On October 29, 2012, the United States Department of Justice filed a motion to dismiss a historic lawsuit filed on September 12 by the Ralls Corporation, a US company owned by two Chinese nationals affiliated with China’s Sany Group, against the President of the United States, the Committee on Foreign Investment in the United States (CFIUS) and the Secretary of the Treasury. The lawsuit challenges an order by CFIUS requiring Ralls to divest windfarms it had purchased in Oregon—and a subsequent order by President Barack Obama prohibiting the acquisition on grounds that it threatened to impair the national security of the US. The Presidential order requires Ralls to divest all interests in the target companies, including intellectual property, technology, personnel and customer contracts.

The case began with Ralls’ acquisition of membership interests in four Oregon windfarm projects. Ralls intended to build the windfarms and enter into long-term contracts that would connect the farms to the transmission grid in the western US that is controlled by PacificCorp, a company that owns wind energy generating facilities. Shortly after the acquisition, the US Navy objected to the location of one of the windfarms and asked that it be moved, stating that it conflicted with low-level military aircraft that train nearby in restricted airspace. Although Ralls agreed to relocate the windfarm, the Navy told the Oregon Public Utility Commission that they were still concerned that having wind turbines in either location “may have negative national security implications.”

Importantly, the Ralls acquisition closed without being first submitted to CFIUS, the multi-agency federal committee that reviews foreign acquisitions of US companies that could affect the national security of the US. After the deal closed, CFIUS invited Ralls to file a notice. At the time, Treasury Deputy Assistant Secretary Mark Jaskowiak reportedly advised Ralls to hold off construction until the review was completed and warned that Ralls would assume the risk of any loss due to an adverse CFIUS determination if it persisted with construction.

Although CFIUS review is voluntary, the law provides what the Justice Department terms “powerful incentives” for companies to file, because “once ... the CFIUS process runs its course, the parties know that, if the President did not exercise his powers under the Act he will not be able to do so in the future (absent a material misrepresentation or omission on the part of the parties) ....”1 The Government’s brief quotes former Deputy Treasury Secretary Robert Kimmit as stating that he “cannot imagine in the post- Sarbanes-Oxley world ... how any director could give the go-ahead on a transaction [that had not been filed], because the President’s authority to unwind the transaction is without limit if the person has not received approval of the process1....”2 Indeed, a review can be initiated at any time, even months or years after a deal closes, and the Ralls acquisition is far from alone in being challenged post-closing. In practice, however, very few cases go to the President for review. Most reviews are completed without adverse action. The cases that present problems are either withdrawn when challenge is apparent, or resolved through mitigation agreements. Prior to President Obama’s divestment order in the Ralls case, no transaction had been formally vetoed since 1990, when President George H. W. Bush ordered the divestiture of China National Aero-Technology Import and Export Corporation’s interest in Mamco Manufacturing Co.

When announced, the CFIUS “Order Establishing Interim Mitigation Measure” was comprehensive— prohibiting all construction and operations, requiring removal of all stockpiled and stored items, and barring Ralls from access to the property (with the exception of US citizens under contract to remove any items from the properties in compliance with the order). Thereafter, CFIUS issued an amended order prohibiting (among other things) the sale of the properties to any third party until all items “deposited, installed, or affixed (including concrete foundations)” after the Ralls acquisition had been removed, CFIUS had been notified, and CFIUS had not objected to the proposed buyer within 10 days. Though some commentators have expressed surprise that CFIUS would constrain Ralls’ ability to sell its interest after ordering divestment, the restriction is common in such cases, and is meant to help CFIUS maintain control of the process, thereby ensuring that the deal does not slip from the proverbial frying pan into the fire.

The lawsuit challenges the CFIUS order and the Presidential order as unlawful and unauthorized, as ultra vires acts, violations of both the statute that gives CFIUS (and the President) their authority as well as of the Administrative Procedures Act, and as an unconstitutional “taking” of Ralls’ property without due process of law.

The Justice Department seeks dismissal of the lawsuit for lack of jurisdiction, noting that the enabling legislation (sometimes called the “Exon-Florio Amendment” after its original Congressional sponsors) expressly provides that the actions and decisions of the President following CFIUS reviews “shall not be subject to judicial review.”3 The Department also argues that the challenge to the interim order was mooted by the President’s order, and that (notwithstanding the arguments of Ralls’ attorneys) the interim order is not “capable of repetition, yet evading review,” noting that each acquisition presents unique circumstances, and pointing out that Ralls has completed other windfarm projects without objection from CFIUS. As for the constitutional challenge, Ralls’ argument that the divestiture amounts to an unconstitutional taking is dismissed as “insubstantial”:

Ralls, like any other foreign acquirer of a United States entity in a transaction that implicates national security, had no legitimate claim of entitlement to complete its acquisition without CFIUS approval .... [T]he Defense Production Act contemplates that parties will voluntarily file a notice of their intended transaction with CFIUS before completing the transaction, and a party that does not do so takes the risk that its transaction will be unwound. For that reason, no well-advised purchaser would proceed with a transaction that raises potential national security concerns without first seeking CFIUS clearance.4

The key defense, of course, is the fact that Congress expressly immunized Presidential orders in CFIUS cases against judicial review. The statutory protection is in keeping with the longstanding view that the Executive should have wide latitude in matters involving foreign policy and national security. “Ralls’s challenge to the Presidential Order would require the Court to entangle itself in the President’s determinations concerning foreign relations and national security,” the Justice Department argues in pressing for dismissal,5 noting that the Supreme Court “has long recognized” that “the very nature of executive decisions as to foreign policy is political, not judicial. They are and should be undertaken only by those directly responsible to the people whose welfare they advance or imperil.”6

When the President’s order was announced, the Treasury Department took pains to say that “[t]he President’s action demonstrates the Administration’s commitment to protecting national security while maintaining the United States’ longstanding policy on open investment,” adding that the President “is committed to ensuring the fair and equitable treatment of all foreign investors” and that “[t]he President’s decision is specific to this transaction and is not a precedent with regard to any other foreign direct investment from China or any other country.”7

Notwithstanding the Treasury Department’s statement, the Ralls case has raised concern over the future of Chinese investment in the US, even at a time when Chinese investment in the US is expected to rise substantially.8

To be sure, there are a number of lessons to be taken from the Ralls case, regardless of the outcome of the litigation, which is widely expected to uphold the President’s authority, but a black mark for Chinese investment is not one of them:

  • Filing for CFIUS review is prudent for any foreign acquisition that implicates US national security, even if the concerns only arise because of the proximity of the target to military or other national security-related installations.
  • CFIUS can and will intervene in deals after they close if they are not presented for review before they close. Government reviews can create delays and increase costs, but divestment is a high price for avoiding review.
  • The Treasury Department’s September 28 statement and the Justice Department’s brief make it clear that this case is not about Chinese investment, as is demonstrated by the billions of dollars in Chinese investment in the US that go unchallenged every year. While investments from countries that have a history of industrial espionage will always get special scrutiny, as will investments from countries (like China) that are subject to US arms embargoes, the reality is that any acquisition from any country or in any area that presents national security concerns is going to get the attention of CFIUS.
  • It is much harder to fix problems after a transaction has closed.

It is impossible to predict the future course of this litigation. Whichever way the District Court decides, the case could be appealed to the Supreme Court— and appeal is virtually certain if the Court seeks to rebuff the Presidential order. A win for the plaintiffs would have a substantial impact on the future course of CFIUS reviews, as it would potentially open any decision to judicial scrutiny, emboldening foreign investors and making mitigation efforts all the more combative. But a win for the Government does not necessarily mean a return to “business as usual.” Given that there are no firm rules or boundaries when CFIUS writes mitigation orders, the Ralls case raises a number of legitimate questions about the CFIUS process, and may serve to chasten the Committee against overreaching.