The Lone Star Infrastructure Protection Act (LIPA), a new Texas law that came into effect in June 2021, prohibits companies and governments in Texas from contracting with entities owned or controlled by individuals from China, Russia, North Korea and Iran, if the contract relates to “critical infrastructure” and provides the foreign party with remote access or control of “critical infrastructure”.
“Critical infrastructure” is defined as:
- communication infrastructure systems;
- cybersecurity system;
- electric grid;
- hazardous waste treatment systems; and
- water treatment facilities.
The communications infrastructure and cybersecurity industries are also subject to additional federal regulations issued by the US Department of Commerce which, as of March 22, 2021, prohibit business transactions with Chinese, Russian, North Korean, and Chinese companies. Iranian and Venezuelan if the transactions involve the acquisition or use of certain “information and communication technologies and services” (“ICTS and ICTS regulations”). (See 15 CFR 7.)
LIPA and the ICTS regulations add to and overlap a complex web of federal laws and regulations that prohibit US companies or individuals from engaging in business transactions with citizens, among other countries, of the Crimean region in Ukraine, Cuba, North Korea, Syria, and Iran (“US sanctions laws”). Unlike ICTS regulations and U.S. sanctions laws, LIPA contains no enforcement mechanism, fines or penalties for non-compliance, and unlike federal requirements, no detailed set of regulations. Federal regulations governing the acquisition and use of foreign-sourced technology and other goods and services raise the possibility that LIPA may be preempted by these more comprehensive federal requirements, but this discussion is beyond the scope of this article.
LIPA amends the Texas Business and Commerce Code and the Texas Government Code to prohibit governments and businesses in Texas from knowingly allowing a foreign adversary to access or remotely control any of the critical infrastructures described. (See LIPA at § 2.) The Texas Attorney General has provided some guidance on his interpretation of LIPA as it applies to the power generation, transmission and distribution industry in Texas. The Attorney General, in describing the interconnection agreement that allows an electricity generator to access the Texas electricity grid, noted that:
The interconnection agreement having as its object the connection of an electricity producer to the transmission system of the electricity network, the agreement covers critical infrastructures as defined in the Law. In addition, by granting the production owner the possibility of connecting the producer to the transmission network, a production interconnection agreement gives this company direct or remote access to critical infrastructures and is therefore affected by the law.
September 23, 2021; Opinion of the Attorney General n ° KP-0388.
The Attorney General also considered that a land lease agreement between an electricity producer or transmission service provider and a subsidiary wholly or majority-owned landowner of a prohibited country would likely allow direct or access to the land. distance or control of critical infrastructure and, as such, be prohibited by LIPA. Username. at 5.
As previously reported, bans on the acquisition and use of foreign technology that could be used to disrupt US critical infrastructure are growing rapidly at the federal level following an executive order of May 5, 2019 13873 and regulations that may to be found on 86 Fed. Reg. 4909, “Securing the Information and Communications Technology and Services Supply Chain. The ICST Regulations apply to the acquisition, importation, transfer or installation of any information and communications technology or service provided by or from “foreign adversaries”. (See 15 CFR § 7.1.) Foreign adversaries are defined as China, including Hong Kong, Cuba, Iran, North Korea, Russia and Venezuela. (See 15 CFR § 7.4.)
The ICTS regulations allow the Secretary of Commerce to review ICTS transactions to determine whether they pose an undue or unacceptable risk to the US infrastructure. (See 15 CFR § 7.100.) The regulations cover broad classes of technology (software, hardware for wired and wireless telecommunications and Internet networks, monitoring devices or products integrated into data hosting or IT services, as well as the development of technologies such as robotics and AI). (See 15 CFR § 7.3.) Civil penalties for failure to comply with the secretary’s conclusions are $ 250,000 or double the amount of the transaction and criminal penalties of $ 1,000,000 and imprisonment for up to 20 years. (See 50 USCS §1705, 15 CFR § 7.200.)
Much of this ICT sector is also subject to a mandatory pre-acquisition submission and review process with the Committee on Foreign Investment in the United States (CFIUS) when a foreign party seeks to acquire or to invest in critical US technologies or infrastructure. (See 31 CFR § 800, et seq.) Unlike CFIUS, ICTS regulations currently do not have a voluntary submission process to clear pending or past transactions, but the Department of Commerce has requested public comment on establishing a ” a voluntary submission and review process. (See 86 Fed. Reg. 16312, March 29, 2021.)
The ICTS regulations apply to all transactions made after January 19, 2021 and allow the Ministry of Commerce to subpoena documentation relating to an applicable transaction, obtain evidence, including depositions, and issue “a first written determination explaining the conclusion and whether the Secretary has made a determination to unwind, prohibit or propose mitigating actions for the completed or proposed ICTS transaction at issue. (See 15 CFR § 7.105.) Parties to the ICTS transaction may submit a response, with evidence and mitigation offers 30 days after the Commerce Department makes its initial decision. (See 15 CFR § 7.107.) An unfavorable conclusion of the Trade may force the parties to unwind a completed transaction or to block proposed transactions.
The Commerce Department receives referrals from the public and other federal agencies and conducts its own investigation of completed, pending, and future ICTS transactions. In this regard, the Commerce Department has issued subpoenas to Chinese companies that supply ICT to the United States, and once the Department completes its review of priority ICTS technologies, we expect to see formal investigations into completed or pending transactions. The estimated costs for complying with these regulatory requirements to US businesses are $ 40.2 billion. (See 86 Fed. Reg. 4921.)
The ICTS and Texas LIPA regulations are part of a larger regulatory infrastructure that applies to the acquisition and use of foreign technology that could be used to disrupt critical U.S. infrastructure. Care should be taken to perform the due diligence necessary to comply with this mosaic of laws and, in the context of mergers and acquisitions, to obtain the necessary representations and warranties, as well as to perform adequate due diligence for compliance and future impacts on the target company. Companies importing technologies used in the communications and information storage sector should carefully classify the goods and services they purchase, with particular emphasis on goods and services of Chinese and Russian origin, and should put in place compliance programs to ensure they do not violate the requirements of US sanctions. . Due diligence on the sourcing of future technology products should also be carried out to ensure that technology originating in one country has not been wholly or partially produced in a foreign adversary country. Jackson Walker’s international trade team is experienced in helping businesses develop programs and perform due diligence to help them comply with these regulatory requirements.
 Lone Star Infrastructure Protection Act, 87th Leg., RS, SB 2116 (to be codified as Tex. Bus. & Com. Code § 113.001, and following. and as Texas Government Code § 2274.0101, and following.) (“LIPA”).
 Username. in § 2 (2).
 To learn more about the possible federal preemption of LIPA, see 13 Harvard Nat. Second. J. – (to be published in 2022) (available on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3985070).