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.

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