If the recent D.C. Circuit decision in Ralls Corp. v. Committee on Foreign Investment in the United States, et al., No. 13-5315 (D.C. Cir. July 15, 2014) stands, it may change the review process, if not the outcome, of reaching a Committee on Foreign Investments in the United States (“CFIUS”) recommendation or Presidential determination concerning a foreign person’s acquisition of control of a US business. At present, the government is under no obligation to share any information whether classified or unclassified concerning the basis for its determination and, typically, does not share any such information. Although the Ralls decision does not require CFIUS to provide classified information to foreign investors, the U.S. government may be required, depending on the circumstances, to provide a foreign company whose acquisition is under CFIUS review with any unclassified information relevant to the determination and to allow the foreign company to respond to that information as part of the review. This change would give foreign investors the chance to provide focused responses to certain of CFIUS’s concerns. However, because the ultimate determination can continue to be based on classified information, which is not shared, the foreign company remains at a significant disadvantage and cannot challenge the ultimate determination.
The CFIUS Review Process
The US government officially maintains an open investment policy that treats all foreign countries the same. CFIUS is the interagency committee that reviews the national security implications of the acquisition of “control” by a foreign person of a US business under the Exon-Florio Amendment, Section 721 of the Defense Production Act of 1950, as further amended by the Foreign Investment and National Security Act of 2007. It is very rare for the President to block or unwind a transaction after the fact, but President Obama ordered the Ralls windfarm transaction to be unwound in 2012. Only a few other transactions have suffered a similar fate but a larger number have been withdrawn because of political opposition or because the terms proposed by CFIUS to mitigate its national security considerations are unacceptable to the parties.
Ralls challenged the President’s decision requiring the company to divest its U.S. acquisitions on U.S. constitutional and other grounds. Ralls’ challenge was dismissed on jurisdictional grounds by the US District Court for the District of Columbia. On appeal to the United States Court of Appeals for the DC Circuit the DC Circuit reversed the decision of the District Court and remanded the case to the District Court for further proceedings.
The Key Holding in Ralls
The Ralls appellate court held that due process may require the U.S. government to provide a company subject to a CFIUS review with the unclassified information against it and to provide that company with the opportunity to rebut that unclassified information.1
While this holding recognizes a significant due process interest as to the CFIUS decision-making process, it is important to note that the court’s holding is very narrow. The U.S. government is not required to provide a company subject to a CFIUS review with classified information nor, correspondingly, to permit the company to rebut that classified information. Also, the U.S. government may not be required to provide unclassified information that is protected by executive privilege. Finally, the Ralls case does not allow the challenge of the President’s determination that Ralls’ acquisition posed a national security threat.
Still, the Ralls decision is important because it recognizes a constitutional protection not previously afforded to companies subject to CFIUS review. However, the U.S. government may appeal the D.C. Circuit opinion, either by seeking en banc review or petitioning for certiorari to the U.S. Supreme Court, and there will be further proceedings in the District Court on Rall's remaining claims and the issue of executive privilege for unclassified information.
Background on the Transaction
In March 2012, Ralls Corp. “purchased four American limited liability companies...previously formed to develop wind farms in north-central Oregon.” Slip Op. at 2, 7. Because Ralls Corp. is owned by foreign (Chinese) nationals, the acquisition was subject to review by CFIUS. CFIUS has the power to review any covered transaction “which could result in foreign control of any person engaged in interstate commerce in the United States.”2 Any covered party may initiate a CFIUS review by submitting a written notice to the CFIUS chairman, or if the parties do not choose to submit a voluntary notice.3 CFIUS may also initiate a review.4 On June 28, 2012, after Ralls Corp. acquired the wind farm companies, Ralls submitted a written notice to CFIUS, informing CFIUS about the March acquisition, and CFIUS chose to review the acquisition. During its reviews, CFIUS considers a range of factors to determine whether the transaction will affect national security.5 The Ralls review ultimately resulted in a Presidential order requiring Ralls to divest itself of the companies, their assets and operations.
The appellate court concluded that it had jurisdiction to hear Ralls’ claim that it had been deprived of procedural due process – i.e., that it had jurisdiction to hear Ralls’ claim that it had not received adequate process by the government before it was deprived of its property. The court concluded that, although CFIUS’s authorizing statute bars review of the Presidential action, the “text does not…refer to the reviewability of a constitutional claim challenging the process preceding…presidential action.”6 In reaching this conclusion, the court emphasized that the procedural due process question before it was a narrow question. The case did not “challenge (1) the President’s determination that its acquisition of the Project Companies threatens the national security or (2) the President’s prohibition of the transaction in order to mitigate the national security threat.”7
The D.C. Circuit also considered, among other questions, whether Ralls was afforded adequate procedural due process. It held that Ralls Corp. was deprived “of constitutionally protected property interests without due process of law.”8
Having concluded that Ralls had a protectable property interest under state law, the court held that “Ralls’s state-law property rights fully vested upon the completion of the transaction, meaning due process protections necessarily attached.”9 Because “[b]oth the Supreme Court and [the Appellate] Court have recognized that the right to know the factual basis for the action and the opportunity to rebut the evidence supporting that action are essential components of due process,” Ralls thus had a procedural due process right to “be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut the evidence.”10 That is, Ralls was deprived of its constitutionally protected property interests without due process because the government did not provide Ralls with the unclassified evidence against it or permit Ralls to respond to that unclassified evidence.
The court concluded that Ralls may be entitled to review non-classified evidenced against it “notwithstanding [the government’s] substantial interest in national security.”11 On the other hand, the court remanded to the lower court the question of whether such non-classified documents might be protected from disclosure by executive privilege, (which allows the government in some instances to protect information it creates or collects).12 If the district court determines on remand that the non-classified evidence is protected by executive privilege, the documents will likely not be provided by the U.S. government to Ralls.
Finally, the court noted it was uncertain whether “more process would have led to a different presidential decision.” 13 Although the Ralls opinion may require the government to provide Ralls with the non-classified evidence against it, it is far from certain that Ralls’ attempted rebuttal of that evidence will affect the eventual outcome in its case. In addition, the U.S. government may seek further review of the D.C. Circuit panel decision through an en banc review by the D.C. Circuit, or through a petition for certiorari seeking review of the decision by the U.S. Supreme Court.
In short, even if the D.C. Circuit panel decision is ultimately upheld, the U.S. government may still rely on classified information to reach a negative decision and does not have to disclose that information to the parties to the transaction. With respect to the Ralls case, the President may still reach the same conclusion as he did in 2012 — that Ralls’ acquisition poses a national security threat and Ralls must divest. Such Presidential findings and decisions will continue to be barred from judicial review.14