Eight Legal Challenges CHIPS Navigated

A game of industrial policy Minesweeper

The spring of 2024 was a high point for the CHIPS team. After months of intensive parallel negotiations with Intel, Micron, Samsung, and TSMC, we had landed a set of preliminary term sheets that promised to catalyze huge investments in leading-edge chipmaking and signaled that our program was on track to succeed.

But the thrill was short-lived. Preliminary term sheets are not final awards. To fully implement the program, we still needed to sign binding contracts with these leading-edge companies and close another dozen or so deals. The contracts would commit government subsidies (usually around 10% of total capital expenditures) to support specified projects and detail the milestones and other conditions for receiving those funds over time. And that meant, among other tasks, defining the legal relationship between the government and the applicant, which would govern the funding process and establish the legal rights of each party.¹

I didn’t anticipate that establishing this legal relationship would become the central preoccupation of the rest of my tenure as program director. I expected these contract terms to be negotiated primarily between lawyers — complicated conversations, no doubt, but ultimately the kind of thing lawyers work through. Instead, our proposed terms drew fierce opposition that escalated well beyond the legal teams. Company executives and boards became directly involved, viewing these provisions as fundamental business issues rather than technical legal matters. It became clear that, absent concerted negotiations that included executive leadership, we wouldn’t close our deals, and the program would fail.

Over the coming months, Todd and I immersed ourselves in the legal details alongside a group of truly exceptional Commerce Department lawyers. These details were deep in weeds familiar to transactional lawyers, allocating risk and protections across a range of possible adverse outcomes. And the negotiations were intense — a negotiating session with a single company might stretch across a full day or even a full week, and several sessions were needed to close each deal.

We ultimately succeeded, closing 20 awards totaling roughly $34 billion in direct funding and $5 billion in loans by January 2025. It was hard-earned, but with the benefit of hindsight, we wish we had thought more holistically about these issues as both legal and policy matters earlier in program design. This piece describes some of the key challenges we faced to help future policymakers anticipate and navigate them. In the process, it may illuminate a new dimension of what industrial policy looks like at the ground level.

What informed our legal framework?

The challenge for the Department’s legal team was that there was no clear precedent for the types of discretionary, grant-like industrial subsidies we were providing. So the team drew on other sources.

The most influential precedent was the form loan agreement used by the Department of Energy’s Loans Program Office. LPO’s loans are a direct support for industrial projects and seemed like the strongest analog to what we were doing, but they were an imperfect one: loans must be repaid, but our support generally would not be (with exceptions, as discussed below).

The team also drew from grant regulations, but these too were an imperfect fit. In the US government, grants typically go to state and local governments, or nonprofits like universities; when they do support industry, it’s usually at a relatively small scale. Our agreements also had to integrate a range of statutory requirements that applied to CHIPS funds specifically or federal financial assistance generally. And, of course, we had to account for our bespoke program objectives.

Our legal team compiled this framework into a form award agreement that ran around 150 pages, which would evolve substantially over the subsequent months of negotiations between the government and industry, between the CHIPS office and counsel’s office, and between counsel’s office and the DOJ.²

The following eight challenges proved among the most difficult to resolve.

Challenge #1: What are the consequences of violating laws unrelated to the CHIPS program?

At the most basic level, our award contracts were commitments by the government to fund projects in tranches over time. The money wouldn’t go out up front, but as construction, production, technical, and/or commercial milestones were met. But beyond hitting those milestones, we needed to decide what standards of conduct, if any, the companies needed to maintain to be entitled to ongoing funding. A baseline question related to their obligation to comply with laws unrelated to the CHIPS program. Like other government financial assistance and loan programs, our agreements had a general compliance-with-law standard. They also included specific provisions related to compliance with laws governing things like sanctions, export controls, intellectual property rights, labor law, and environmental law.

These provisions track a pretty strong normative intuition: that a government probably shouldn’t be forced to deliver on potentially billions of dollars in funding if a company is breaking the law. We had to ask ourselves, for example, whether the government should be able to withhold funds if an environmental catastrophe or sanctions violation comes to light. But for companies, these provisions raised the prospect that minor foot faults could become excuses to withhold the funds needed to make the project economics work. And for projects of this scale — tens of billions in investment, thousands of employees, dozens or hundreds of external suppliers — such foot faults are common. Applicants also pointed out that the US government has existing enforcement tools for all these issues, and that CHIPS incentives had a different purpose — to encourage chip manufacturing. These arguments resonated with many on our team and informed our negotiation posture.

We ultimately settled on a middle path: holding the line that the companies must comply with law to maintain compliance with the agreement, but negotiating the specific language to ease their concerns. We didn’t take the extreme position that compliance with other laws should be left entirely to other enforcement regimes, but we also wanted to make clear that foot faults wouldn’t derail investments. We wanted to “keep the main thing the main thing,” and in this case the main thing was encouraging semiconductor manufacturing.

To put this into effect, we qualified the legal requirements with materiality standards to codify that our intent was not to penalize minor infractions but to give the government the latitude to withhold funds for major ones, even if milestones were met.³ We often settled on a simple fix: adding the word “material” to a provision to raise the threshold for penalty. For example, only “material” violations of environmental or labor law would trigger noncompliance. For provisions relating to maintenance of intellectual property, we clarified in the contract language that the losses of IP that would trigger the provision should only be those that would make the project no longer viable, such as a third party suing for IP infringement and winning an injunction against using IP that was essential to project viability.

Challenge #2: How do you navigate other legal requirements that attach specifically to the funding?

Solving the first challenge required defining how to treat violations of laws that govern applicants’ economic activities, regardless of whether they took CHIPS funding. But by receiving CHIPS awards, applicants were also signing up for a slew of additional statutory requirements, all of which would have to be implemented through the terms of our contract.

Congress decides how these requirements apply through either explicit stipulation or omission. In some instances, there was affirmative language stipulating requirements. For example, the CHIPS Act explicitly established the so-called “national security guardrails.” These provisions required the clawback of funds if companies “materially expanded” manufacturing capacity in China or engaged in joint research or technology licensing with Chinese entities in domains that raise national security concerns. Similarly, the CHIPS Act also specified that recipients of CHIPS funds would need to pay “prevailing wage” for construction work under the terms of the Davis-Bacon Act.

Our terms also had to account for baseline requirements that broadly attach to federal funding or other government action unless an exemption is provided. For us, this was the case for NEPA (until Congress provided an exemption) and statutes like the “Fly America Act” (which requires anyone taking a flight paid for with CHIPS monies to fly on only “US flag” air carriers) and the Trafficking Victims Protections Act (which addresses compliance with human trafficking laws). Our legal team compiled a detailed spreadsheet tracking these laws to ensure that we were addressing them as required.

Importantly for program implementers, these requirements are not self-actualizing. At a minimum, they need to be incorporated into award terms. But implementation often calls for much more than that. For example, we defined the parameters of the national security guardrails through a 68-page notice-and-comment rulemaking and then conducted company-by-company diligence for each applicant to document a baseline of existing activities in China and delineate which activities would be allowed going forward. I’ve also written previously about the challenges associated with NEPA.

We succeeded in reconciling these many intersecting requirements when we started early and engaged with industry. For example, choosing to go through notice-and-comment on the technical details of implementing the national security guardrails helped us achieve Congress’s policy goals without derailing investment in ways we didn’t anticipate. By contrast, we were caught off guard by some of the challenges of implementing Davis-Bacon, and that came with a cost.

But even with the best planning, lawmakers should appreciate that attaching additional legal requirements to government funding can have real impacts on program outcomes. They can impose administrative costs, such as systems investments for both companies and the government, and added fiscal costs because companies request higher incentives to account for additional costs or uncertainty. Stringent requirements can also deter participation altogether. We had companies withdraw applications and decline to apply because they didn’t want to comply with the statutory constraints on their activities in China.

Challenge #3: How do we address the ghost of “federal interest”?

While most legal requirements on CHIPS funds were imposed by Congress, one came from the courts.

“Federal interest” is considered a common law right, meaning that it was created by federal courts rather than statute — in this case, through a series of judicial rulings over the past century. The basic premise of federal interest is that if the government gives a grant for a project (say, a grant to a nonprofit to build a workforce center) and either (a) the grant isn’t used as intended (the workforce center becomes a commercial warehouse), or (b) the entity that received the grant goes bankrupt, the government retains a financial interest in the property that allows it to recoup all or a portion of the grant. In the case of bankruptcy, the government has “super senior” interest — skipping ahead of any other creditors. And while our awards were not technically grants (they were other transactions), case law established that federal interest attached to our form of financial assistance.⁴

Addressing the federal interest with our applicants was challenging. For them, the concept was foreign and unexpected: they understood our grant-like awards as not requiring repayment unless a specific clawback was invoked, so it was hard to accept that CHIPS funds would give the government a financial interest in their property. Moreover, it would constrain their flexibility to enter into financing arrangements in the future — if the government had a super senior interest in a fab in bankruptcy, financing would be harder to secure or more expensive. And for companies with existing financing arrangements, intercreditor issues would arise. How would the federal interest be treated compared to first lien lenders and equipment financiers? Settling these matters often requires executing intercreditor agreements that establish the rights of existing lenders relative to the government, demanding negotiation and agreement with banks or other third parties. These are complex questions for any award, but even more so for a semiconductor project with thousands of pieces of equipment for which the government is providing a small minority of the funding.

The application of federal interest in an industrial policy context presents policy tradeoffs. On the one hand, it does create real financial protection for taxpayers: if a company goes bankrupt, a security interest in the underlying property allows the government to recoup funds and avoid the money-losing scenarios that activate oversight (see the Solyndra hysteria). And in at least one or two instances involving companies or projects with more precarious financials, we were glad to have that taxpayer protection, which provided security beyond a typical bankruptcy-activated clawback. But in most cases, federal interest created a considerable hurdle without commensurate benefit — the probability that its protections would ever be necessary was so remote that it felt like wrestling a bear to protect a house that was miles away. Congress should consider waiving federal interest for future industrial policy programs, or explicitly empowering the executive branch with the ability to do so.

Challenge #4: When should we use the bazookas of disbursement stops and clawbacks?

Beyond determining the substantive standards we’d hold awardees to, we also needed to decide on consequences for violation. There are really only two tools that give the government meaningful leverage after an award is issued: clawing back funds already paid, and stopping disbursement of future milestone-based payments.

But applicants viewed both of these interventions as bazookas. Even disbursement stops, which are considered the less extreme option, could threaten the financial viability of a project. Applicants pushed us to limit the conditions for disbursement stops to a subset of contract violations, but we felt that this would make the excluded terms more or less unenforceable. We therefore maintained our right to disbursement stops as a general remedy for contract violations. But to address applicants’ concerns, we negotiated the materiality qualifiers discussed above, and also defined cure periods to give companies the right to fix a problem first.

The bigger challenge for us was figuring out where we’d reserve the right to claw back and where withholding funds would be sufficient. In traditional grants, clawbacks aren’t available to the government (with the exception of the federal interest, as explained above). But CHIPS mandated two conditions for clawbacks in statute: violation of the national security guardrails, and receiving funds for a project and then failing to commence or complete it. Beyond the statutory requirements, we initially included clawbacks in the set of tools available to the government, while providing verbal assurances that our intent was to only use them in extreme cases. But verbal assurances weren’t good enough for applicants — the consequences of a clawback were too dire, and the posture of the government could change with an election. We responded to these concerns and ended up limiting the clawback conditions to a narrow set of circumstances, such as abandoning the project entirely or bankruptcy.

Again, there were trade-offs here. Limiting clawbacks to a narrower set of violations limited the government’s ability to enforce the other terms of the agreement once funds were distributed (typically over the course of 3-5 years). But we understood that the prospect of clawbacks for relatively minor breaches would be commercially untenable for our applicants. We shaped our approach accordingly.

Challenge #5: How bounded is the government’s discretion?

In typical commercial arrangements, parties to a contract generally have a duty to interpret and perform contract terms reasonably. In other words, if one party’s actions under a contract are challenged, it may lose if the court finds it is not meeting a reasonableness standard. This duty to act reasonably can be defined in contract terms, but even without explicit language, courts will impose it as an implicit duty under common law.⁵

Consistent with other federal grant agreements, our terms provided that CHIPS awards would be administered at “the discretion of the government.” But that language — which implied broad latitude — made some of our applicants very uneasy. In the event of a dispute under the contract, they wanted courts to hold the government to a “reasonableness” standard typical for commercial agreements.

But we couldn’t accommodate that request. The challenge was that the Administrative Procedure Act gives courts the ability to invalidate certain actions by government agencies (including withholding grants) if the court determines that they are “arbitrary and capricious.”⁶ Our legal team analyzed the APA and determined that it applied to our awards and that we didn’t have the authority to bind the government to a more constrained standard of review beyond the “arbitrary and capricious” test of the APA.

The standard makes sense in many traditional government contexts where agencies make decisions based on policy judgment. But industrial policy programs blur the line between typical government administration and commercial partnership. When the government is acting as a commercial counterparty — negotiating terms, making milestone payments, and enforcing performance requirements similar to a private investor — companies expect the legal protections typical of commercial relationships. Under the “arbitrary and capricious” standard, even if the government made a questionable interpretation of the agreement that a court might consider unreasonable in a commercial context, companies would have little recourse as long as that interpretation was within the bounds of the APA. This concern was amplified by the political reality that “the government” might mean entirely different decision-makers after an election. Companies worried they could be locked into long-term agreements with billions of dollars at stake, yet have limited legal recourse against adverse interpretations by future administrations.

For future programs, Congress should consider specifying that agencies may commit to a more constrained standard of review than the APA provides in their commercial agreements.

Challenge #6: What happens when a company wants to terminate the deal?

Many applicants also wanted the right to terminate and withdraw from the agreement. In traditional grantmaking, applicants usually seek out the grant because they have limited other sources of funding. But CHIPS grants were typically not about providing cash to companies that didn’t have it — they were about creating internationally competitive project-level financial returns for applicants that already had access to ample financing. So applicants raised the idea of repaying the subsidy and relieving themselves of the obligations of our legal agreements. They particularly wanted to rid themselves of the statutory restrictions on activity in China.

This wasn’t something the applicants considered lightly, nor did they think it likely that they’d ever want to repay their grants — after all, doing so would be expensive. They were interested in termination rights mostly as a safeguard against worst-case scenarios. Some envisioned situations in which the government refused to distribute funds to which companies were legally entitled under the terms of the award contract. Absent termination rights, their only recourse would be to sue the government, which they would be loath to do given the government’s broader power over their business. They could end up receiving none of the benefits of CHIPS funding but all of the associated constraints.

We never thought of CHIPS grants as creating a compulsory obligation: if the economics of a project no longer panned out, we didn’t want to compel completion anyway. But each award also came with a real opportunity cost — we were allocating funds for future milestone-based payments that could otherwise be directed at other national security priorities. And in that context, allowing for low-friction termination didn’t feel right. We suspected that Congress did not intend for companies to have the benefit of subsidized financing only to turn around and relieve themselves of the obligations that came with the money. And the statute constrained termination rights, especially when it came to the national security guardrails.

Challenge #7: What happens if the government gets sued?

Indemnification may seem like an eyes-glaze-over legal detail, but for us it was a matter of intense business interest. The core issue was the prospect of third-party litigation against the government: if the government was sued for the actions of a company it had funded, would the company indemnify (i.e., reimburse) the government for any liability incurred? For the government, indemnity was standard fare and a sensible protection. Why should the government be on the hook for providing funding? And in the context of loans, lenders (including government lenders) are always fully indemnified. Given the size of the funding and complexity of the projects, our legal team felt that the CHIPS program should be indemnified too.

Companies disagreed. CHIPS was typically providing only 10% of project funds, and the government gets sued for all sorts of things; could they really leave their shareholders on the hook for major financial risk years in the future? Even if the prospect of significant liability against the government seemed unlikely, the potential dollars could be large — the types of hard-to-underwrite financial exposures that companies are supposed to protect their shareholders from.

For several deals (including all of our largest and most important ones), the indemnity provision was one of the last issues we resolved, hanging over the entire negotiation and often requiring sign-off from CEOs and boards. What made these negotiations particularly challenging was that they involved a zero-sum allocation of risk that was hard to foresee. We ended up negotiating the specifics of the indemnity in a way that partially addressed company concerns, but companies still had to get comfortable with the resulting provision.

Challenge #8: What happens if the company sells the project — or itself?

There was a suite of issues related to change of control, requiring us to anticipate the myriad situations in which a project’s or company’s control might transfer to another entity. Possibilities included a recipient merging with another company, selling the project to another company, or even selling a minority interest in itself or the project.

For companies considering M&A activity, having to go to the US government for “approval” to execute a transaction in their shareholders’ interest generated intense scrutiny, including at the CEO and board level.⁷ For example, in the summer of 2024, Intel released an earnings result that caused its stock to drop by roughly 40% and triggered intense M&A interest, both publicly and privately. Would Intel be merged with Qualcomm? Or Broadcom? Or GlobalFoundries? Would it take new outside investment in its foundry business? Or enter into a joint venture with TSMC? These questions were now of substantial import to both Intel’s shareholders and US national security: as the only US-based leading-edge logic manufacturer, Intel’s foundry business was critical to the leading-edge ecosystem we were trying to build. Intel was also working with the Department of Defense on certain national security-related programs. As a result, the change-of-control provision with Intel was heavily negotiated. Ultimately, Intel viewed the provision as so material to shareholders that it described it in detail in an SEC disclosure after we signed the deal.

The interest in change of control wasn’t limited to large companies — sales of projects and companies are common throughout the semiconductor industry. And even for companies that did not anticipate M&A activity, requiring government approval for future transactions could limit their optionality, drag on their stock, and create financial penalties.

We negotiated these provisions extensively, detailing what would constitute a change of control, whether any transactions would be exempted, what the approval process would look like, and what the consequences would be for proceeding without approval. Along with indemnity, this was often one the last terms we finalized.

Some companies understood our position but sought targeted flexibility. Others argued that we were overstepping. They felt that our agreements protected the government’s objectives through other provisions and that ownership issues should be left to companies and their boards. But we had vetted our applicants thoroughly and did not want to be bound to do business with future participants that we could not foresee or approve, and who might pursue strategies that run counter to the government’s interests. We generally held the line on change-of-control provisions while negotiating nuances and exceptions to address the specific concerns of companies without compromising program objectives.

Closing thoughts

At one point late in our TSMC negotiation, I asked one of their lawyers how our terms compared with Japan’s approach. The lawyer looked confused: “Japan? We don’t have a contract with Japan. We just submit our receipts and they give us the money.”

I was thinking about that conversation while reading Dan Wang’s recent book Breakneck. In comparing the US and China, Dan draws a distinction between what he calls the “engineering state” and the “lawyerly society.” In his telling, China’s government is run by engineers, who bring a technocratic, build-first mentality to problems both physical and social. America’s system, by contrast, is dominated by lawyers (like me!), who he says bring a more process-oriented, risk-averse perspective that tends to block progress as opposed to advancing it.

We are never going to be Japan or China — I think our political system demands protections for taxpayers in ways theirs may not, and those expectations manifest through legal frameworks. But I think Dan’s framework does have some purchase on the CHIPS experience. The legal provisions we negotiated didn’t emerge from a vacuum. They came from Congress, from courts, from regulations, from other precedents in the executive branch, and from sensible, good-willed efforts to protect taxpayers. And fundamentally, these were negotiations about risk allocation. Each provision we debated represented a choice about who bears what risk. What happens if a company breaks the law? What happens in bankruptcy? What if a company sells itself? How much discretion should government retain? These are legitimate questions with real consequences. The challenge is that each protection, however sensible in isolation, adds friction in aggregate.

The Commerce Department played its game of industrial policy Minesweeper successfully. Twenty awards, $34 billion in direct funding, $5 billion in loans — all negotiated under intense time pressure. We proved that the American system can move with commercial speed and flexibility when necessary. But the effort required was extraordinary, and I’m not sure the approach is sustainable going forward. Each legal protection created costs — in deal complexity, in negotiating time, in relationship friction, in dollars — that accumulate even when individual provisions make sense.

Future programs will face similar tradeoffs, and those tradeoffs deserve serious consideration. After all, CHIPS tax credits — roughly double our direct funding — operated much closer to Japan’s model. The question for both policymakers and implementers is finding the right balance between legal protection and execution efficiency. That’s a conversation worth having as industrial policy becomes a fixture of American economic statecraft.

1. The two other key tasks were (1) conducting confirmatory due diligence and refining the commercial deal based on that work and (2) negotiating programmatic provisions that would attach to the funding (the term that fueled the everything bagel discourse).

2. A “form” agreement is a standard, baseline agreement that can then be adapted and refined for individual deals.

3. Looming in the background was the fact that the government’s “intent” could change with the upcoming election.

4. For more on other transactions, see Statecraft interviews with Rick Dunn and Narayan Subramanian.

5. Courts will also often impose this standard when the government is a party in commercial agreements like procurement contracts.

6. See 5 U.S.C. 551.

7. They wouldn’t actually need government approval for a deal, but failing to get our approval could compromise CHIPS funding, which would functionally amount to the same thing.