Perhaps no issue unites Congress like getting tough on the People’s Republic of China (“PRC”). In 2019, President Trump signed legislation to prevent companies like Huawei Technologies from receiving new equipment licenses from U.S. regulators. In recent weeks, motivated by national security concerns, Congress passed a bill that could ban the wildly popular app TikTok in the United States, or at least force a sale. Now the House has introduced a new version of the BIOSECURE Act and advanced it through a committee “mark up” so it is ready for consideration by the entire chamber. This is the latest legislative effort in what could be termed China “de-risking.” Rep. Wenstrup, the lead Republican sponsor of the bill, called it the “first step” in a “multi-faceted approach” to protect national health security.
What does the act do?
The BIOSECURE Act will force U.S. drug manufacturers to end their relationships with so-called “companies of concern” by 2032 including BGI, MGI, Complete Genomics, WuXi AppTec, and any subsidiary, parent affiliate, or successor of such entities, at least with respect to their work on U.S. government contracts. The act prohibits federal agencies from procuring or obtaining a “biotechnology equipment or service” from a “company of concern” as identified by the Office of Management and Budget in coordination a number of federal agencies. The act also prohibits agencies from entering into a contract or extending or renewing contracts with any entity that uses biotechnology equipment or services produced or provided by a “company of concern” after the statute goes into effect. The definition of a “company of concern” can include companies originating from a range of adversary countries; however, the political reality is that there is bi-partisan support for targeting companies from the PRC.
What should companies do to prepare?
Any biotechnology company that has a contract with the U.S. Federal government or who works with clients on a U.S. Federal government contract needs to structure their operations so that they avoid entanglements with companies of concern going forward. Companies that use products should consider the following:
- Closely examining its supply chain, including development and research components and determine exposure to PRC companies, particularly those that have already been designated in the Act
- Conducting a detailed inventory of the intellectual property involved in the supply chain and determine where the company is over-reliant on Chinese technology (i.e., Chinese company owns the needed technology and any successful transition might require a license of that technology from the Chinese company)
- Working on the difficult task of creating transition strategies, paying close attention to agreements that form the foundation of contractual relationships in the supply chain. Special attention should be given to termination fees, liquidated damages, and royalty fees that might be triggered as a result of any transition strategy
- Identifying strategic business and legal issues that make transition difficult or impracticable, including seeking new regulatory approvals as part of any transition plan that could be extremely time intensive, such as seeking new FDA approvals.
- Determining the cost of transition strategies and obtaining consensus with corporate stakeholders to provide appropriate financing contingencies to cover increased costs.
- Monitoring and participating in the ongoing legislative process to shape the legislation and advocating for changes that reflect transition difficulties.
What are the prospects for the bill?
The bill has now gone through a review process called a markup in both the Senate and the House of Representatives. The bill may now make its way to the floor to be voted on in either chamber. While it is possible for the bill to be brought up for a vote on its own, it will more likely be inserted into a larger vehicle. Bill proponents have mentioned the National Defense Authorization Act, or NDAA, as a possible vehicle. A previous version of the bill was included in an early version of last year’s NDAA before being removed. So far the bill has attracted broad bipartisan support in the House and Senate. It was voted out of committee by a vote of 11-1 in the Senate and 40-1 in the House. The bill’s strong support suggests that there is a good chance the bill could advance and become law this year concerns remain that certain aspects of the bill are overly broad and could have unintended consequences.
The US-China Relationship Will Continue to Be Strained So Now is the Time to be Prepared.
The BIOSECURE Act is yet another tool that the U.S. government is using to encourage multinational companies across a spectrum of industries to de-risk or de-couple from China. President Biden announced on May 14 a sharp increase in tariffs targeted at industries such as electric vehicles, solar cells and semiconductors. The U.S. Department of Commerce issued new rules that became effective in April 2024 that allowed “transnational subsidies” to be countervailed for the first time (targeting the PRC’s “Belt and Road Initiative” and other financing/incentive programs offered by PRC to third countries and companies to essentially take China’s manufacturing capacity abroad to friendly jurisdictions). We have observed that Chinese suppliers and their China-based advisors are feeling the squeeze and that the pressure to circumvent U.S. laws illegally is mounting.
In light of these dynamics (which will likely become more acute regardless of the outcome of the U.S. Presidential election in the fall) multinational companies, including life sciences and biotech companies, need to scrutinize their supply chains and exercise vigilance against getting any aspect of their supply chains involved with Chinese circumvention. Such work takes time and planning. In addition, obtaining needed information from Chinese suppliers is often tedious, slow and requires time-intensive communications. Nonetheless, the importance of this work cannot be understated as the associated risks can be existential threats to the underlying business and in some cases, can result in possible U.S. criminal liability.
Author Bio:
Evan Chuck is a partner in the government affairs, international trade and corporate practice groups of Crowell & Moring with more than 30 years of experience and leads the firm’s Asia practice.
Aaron Cummings co-leads Crowell & Moring’s government affairs practice group. Prior to joining the firm, he was the former Chief of Staff to U.S. Senator Chuck Grassley (R-IA), the longest serving Republic Senator in history, and current President Pro Tempore of the U.S. Senate. As Senator Grassley’s Chief of Staff, Aaron worked closely with other members of the Republican Senate Leadership and their senior staff to advance the priorities of the Republican Caucus.