FedEx Corporation (FDX) is testing the weight of U.S. export laws that prohibit delivery of certain U.S. items to entities identified as a risk to national security. Legal experts say FedEx is unlikely to get all of its demands met, though.
In a suit against the U.S. Commerce Department and it subagency the Bureau of Industry and Security (BIS), FedEx argued for an injunction freeing it from BIS enforcement, claiming it cannot comply with the Export Control Reform Act of 2018 (ECRA), and the Export Administration Regulation Act (EAR), that, together, ban U.S. individuals and entities from delivering unlicensed commodities, software, and technology to entities included on the BIS “Entity List” — including, notably, the controversial Chinese telecommunications giant, Huawei.
The list singles out entities in more than 60 countries believed to pose a risk to U.S. national security interests. FedEx also requests a declaration that the EAR is unlawful as applied to the company.
Farhad Alavi, a trade compliance lawyer who represents clients designated on the Entity List, said he would be “amazed” if FedEx gets everything it’s requesting in its complaint. The government, he said, will likely view FedEx as an important link in the chain of protecting national security.
“There is substantial deference to agencies whose job it is to basically monitor national security,” Alavi told Yahoo Finance. “I was actually very surprised to see this complaint brought.”
‘Considerably more screening than possible’
The dispute comes as FedEx faces accusations from Huawei, which was added to the Entity List in May and threatened to blacklist FedEx for allegedly diverting multiple packages addressed to Huawei destinations in Asia. In a conference call with investors Tuesday, FedEx CEO Fred Smith said Huawei was not the impetus for the suit and played only a peripheral role in FedEx’s decision to file its action.
The laws require “considerably more screening than possible” for FedEx, the company said in its complaint. According to FedEx, the laws “deputize” the company, requiring it to police the contents of millions of packages it ships each day.
Joseph Gustavus, senior principal and leader of the Miller Canfield Export Control Practice, said that under the current laws FedEx needs to be concerned with package contents only when a parcel originates from a location outside the U.S.
“U.S. legal jurisdiction attaches if the package exits the U.S. and is sent to an entity on the Entity List,” he said. “You could send a teddy bear to an entity on the list and it would be a problem.”
In other words, Gustavus said, FedEx has no obligation to look inside a U.S.-originated package because its inquiry ends once it identifies a package addressed to an entity on the list. Without a license, such a package may not be delivered, regardless of its contents. Gustavus explained that although certain items may be technically exempt from the prohibited items list, in theory, the word “commodities,” as included in the government’s list of prohibited items is construed by export authorities as “tangibles.”
FedEx said it ships approximately 15 million packages per day, though it did not specify how many packages originate from foreign versus U.S. locations, or how many foreign-originated packages tend to be addressed to Entity List recipients. Yahoo Finance requested a response from FedEx concerning the estimates and did not receive a reply.
“Although the plight described by FedEx as a common carrier, is understandable, the BIS expects that companies as sophisticated as FedEx would have screening systems implemented that would capture the identities of the shipper or the ultimate recipient,” Gustavus said. The larger problem arises when FedEx is asked to deliver a package that originated overseas and is addressed an entity list designee.
Without inspecting the package contents, “FedEx has no way of understanding whether foreign items originating in a foreign country and destined for Huawei, or another listed entity, incorporates U.S. items,” Gustavus said. To make matters more complicated, under the EAR’s de minimis rule items that contain less than 25% of U.S. “total foreign product value” are exempt from U.S. export control laws.
“Determining foreign product value and overall qualification for the de minimis rule can be a complex process and must be documented in a written reasoned analysis,” Gustavus said, something his firm has successfully navigated for multiple foreign clients with respect to Huawei.
“It becomes hard for an American company that is competing on an international level, like FedEx, dealing often times between third countries. Not everything is from or to America,” Alavi said. Liabilities imposed by export laws create a cascading effect that ultimately precludes some legitimate activities from being logistically possible, he explained.
Whether the rules ultimately put American companies at a disadvantage is debatable. Alavi said similar national security-based laws are often adopted in other countries after the U.S. takes a position. “Europe has its own export controls — Australia has its own export controls,” he said.
Alavi reasoned that the court could offer FedEx and common carriers some leeway. “I think it does highlight the issue whether there is an imbalance between the commercial viability of these things versus the need for enforcing our exports. Obviously, any kind of common carrier does have an important duty, I would argue, on that front.”
FedEx also raised the possibility that inspecting package contents could infringe upon a sender’s privacy. Gustavus said the court is unlikely to give the theory much weight. “That’s the privacy right tail wagging the export control dog,” he said.
Because FedEx’s is requesting immediate relief Gustavus said the court is likely to grant a hearing within two weeks.
“I would imagine it will be looked at very soon,” Alavi said. “These courts move very quickly.”
According to a Bloomberg report, U.S. memory chipmaker Micron Technology Inc. (MU) and microprocessor manufacturer Intel Corp. (INTC) have implemented a workaround to legally circumvent the export ban.
On Tuesday, FedEx reported adjusted fourth quarter earnings of $5.01 per share, beating consensus expectations for $4.81 a share, though it has lowered its 2019 earnings guidance citing continued weakness in global trade and industrial production.
Alexis Keenan is a New York-based reporter for Yahoo Finance. She previously produced and reported for CNN and is a former litigation attorney.
Follow Alexis Keenan on Twitter @alexiskweed.