collectively referred to as “Section 301,” the United States imposed additional tariffs on a wide range of products manufactured in China. The Section 301 tariffs were rolled out in tranches, but they fairly quickly covered a majority of all Chinese-made products imported into the United States. The Section 301 tariffs imposed an additional 25% customs duty on those products.

As is always the case when high tariffs are imposed on imported goods, the Section 301 tariffs were met with a mix of responses by importers. In some cases, importers simply paid the additional 25% duties. In some cases, the importers found new sources, outside of China, for the products they wished to import. And in many cases, the importers started cheating—evading the tariffs either by lying to Customs and Border Protection (“CBP”) about what was being imported, or engaging to transshipping schemes to make it appear that the products were actually made in some country other than China.

Evasion of customs duties violates the False Claims Act, a federal law that, among other things, outlaws the making of false statements to avoid payment of money owed to the government. Evasion of customs duties will almost always involve such false statements because when goods are imported into the United States, the importer must provide CBP with a completed form, called an Entry Summary (also known as a Form 7501), in which the importer provides information about the nature, quantity, value, and country-of-origin of the goods being imported. To avoid or reduce the payment of duties, the importer will almost always lie on the Entry Summary about one or more of those, thus exposing the importer to liability under the False Claims Act.

The False Claims Act has a qui tam provision, which means that a private person or company may bring a lawsuit in the name of the government against the importer that has evaded payment of duties. If the qui tam lawsuit is successful, most of the money goes to the government. But the person or company that brought the lawsuit typically referred to as a whistleblower or, more technically, as the “relator”—gets an award that is between 15% and 30% of the amount recovered for the government.

When a qui tam case is first filed, it is put “under seal” by the court, meaning that it is secret and not available to the public. The case stays under seal, often for multiple years, as DOJ investigates the claims made in the case. But once DOJ decides to pursue a case, the seal is lifted, and the case becomes public. Often, this happens almost simultaneously with the announcement of a settlement of the case.

That is what happened with three cases that became public in late 2023. The first announcement came on November 29, 2023, when the U.S. Attorney’s Office for the Northern District of Georgia announced a $1.9 million settlement in a case captioned United States ex rel Chinapacificarbide Inc. v. King Kong Tools, LLC. In that case, the whistleblower that had brought the qui tam lawsuit was a competitor company which alleged that King Kong Tools was manufacturing cutting tools in a factory in China, shipping them to Germany, and then importing them from Germany into the United States, claiming falsely that the tools were made in Germany. The whistleblowing company received an award of $286,861.

The second such announcement came on December 5, 2023, when the U.S. Attorney’s Office for the Northern District of Texas announced a $2.5 million settlement in a case captioned United States ex rel. Reznicek et al. v. Dallco Marketing, Inc. In that case, the whistleblowers were two individuals who alleged that the defendants evaded the Section 301 tariffs by underreporting the value of the products they were importing from China into the United States. The whistleblowers received an award of $500,000.

The third such announcement case on December 13, 2023, when the U.S. Attorney’s Office for the Eastern District of Texas announced a settlement of $798,334 in a case captioned United States ex rel. Edwards v. Homestar North America LLC. Like the Dallco Marketing case, the Homestar case was also brought by an individual who alleged that the importer had lied to the government about the value of the goods being imported from China into the United States, in order to avoid payment of Section 301 tariffs. The whistleblower received an award of $151,683.

Accordingly, over the course of just two weeks in late 2023, three Section 301 settlements were publicly announced in quick succession. And notably, all three were whistleblower qui tam cases. This demonstrates the key role that whistleblowers play in the enforcement of customs tariffs and duties. No doubt, many other such cases remain under seal, and will start to become public as DOJ concludes its investigations. And because the Section 301 tariffs remain in place to this day, additional qui tam cases will almost certainly continue to be brought by both individual whistleblowers and competing companies seeking to level the playing field. Accordingly, these three settlements are likely just the early signs of a wave of Section 301 cases that will crest in the coming years.

G7 Sanctions Enforcement Coordination Mechanism and Centralized EU Sanctions Watchdog Proposed

On Feb. 20, 2023, Dutch Minister of Foreign Affairs Wopke Hoekstra gave a speech titled “Building a secure European future” at the College of Europe in Bruges, Belgium where he made a plea to “(…) sail to the next horizon where sanctions are concerned.” The Dutch Foreign Minister said European Union (EU) “(…) sanctions are hurting the Russians like hell (…)” but at the same time the measures “(…) are being evaded on a massive scale.” Hoekstra believes this is in part because the EU has too little capacity to analyze, coordinate, and promote the sanctions. However, arguably, there is also a lack of capacity at the EU Member-State level to enforce sanctions.

Against this background the Dutch Foreign Minister proposed to set up a sanctions headquarters in Brussels, Belgium, i.e., a novel watchdog or body to tackle the circumvention of EU sanctions. Such a body might represent the nearest EU equivalent to the U.S. Office of Foreign Assets Control (OFAC). OFAC both implements and enforces U.S. economic sanctions (issuing regulations, licenses, and directives, as well as enforcing through issuing administrative subpoenas, civil and administrative monetary penalties, and making criminal referrals to the U.S. Department of Justice). In Hoekstra’s words:

“A place where [EU] Member States can pool information and resources on effectiveness and evasion. Where we do much more to fight circumvention by third countries. This new HQ would establish a watch list of sectors and trade flows with a high circumvention risk. Companies will be obliged to include end-use clauses in their contracts, so that their products don’t end up in the Russian war machine. And the EU should bring down the full force of its collective economic strength and criminal justice systems on those who assist in sanctions evasion. By naming, shaming, sanctioning, and prosecuting them.”

The Dutch Foreign Minister’s proposal – which is also set out in a separate non-paper – apparently is backed and supported by some 10 or so EU Member States, including Germany, France, Italy, and Spain.

Additionally, on Feb. 23, 2023, the press reported the international Group of Seven (G7) is set to create a new tool to coordinate their enforcement of existing sanctions against the Russian Federation (Russia). The aim of the tool, tentatively called the Enforcement Coordination Mechanism, would be to bolster information-sharing and other enforcement actions.

Background

Like other Members of the G7, the EU has adopted throughout 2022 many economic and other sanctions to target Russia’s economy and thwart its ability to continue with its aggression against Ukraine. Nevertheless, currently EU Member States have different definitions of what constitutes a breach of EU sanctions, and what penalties must be applied in case of a breach. This could lead to different degrees of enforcement and risk circumvention of EU sanctions.

As we have reported previously, on Nov. 28, 2022, the Council of the EU adopted a decision to add the violation of restrictive measures to the list of so-called “EU crimes” set out in the Treaty on the Functioning of the EU, which would uniformly criminalize sanctions violations across EU Member States. This proposal still needs the backing of EU Member States, which have traditionally been cautious about reforms that require amendments to their national criminal laws.

Next steps

The decision on when and how to enforce EU sanctions currently lies with individual EU Member States, who also decide on the introduction of the EU’s restrictive measures by unanimity. As such, the Dutch Foreign Minister’s proposal requires the backing and support of more EU Member States. If adopted, the new proposed body could send cases directly to the European Public Prosecutor’s Office (EPPO), assuming the separate “EU crimes” legislative piece was also adopted.

Notably, the Dutch Foreign Minister’s proposal appears to suggest a stronger targeting of third countries, which are not aligned with the EU’s sanctions against Russia or help in their circumvention (e.g., Turkey, China, etc.).

Whether or not an EU sanctions oversight body is established, the Dutch proposal signals the current appetite for enhanced multilateral coordination on economic sanctions implementation and tougher, more consistent enforcement of economic sanctions violations. The G7’s proposed Enforcement Coordination Mechanism points in the same direction.

Category: Trade

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