United States: D.C. Circuit Holds That CFIUS Must Provide Due Process Before Prohibiting A Transaction

Last Updated: August 1 2014
Article by Keneth J. Nunnenkamp, Chad O. Dorr and Bevin M.B. Newman

The U.S. Court of Appeals for the D.C. Circuit has issued a landmark opinion granting due process rights to parties whose transactions have been blocked or suspended by the President of the United States following a national security review and investigation by the Committee on Foreign Investment in the United States ("CFIUS" or the "Committee"). By reversing the district court's dismissal of claims against CFIUS and the President in Ralls Corp v. Committee on Foreign Investment in the United States, No. 13-5315 (D.C. Cir. July 15, 2014), the panel confirmed that the Ralls Corporation ("Ralls" or the "Company") had acquired property with vested constitutional rights to due process, which CFIUS and the President failed to provide during the course of the CFIUS review. In doing so, the D.C. Circuit also determined that CFIUS mitigation orders are subject to constitutional challenges even though the Exon-Florio Amendment to the Defense Production Act ("DPA"), which establishes the CFIUS process, states that actions and findings of the President under the DPA are not subject to judicial review.

CFIUS Process

The Exon-Florio Amendment to the DPA authorizes CFIUS to review mergers, acquisitions, and other transactions by which foreign persons may control a U.S. business, to determine whether the transaction affects the national security of the United States. The Foreign Investment and National Security Act of 2007 ("FINSA") confirmed this authority and established CFIUS as a statutory body. Parties who believe their transaction is "covered" by the DPA and the CFIUS regulations file a notice with the Committee, thereby subjecting the transaction to a multi-agency review process. CFIUS may also initiate a review of a transaction when requested by a Committee member or the Treasury Department, as the chair of the Committee. The initial CFIUS review is limited to 30 days. If CFIUS determines that unresolved issues of national security exist, it may launch a 45-day investigation into the transaction. Following that review, if CFIUS believes the transaction still poses unmitigated security risks, it must forward its recommendation to suspend or prohibit the transaction to the President, who must act within 15 days. The DPA states that the actions of the findings of the President "shall not be subject to judicial review." Transactions that do not pose unresolved national security risks will receive CFIUS approval and cannot be re-reviewed unless the parties' notice is materially inaccurate or incomplete.

Factual Background

In a series of transactions in 2012, Ralls, a U.S. entity owned by two Chinese nationals, purchased four limited liability companies formed to develop wind farms in north-central Oregon (the "Project Companies"). The Project Companies held various assets including property leases for wind farm sites that are located beneath and near restricted airspace used as a bombing and training range by the U.S. Navy. Several of the established wind turbines in the area—including those within the boundaries of the bombing range—are foreign-owned or foreign-made.

Ralls closed the transactions for the Project Companies and began construction on the various project sites. Although it had been working with the Navy during project planning (and moved the location of one of its projects at the Navy's urging), Ralls elected not to file a voluntary notice to CFIUS prior to concluding the transactions. Instead, CFIUS informed Ralls that the Defense Department intended to initiate a review if Ralls did not file a notice. Ralls thereafter filed the notice, responded to several questions during the CFIUS review, and provided a presentation to the Committee. During the 30-day review and 45-day investigation, CFIUS determined that Ralls's acquisition of the Project Companies posed a national security risk and promulgated interim mitigation measures through two orders directing that Ralls cease construction, remove stockpiled equipment from the project properties, and notify CFIUS of any sale of the Project Companies. Following the investigation, the matter was referred to the President, who found that the transaction threatened the national security. Based on that finding, the President ordered Ralls to divest its interest in the Project Companies along with other restrictions regarding access and use of the sites.

Neither CFIUS nor the President informed Ralls of the evidence that it relied upon to determine that the transaction posed a national security threat, nor gave Ralls an opportunity to rebut that evidence. Ralls challenged the CFIUS and presidential orders on various grounds in the U.S. District Court for the District of Columbia ("D.D.C."). The D.D.C. initially dismissed all claims on jurisdictional grounds except for the constitutional challenge under the Fifth Amendment that the government had deprived Ralls of its property right without due process. The court later dismissed the due process claim, finding that Ralls's property interests were not constitutionally protected because the Company acquired the property knowing the acquisition was subject to the risk of a presidential veto and waived the opportunity to obtain CFIUS approval before closing the transaction.

The D.C. Circuit Reversal

In July of this year, the D.C. Circuit reversed the lower court's dismissals on all counts. The court found that Ralls had a vested, constitutionally protected property right in the Project Companies. Thus, it reviewed the information CFIUS provided Ralls before the President undid the transaction and found that the process was inadequate to meet constitutional standards. The court held that Ralls had a right to review the unclassified evidence that led to the government's action and to have an opportunity to rebut that evidence. Although Ralls participated in the CFIUS process and was given an opportunity to respond to queries from the Committee, the court determined that government did not present Ralls with the unclassified evidence that led it to conclude that the transaction posed a threat to national security, nor did it give the Company an opportunity to rebut that evidence. Significantly, the court held that the government did not have to provide the Company with access to classified evidence. The court limited the due process owed to access to the unclassified evidence against Ralls.

The court also revived Ralls's other claims against the government, finding that the district court had improperly ruled that it did not have jurisdiction over the claims related to the interim CFIUS orders. Those claims had been dismissed as moot because the presidential order had superseded the CFIUS orders. Instead, the D.C. Circuit held that because of the short duration of the CFIUS process, orders by CFIUS were capable of evading judicial review, and thus Ralls had standing under the exception to the mootness doctrine.

Significance of the Ruling

The D.C. Circuit's reversal of the district court's dismissal on all counts is significant for several reasons. First, it imposed a due process requirement on the CFIUS process never before recognized. The Committee and parties to a filing exchange information regarding the transaction that provides parties some insight into CFIUS's potential concerns. But this process is not detailed in the regulations and remains ad hoc. By finding that the parties are entitled to unclassified evidence upon which the government relied, the court introduced some rigor into the informal exchanges that occur and established a baseline upon which parties can rely. This process, moreover, must be conducted before any presidential order to prohibit the transaction. Because the DPA gives the President only 15 days to act, in practical terms, this means CFIUS will have to accommodate this process during its 30-day review and 45-day investigation period. For transactions that raise significant issues, this will likely compress the time available for CFIUS to investigate the transaction and determine whether to recommend that the President prohibit the transaction.

Second, the D.C. Circuit held that although the DPA shields the President's findings and actions to prohibit a transaction from judicial review, certain collateral challenges are justiciable issues. Thus, while parties to a transaction may not be able to challenge the President's conclusion that a transaction threatens U.S. national security, they may be able to bring various challenges to the method by which the President reached this conclusion. In addition to due process claims, like that at issue in the Ralls case, such challenges could potentially include equal protection claims or claims that the parties are entitled to "just compensation" under the Takings Clause of the Fifth Amendment.

Third, although Ralls may have won the court battle, it may not ultimately win the war. The D.C. Circuit emphasized that although presidential blocking of transactions requires due process, that process affords the challenger only the opportunity to review unclassified evidence and to rebut that evidence. The President need not disclose either classified evidence or "his thinking on sensitive questions related to national security." The court also expressed uncertainty whether more process would have led to a different result. Ralls may get its day in court, but its prospects of building out the Project Properties may not have significantly improved if the government does not explain the rationale behind the prohibition.

Finally, the practical impact of the D.C. Circuit's ruling remains to be seen. It is possible that the government will seek further review by the full D.C. Circuit en banc court and/or the U.S. Supreme Court. In addition, the D.C. Circuit's ruling directly affects only cases in which CFIUS or the President seek to block a transaction; it is, as yet, unclear whether and to what extent it will indirectly affect the vast majority of CFIUS filings where CFIUS approves the transaction either unconditionally or subject to mitigation measures voluntarily agreed to by the parties.

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.

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