A US Appellate Court has ruled for the first time that the US government must provide access to at least some of the evidence relied upon    by the President and the Committee on Foreign Investment in the United States (CFIUS) when conducting national security reviews of foreign acquisitions of US businesses.

Facts and Decision

On Tuesday, July 15, 2014, the US Court of Appeals for the District of Columbia held in Ralls v. CFIUS that President  Barack Obama’s September 28, 2012 Order Regarding the Acquisition of Four U.S. Wind Farm Project Companies by Ralls Corporation (Presidential Order) blocking Ralls Corporation – a Delaware corporation owned by two Chinese nationals – from purchasing wind farms in Oregon deprived the company of its constitutionally-protected property interests without due process of law. The President had issued the order pursuant to a recommendation by CFIUS, which determined in a July 25, 2012 Order Establishing Interim Mitigation Measures (CFIUS Order) that the transaction threatened US national security. Neither CFIUS nor the President notified Ralls of the evidence on which they based their determinations, and the Court of Appeals found that they did not give Ralls a satisfactory opportunity to rebut  that evidence. Consequently, in overturning the district court’s ruling, the Court of Appeals held that Ralls was deprived of its significant property interests – valued at US$6 million – without adequate procedural protections required by the US Constitution. Even if CFIUS reaches the same outcome after Ralls reviews and rebuts the evidence against it, the Ralls decision represents a  sea change in the level of transparency the US must afford to foreign-owned entities that it regulates.

Background

In March 2012, Ralls purchased four US companies (Project Companies) previously formed to develop four wind farms in Oregon. Three of the wind farm sites are located within seven miles of a restricted airspace and bombing zone maintained  by the US Navy, and the fourth is located within the restricted airspace.

On June 28, 2012, Ralls submitted a notice of its acquisition of the Project Companies to CFIUS. Following the initial 30-day review period, CFIUS determined that Ralls’ acquisition of the Project Companies posed a national security threat and issued the CFIUS Order, requiring Ralls to: (1) cease all construction and operations at the windfarm sites; (2) remove all stockpiled and stored items from the sites; (3) cease all access to the projects; and (4) refrain from completing any sale of the Project Companies or their assets until Ralls removed all items from the sites (including concrete foundations), notified CFIUS of   the sale, and allowed CFIUS ten business days to object to the transaction. In response, Ralls sued CFIUS in district court, seeking to invalidate the CFIUS Order and enjoin its enforcement.

Two weeks later, President Obama issued the Presidential Order prohibiting the transaction. The order stated that the President found there was credible evidence to believe Ralls might take actions that threatened to impair US national security, and other provisions of law did not give the President adequate authority to protect against such actions. Importantly, the Presidential Order did not provide any basis for the President’s findings.

Ralls then amended its complaint, adding a challenge to the Presidential Order alleging, among other things, that the CFIUS Order and Presidential Order violated the Due Process Clause of the Fifth Amendment to the US Constitution. The district court dismissed Ralls’ CFIUS order claims as moot and its due process challenge to the Presidential Order as failing to state a claim. The Court of Appeals reversed on the following grounds.

First, the appellate court held that it had jurisdiction to hear  Ralls’ due process claims. While courts are barred by statute from reviewing final actions that the President takes “to suspend or prohibit any covered transaction that threatens to impair the national security of the United States,” 50 U.S.C. app. § 2170(d) (1), the courts maintain jurisdiction to review constitutional claims challenging the process preceding such action.

Next, the court held that the Presidential Order did not raise a non-justiciable political question. Under the political question doctrine, matters of foreign policy and national security are rarely proper subjects for judicial review. However, Ralls sought review of a CFIUS procedure, not the substance of the Presidential Order, and according to the court, interpreting the Due Process Clause of the U.S. Constitution is clearly a “role the Framers entrusted to the judiciary.”

In reviewing Ralls’ due process claims on the merits, the court held that the Presidential Order deprived Ralls of its property interests in the Project Companies and their assets without the constitutionally-required procedural safeguards. According to the court, due process requires that, at minimum, an affected party be: (1) informed of the action to be taken against it; (2) given access to the evidence on which the official actor relied; and (3) afforded an opportunity to rebut that evidence. Ralls   was not given any of these procedural protections before the President prohibited its purchase of the Project Companies. The court noted, “That Ralls had the opportunity to present evidence to CFIUS and to interact with it…is plainly not enough to satisfy due process because Ralls never had the opportunity to tailor its submission to the [government’s] concerns or rebut the factual premises underlying the President’s action.”

The Court of Appeals remanded the case to the district court  with instructions that Ralls must receive the requisite procedural safeguards outlined above, including access to the unclassified evidence on which the President relied in blocking the transaction. The court was careful to note that due process does not require disclosure of classified information supporting the Presidential Order, finding that “a substantial interest in national security supports withholding only the classified [i.e., secret] information.” The appellate court also left to the district court to consider on remand whether executive privilege shields any of the ordered disclosures.

Summary

The Ralls v. CFIUS decision could cause a sea change in the way foreign acquisitions are reviewed by the US government. Until now, the government has not afforded foreign-owned companies such substantial rights to evidence and procedural protections when acquiring US companies. It will be important to monitor how this case proceeds on remand in order to fully assess the significance of this new ruling. It is also possible that the US government might seek rehearing or review of the decision before the United States Supreme Court.