Lessons From the Applied Materials Case

As a corporate trade compliance lawyer, the recent publication of the settlement between BIS (Bureau of Industry and Security) and Applied Materials, a major American manufacturer of semiconductor equipment, had to catch my attention.  How can you miss a settlement for $252.5 million, second highest ever settlement with BIS?!

Indeed, this case is interesting because, much like in the highest-ever BIS settlement to date (Seagate, in April 2023, at $300 million), the violations with which Applied Materials was charged were not the result of an accidental omission.  Rather they resulted from a very deliberate and considered course of action by the company.

Applied Materials was charged with violations for 56 actual and attempted re-exports of its ion implanting equipment to Semiconductor Manufacturing International Corporation (SMIC) in China.  SMIC was named on the BIS Entity List in December 2020, and as a result, any export of any item subject to the Export Administrative Regulations (EAR) (in other words, subject to the jurisdiction of BIS) to SMIC has required an export license ever since.  Even before SMIC was added to the Entity List, in September 2020, Applied Materials received an “is informed” letter about SMIC from the BIS, which amounted to a “cease & desist” order, requiring it to stop shipping items subject to the EAR to SMIC.  Yet Applied Materials continued selling its products to SMIC until July 2022.

Why would Applied Materials continue exporting well after receiving notice and warning from the BIS?  Apparently, Applied Materials’ Global Trade Group, which no doubt was staffed with export compliance experts, decided that the solution they devised was compliant with BIS regulations.  The solution consisted of a “dual-build” process for the equipment in question:  Applied Materials partially produced the equipment per SMIC’s orders in its Gloucester, Massachusetts factory, then shipped the partially produced modules to their factory in South Korea, where they would undergo further manufacturing, assembly, and testing, and then supplied the equipment to SMIC, where the assembly would be finished with enclosures and factor interfaces, which were shipped by Applied Materials from Singapore.  Applied Materials reasoned that through this process the ion implanters were “substantially transformed” in South Korea and therefore became foreign-made items.  Then, presumably, the company subjected the products to de minimis analysis, to determine that they were not subject to the EAR because they did not contain 25% or greater export-controlled U.S. content.

BIS could not disagree more.  In the settlement documents, the agency stated its position that the dual-build process with assembly in South Korea did not result in a foreign-made item, and that the concept of “substantial transformation,” borrowed from Customs practice, was inapplicable here.  Rather, BIS stated, “U.S. origin items . . .  [a]re not rendered ‘foreign-made’ when the items are exported and then undergo further assembly and testing in a foreign country when, as here, those activities outside the United States involved little or no foreign-origin parts that were shipped to the foreign location from a non-U.S. location.”  Therefore, in the view of BIS, which is the one that matters here, Applied Materials ion implanters remained U.S. origin items and were subject to the EAR, and because of this, their unlicensed re-exports from South Korea to SMIC were violations.

It is remarkable that BIS’ largest settlements involved sophisticated companies that thought they knew what they were doing, but took the risk of adopting a legal position that was contrary to the spirit of BIS’ restrictions.  The settlement agreement noted that Applied Materials (and no doubt its trade compliance professionals) were under great pressure to continue to ship equipment to SMIC because it was a major customer. 

Apparently, BIS really does not like it when sophisticated companies come up with creative legal interpretations to continue to do business with restricted parties.  Applied Materials’ settlement amount – $252.5 million, is twice the value of the equipment sold in violation of the regulations and is the maximum allowed by the law.  In addition, it appears that Applied Materials did not voluntarily disclose its violations to BIS (probably because it did not believe that they were violations), and this also contributed to the high penalty amount.

Corporate compliance professionals can extract the following lessons from this settlement:

• BIS does not recognize the principles of customs law as to the country of origin of an item for the purposes of determining whether the item is subject to the EAR – de minis rules apply
• A creative legal interpretation of regulations that is inconsistent with the spirit of restrictions imposed by BIS carries a very high risk
• If BIS sends you an “is informed” letter, they expect you to immediately cease your activity, not modify it
• Obtaining multiple legal assessments in high-risk situations can help protect the company and its internal personnel from trouble.