D.C. Circuit Court’s Surprising Ruling on Chinese CFIUS Case May Result in Greater Transparency in Certain National Security Proceedings

by Eversheds Sutherland (US) LLP

 On July 15, the United States Court of Appeals for the District of Columbia Circuit ruled that the President violated the due process rights of Ralls Corporation, a U.S. company owned by two Chinese nationals when, pursuant to Section 721 of the U.S. Defense Production Act (“Exon-Florio”), he ordered the divestiture of the corporation’s newly acquired U.S. wind farm assets due to national security concerns. The court found that due process requires the President and, by implication, the Committee on Foreign Investment in the United States (“CFIUS”), to provide the company with: (1) notice of his determination, (2) the unclassified information on which his determination was based, and (3) an opportunity for rebuttal.

Although narrow in scope, the court’s ruling is a departure from the established practice of judicial deference to the Executive Branch in national security matters, and particularly those arising under Exon-Florio. By its terms, Exon-Florio expressly precludes judicial review over the President’s actions to prohibit foreign acquisitions that impair national security. If it stands, the ruling could pose procedural challenges for CFIUS; however, for a number of reasons, the ruling will likely have only limited implications in some future CFIUS proceedings by affording parties more insight into CFIUS’s deliberations.

The court’s ruling arose out of a 2012 Presidential Order that prohibited Ralls Corporation from owning four Oregon-based U.S. wind farm project companies (apparently due to concerns over the proximity of the farms to a sensitive military facility). Ralls had acquired the wind farms in March 2012 but did not file advance notice of the acquisition with CFIUS. In June 2012, after the transaction closed, Ralls filed a notification with CFIUS because the company became aware that CFIUS was going to initiate a review on its own. CFIUS conducted its customary review and investigation and found there was credible evidence that the transaction posed a threat to national security. The Presidential Order, which was issued after the close of the CFIUS investigation, was largely based on CFIUS’s recommendation and ordered the company to divest its Oregon holdings.

In response, the company filed suit in the United States District Court for the District of Columbia challenging the President and CFIUS’s authority to order divestiture. Ruling on a motion to dismiss, the district court found that the company’s claims against the President’s decision were not subject to judicial review, particularly because Exon-Florio prohibits court review of a final determination by the President. The district court also found that the company had not been denied due process, explaining that Ralls did not have a property interest in the wind farms because it had chosen to purchase them without filing a notice with CFIUS before the purchase was made (an option permitted by statute). Therefore, the court found that Ralls knew the risk of divestiture existed when it purchased the wind farms and, as such, did not have a constitutionally protected property interest.

On appeal, the D.C. Circuit reversed the district court’s findings. First, the circuit court confirmed that the President’s ultimate determination under Exon-Florio was not reviewable by virtue of the express exception from judicial review contained in the statute. Nonetheless, the court found that the statute’s bar of substantive judicial review did not preclude the court from reviewing constitutional claims challenging the CFIUS process. Second, applying established doctrine, the court found that Ralls’ state law property interests had fully vested when the transaction was completed, “meaning that due process protections necessarily attached” to the company’s interest in the wind farms. The court took the position that it was of no consequence that these state law property interests could be divested pursuant to federal law.

The court next addressed the Presidential review process. Despite the fact that CFIUS reviews inherently involve national security, the court found that the procedure used in this case was constitutionally inadequate because Ralls had not been afforded access to the unclassified evidence supporting the President’s determination or an opportunity to rebut that evidence. (The court concluded that “a substantial interest in national security” supported withholding classified information.) The D.C. Circuit remanded the case to the district court, ordering that the company be granted the opportunity to access the unclassified evidence supporting the President’s determination, as well as an opportunity for rebuttal.

While the D.C. Circuit’s decision is surprising, it is narrow in scope, only affording parties the opportunity to review and rebut unclassified information, not to attack a final decision. Further, with respect to due process, the court found that Ralls had a property interest in the wind farms because of the posture of its purchase (i.e., having already acquired the wind farms prior to commencing the CFIUS review process). In most CFIUS cases, the parties file notice with CFIUS before they close the transaction. In such a situation, the acquiring party arguably has no vested property interest in the asset at the time of filing and due process rights are not implicated, making it doubtful that the court’s ruling would affect the typical CFIUS case.

Whether the Obama Administration will seek en banc review of this decision by the entire D.C. Circuit or seek U.S. Supreme Court review remains to be seen. The need to preserve Executive Branch prerogatives in national security matters may very well cause it to seek such review and, indeed, there are cogent reasons to question the circuit court’s logic. In particular, the notion that the broad statutory prohibition on judicial review of final Presidential determinations somehow does not preclude courts from reviewing CFIUS procedures raises questions—is this type of statutory parsing appropriate in a case involving a national security proceeding? For another, the circuit court’s view of how much process is due is unprecedented in a national security proceeding such as this one in which there is no formal record and the process involves deliberative decision-making on sensitive policy matters. In this regard, it is difficult to identify another national security proceeding—from export license determinations to decisions on industrial security—where courts have required this type of process. Such deliberative decision making by an Administration is normally shielded from scrutiny precisely to encourage open deliberation of important national matters by policy-makers. If this decision stands, it would raise the prospect of broader transparency in a range of national security matters customarily shielded from public view.

In any event, to the extent the ruling stands and for those firms to which it applies (i.e., companies that have closed a transaction and therefore have a property interest), it is likely to complicate the CFIUS review process. Parties will now seek to see unclassified data showing national security concerns so that they have a chance to rebut them. In particular, as CFIUS attempts to respond to requests to review unclassified information, it is possible that the Committee will not be able to complete initial reviews in the customary 30-day period, slowing the review process and causing more cases to require an extended 45-day investigation period. Further, in an attempt to protect information from disclosure to avoid the effect of the ruling, CFIUS may seek to qualify more information as classified.

The D.C. Circuit’s decision underscores that foreign parties seeking to acquire U.S. businesses must conduct a thorough analysis of whether they should file under CFIUS before closing a transaction to avoid the uncertainty and controversy that arose in the Ralls case.

For more information on Exon-Florio and CFIUS, click here to access Sutherland’s previous Legal Alert on this topic.


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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