United States: Federal Court Affirms Broad, Largely Unreviewable Presidential Powers To Force Divestment Of Foreign Investments In U.S. Businesses

In its two decisions in Ralls Corporation v. Committee on Foreign Investment in the United States, the U.S. District Court for the District of Columbia became the first court in the nation to address (1) the breadth of the President's remedial powers under section 721 of the Defense Production Act of 1950, as amended (Exon-Florio), and (2) whether judicial review is available for an order by the President under that law requiring a foreign person to divest a U.S. business. Together, the two decisions stand for the propositions that the President has very broad remedial powers under Exon-Florio that are largely unreviewable by the courts.

This client alert summarizes the key components of the two Ralls decisions. The full text of the court's decisions are available here1 and here.2

Exon-Florio Process

Under Exon-Florio and its implementing regulations, the power to review the national security effects of any particular foreign investment in the United States is vested in the President acting through the Committee on Foreign Investment in the United States (CFIUS). CFIUS is a committee composed of the U.S. Attorney General, the heads of the Office of U.S. Trade Representative and Office of Science & Trade Policy, and the Secretaries of the U.S. Departments of Treasury, Homeland Security, Commerce, Defense, State and Energy (or their respective designees). Other designated offices, such as the National Security Council and the National Economic Council, observe and, as appropriate, participate in CFIUS' activities. The Director of National Intelligence and the Secretary of Labor serve as non-voting members of CFIUS and representatives of other government agencies or departments may join CFIUS as the President determines is appropriate.

A review can be initiated voluntarily by the parties to a transaction or by any CFIUS member that is aware of it. Once a review has been initiated, CFIUS has 30 days in which to determine the transaction's effects on national security. If CFIUS finds that the transaction threatens national security (and the national security concerns have not been mitigated), or if the transaction falls into certain specific categories, then CFIUS proceeds to a 45-day investigation phase. As part of the investigation, CFIUS has the authority to negotiate, impose and enforce any agreement or condition it believes is necessary to mitigate the threat to national security.

At the end of the 45-day investigation period, CFIUS can decide to take no further action (effectively allowing the transaction to go forward with whatever mitigation agreements the parties have negotiated with CFIUS) or it may submit the matter to the President for further consideration. The President has 15 days in which to announce his decision on matters submitted to him. Exon-Florio grants the President the authority to "take such action for such time as the President considers appropriate to suspend or prohibit" the transaction in question. If a transaction is submitted to CFIUS for review and CFIUS or the President permits the transaction to proceed, then the President may not subsequently order the foreign buyer to divest the acquired business. On the other hand, and critically important in the Ralls case, if a transaction involving a foreign buyer and an effect on national security is not submitted to CFIUS for review, it is possible for the President to order divestiture or other relief at any time, even after the transaction has closed.

Ralls Background

In March 2012, Ralls Corporation (Ralls) purchased four limited liability companies (Project Companies) with wind farm projects in north-central Oregon. Ralls, a Delaware corporation, is owned by two Chinese nationals who are also senior executives of Sany Group, a Chinese manufacturing company. Three of the wind farm sites owned by the Project Companies are near restricted airspace used by U.S. military aircraft. The fourth is within that restricted airspace. The transactions were not submitted to CFIUS for pre-acquisition review.

In early June 2012, the U.S. Treasury Department learned about the transaction and asked Ralls to make a "voluntary" CFIUS submission; it also advised Ralls that the U.S. Department of Defense would initiate CFIUS review if Ralls did not do so. On June 28, 2012, Ralls submitted a voluntary notice to CFIUS seeking review of the wind farm acquisition and then met with CFIUS the next day.

On July 25, 2012, within the 30-day review period mandated by Exon-Florio, CFIUS commenced the investigation phase and issued an interim order (CFIUS Order) broadly requiring Ralls to cease all activities at the four wind farm sites, to remove items from those sites, to restrict access to those sites to U.S. citizens approved by CFIUS, to refrain from selling any items manufactured by Sany to third parties, and to refrain from selling the wind farm projects to any third parties without prior notice to (and consent from) CFIUS. On September 13, 2012, within the 45-day deadline for completing an investigation, CFIUS transmitted a report to the President. The government did not provide a copy of the report (or even excerpts thereof) to Ralls (as none was required to be provided under Exon-Florio or the implementing rules).

On September 28, 2012, the President issued his own order making certain findings and requiring certain actions (Presidential Order). The President found that there was credible evidence that led him to believe that Ralls, Sany and others, through the control of the wind farms "might take action that threatens to impair the national security of the United States" and that provisions of existing law did not mitigate these threats. The Presidential Order did not identify what those actions or threats were. The Presidential Order also replaced the CFIUS Order's restrictions and imposed its own, similar restrictions.

FirstRalls Decision

On September 12, 2012 (i.e., the day before CFIUS' 45-day investigation period ended and prior to the issuance of the Presidential Order), Ralls filed a complaint against CFIUS in the U.S. District Court for the District of Columbia. After the issuance of the Presidential Order, Ralls amended its original complaint to add the President as a defendant. The amended complaint alleged that the CFIUS Order exceeded CFIUS' statutory authority and was arbitrary and capricious (Counts I and II), that the President's actions were ultra vires (Count III), and that the CFIUS Order and the Presidential Order unconstitutionally deprived Ralls of property without due process of law (Count IV) and also violated its equal protection rights (Count V).

In a case of first impression, the court dismissed Counts I and II as moot (since the Presidential Order replaced the CFIUS Order subject to these counts) and addressed Counts III, IV and V of the amended complaint as they related to the Presidential Order.

Count III: Ultra Vires. The court first turned its attention to Ralls' contention that certain aspects of the Presidential Order were ultra vires. Initially, the court observed as a general matter that executive actions—even those that implicate national security—are not inherently unreviewable. The court concluded that precedent suggests "that there is non-statutory authority permitting a court to interpret the legislation in question and articulate the boundaries of a statutory grant of power to the executive."3

The court noted that the U.S. Court of Appeals for the District of Columbia Circuit had previously found that there is a presumption of judicial review and that there must be "clear and convincing" evidence that Congress intended to cut off such review. In Ralls, however, the court found this evidentiary standard was satisfied easily because Exon-Florio expressly contemplates limits on judicial review: "The actions of the President under paragraph (1) of subsection (d) of this section and findings of the President under paragraph (4) of subsection (d) of this section shall not be subject to judicial review."4

In sum, in the court's view, the President's findings pursuant to paragraph (4) of subsection (d) of Exon-Florio (i.e., that there was credible evidence leading him to conclude that the foreign interest might take action that impairs national security and that other provisions of law do not provide adequate and appropriate authority to protect national security) were not judicially reviewable. Once those findings were made, the President had the unreviewable authority to "take such action for such time as the President considers appropriate to suspend or prohibit any covered transaction that threatens to impair the national security of the United States."

The court also rejected Ralls' argument that the President could only suspend or prohibit a transaction and, therefore, could not impose restrictions on the sale of the projects or the disposition of the turbines. The court found that Exon-Florio granted the President extremely broad authority and allowed the President "to do what he deems necessary to accomplish or implement the prohibition—not merely to issue it."5

Count IV: Due Process. Although the court found that Congress intended to preclude review of the ultra vires and (as described below) equal protection claims, the court did not similarly conclude that Congress intended to divest the courts of any ability to hear a due process claim related to Exon-Florio. The court denied the motion to dismiss Count IV, but later considered a second motion to dismiss Count IV, as discussed below.

Count V: Equal Protection. Ralls styled Count V as a constitutional challenge under the Equal Protection Clause. Its claim in this regard was that it had been unjustly accorded treatment that was different from the treatment accorded to others who were similarly situated. However, the court found that "at bottom [this claim] asks the Court to review the merits of the President's decision."6 The court found that, to adjudicate this claim, it would have had to review the President's findings and the reasons behind them, which it already had found it was prohibited from doing.

Second Ralls Decision

In its decision dated October 10, 2013, the court addressed a second motion to dismiss Count IV and the two questions left open by the court's earlier decision: (1) whether Ralls had acquired any constitutionally-protected interests when it acquired the wind farm assets and (2) whether, if it had, Ralls had been afforded the process that it was due.

As to the first question, the court answered emphatically that Ralls had not in fact acquired any protected interests when it acquired the Project Companies. Largely adopting the government's analysis, the court observed that Ralls "undertook the transaction and voluntarily acquired those state property rights subject to the known risk of a Presidential veto."7 Moreover, because Ralls had been afforded—but declined—the opportunity to obtain a pre-acquisition review of the transaction, the court concluded it was inappropriate to apply the due process analysis that would have applied if there was no opportunity for pre-acquisition review. Finally, given the President's broad and unreviewable discretion to prohibit a covered transaction, the court found that Ralls did not acquire any property interest in a particular outcome (i.e., permanent ownership of the Project Companies) that merited due process protection under the Constitution.

As to the second question, the court found that, even if Ralls had acquired a protected interest entitled to due process, it had received sufficient due process. As the court held, "[a]ll that is required before the deprivation of a protected interest is 'notice and opportunity for hearing appropriate to the nature of the case.'"8 In this particular case, the court found that the undisputed facts revealed that Ralls was given notice before a decision was made and that its views were submitted to CFIUS. These findings left merely the argument that Ralls was entitled to know the President's unclassified reasons for prohibiting the transaction and to have an opportunity to rebut those reasons. The court concluded that, in light of the process that Ralls was already afforded and the limited nature of the additional process that it sought, the factors "in this case weigh overwhelmingly in favor of the government." The court, therefore, dismissed the remaining count of Ralls' complaint.

Conclusion

The court's decisions in Ralls represent a complete (or at least near complete) endorsement of a broad executive power under Exon-Florio and a significant victory for the federal government. The case highlights the potential dangers of failing to seek CFIUS clearance where a foreign buyer is seeking to acquire U.S. assets even when the primary national security issues are unclear and the governmental interest might be mere physical proximity to military installations or other sensitive installations.

Footnotes

1.926 F. Supp. 2d 71(D.D.C. 2013) (Ralls I).

2.No. 12-1513 (ABJ), 2013 WL 5583847 (D.D.C. Oct. 10, 2013) (Ralls II).

3.Ralls I at 86.

4.50 U.S.C. app. § 2170(e).

5.Id. at 89.

6.Ralls I at 92.

7.Ralls II at 7 (emphasis added).

8.Id. at 10, quoting Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 542 (1985).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions