Foreign companies whose investments run afoul of CFIUS have due process rights.  That was the headline in the DC Circuit’s July 2014 decision in Ralls v. Committee on Foreign Investment in the United States1 – the only litigation against CFIUS since the Committee’s inception.

But that was not the DC Circuit’s only holding.  The case is ongoing, sent back to the district court, with further potential ramifications for cross-border deal participants.

Until now, this litigation has focused on a September 2012 Presidential Order against Ralls, a US company owned by Chinese nationals.  The Presidential Order, made at CFIUS’s recommendation, directed Ralls to divest certain windfarm projects located near a US defense facility.  That recommendation was based on CFIUS’s view that Ralls’ purchase of these projects threatened national security.  But the DC Circuit found that Ralls had been deprived of its constitutional due process rights to try to rebut unclassified evidence supporting the Presidential Order.

The DC Circuit opinion triggered a lot of commentary, much of which has focused on the constitutional due process headline regarding the Presidential Order.  That focus, however, has obscured another holding that may be of more practical import:  The DC Circuit held that Ralls can attack the validity of two orders issued by CFIUS prior to the Presidential Order.

If those CFIUS orders were defective – or even if the court finds merely that they were subject to the Administrative Procedures Act (APA) – then foreign investors may discover they have more leverage with CFIUS.  While several unusual aspects of the Ralls case may render the due process holding to be of limited utility, a finding regarding the CFIUS orders themselves may have much larger import.

The Due Process Headline 

Let’s back up.  CFIUS routinely reviews foreign investments in US companies when the investments might implicate national security.  The Committee clears the vast majority of these investments, though it sometimes conditions these clearances on commitments of the foreign acquirer, usually called “mitigation measures,” such as providing CFIUS the right to conduct on-site inspections and review the foreign investor’s books.  On the rare occasion that CFIUS refuses to clear an investment, the parties generally choose to abandon the transaction.  In the even rarer circumstances in which the parties do not abandon their transaction, CFIUS can recommend that the President block it or order divestment if the transaction has closed.

The Ralls case was such a rare occasion.  There, for only the second time in history, the President ordered divestment.  Ralls sued, and the DC Circuit found, to many commentators’ surprise, that Ralls had not been provided due process.

While this holding is undoubtedly significant, commentators have observed that this may be tantamount to a mere pause in a seemingly preordained course of events:  The government was required to provide some unclassified information to Ralls, which it did on November 25, 2014.   Ralls now has the right to argue that the evidence is weak and overwhelmed by contrary evidence, but the government might then simply affirm its prior decision.

An order by the district court on November 6, 20142 foreshadows this outcome, some CFIUS observers have said.  The court order concludes with the mandate that after Ralls has been afforded the requisite opportunity to contest evidence, “defendants shall inform Ralls whether the Presidential Order has been reaffirmed, rescinded, or revised in any way.”  These CFIUS observers have predicted a government conclusion to the effect that “the Presidential Order is reaffirmed, and not rescinded or revised in any way.”

Regardless of the outcome for Ralls, it’s not likely that the DC Circuit’s due process holding will be useful for foreign investors more than once in a blue moon.  The DC Circuit only reviewed the validity of the Presidential Order regarding divestment, sending the issues regarding the CFIUS orders back to the district court.  CFIUS may then interpret the holding to apply only when CFIUS is going to recommend that the President order divestment (in circumstances when a transaction already has closed), which is a rarity.

Indeed, since the DC Circuit’s opinion, CFIUS has shown no inclination to offer foreign investors rights to rebut evidence in standard CFIUS cases, nor even in cases in which the relations between CFIUS and the parties become acrimonious.  Perhaps the due process requirement might make CFIUS think again before sending a case to the President.  But CFIUS already thinks more than twice about that – most White House occupants do not want to spend resources on CFIUS matters, and the Treasury Department, which chairs the CFIUS process, has absorbed that message over the years.

This disinclination to utilize presidential resources puts a premium on the Committee’s own authorities.  And it’s here that the DC Circuit’s decision in Ralls might have a profound effect.

CFIUS’s Authority

CFIUS’s ability to produce orders, such as those currently under review, stems from an authority asserted by CFIUS to require mitigation measures over a foreign investor’s objection.  CFIUS, however, has not always claimed this power.  For approximately 20 years, the Committee’s authority with respect to foreign investments was commonly understood as limited to two types of actions: (1) CFIUS could recommend blocking or divestment to the President; or (2) CFIUS could negotiate mitigation measures with the foreign investor (e.g., the right to conduct on-site inspections and review the foreign investor’s books).

CFIUS’s second authority – negotiating mitigation measures with the foreign investor – was dependent on its authority to make negative recommendations to the President.  The threat of such negative recommendations, and the likelihood that the President would implement them, enabled the Committee to extract negotiated mitigation measures from foreign investors.  In exchange, the Committee would refrain from making a negative recommendation to the President.

But in CFIUS’s negotiations with foreign investors, the foreign investors had a modicum of leverage:  The President’s time is a scarce resource.  So, if CFIUS wanted a foreign investor to agree to ten mitigation measures for CFIUS to clear the deal, the foreign investor might seek to exclude the most burdensome of those measures.  The Committee would have to consider whether it was worth sending the case to the President or instead accepting the limitations proposed by the foreign investor (e.g., eight of the ten mitigation measures).  Often, when the foreign investor’s proposal was reasonable, the Committee accepted it.

A few years ago, however, CFIUS found authority that it previously did not recognize – the authority to issue its own orders, rather than merely making recommendations to the President.  There is a technical legal debate about whether this authority is well grounded in the statute and implementing regulations.  Regardless, since the discovery of its presumed authority, CFIUS has not been shy about asserting it.

This has diminished the ability to negotiate with the Committee over security commitments – after all, there is little reason for the Committee to negotiate when it can issue the orders it prefers.

Will CFIUS’s Authority Be Undercut by Ralls?

The current Ralls litigation, however, has the potential to swing some negotiating power back to foreign investors.  The DC Circuit took the first step, finding that the CFIUS orders were “capable of repetition yet evading review.”  This finding allowed the Circuit to send back to the district court claims that the CFIUS orders were invalid, despite the fact that the CFIUS orders had been superseded by the Presidential Order. 

The district court’s November order required the parties to propose scheduling for briefing the validity of the CFIUS orders.  The district court will now consider several claims regarding the CFIUS orders, including several under the APA.  For example, Ralls claims the orders are “arbitrary and capricious” because CFIUS did not give reasoned explanations for its orders or for why the measures it imposed were necessary over available less burdensome alternatives.  Additionally, Ralls claims the CFIUS orders exceed the Committee’s statutory authority because the mitigation measures effectively blocked the transaction – a power given only to the President. 

If the district court finds the CFIUS orders violate the APA for any of these reasons, this finding may once again shift the balance of power between CFIUS and foreign investors.  Foreign investors could demand a reasoned explanation why CFIUS is requiring certain security commitments over others and may also be able to cite limits on CFIUS’s authority to impose certain commitments at all.

Even if the court finds these particular orders valid, so long as they find them subject to the APA, foreign investors may gain negotiating power.  With the knowledge that CFIUS orders are reviewable in court, if a foreign investor objects to a certain security commitment (and cites APA concerns), CFIUS will need to consider whether the specific measure desired is worth facing litigation and potentially harmful court precedent.  This new dynamic may shift a bit of leverage back to foreign investors:  with a more restricted authority to issue orders, CFIUS may find more frequently than before that it makes sense for CFIUS to accept parameters proposed by foreign investors. 

Conclusion

To be sure, the full consequences of the Ralls litigation are still to be seen.  While the DC Circuit’s due process holding is a significant development, the most practical import of the Ralls litigation may be yet to come.  A court decision regarding the CFIUS orders has the potential to affect a much larger number of CFIUS cases because mitigation measures are common features of CFIUS cases, whereas divestment recommendations to the President are not.  And if CFIUS orders are found to be invalid, or even simply reviewable under the APA, foreign investors may discover they have a bit more leverage in their dealings with CFIUS.