On January 5, 2021, President Trump issued Executive Order 13971 (the “Executive Order”) that provides for prohibitions on U.S. persons engaging in transactions with persons that develop or control any of the following eight Chinese “connected software applications,” or with their subsidiaries: Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay, and WPS Office. The prohibitions outlined in the Executive Order are scheduled to become effective on February 19, 2021, nearly a month after the Biden Administration begins, leaving it to the incoming administration to implement, amend, or even revoke the Executive Order.
The Executive Order is the latest in the series of executive actions targeting Chinese companies engaged in information communications technology and services. As described below, the fate in the United States of the Chinese software applications TikTok and WeChat, which were previously targeted by the Trump Administration’s actions, remains unclear following suspensions on implementing regulations resulting from injunctions issued by U.S. federal judges. The Executive Order will likely face similar legal challenges and judicial scrutiny. Nevertheless, entities that could be affected by the prohibitions contemplated by the Executive Order should consider the potential implications on their businesses and take steps to ensure they are well-positioned to address any resulting legal obligations and associated compliance risks.
Prior Executive Action Against Chinese Software Companies
On May 15, 2019, President Trump declared a national emergency with respect to threats by foreign adversaries to the U.S. information and communications technology and services supply chain, based on authority under the International Emergency Economic Powers Act and the National Emergencies Act. Two Executive Orders—13942 and 13943—were issued on August 6, 2020, mandating a ban on, respectively, (i) transactions with ByteDance Ltd., the owner of TikTok, and (ii) transactions related to WeChat with its owner Tencent Holdings Ltd. (“TikTok and WeChat Executive Orders”). As described in our prior alerts here and here, the Department of Commerce initiated the implementation of the TikTok and WeChat Executive Orders, identifying a broad set of transactions related to TikTok and WeChat that would be prohibited. However, the regulations implementing the TikTok and WeChat Executive Orders have not become effective due to injunctions issued by multiple U.S. federal courts in favor of petitioners that claimed they would be harmed by such implementation.
Purpose and Scope of the Executive Order
The Executive Order provides that “the pace and pervasiveness of the spread in the United States of certain connected mobile and desktop applications and other software developed or controlled by persons in the People’s Republic of China [PRC], to include Hong Kong and Macau (China), continue to threaten the national security, foreign policy, and economy of the United States.” It refers to findings by the U.S. government that a number of Chinese connected software applications automatically capture “vast swaths of information from millions of users in the United States,” including sensitive personally identifiable information, which would allow the PRC and the Chinese Communist Party access to Americans’ personal and proprietary information.
The Executive Order provides for prohibitions on all transactions with persons that develop or control the eight Chinese software applications named above and with their subsidiaries. The Secretary of Commerce (the “Secretary”) is tasked with identifying such transactions and persons no earlier than 45 days after the issuance of the Executive Order, February 19, 2021 (this limitation is presumably meant to provide adequate time for such identification by the new administration). Within the same 45-day period, the Secretary is to provide recommendations to prevent the sale or transfer of U.S. user data to foreign adversaries, including through the establishment of regulations and policies to identify, control, and license the export of such data. It appears that the prohibitions are likely to become effective, if at all, on the day the relevant transactions and persons are identified by the Secretary.
The Executive Order directs the Secretary to continuously evaluate and take action with respect to other Chinese connected software applications that may pose a risk to the national security, foreign policy, or economy of the United States. In addition, the Executive Order’s prohibitions are to apply retroactively, “notwithstanding any contract entered into or any license or permit granted before the date of [the Executive Order].”
In contrast to the Tencent and WeChat Executive Orders, the Executive Order includes a severability clause that is quite unusual and is presumably intended to preserve at least portions of the Executive Order if certain parts of it are repealed by the incoming administration or found to be unlawful by the courts.
The Executive Order represents a final Trump Administration effort to crack down on Chinese companies that purportedly aim to commercially collect in bulk the personal data of millions of Americans in order to malignantly use or share this data for the benefit of the Chinese government. Given the timing of the Executive Order’s prospective implementation described above, it remains to be seen whether the incoming Biden Administration will pause or even cancel the implementation of the Executive Order. We continue to closely monitor the evolving situation regarding these executive actions.