Originally appeared in Law360 on July 18, 2014.

On July 15, the US Court of Appeals for the District of Columbia (the court) held that the  President violated the constitutional due process rights of Ralls Corporation when he blocked  Ralls’ acquisition of a wind farm project. In particular, the court held that Ralls was entitled to  be provided with notice of the intended divestment order, access to the unclassified evidence on  which the President’s decision was made, and a chance to refute that evidence. 

The President prohibited the transaction based on the recommendation of the Committee on Foreign Investment in the United States (CFIUS), which had previously imposed substantial mitigation requirements on the transaction. CFIUS, which principally comprises executive- branch agencies, reviews foreign direct investments and acquisitions that could affect national security. Transactions deemed to threaten US national security may, following review by CFIUS, be referred to the President, who has the authority to block or order divestment in transactions that are determined to pose a threat to US national security. Companies have long been hesitant to challenge CFIUS because of the broad discretion given to the executive branch on issues of national security. While this decision does not erode that discretion, it requires more transparency in the CFIUS process and could open the door to other such challenges.

The dispute stems from the government’s reaction to a 2012 acquisition by Ralls—a Delaware corporation owned by two Chinese nationals—of land, projects, and other assets in Oregon for the construction of a wind farm. The wind turbines were to be provided by the Sany Group, a Chinese company associated with Ralls. Ralls sought to acquire the four wind farm projects in Oregon without initially filing a voluntary notice with CFIUS. Upon learning of the transaction, CFIUS requested the parties submit a CFIUS notice, which they did. During its review, CFIUS issued an interim mitigation order requiring, among other things, that Ralls remove materials from the sites and not access them. In the first direct challenge to the validity of a CFIUS order, Ralls brought a lawsuit against CFIUS in the US District Court for the District of Columbia (District Court), claiming that the mitigation requirements were tantamount to ordering divestment, which is a power reserved for the President under the CFIUS statute. Following the lawsuit, CFIUS referred the case to the President, who ordered divestment of the assets from the project sites, which were within or in the vicinity of restricted air space at Naval Weapons System Training Facility Boardman in Oregon. The President’s order restricted the manner in which the divestiture was to proceed, denied Ralls access to the properties, and required  removal of all items, structures, and physical objects produced by the Sany Group. Following the presidential order, Ralls amended its complaint to add the President as a defendant.

In its lawsuit, Ralls argued that CFIUS’s actions were beyond the scope of authority granted under the Foreign Investment and National Security Act of 2007 (FINSA) and constituted a violation of Ralls’ due process rights under the Fifth Amendment. In early 2013, the District Court dismissed all but Ralls’ due process challenge, in part because the original claims regarding the CFIUS order were deemed moot since it had been replaced by the President’s divestment order. Later that year, the District Court again ruled against Ralls, rejecting its remaining claim, holding that Ralls essentially assumed the risk that the transaction could be unwound when it did not seek pre-acquisition review by CFIUS. The District Court further held that even if Ralls did have a protected interest, it was not denied sufficient process, as Ralls was given the opportunity to submit evidence in its filing to CFIUS and present its case to CFIUS officials.

“Companies have long been hesitant to challenge CFIUS because of the broad discretion given to the executive branch on issues of national security. While this decision does not erode that discretion, it requires more transparency in the CFIUS process and could  open the door to other such challenges.”

The court rejected the District Court’s jurisdictional findings, ruling that, absent clear legislative intent to the contrary, the part of FINSA barring judicial review does not apply to the question of constitutional due process related to the President’s final actions to suspend or prohibit transactions. Similarly, the court held that whether the Constitution requires due process  leading up to the President’s final determination is not a political question exempt from judicial review.

Having found jurisdiction to review Ralls’ claims on the merits, the court held that the presidential order of divestment was an unconstitutional deprivation of Ralls’ property rights without due process. The court determined that state law property interests attached when Ralls acquired the property interests, and these interests were not contingent, regardless of any potential for federal intervention by CFIUS. Further, Ralls did not waive its property rights by failing to seek CFIUS approval, particularly since CFIUS review is voluntary, and approval can be sought after closing. Moreover, the court determined that the CFIUS process itself does not afford sufficient due process, notwithstanding that the parties interacted with, and presented information to, CFIUS during the review process. The court determined that the CFIUS review alone was insufficient because without knowing CFIUS’s specific concerns, Ralls never had the opportunity to tailor its submissions to the government’s concerns or rebut the factual premises underlying the President’s action.

The court ruled that parties cannot be deprived of a vested property interest without first receiving notice of the intended decision, access to the unclassified evidence supporting the conclusion, and an opportunity to rebut that evidence. The court indicated that CFIUS could also satisfy the President’s due process obligation during its review because the President makes a decision only after reviewing the record compiled by CFIUS. The court also noted that this due process was required regardless of whether it would lead to a different result; indeed the court acknowledged that the President’s ultimate decision, and the considerations on which it is based, are not subject to judicial review under FINSA. The court emphasized, however, that due process does not require releasing classified information to the parties, nor must the President reveal his thinking on sensitive questions pertaining to national security when reviewing transactions. Because executive privilege was not raised until oral arguments, the court remanded to the District Court the issue of whether executive privilege could prevent the disclosure required by the court.

“The court ruled that parties cannot be deprived of a vested property interest without first receiving notice of the intended decision, access to the unclassified evidence supporting the conclusion, and an opportunity to rebut that evidence.”

The court also addressed Ralls’ original challenges to the CFIUS mitigation order, which the District Court had dismissed as moot once the CFIUS order was superseded by the President’s order. Although the court agreed with the mootness conclusion, it found that this case fell within the “capable of repetition yet evading review” exception to mootness. A lawsuit satisfies this exception when the duration of the challenged action is too short to be litigated fully before the cessation or expiration of the challenged conduct (typically two years) and the plaintiff is reasonably expected to be subject to the same action in the future. In light of the relatively short term of the CFIUS process and the potential for Ralls to encounter similar resistance from CFIUS in future transactions, the court reversed the District Court’s dismissal and ordered the District Court to consider the merits of Ralls’ claims regarding the CFIUS mitigation order. This could have significant implications because Ralls’ challenge of the CFIUS mitigation order calls into question the breadth of CFIUS’s authority when issuing mitigation in transactions. Historically, cases have rarely gone to the President for adjudication, in part because CFIUS has broad power to require mitigation conditions, short of explicitly ordering divestment, to address any national-security concerns.

This ruling may not be the final word, as the government could ask the court to reconsider the case en banc, or it could appeal the decision to the US Supreme Court. Additionally, notable questions may be considered on remand to the District Court, including whether executive privilege shields the requisite disclosures and whether there are restrictions on CFIUS’s authority in ordering mitigation measures. If the ruling stands, at least in some cases it would likely increase transparency in the typically secretive CFIUS process, which may give companies a better opportunity to address perceived national-security concerns upfront. It also remains to be seen whether this decision will be limited to cases where the President intends to block a transaction, or if parties may succeed in claiming these due-process rights in other cases, such as where CFIUS intends to impose mitigation requirements.