U.S. Appellate Court Raises Questions Regarding Transparency of CFIUS Process

The District of Columbia Court of Appeals, generally considered the most influential appellate court in the country on matters involving issues of governmental power, has resurrected a challenge by a Chinese-owned company to President Obama’s decision to block development of a wind farm in Oregon due to national security concerns. The decision for the first time raises constitutional questions about the formulation of Presidential determinations under the Exon-Florio Amendments to the Defense Production Act and the attendant procedures exercised by the Committee on Foreign Investment in the U.S. (“CFIUS”). Of notable significance, the President’s authority to unwind foreign investments in the United States that are deemed to threaten national security, remains unchallenged.

Overturning a lengthy lower court process, the D.C. Circuit found that constitutional due process requires that government provide parties with some, but not all, the evidence that supports a CFIUS determination to block an acquisition and, more importantly, an opportunity to rebut that evidence.1 As indicated in our prior October 1, 2012 client update,2 President Obama issued an order blocking the Ralls Corporation (“Ralls”), U.S.-based company owned by two Chinese individuals, from proceeding with the development of four wind farm projects. The Presidential Order, issued on September 28, 2012, replaced an August 2012 CFIUS Order and required Ralls to divest itself of all ownership in the Project Companies, to remove all equipment from the sites, barred companies’ employees access to the sites, and barred any non-U.S. citizens from dismantling the installed equipment. This was only the second time since enactment of the Exon-Florio amendments in 1988 that a president has ordered the “unwinding” of a foreign buyer’s acquisition of a U.S. business.

In September 2012, Ralls filed a lawsuit challenging the CFIUS Order and the Presidential Order.3 The lawsuit alleged CFIUS exceeded its statutory authority and violated the Administrative Procedures Act, constitutional due process and equal protection of the law.4 The lawsuit also alleged that the Presidential Order exceeded the authority conferred upon the President and violated constitutional due process and equal protection of the law.5

On October 10, 2013, the lower court granted the Government’s motion to dismiss the alleged due process violation from the Presidential Order because Ralls did not allege it was deprived of a protected interest.6 The court also found that even if there had been a protected interest, Ralls had received sufficient process before the deprivation took place because it had been notified that the transaction was subject to review and was given an opportunity to present evidence in its favor in both its voluntary notice filing and during the follow-up conversation with and presentation to CFIUS officials.7

In a surprising move, on July 15, 2014, the D.C. Circuit reversed the lower court’s dismissal of the due process challenge. The D.C. Circuit found that Ralls’ interest in the Project Companies constituted “property” under Oregon law,8 and that the Presidential Order deprived Ralls of its constitutionally protected property interests without due process.9 Specifically, the court ruled that due process requires that

  1. the affected party be informed of the official action;
  2. the affected party be given access to the unclassified evidence on which the official actor relied; and
  3. the affected party be afforded an opportunity to rebut the evidence.10

The D.C. Circuit reversed and remanded the case to the lower court to comply with its ruling.11

This ruling will likely be appealed by the U.S. government, either en banc to the D.C. Circuit or to the Supreme Court. For the time being, the decision’s main implication is that parties facing a CFIUS determined to block an acquisition, may be in a stronger position to demand any unclassified information about the government’s concerns, potentially setting the stage for more frequent and informed challenges to CFIUS decision-making. The decision may bode well for a very small minority of covered transactions where there may be misunderstandings by CFIUS or poor communication between the parties that could be remedied by a more iterative process that requires CFIUS to provide more information regarding its specific security related concerns. However, for many types of transactions that face strong headwinds in CFIUS, the concerns that drive CFIUS regarding espionage, cybersecurity, or defense threats, will likely be based on confidential or classified sources, which the D.C. Circuit agreed need not be disclosed to private parties. Notably, since 2008, CFIUS receives a detailed input from the Director of National Intelligence, which provides the core component of the risk calculus that CFIUS must consider - it is highly unlikely that any intelligence community information would be made accessible to the parties.

In its remand instructions, the court also potentially reopened the narrower question around CFIUS’s authority to impose mitigation measures during the interim phase of a review. Ralls’ challenge on this point became moot during the lower court proceedings once President Obama issued his final order. Should the lower court find that CFIUS exceeded its authorities in imposing interim mitigation, it is possible that such a finding would limit CFIUS’s ability to pressure parties to accept interim mitigation measures. In practice, however, foreign investors typically work hard to cooperate with CFIUS and will agree to interim mitigation to keep alive the prospects for a positive outcome.

1Ralls Corp. v. Committee on Foreign Investment in the United States, No. 13-5315, (D.C. Cir. July 15, 2014).
2President Obama Blocks Chinese-Owned Wind-Farm Development, Baker Botts International Trade Update, October 1, 2012, available here.
3Ralls Corp. v. Committee on Foreign Investment in the United States, No. 12-153, slip op. at *10-11 (D.D.C. Feb. 26, 2013).
4Id. at *11.
5Id.
6Ralls Corp. v. Committee on Foreign Investment in the United States, No. 12-153, slip op. at *29 (D.D.C. Oct. 10, 2013).
7Id.; Ralls Corp., No. 13-5315, slip op. at *13.
8Ralls Corp., No. 13-5315, slip op. at *29.
9Id. at *36.
10Id.
11Id. at *47.

Topics:  CFIUS, China, National Security, Trade Policy, Transparency

Published In: Civil Procedure Updates, Constitutional Law Updates, Elections & Politics Updates, Finance & Banking Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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