Over a year ago, Congress passed the Secure Equipment Act of 2021, mandating that the Federal Communications Commission (“FCC”) block the authorization of network licenses from Chinese companies deemed a national security threat. On November 25, 2022, the Commission adopted a Rule and Order, on a bipartisan and unanimous basis, implementing that requirement, effectively using its certification procedures to block for the first time in FCC history the authorization, and therefore the importation and sale into the United States, of devices on national security grounds.
This action is one more in a series of actions by the FCC and by the U.S. government more broadly intended to reduce Chinese-made equipment in national security sensitive supply chains, and is part of a broader and intensifying pattern of U.S. government regulatory actions to manage China-related technology risks. Chinese companies that produce security-sensitive products and have significant market share are likely to be the subject of extensive U.S. government scrutiny and additional, potential action in the future.
The effect of the FCC’s historic order
The basic prohibition. The prohibition will affect equipment and devices produced by entities on the Covered List, which include communications equipment produced by Huawei, ZTE and surveillance equipment produced by Hytera Communications (“Hytera”), Hangzhou Hikvision Digital Technology (“Hikvision”), and Dahua Technology (“Dahua”)—making them ineligible for the FCC’s certification program. Without the FCC’s certification, the equipment will be ineligible for importation and sale in the United States. The ban applies to white-labeled goods as well (i.e., products that are sold under the branding of one party, though produced by another party).
Ban is broader for Huawei and ZTE than for Hytera, Hikvision, and Dahua. The ban with respect to Hytera, Hikvision, and Dahua applies only to the extent the equipment and devices are used for the purposes of public safety, security of government facilities, physical security surveillance of critical infrastructure, and other national security purposes. However, the FCC indicated that, because it does not have confidence that these products will not be marketed and sold for such sensitive end-uses, it was generally prohibiting authorization of such devices until such time as it approves these entities’ plans and measures to ensure that the equipment will not be marketed or sold (including by distributors) for such restricted purposes. The bans with respect to Huawei and ZTE are general, and not limited to such restricted purposes.
Ban is forward looking, for now. The FCC’s order applies to the future authorizations of equipment – which would maintain the current equipment in use. However, the FCC left open the possibility it could revoke previous authorizations.
The ban as another step in an intensifying pattern of U.S. regulatory actions
Huawei and ZTE, probably the two best known of the five companies, have been targeted by the U.S. government for many years, owing to their production of equipment that operates core telecommunications infrastructure, potentially allowing the interception of sensitive communications traffic and disruption of critical telecommunications services at the direction of the Chinese government. Huawei’s tribulations began as far back as 2008, when the Committee on Foreign Investment in the United States (“CFIUS”) raised concerns with the proposed acquisition of 3Com by Bain Capital in partnership with Huawei. Huawei investment or use of Huawei equipment by transaction parties have been the subject of CFIUS scrutiny and action ever since then. Of the three lesser-known companies subject to the FCC Order, both Hikvision and Dahua primarily manufacture video surveillance equipment, with Hikvision being the world’s largest manufacture of such equipment. Hikvision is state-owned, and Dahua is publicly traded with some of its shares held by state-owned entities. For both companies, national security concerns center around the Chinese government’s potential ability to exploit networked surveillance equipment to engage in espionage. Hytera primarily manufactures two-way radio systems used by, among others, police and first responders. In February 2022 the Department of Justice indicted Hytera for conspiring with former Motorola Solutions employees to steal technology.
While the U.S. government has expressed concerns with Chinese-origin equipment for many years, the pace of actions taken to secure telecom networks from these devices has only been accelerating in the past couple of years. The FY19 National Defense Authorization Act barred federal agencies from purchasing equipment produced by the five firms named in the FCC Order. In May 2019 Huawei Technologies Co., Ltd. (Huawei) and a number of non-U.S. affiliates were placed on the Department of Commerce’s (“Commerce”) Entity List. The FCC banned companies from using Universal Service Fund dollars to purchase Huawei and ZTE kit in November 2019. President Trump formalized the operations of the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector (aka “Team Telecom”) via Executive Order in April 2020. This was followed by the FCC designating Huawei and ZTE as national security threats in June 2020. In March 2021, the Biden administration allowed a Trump era rule to go into effect that gave Commerce the authority to block or impose conditions on the ordinary course procurement of certain information and communications technology or services from a “foreign adversary.”
Takeaways
- As with previous FCC actions targeting Chinese entities, the unanimous vote by the Commission reflects the strong bipartisan consensus regarding national security concerns related to China and cyber security.
- While technological decoupling from China might not be the official policy of the Biden administration, the cumulative effect of actions taken against Chinese technology companies is increasingly sending the message that companies need to think in terms of “a China strategy” and “a rest of world strategy” when it comes to technology investment.
- With specific regard to Huawei and ZTE, the FCC’s Order is essentially a formalization of a de facto ban against Chinese telecommunications equipment that the U.S. government has been implementing in a piecemeal fashion for over a decade.
- The FCC’s new order will fill loopholes by disallowing private stakeholders/shareholders from purchasing cheaper Chinese equipment, under “white labels” or where no government funding or procurement is involved.
- The FCC may yet promulgate rules to address how to disentangle products of these companies that have already been approved for importation and may be in use from critical U.S. infrastructure.
- Companies should be aware that the U.S. government will likely scrutinize any security sensitive technologies for which China has accumulated a leading market share, and that it is conceivable that such technologies may be targeted using a broad range of U.S. government authorities in the future. For example, drone maker DJI has been added to the list of companies associated with the Chinese military that are operating in the United States that the Department of Defense (“DOD”) is required by law to maintain. FCC Commissioner Carr called one year ago for DJI to be added to the FCC’s Covered List. The DOD list already includes four of the five companies that were the subject of the FCC’s recent action and also includes several Chinese mobile service providers (China Mobile, China Unicom, and China Telecom), all of whom have had authorization applications or past authorizations denied or revoked by the FCC.
