On September 18, 2020, the U.S. Department of Commerce (Commerce) released for public inspection substantively identical notices1 specifying the transactions relating to mobile applications TikTok and WeChat to be prohibited pursuant to the executive orders related to both entities issued by President Trump on August 6, 2020 (the TikTok Notice and the WeChat Notice, respectively, and together, the Notices).2 Commerce withdrew both Notices before formal publication on September 22, presumably to address uncertainty regarding the effective dates in light of developments in both matters; the TikTok Notice has already been re-issued with revised timing, but negotiations over a possible partial sale of TikTok continue.3 The WeChat Notice has yet to be re-issued, possibly as a result of timing uncertainty regarding the preliminary injunction discussed below.4
The key features of the Notices (which are preserved in the re-issued TikTok Notice and may or may not be reintroduced in relation to WeChat) are as follows:
- Personal and business users of the apps face no restrictions, inside or outside the United States (although service within the United States may be degraded).
- Support for the apps within the borders of the United States via app stores, development of apps incorporating WeChat or TikTok code, or internet hosting services will be prohibited, as is development or support of payment services connected with either app for use within the United States.
- U.S. companies remain free to develop apps for use with WeChat and TikTok outside the United States.
- All other transactions involving ByteDance and Tencent, the parent entities of TikTok and WeChat respectively, remain unrestricted.
As we predicted in a prior post,5 the restrictions imposed were much narrower than the limits of the authority conferred by statute and the underlying Orders and are aimed at impairing (but not fully prohibiting) use of the apps on U.S. networks rather than imposing sweeping sanctions against the companies involved.
As noted, the future of these proposed restrictions is a rapidly evolving question, and this note may be out of date as soon as it is posted. Even if none of the planned restrictions in the Notices come into effect for some time, or ever, their content is in any event instructive regarding the government's thinking.
I. Details of the Notices
While the TikTok and WeChat Orders, and the underlying International Emergency Economic Powers Act, give Commerce authority over all activities by U.S. persons or within U.S. jurisdiction, in contrast to the OFAC sanctions regimes the Notices by their substantive terms restricted their impact to activities physically within the United States and to infrastructure activities meant to support the targeted apps. Users of the apps are not directly subject to any restrictions.
The following business-to-business activities were prohibited:
(1) providing services to distribute or maintain the applications, constituent code, or application updates through an online mobile application store in the United States;
(2) services through WeChat to transfer funds or process payments to or from parties within the United States;
(3) internet hosting services, content delivery network services, and directly contracted or arranged internet transit or peering services that enable the functioning or optimization of the mobile application in the United States; and
(4) use of the mobile application's constituent code, functions, or services in the functioning of software or services developed and/or accessible within the United States (note that the restriction on "development" appears to be substantially mitigated by the exceptions below).
Note that while the substance of these restrictions is limited to activities relating to use of the apps within the United States, as noted the jurisdictional reach of the prohibitions is the same as that of U.S. sanctions, encompassing all activities by U.S. persons or within U.S. jurisdiction. Thus, while providing (for example) internet hosting services in Canada for Canadian users of the apps would not be prohibited, providing internet hosting services in Canada for users in the United States would be a violation if any U.S. person or transaction within U.S. jurisdiction (which notably includes U.S. dollar payments) are involved.
The Notices further clarify that the prohibitions do not apply to:
(1) payment of wages, salaries, and benefit packages to employees or contractors;
(2) the exchange between or among TikTok and WeChat mobile application users of personal or business information using the TikTok and WeChat mobile applications, including transferring and receiving funds;
(3) activities related to mobile applications intended for distribution, installation, or use outside of the United States by any person, including U.S. persons, and all ancillary activities ordinarily incident to, and necessary for, the distribution, installation, and use of mobile applications outside of the United States; or
(4) storing of TikTok and WeChat mobile application user data in the United States.
As noted, the Notices are aimed at the providers of infrastructure for the operation of TikTok and WeChat, not at individual users. They do not prohibit U.S. persons from using either application in the United States for personal or business reasons (i.e., U.S. persons are not required to delete the applications from their phones, nor would they be prohibited from downloading the apps in the future). However, TikTok and WeChat would not be available for download or update from U.S. app stores, and U.S. internet service providers will be unable to provide hosting services that improve the apps' functionality. As a result, users of either application in the United States may experience decreased functionality and performance over time and it may be more difficult to obtain, upgrade, and run the applications. Also, applications intended for use in the United States could not use or incorporate TikTok or WeChat code. This may require developers to create one version of an application for the United States that does not use or rely on TikTok or WeChat code and another version of the application for use outside the United States. On the other hand, the Notices appear to indicate that it is permissible to develop an application incorporating WeChat or TikTok code within the United States so long as the app is for use outside the United States. The prohibition on providing services through WeChat to transfer funds or process payments to or from parties within the United States appears to be aimed at financial institutions and credit card companies involved in such transfers, as it does not prohibit users from transferring funds to or from the United States via the app.
II. TikTok Status
As we discussed in a prior blog post,6 the TikTok matter involves not only the TikTok Order but also a CFIUS review of ByteDance's 2017 acquisition of Musical.ly. On August 14, 2020, President Trump ordered ByteDance to divest its interests and rights in any U.S. assets used to enable or support the U.S. operations of TikTok and all related Musical.ly and TikTok data obtained or derived from U.S. users within 90 days.7
On Saturday, September 19, Oracle and Walmart announced that they had tentatively agreed with ByteDance that Oracle would be the "secure cloud technology partner" for, and would take a 12.5% stake in, a new entity called TikTok Global that would operate TikTok in the United States and much of the rest of the world, and Walmart would take a 7.5% stake and become a commercial partner.8 The companies further announced that they, TikTok Global, and a number of TikTok investors "will create an educational initiative to develop and deliver an AI-driven online video curriculum to teach children from inner cities to the suburbs, a variety of courses from basic reading and math to science, history and computer engineering," that they planned to conduct an initial public offering of TikTok Global within one year, and that the transaction had been conditionally approved by the U.S. government. President Trump appeared to confirm this, saying "I have given the deal my blessing."9 When U.S. ownership of ByteDance is taken into account, that would give U.S. investors a greater than 50% interest in TikTok Global prior to the planned IPO.10
However, the proposed deal quickly came into question, with the parties disagreeing over whether ByteDance would retain an 80% stake in (and control over) TikTok Global or distribute the shares to its shareholders and the nature and scope of the educational fund unclear.11 The Chinese government also has not yet taken a public position on the transaction, though it appears that TikTok's algorithms (the recent subject of Chinese government restrictions) will not be given to TikTok Global. As of publication, the outcome of these disputes, and the ultimate approval by the parties and the U.S. and Chinese governments, remains uncertain.
The process remains completely extraordinary in light of the traditional confidentiality and national security focus of the CFIUS process. The agreement was reportedly negotiated directly among the chief executives of the U.S. investors and the White House, with the education fund apparently being added as a sweetener to obtain President Trump's approval according to press reports and the President himself.
III. WeChat Status
On September 19, 2020, a federal Magistrate Judge in California issued a preliminary injunction on First Amendment grounds prohibiting implementation of the WeChat Notice.12 The judge found that the plaintiffs raised substantial claims that the WeChat Order unduly restricted their First Amendment right to communicate with persons in China, as the Chinese government does not permit other messaging apps, and with Chinese persons in the United States, as alternative messaging apps do not adequately support Chinese language and culture. The argument is somewhat surprising, both in holding messaging apps as essential means of communication and in permitting the PRC government's choice to ban other messaging apps to mandate that the U.S. government must permit the use of WeChat, but the outcome remains to be seen. Commerce has announced that the government will appeal the preliminary injunction.13
IV. Broader Context
The Notices and the ByteDance CFIUS review mark the continued evolution of the U.S. government's scrutiny of Chinese access to U.S. networks and data. This scrutiny is not unique to these deals; indeed, media reports indicate that CFIUS is also scrutinizing Tencent's investments in U.S. gaming companies Epic Games Inc. and Riot Games.14 It also is not unique to the Trump Administration; CFIUS, its member agencies, and other government entities such as the FCC have long closely scrutinized the role of Chinese telecommunications equipment in U.S. networks and Chinese access to software collecting sensitive data on U.S. persons, stretching well back into the Obama Administration. This scrutiny is likely to continue regardless of the outcome of the November election, Trump Administration departures from procedural norms notwithstanding.
As with all recent matters involving relations between the United States with China, the situation regarding TikTok and WeChat remains fluid. We will continue to monitor and report on developments.
1. U.S. Dep't of Commerce, Identification of Prohibited Transactions to Implement Executive Order 13942 and Address the Threat Posed by TikTok and the National Emergency with Respect to the Information and Communications Technology and Services Supply Chain (Sept. 18, 2020); U.S. Dep't of Commerce, Identification of Prohibited Transactions to Implement Executive Order 13943 and Address the Threat Posed by WeChat and the National Emergency with Respect to the Information and Communications Technology and Services Supply Chain (Sept. 18, 2020).
2. E.O. 13942, 85 Fed. Reg. 48637 (Aug. 11, 2020) (TikTok Order), and E.O. 13943, 85 Fed. Reg. 48641 (Aug. 11, 2020) (WeChat Order, and together with the TikTok Order, the Orders). The Orders gave Commerce 45 days to specify exactly which transactions with TikTok and WeChat would be prohibited.
3. U.S. Dep't of Commerce, Identification of Prohibited Transactions to Implement Executive Order 13942 and Address the Threat Posed by TikTok and the National Emergency with Respect to the Information and Communications Technology and Services Supply Chain (Sept. 24, 2020), available at: https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-21193.pdf. Certain of these restrictions are currently scheduled to take effect on September 27, 2020, while others are scheduled to take effect on November 12, 2020.
4. As the WeChat Notice has not been reissued as of the time of publication, we have posted the original version on our website at https://www.clearytradewatch.com/wp-content/uploads/sites/410/2020/09/2020-20921-1.pdf.
5. Cleary International Trade & Sanctions Watch, President Trump Authorizes Restrictions On WeChat And TikTok; Details To Come (Aug. 7, 2020), available at: https://www.clearytradewatch.com/2020/08/president-trump-authorizes-restrictions-on-wechat-and-tiktok-details-to-come.
6. Cleary International Trade & Sanctions Watch, TikTok: Familiar Issues, Unfamiliar Responses (Aug. 6, 2020), available at: https://www.clearytradewatch.com/2020/08/tiktok-familiar-issues-unfamiliar-responses/.
7. Regarding the Acquisition of Musical.ly by ByteDance Ltd., 85 Fed. Reg. 51297 (Aug. 19, 2020).
8. Oracle Corp., Oracle Chosen as TikTok's Secure Cloud Provider (Sept. 19, 2020), available at: https://www.oracle.com/news/announcement/oracle-chosen-as-tiktok-secure-cloud-provider-091920.html; Walmart Inc., Walmart Statement About Potential Investment in and Commercial Agreements with TikTok Global, available at https://corporate.walmart.com/newsroom/2020/09/19/walmart-statement-about-potential-investment-in-and-commercial-agreements-with-tiktok-global.
9. Washington Post, Trump says he has given his 'blessing' to TikTok deal but that final terms are still being negotiated (Sept. 19, 2020), available at: https://www.washingtonpost.com/business/2020/09/19/trump-tiktok. President Trump stated that the deal includes the creation by TikTok Global of a USD 5 billion educational fund, but the parties' press release separately identifies the educational fund mentioned above and an estimate that TikTok Global will generate $5 billion in tax revenues in the United States.
10. Reuters, China's ByteDance gets Trump nod to avoid TikTok shutdown (Sept. 19, 2020), available at: https://www.reuters.com/article/us-usa-china-tiktok/chinas-bytedance-gets-trump-nod-to-avoid-tiktok-shutdown-idUSKCN26A0ZU.
11. Wall Street Journal, TikTok's Zero Hour: Haggling With Trump, Doubts in China and a Deal in Limbo (Sept. 21, 2020), available at: https://www.wsj.com/articles/tiktok-and-oracle-spar-over-ownership-threatening-deal-11600702185.
12. U.S. WeChat Users Alliance v. Trump, No. 3:20-cv-5910 (N.D. Cal. Sept. 19, 2020) (order granting preliminary injunction), available at: https://www.courtlistener.com/recap/gov.uscourts.cand.364733/gov.uscourts.cand.364733.59.0.pdf.
13. Reuters, U.S. to challenge judge's order that blocked U.S. WeChat app store ban (Sept. 21, 2020), available at: https://www.reuters.com/article/us-usa-wechat-ban-idUSKCN26C1QZ?taid=5f68df943217420001512db3&utm_campaign=trueAnthem:+Trending+Content&utm_medium=trueAnthem&utm_source=twitter.
14. Bloomberg, Tencent's Gaming Stakes Draw U.S. National Security Scrutiny (Sept. 17, 2020), available at: https://www.bloomberg.com/news/articles/2020-09-17/tencent-s-game-investments-draw-u-s-national-security-scrutiny.
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