Xiaomi is Xiaomi Again
In November of last year former President Trump signed Executive Order 13959 invoking the International Emergency Economic Powers Act to prohibit all US persons from making equity investments in all “Communist Chinese Military Companies”, under the definition that the entity “is owned or controlled by the People’s Liberation Army and is engaged in providing commercial services, manufacturing, producing or exporting.” On January 13 of this year the executive order was amended to require all US persons to fully divest and holdings of shares in CCMCs, and the next day the DOD added an additional list of CCMCs that brought the total to 44 companies.
On March 12, the US District Court for the District of Columbia granted a preliminary injunction against the implementation of the EO, in favor of Xiaomi Corp (1810.HK), one of the named CCMCs. The court cited the Administrative Procedure Act, finding that the DOD did not develop sufficient evidence to support its designation of Xiaomi as a CCMC, particularly after Congress over-rode the President’s veto of the National Defense Authorization Act, adding more stringent requirements for inclusion in the DOD’s list. While the exemption only includes Xiaomi, it weakens other CCMC designations and leaves them open to legal challenge with the potential to cause the Executive Order to prove ineffective.
Such designations by the DOD and other agencies that were granted during the previous administration also have implications for businesses and contractors involved in the US government’s supply chain, as ‘procuring or obtaining” “any equipment, system, or service” that utilizes “covered telecommunications equipment or services” for certain critical technology or a “substantial or essential component of any system” is forbidden under the Federal Acquisition Regulations Act, although the Secretary of Defense has the ability to apply the prohibitions to an entity that he/she believes to be owned or controlled by, or otherwise connected to, the government of a foreign country. Overall federal agencies have broad discretion in evaluating national security risk however if CCMCs are involved in transactions regulated by the US government, legal challenges to CCMC status could limit the use of the CCMC designation when agencies are doing risk assessment. By overstepping the use of the designation, the previous administration will likely have reduced or eliminated its effectiveness going forward.
On March 12, the US District Court for the District of Columbia granted a preliminary injunction against the implementation of the EO, in favor of Xiaomi Corp (1810.HK), one of the named CCMCs. The court cited the Administrative Procedure Act, finding that the DOD did not develop sufficient evidence to support its designation of Xiaomi as a CCMC, particularly after Congress over-rode the President’s veto of the National Defense Authorization Act, adding more stringent requirements for inclusion in the DOD’s list. While the exemption only includes Xiaomi, it weakens other CCMC designations and leaves them open to legal challenge with the potential to cause the Executive Order to prove ineffective.
Such designations by the DOD and other agencies that were granted during the previous administration also have implications for businesses and contractors involved in the US government’s supply chain, as ‘procuring or obtaining” “any equipment, system, or service” that utilizes “covered telecommunications equipment or services” for certain critical technology or a “substantial or essential component of any system” is forbidden under the Federal Acquisition Regulations Act, although the Secretary of Defense has the ability to apply the prohibitions to an entity that he/she believes to be owned or controlled by, or otherwise connected to, the government of a foreign country. Overall federal agencies have broad discretion in evaluating national security risk however if CCMCs are involved in transactions regulated by the US government, legal challenges to CCMC status could limit the use of the CCMC designation when agencies are doing risk assessment. By overstepping the use of the designation, the previous administration will likely have reduced or eliminated its effectiveness going forward.
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