$300 Million Seagate Export Control Penalty Shows New, Aggressive China-Trade Enforcement

On April 19, 2023, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) imposed a $300 million civil penalty on Seagate Technology LLC, a U.S. supplier of data-storage products. BIS found that approximately 7,000 Seagate sales of hard disk drives to Huawei Technologies Co. Ltd. violated the Export Administration Regulations (“EAR”).

The Seagate case confirms that:

• the U.S. government is prioritizing export control enforcement against allegedly unauthorized supply of products to China, as discussed in our recent alert;
• it is critical that U.S. and non-U.S. companies complete the factual and legal due diligence and analysis needed to achieve clarity about the status of their business with China under international trade restrictions; and
• for business with China, it is especially risky for companies to rely on aggressive interpretations of trade restrictions, particularly regarding complicated regulations that establish the extraterritorial scope of the restrictions.

The U.S. government imposes far-reaching “Entity List” sanctions against Huawei and scores of its affiliates. The restrictions generally require a license for supply to sanctioned Huawei companies of any item (commodity, software or technology) that is “subject to” the EAR.

At the time of the transactions at issue (2020 and 2021), Seagate took the position that these export control sanctions did not reach its supply of disk drive products to Huawei. Seagate probably did so on the grounds that the products were made and supplied from outside the United States and were not otherwise subject to the EAR. BIS concluded that the restrictions covered the exports to Huawei because the products were subject to the EAR under a recently implemented “foreign direct product” rule.

The enforcement action shows that the U.S. government is prepared to apply foreign direct product rules and related EAR scope requirements aggressively, notwithstanding the rules’ complexity and resistance to clear application. For Seagate, BIS concluded that the foreign-made disk drive products were subject to the EAR because they were produced using equipment that is subject to the EAR even though that equipment is lightly controlled.

For decades, many suppliers of foreign-made products have assumed that they are safe from U.S. export control enforcement, provided it is not obvious that the products are subject to the EAR. The Seagate case highlights that, particularly for supply to China, U.S. and non-U.S. companies should not be comfortable assuming that their foreign-made products are outside the regulations’ scope except as established through comprehensive expert analysis.