US Court Provides Relief from Chinese Military Company Designation

As widely reported in the press this week, leading Chinese smartphone manufacturer Xiaomi Corporation has successfully appealed to the US federal judiciary against its designation as a Communist Chinese Military Company (CCMC), thus avoiding the broad-ranging export and investment restrictions implicated by this designation.

In this post we examine the judgment of the US District Court for the District of Columbia and consider what it potentially means for other designated Chinese companies.

Background: What is CCMC designation?

In Executive Order 13959 issued on November 12, 2020, the Trump administration prohibited transactions in either the “publicly traded securities,” or “derivative[s]” of securities of any company designated as a CCMC by US authorities. Since June 2020, over 30 Chinese companies, collectively estimated to comprise more than US$500 billion in market capitalisation, have been designated as CCMCs, including many of the country's leading technology and communications companies, as well as state-owned energy and infrastructure groups.

The CCMC designation was created pursuant to Section 1237 of the National Defense Authorization Act of 1999, which defines a CCMC as any company that:

1. is owned or controlled by, or affiliated with, the PLA or a ministry of the government of the PRC or that is owned or controlled by an entity affiliated with the defense industrial base of the PRC; and
2. is engaged in providing commercial services, manufacturing, producing, or exporting.

Please see our previous posts for further information on EO 13959 and CCMC guidelines subsequently issued by OFAC.

What is the impact of the US court judgment in the Xiaomi case?

While some press reports have characterised the judgment issued by the US District Court for the District of Columbia as having the effect of reversing Xiaomi's designation as a CCMC (and therefore lifting the investment ban against it), this is not completely accurate.

In fact, the District Court's judgment grants a preliminary injunction preventing US authorities from enforcing the EO13959 restrictions, which were scheduled to come into effect from 15 March 2021 (60 days after Xiaomi's designation on 14 January 2021, as required by EO13959).

The Court determined that the granting of a preliminary injunction was appropriate on the basis that Xiaomi had demonstrated "a high likelihood of success" on the merits of its ongoing Administrative Procedure Act (APA) claim to remove its CCMC designation and that, without injunctive relief, Xiaomi would suffer "irreparable harm in the form of serious reputational and unrecoverable economic injuries."

The Court rejected the DoD's claims that Xiaomi is affiliated with the PRC military per the Section 1237 definition (see above) and held that, despite the DoD's assertion to the contrary, Xiaomi's significant investment in developing AI and 5G technologies (described by DoD as "essential to modern military operations") was not sufficient in itself to define Xiaomi as a CCMC. The judgment observed that "5G and AI technologies are quickly becoming industry standard for consumer electronics devices and that failure to develop these technologies "would render Xiaomi’s products obsolete."

Subsequent to the court's judgment in Xiaomi's favour, OFAC issued a notice via its FAQ page stating that the EO 13959 prohibitions do not apply to Xiaomi pending further order of the court.

What does this mean for other companies designated as CCMCs?

Other Chinese companies designated by US authorities and their international business partners may be encouraged by the Court's ruling in the Xiaomi case.

In addressing the specific details of Xiaomi's designation, the Court's judgment is critical of the DoD and makes a number of general criticisms of the agency's approach to designation, including stating that "fundamental problems remain with the [DoD's] proffered explanation, and thus, their overall decision-making process" and highlighting errors which "do not inspire confidence in the fastidiousness of the agency’s decision-making process."

While the Court expressed a favourable view of the merits of Xiaomi's APA claim, it of course remains to be seen whether the APA claim will be successful, resulting in Xiaomi's removal from the CCMC list.

Nevertheless, this judgment sets an important precedent for other CCMCs pursuing APA claims and may encourage other designated companies to follow suit.

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