COVID-19 Pandemic May Lead to Biotech Export Controls, More Stringent Foreign Investment Reviews, Lawyers Say
Countries will more strictly review transactions involving foreign direct investment as the COVID-19 pandemic continues, especially the U.S., which could increase scrutiny and export controls in the biotechnology sector, trade lawyers said. The Committee on Foreign Investment in the U.S. may increase reviews of transactions involving health care technology to keep critical virus-fighting resources in the U.S., said Aimen Mir, a trade lawyer with Freshfields Bruckhaus Deringer. Mir, who also formerly served as the Treasury Department’s deputy assistant secretary for investment security, said the pandemic will also cause CFIUS and other agencies to increasingly look to prevent transfers of pathogen-related technologies and to maintain technology leadership in the biotechnology sector.
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“CFIUS has always looked at biotechnology issues to one degree or another,” Mir said during a March 25 webinar hosted by Lexology. “But one can imagine that the current crisis will focus new attention on issues of healthcare and biotechnology.” The virus has already prompted some countries to consider stronger measures on foreign investment reviews, including Spain, France, Italy, Hungary and Germany, according to a March 25 alert from Baker McKenzie. The U.S. has not yet announced additional restrictions on investment or technology transfers, Baker McKenzie said, but “given the increasing awareness of vulnerabilities in the U.S. medical supply chain, foreign investments in this sector could attract more scrutiny in the future.” The Commerce Department and the Treasury Department did not comment.
Added restrictions in the U.S. are likely, especially if the government identifies “cutting edge technologies” that can be used to develop pathogens for “malicious uses,” Mir said. Any companies conducting research and development in this area should expect greater scrutiny, he added. “Biotechnology is on the list of issues that the government has been thinking about for the past year or two ... where there may be a need for advanced thinking of how these things should be controlled,” Mir said.
That process could fall to Commerce, which is developing export controls for emerging technologies and working on an advance notice of proposed rulemaking for foundational technologies (see 2002040057), both of which may include items within the biotechnology sector. A top Commerce official said the agency’s emerging technology effort will result in at least one control in the biotechnology sector (see 1912160032).
But industry should not expect a comprehensive ban on biotechnology exports, Mir said. It should instead expect a potential set of restrictions on narrow slices of biotechnology. And because the recently released final regulations for the Foreign Investment Risk Review Modernization Act give CFIUS the ability to review transactions involving critical technologies -- including emerging and foundational technologies (see 2001140060) -- any biotechnology controls issued by Commerce would likely also be eligible for CFIUS review.
“Given the experience that we’re all undergoing now,” Mir said, “one can anticipate there will be particular interest in making sure the United States industry remains strong in the area of biotechnology and that technology … is not being lost to other countries.”
The definition of critical technologies within FIRRMA has been a point of confusion for industry (see 2002110042), partly because Commerce has not yet released rules to help define emerging and foundational technologies. “There's a lot of pressure on [the Bureau of Industry and Security] to speed up,” a trade policy director for a large car manufacturer said. “Until we know how they define these sorts of critical and emerging and foundational technologies, we don’t know when FIRRMA will be triggered.”
But because Commerce has yet to release export controls over emerging and foundational technologies under the authority granted by the Export Control Reform Act of 2018, companies involved in those technology sectors are not yet subject to CFIUS review, Mir said, despite those technologies being mentioned in FIRRMA. “Investments in those companies would not be considered an investment in a critical technology company,” Mir said, “[even though they] are precisely the ones that Congress was interested in being able to allow CFIUS to review.” Mir said CFIUS will only be able to review investments involving emerging and foundational technologies after those technology rules are issued. “If you complete a transaction now, and the technology becomes export controlled in the future, that doesn’t apply retroactively to your previous transaction,” Mir said. “It would only apply potentially to future transactions once that rule has been written into law.”
Although the global foreign investment landscape has undergone increased scrutiny due to a rise in national security concerns (see 2002260042), the COVID-19 pandemic is causing countries to screen investments for other reasons, including “wider economic and social concerns,” Baker McKenzie said. Spain recently introduced a new, temporary requirement requiring “ex-ante approval” for all foreign direct investment from outside the European Union in the country’s “strategic sectors,” the law firm said, including critical technology sectors and dual-use items. Italy is also considering measures to protect companies in “strategically important sectors,” Baker McKenzie said, and Germany will “likely restrict the acquisition of medical companies by non-EU or [European Free Trade Association] entities.” As a result, the law firm said, cross-border transactions in strategic sectors “may encounter more scrutiny and face a prolonged approval process at this highly sensitive and volatile time.”