Applying Bright Lines to the "Black Box": Article II Powers as a Tool for Reducing Uncertainty in CFIUS Reviews

Category: Print Issues

Applying Bright Lines to the "Black Box": Article II Powers as a Tool for Reducing Uncertainty in CFIUS Reviews

Henry K. Chen

Volume 28

, Issue 3

28 GEO. MASON L. REV. 1181 (2021)

Introduction

In May 2018, under increasing pressure to address Chinese technology theft, the Trump administration announced that it would take the unprecedented step of using executive powers to implement investment restrictions prohibiting the Chinese acquisition of advanced information and manufacturing technologies.¹ A month later, the administration backtracked following intense internal debate, opting to use the existing statutory process for regulating Chinese investments.² President Trump endorsed legislation granting enhanced powers to the Committee on Foreign Investment in the United States (“CFIUS”), shelving plans to utilize executive emergency powers.³

This Comment argues in favor of the road not taken: the use of Article II emergency powers to regulate foreign investments that pose national security concerns. Although recent legislation strengthening CFIUS review is clearly aimed at addressing Chinese technology theft, residual ambiguities in CFIUS regulations burden harmless investors and simultaneously fail to comprehensively mitigate the threats posed by the People’s Republic of China and other hostile actors. The President should supplement CFIUS by utilizing his Article II powers under the International Emergency Economic Powers Act (“IEEPA”) to explicitly prohibit certain categories of foreign investment from China, adjusting these restrictions to changing geopolitical and technological circumstances. Based on existing statutory and legal precedent, such action would fall clearly within the scope of executive authority. Though potentially controversial, these actions may well prove to be the best route for preventing technology theft while establishing regulatory certainty.

CFIUS is an interagency committee, authorized by statute to review foreign acquisitions of US assets that may result in harm to national security. Following review, CFIUS submits a report to the President, who may subsequently prohibit such transactions or require divestment of specific assets as a precondition for the acquisition.⁴

The existing CFIUS framework contains several drawbacks. First, both the statutory language authorizing CFIUS as well as its implementing regulations are broad.⁵ This breadth leaves potential investors guessing as to whether their acquisitions pose a sufficient national security threat to undergo review.⁶ Due in part to this ambiguity, informal negotiations between transaction parties and CFIUS staff protract the timeline for CFIUS review.⁷ CFIUS fails to explicitly single out the growing threat posed by state-backed and state-influenced investors from China.⁸ In declining to do so, the facially neutral CFIUS regulations place an unnecessary burden on investors from friendly nations and risk overburdening the committee’s resources and diluting its focus.⁹ Although the increased clarity provided by the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) has partially alleviated some of these concerns, CFIUS remains a “black box” of uncertainty.¹⁰

Second, because CFIUS is statutorily grounded, major changes to its review procedures require a time-consuming legislative process.¹¹ Additionally, changes to CFIUS regulations are subject to the time-consuming notice and comment requirements contained in the Administrative Procedure Act (“APA”).¹² The significant delays required in implementing changes to the CFIUS process likely result in regulatory lag in addressing emerging technologies and budding geopolitical threats. This is particularly concerning as Chinese state-owned enterprises have leveraged US know-how in cutting-edge fields such as artificial intelligence and blockchain.¹³

Third, it is ambiguous whether judicial review over CFIUS determinations is permitted.¹⁴ According to statutory language supported by ample legislative history, the actions of the President following a CFIUS review “shall not be subject to judicial review.”¹⁵ Nevertheless, the Court of Appeals for the D.C. Circuit permitted judicial review of a due process challenge to the CFIUS process in Ralls Corp. v. Committee on Foreign Investment in the United States,¹⁶ the only CFIUS legal challenge to date.¹⁷ Reversing the district court, the D.C. Circuit held that President Obama’s executive order requiring Ralls to divest four wind farms was unconstitutional due to an absence of due process during CFIUS review.¹⁸

These drawbacks illustrate the costs associated with the absence of bright-line rules governing foreign investment screening. Presidential actions blocking foreign acquisitions, mergers, and joint ventures need not derive their authority from the CFIUS statute but fall squarely within the scope of the executive’s existing emergency powers under the National Emergencies Act (“NEA”) and IEEPA.¹⁹ The President should declare a national emergency concerning foreign acquisitions, enabling him to unilaterally block certain categories of foreign (particularly Chinese) acquisitions. These executive actions would help define the scope of reviewable transactions and foreclose the possibility of judicial review, providing much needed legal certainty.²⁰

Part I of this Comment provides a background of CFIUS and the expansion of its statutory authorities, most recently under FIRRMA. It also examines the President’s Article II emergency powers under IEEPA. Part II discusses the primary drawbacks to the current CFIUS process. Part III proposes a framework for foreign investment review grounded in the executive’s expansive Article II national security powers to improve clarity in the foreign investment screening process.

I. Background

A. The Current CFIUS Process

CFIUS consists of a nine-member interagency committee.²¹ The Department of the Treasury chairs the committee, and other voting members include the Office of Science and Technology Policy, the Office of the US Trade Representative, and the Departments of Justice, Homeland Security, Commerce, Defense, State, and Energy.²² CFIUS derives its legal authority from section 721 of the Defense Production Act of 1950.²³ The scope of CFIUS’s legacy jurisdiction is broad: any acquisition by foreign investors or other transaction resulting in foreign “control” that could harm national security is potentially reviewable.²⁴ Recent legislation expanded the scope of CFIUS review to include certain noncontrolling investments as well as joint ventures between US and foreign companies and foreign acquisitions of real estate.²⁵

CFIUS review includes several formal and informal steps. First, “foreign person” investors must file “mandatory declarations” for CFIUS review if the transaction involves a foreign person in which a foreign government has a “substantial interest” or technologies covered by statutory export controls.²⁶ Following a thirty-day review process,²⁷ CFIUS may either grant safe harbor to declared transactions that pose little national security risk or require the investor to file a “notice.”²⁸ Other foreign investors may opt to file “voluntarily notices” for CFIUS review.²⁹ Once a “notice” is filed, CFIUS initiates a national security review of the proposed transactions, which it must complete within forty-five days.³⁰ The term “national security” is not explicitly defined in the CFIUS statute.³¹ Rather, CFIUS member agencies evaluate a transaction’s national security implications by considering a congressionally mandated set of factors.³² Among others, the factors include potential effects on defense related production, military sales overseas, critical infrastructure, and critical technologies.³³ The CFIUS review process ends if all nine member agencies conclude that the transaction poses no national security risks.³⁴

If the committee concludes that a transaction does pose a risk, it initiates a national security investigation, during which it typically negotiates mitigatory measures (e.g., partial divestment).³⁵ CFIUS must complete this investigation within forty-five days, although it may grant itself a fifteen-day extension under “extraordinary circumstances.”³⁶ CFIUS decision-making is typically done by consensus and, in theory, transactions do not proceed until all nine agencies confirm that they have no residual national security concerns.³⁷ CFIUS may condition its approval of a transaction on various mitigation measures, ranging from partial divestment to establishing procedures for the handling of sensitive information.³⁸ If the transaction parties fail to adequately mitigate risks, CFIUS will recommend that the President block the transaction.³⁹ The President then has fifteen days to make a final determination.⁴⁰

In reality, the CFIUS process is more of an art than a science. Outside of the formal process, transaction parties will often engage in protracted informal discussions with CFIUS staff before beginning the review process to ascertain whether a transaction will be blocked.⁴¹ Such informal review enables transaction parties to try to mitigate national security concerns early on, thus avoiding the negative publicity and adverse market responses that may accompany a formal CFIUS national security investigation.⁴² Transactions are seldom actually blocked by the President because transaction parties will usually abandon a transaction when faced with CFIUS opposition.⁴³ In the forty-four years of CFIUS’s existence, only seven transactions have been blocked by presidential order, although notably four of these were issued by President Trump and two by President Obama.⁴⁴

B. CFIUS History

Although President Ford originally created CFIUS by executive order in 1975, Congress has gradually expanded its oversight over the CFIUS review process through a series of statutes.⁴⁵ Each of these statutes gradually increased CFIUS’s powers of review and expanded its jurisdiction.⁴⁶ For much of CFIUS’s history, Congress sought to increase oversight over foreign investments in the United States and a reluctant executive acceded to popular pressure.⁴⁷ This history stands in stark contrast to the executive branch’s hawkish stance on foreign investments under President Trump.⁴⁸

1. CFIUS Under Article II: Early History and Executive Order 11,858

President Ford signed Executive Order 11,858 on May 7, 1975, establishing CFIUS.⁴⁹ CFIUS was given the “primary continuing responsibility within the Executive Branch for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment.”⁵⁰ In establishing CFIUS, President Ford sought to forestall legislative restrictions on foreign investments, particularly from OPEC member states newly flush with oil wealth.⁵¹ Thus in its initial form, CFIUS’s authority was grounded in Article II executive powers rather than in statute.⁵² When constitutional questions were raised regarding whether executive agencies had the authority to collect foreign investment data under the executive order, Congress quickly passed the International Investment Survey Act of 1976,⁵³ granting the President such authority.⁵⁴ CFIUS initially exercised its limited authority to collect and report information on foreign transactions sparingly, prompting congressional criticism as foreign investments rose steadily over the next decade, particularly from Japan.⁵⁵

2. CFIUS Grounded in Statute: Exon–Florio and the Byrd Amendment

In 1988, Congress passed the Exon–Florio amendment to the Defense Production Act, codifying CFIUS.⁵⁶ This amendment grounded CFIUS’s authority firmly in statute, granting the President expanded powers to suspend or prohibit transactions that threatened national security.⁵⁷ The amendment also stipulated that the President could only block a transaction after determining that (1) credible evidence existed that the foreign acquisition would harm national security, and (2) other legal mechanisms—except CFIUS and IEEPA—were inadequate to protect national security.⁵⁸ These two conditions remain in effect today.⁵⁹ The Exon–Florio amendment represented a deliberate effort by Congress to legislate away its powers over foreign investment policy to the President.⁶⁰ Congress again illustrated its desire to legislate away its powers in 1992 when it further strengthened CFIUS by passing the Byrd amendment to Exon–Florio.⁶¹ The amendment required CFIUS to investigate transactions where: “(1) the acquirer is controlled by or acting on behalf of a foreign government; and (2) the acquisition results in control . . . that could affect the national security of the United States.”⁶²

3. Further Strengthening CFIUS: Dubai Ports World and FINSA

The normally humdrum CFIUS process made political headlines in 2006, just a few years after the September 11, 2001 attacks, when CFIUS approved a deal granting leases to operate several major port facilities to Dubai Ports World, a UAE state-owned enterprise.⁶³ Bipartisan congressional opposition to the deal quickly emerged due to fears that Dubai Ports World’s ownership would enable terrorist groups to infiltrate the port facilities.⁶⁴ Yet President George W. Bush’s administration vigorously defended the deal, discounting the possibility of national security harm and warning of a chilling effect on international investment.⁶⁵ The administration alleged that fearmongering and racial biased drove congressional efforts to block the deal.⁶⁶ Faced with imminent veto-proof legislation blocking the transaction, Dubai Ports World ultimately opted to drop out of the deal.⁶⁷

The Bush administration introduced mitigation agreements in the aftermath of this debacle, which conditioned transaction approvals on certain actions to reduce national security risk (e.g., information-sharing restrictions).⁶⁸ Today, CFIUS can rereview a transaction if it finds there has been a material breach of the mitigation agreement.⁶⁹ The Dubai Ports World controversy also resulted in a statutory interpretation dispute regarding whether the Byrd amendment required CFIUS to conduct a full forty-five day investigation when the acquirer is controlled by a foreign government or whether the committee had discretion to opt for a shorter review.⁷⁰

The next major elevation of CFIUS’s powers occurred in 2007 when President Bush signed the Foreign Investment and National Security Act (“FINSA”)⁷¹ into law. FINSA further strengthened CFIUS through a number of provisions, including adding the Director of National Intelligence to the review process, requiring each committee member to certify to Congress (at the Assistant Secretary level or above) that a transaction has no unresolved national security risks, and requiring the Secretary of the Treasury to designate a lead agency for each review.⁷² Through FINSA, Congress continued its long-term practice of strengthening CFIUS’s statutory authority while increasing congressional oversight of the review process.⁷³

4. Introducing Judicial Review: Ralls Corp. v. CFIUS

In 2012, President Obama issued an order under CFIUS blocking the Ralls Corporation, a US company owned by Chinese investors, from acquiring a wind farm located near a US Navy training site.⁷⁴ The presidential order did not give notice to Ralls of the evidence on which CFIUS relied in reaching its determination.⁷⁵ Consequently, Ralls sued CFIUS, alleging a Fifth Amendment due process violation because it was denied the opportunity to review and rebut evidence that the transaction posed a national security risk.⁷⁶

Although the CFIUS statute specifies that final orders of the President are not subject to judicial review,⁷⁷ the D.C. Circuit found that this language did not bar Ralls’s Fifth Amendment due process claim, distinguishing constitutional challenges from other types of claims.⁷⁸ The court allowed Ralls’s challenge to proceed, holding “that neither the text of the statutory bar nor the legislative history of the statute provides clear and convincing evidence that the Congress intended to preclude judicial review of Ralls’s procedural due process challenge.”⁷⁹ The court also rejected the government’s argument that the presidential order was a nonjusticiable political question (where the Executive is entitled to discretion, particularly in issues of national security), because Ralls’s claim was limited to access to evidence and did not implicate the President’s policy making discretion.⁸⁰

Then, reversing the district court, the D.C. Circuit found on the merits that the presidential order blocking the transaction “deprived Ralls of its constitutionally protected property interests without due process of law.”⁸¹ While noting that due process “does not require disclosure of classified information,” the court held that “due process requires, at the least, that an affected party . . . be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence.”⁸² The court remanded the case, leaving unresolved the question of whether executive privilege shielded any unclassified CFIUS evidence from disclosure.⁸³

The D.C. Circuit’s unprecedented review of CFIUS action has been criticized as a rare intrusion by the courts into the executive’s traditional authority over issues of national security.⁸⁴ Moreover, the Ralls precedent is unlikely to aid future litigants because agencies could simply raise the classification of CFIUS documents to avoid disclosure, possibly leading to less transparency.⁸⁵ Also problematic, the Obama administration declined to challenge the Ralls holding on executive privilege grounds, leaving the scope of such privilege undetermined.⁸⁶ Ultimately, Ralls reached a settlement with the US government under which it divested the wind farms.⁸⁷

5. CFIUS in the Headlines: Uranium One and Broadcom

In recent years, two high profile CFIUS determinations have garnered widespread media attention, placing the committee in the political spotlight. The first of these controversies involved the Russian state corporation Rosatom’s acquisition of the mining company Uranium One in a 2010 deal approved by CFIUS, which granted Rosatom rights to twenty percent of US uranium production.⁸⁸ Republican lawmakers alleged that then-Secretary of State Hillary Clinton approved the deal (the Department of State is one of nine CFIUS committee members, all of whom were required to certify that the deal did not pose national security concerns) in exchange for $500,000 in speaking fees from a Kremlin-connected bank.⁸⁹ The purported scandal garnered widespread attention (particularly in conservative-leaning media),⁹⁰ but gradually petered out after a special counsel appointed by then-Attorney General Jeff Sessions failed to uncover tangible evidence of wrongdoing.⁹¹

Another high profile CFIUS case occurred in March 2018, when President Trump blocked the then-Singapore-based Broadcom’s acquisition of US telecommunications technology firm Qualcomm in accordance with CFIUS’s recommendation.⁹² CFIUS raised concerns that Qualcomm’s acquisition would reduce US investments in 5G technology, hindering the ability of the United States to compete with China in this growing field.⁹³ Additionally, the fact that Broadcom attempted a hostile takeover may have increased CFIUS scrutiny over the deal.⁹⁴ Notably, Broadcom planned to redomicile to the United States when the deal was blocked, a process that was completed in April 2018.⁹⁵ The block garnered significant media attention due to the size of the proposed deal ($117 billion) and because it hinted at a more interventionist CFIUS under President Trump, which suggested an increased willingness to restrict takeovers.⁹⁶

C. The Road Not Taken: China, FIRRMA, and IEEPA

Concerns over Chinese intellectual property theft and technology transfer primarily drove Congress’s most recent CFIUS law, FIRRMA.⁹⁷ The Trump administration had alternatively considered using Article II powers under IEEPA to address these threats, but it ultimately opted for a statutory solution.⁹⁸ Most notably, FIRRMA expands CFIUS’s powers of review over critical technologies and effectively permits CFIUS to discriminate among foreign investors by country of origin.⁹⁹ Further modifications to the CFIUS process will, for the foreseeable future, likely be driven by threats posed by China.¹⁰⁰

Nevertheless, President Trump issued several executive orders in 2020 that imposed unprecedented restrictions on dealings with Chinese companies under IEEPA and appeared to leave open the possibility of Article II investment prohibitions for subsequent administrations.¹⁰¹ Most significantly, the Trump administration utilized IEEPA in August 2020 to prohibit all transactions with TikTok’s parent company ByteDance Limited (“ByteDance”) (a multinational domiciled in the Cayman Islands but headquartered in China),¹⁰² while simultaneously utilizing the normal CFIUS process to force ByteDance to divest the Musical.ly application.¹⁰³

1. An Emerging Threat

In recent years, Chinese technology theft and forced technology transfers have resulted in bipartisan alarm.¹⁰⁴ Beijing’s “Made in China 2025” plan, which lays out ambitions to dominate ten high-technology sectors—including robotics, advanced manufacturing, and aerospace—has drawn particular apprehension.¹⁰⁵ Foreign acquisitions and forced joint ventures with foreign firms are among the strategies Beijing is pursuing to achieve the plan’s goals for 2025 and beyond.¹⁰⁶ Over the past decade, the stock of Chinese foreign direct investment in the United States has grown rapidly from $3.3 billion in 2010 to $37.7 billion in 2019.¹⁰⁷

Especially concerning, Chinese organizations and citizens are required to “support, assist and cooperate with . . . state intelligence work” under China’s 2017 National Intelligence Law.¹⁰⁸ This means that Chinese corporations would be legally obligated to hand over any US customer’s data requested by the Chinese government.¹⁰⁹ In light of these circumstances, CFIUS has placed increased scrutiny on transactions involving Chinese investors.¹¹⁰ In 2017, President Trump blocked the acquisition of the Lattice Semiconductor Corporation by a Chinese state-owned enterprise pursuant to a CFIUS recommendation.¹¹¹ The move was prompted by concerns that the acquisition would give China access to sensitive microchip technology with military applications.¹¹²

On March 22, 2018, the Office of the US Trade Representative released a much anticipated report outlining the effects of Chinese trade practices on the US economy.¹¹³ Unsurprisingly, the report found that China continued to pursue a strategic policy of technology transfer despite high-level commitments to the contrary.¹¹⁴ The report also noted public estimates “that Chinese theft of American IP currently costs between $225 billion and $600 annually.”¹¹⁵ That same day, President Trump issued a memorandum to the Secretary of the Treasury directing him to propose “executive branch action . . . using any available statutory authority, to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.”¹¹⁶ Meanwhile in Congress, growing concern over Chinese high-technology investments led to the introduction of FIRRMA in November 2017 with broad bipartisan support.¹¹⁷

2. The Road Not Taken

Initially, the Trump administration signaled a willingness to use executive powers outside of the CFIUS process to address Chinese technology transfers. On May 29, 2018, the White House released a statement announcing: “The United States will implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology. The list of restrictions and controls will be announced by June 30, 2018.”¹¹⁸ Nevertheless, within a month, the administration had backtracked, opting instead to use the existing statutory process for regulating Chinese investments.¹¹⁹ President Trump consequently endorsed legislation granting enhanced powers to CFIUS, shelving plans to utilize executive emergency powers for the time being.¹²⁰ FIRRMA soon passed both houses of Congress with overwhelming bipartisan support,¹²¹ and President Trump signed it into law on August 13, 2018 as part of the fiscal year 2019 National Defense Authorization Act.¹²²

3. FIRRMA Provisions

FIRRMA constitutes the latest step in Congress’s longstanding trend of granting the President increased statutory authority to review foreign transactions. The Department of the Treasury issued its final regulations implementing FIRRMA on January 13, 2020, which became effective thirty days later.¹²³ FIRRMA expanded the scope of CFIUS review to include a multitude of transactions previously not covered. Most significantly, whereas CFIUS previously only had the authority to review “control transactions” (transactions leading to foreign control of a US business),¹²⁴ FIRRMA placed certain “covered investments” (noncontrolling investments in sensitive Technology, Infrastructure, and Data (“TID”) businesses)¹²⁵ under CFIUS jurisdiction.¹²⁶

FIRRMA’s implementing regulations specify three broad categories of noncontrolling “covered investments” in businesses subject to CFIUS oversight.¹²⁷ The first of these categories covers investments in critical technologies, defined broadly to include technologies subject to various statutory export controls.¹²⁸ The second category covers investments in critical infrastructure, with twenty-eight eligible types of infrastructure laid out in an appendix to the regulations.¹²⁹ The last, and broadest, of these categories covers US businesses that collect or maintain “sensitive personal data.”¹³⁰ These are broadly defined to include businesses that have collected one of ten categories of data and either (1) target their services to sensitive personnel (e.g., military or federal agency employees) or (2) collect or intend to collect data on more than one million persons.¹³¹

This liberal definition of “sensitive personal data” has attracted concern for creating legal uncertainty for would-be foreign investors.¹³² Notably, FIRRMA directs CFIUS to discriminate in favor of certain foreign investors (based on country of origin) when evaluating covered investments.¹³³ In February 2020, the Department of the Treasury designated core US allies Canada, Australia, and the United Kingdom as “excepted foreign states.”¹³⁴ Citizens of these excepted foreign countries, as well as entities from these countries that meet specific criteria, are exempt from CFIUS review over noncontrolling investments as well as CFIUS oversight of certain real estate transactions.¹³⁵

In addition to granting CFIUS oversight over noncontrolling investments, FIRRMA further expands the committee’s scope of jurisdiction in several ways. FIRRMA makes expressly clear that CFIUS has oversight over certain joint ventures, albeit a watered-down version of the joint venture provisions from previous iterations of FIRRMA that were ultimately rejected due to pressure from business lobbyists.¹³⁶ In 2020, a CFIUS review resulted in the termination of a joint venture between Ekso Bionics, a US company manufacturing powered exoskeletons with military applications, and two Chinese partners.¹³⁷ FIRRMA also expands CFIUS oversight to cover the purchase and lease of real estate where the property in question is part of an air or sea port or is located in close proximity to military facilities or other sensitive government facilities.¹³⁸

FIRRMA’s implementing regulations make CFIUS declarations mandatory for certain transactions, whereas normally investors may—but need not—make CFIUS declarations to obtain safe harbor.¹³⁹ Generally, CFIUS declarations are mandatory if “‘U.S. regulatory authorization’ would be required” to export the US business’s technologies to the foreign investor.¹⁴⁰ Additionally, declarations are mandatory if they involve a foreign investor in which a foreign government has a “substantial interest.”¹⁴¹ Finally, FIRRMA authorizes CFIUS to collect modest filing fees, with an eye towards providing the committee with resources to handle an anticipated increase in caseload.¹⁴²

While FIRRMA undoubtedly strengthened the CFIUS process, it contains some notable limitations. Although Congress explicitly authorized CFIUS to apply particular scrutiny to transactions involving “countr[ies] of special concern” in the FIRRMA statute,¹⁴³ such a blacklist is absent from the Department of the Treasury’s final regulations implementing FIRRMA.¹⁴⁴ Thus the CFIUS regulations are facially neutral towards investments from China vis-à-vis most other countries.¹⁴⁵ FIRRMA also fails to address the issue of “greenfield” investments—foreign seed capital used to form new start-up companies as opposed to purchasing existing companies.¹⁴⁶ These greenfield investments now account for a majority of foreign investment transactions,¹⁴⁷ and CFIUS’s lack of oversight is particularly concerning because Chinese state-owned enterprises have turned to greenfield investments as a method of leveraging US innovation to acquire cutting-edge technologies.¹⁴⁸

4. CFIUS Under FIRRMA: TikTok and Beyond

CFIUS’s caseload has increased significantly in recent years from a total of 143 filings in 2015 to a total of 325 in 2019.¹⁴⁹ FIRRMA’s enactment has led directly to an increase in CFIUS caseload due to the mandatory declarations required by the statute.¹⁵⁰ This increase in filings is partly a reflection of CFIUS’s increasingly hawkish stance on Chinese investments.¹⁵¹ In March 2019, CFIUS pressured the Chinese company Beijing Kunlun Tech into divesting its sixty percent share of the gay dating application Grindr.¹⁵² CFIUS feared that Grindr’s acquisition would allow the Chinese government to access sensitive data collected by the application—including HIV status and sexual orientation—to blackmail US citizens.¹⁵³

Over the past year, CFIUS reviews have resulted in two presidential orders blocking transactions involving Chinese investors.¹⁵⁴ In March 2020, President Trump blocked the acquisition of StayNTouch Inc., a cloud-based hotel management software developer, by Beijing Shiji Information Technology Company.¹⁵⁵ The move was prompted by CFIUS’s concerns that the acquisition would allow the Chinese company to access sensitive hotel guest data.¹⁵⁶

Later in August 2020, in perhaps the highest profile CFIUS case to date, President Trump issued a CFIUS order retroactively blocking the Chinese technology company ByteDance’s acquisition of the TikTok video streaming application and directing ByteDance to divest the application within ninety days.¹⁵⁷ CFIUS review of the TikTok acquisition was initially prompted by congressional concerns that China would gain access to sensitive personal data through the app and censor the content available to US users.¹⁵⁸ Concurrent with the CFIUS action, the Trump administration attempted to ban TikTok altogether, utilizing emergency economic powers.¹⁵⁹ These moves attracted widespread media attention given the broad prevalence of the TikTok app¹⁶⁰ and triggered a scramble by ByteDance to find a US company to acquire TikTok before the CFIUS-imposed deadline.¹⁶¹ Notably, President Trump was intimately involved in corporate negotiations to divest TikTok and initially suggested that approval of such a deal would be conditional on a payment to the Department of the Treasury, before backing away from this demand amidst legal concerns.¹⁶² These trends, and the ongoing TikTok saga, suggest that CFIUS’s caseload will continue to increase in line with growing alarm over Chinese economic espionage.

D. Article II Economic Regulatory Powers

1. The National Emergencies Act

The President has historically enjoyed broad discretion in the exercise of Article II powers over policy issues that touch on foreign policy.¹⁶³ Executive emergency powers are not expressly granted in the Constitution but are rather implied by the President’s role as Commander in Chief.¹⁶⁴ In an effort to formalize and limit the executive’s emergency powers, Congress passed the NEA in 1976.¹⁶⁵ The NEA originally provided for a legislative veto over declarations of national emergency—Congress could terminate an emergency by passing a concurrent resolution requiring a simple majority in each house.¹⁶⁶ However, the Supreme Court invalidated the legislative veto in 1983 as inconsistent with constitutional separation of powers.¹⁶⁷

Consequently, the NEA was amended in 1985 to permit Congress to terminate an emergency with a joint resolution.¹⁶⁸ However, a joint resolution (unlike a concurrent resolution) is subject to presidential veto. Such a veto occurred recently when bipartisan majorities in both chambers passed a joint resolution terminating President Trump’s national emergency concerning the southern border.¹⁶⁹ President Trump vetoed the joint resolution, and Congress subsequently failed to muster the bicameral two-thirds majority necessary to override the veto.¹⁷⁰ Despite Congress’s limited ability to repeal a declaration of national emergency, a national emergency has occasionally been struck down through judicial review.¹⁷¹ Nevertheless, the Supreme Court has generally proven deferential to the executive’s Article II powers in cases with a clear foreign nexus.¹⁷²

2. IEEPA Powers: History and Scope

In 1977, Congress passed the IEEPA,¹⁷³ which grants the President unfettered authority to regulate a broad range of economic activities following a declaration of national emergency pursuant to the NEA.¹⁷⁴ IEEPA restricted existing executive powers under the Trading with the Enemy Act (“TWEA”), enacted during World War I, which permitted the President to exercise controls over both foreign and domestic economic transactions during declared national emergencies.¹⁷⁵ Notably, President Franklin D. Roosevelt used these powers to impose a bank holiday during the Great Depression.¹⁷⁶ During the post-war era, TWEA emergencies were used extensively to place sanctions on communist governments, control the gold supply, place restrictions on outgoing foreign direct investment, and impose a ten percent supplemental tariff.¹⁷⁷ In the aftermath of Watergate and the Vietnam War, Congress sought to reign in the executive branch’s emergency powers, prompting statutory revision.¹⁷⁸

IEEPA enables the President to exercise controls over international economic transactions following a declaration of national emergency.¹⁷⁹ Consequently, the President may use these powers to block transactions involving any foreign country or national.¹⁸⁰ IEEPA contains several procedural requirements beyond those in the NEA, requiring that the executive consult with Congress “in every possible instance” before using its powers, transmit a detailed report to Congress justifying the use of powers, and provide updates to Congress every six months.¹⁸¹ Nevertheless, these requirements provide Congress with little substantive power for checking the exercise of emergency powers. As with the CFIUS statute, IEEPA has been amended numerous times by Congress, primarily to increase the statutory penalty for violation of IEEPA orders.¹⁸² Unlike the CFIUS amendments, the IEEPA amendments did not substantially increase the scope of executive power granted by statute.¹⁸³

Courts have consistently granted the executive broad deference in exercising powers under IEEPA, and even constitutional challenges to IEEPA have generally been unsuccessful.¹⁸⁴ In the seminal case on IEEPA’s scope, Dames & Moore v. Regan,¹⁸⁵ the petitioners challenged a settlement agreement between the Reagan administration and the Iranian government that resulted in an executive order terminating all existing private legal proceedings against Iran. The Court noted that although IEEPA did not expressly grant the President the power to settle claims, the absence of legislative history opposing such powers indicated that Congress had “implicitly approved the practice of claim settlement by executive agreement.”¹⁸⁶ The Court reasoned that TWEA had granted the President broad economic powers, and that these powers were not constrained by the passage of IEEPA.¹⁸⁷

IEEPA’s grant of executive power is broad enough to encompass the delegations contained within other statutes. For example, when the Export Administration Act expired in 1983 and before Congress could renew it, President Reagan declared a national emergency to maintain the existing system of export controls under IEEPA.¹⁸⁸ Later presidents continued to issue similar executive orders, up until the passage of the Export Control Reform Act of 2018, which once again returned export controls to sound statutory footing.¹⁸⁹ Legal challenges to this prior arrangement have generally been unsuccessful, with courts typically holding that Congress had implicitly authorized the continuation of export controls under IEEPA orders.¹⁹⁰

3. Contemporary Use of IEEPA

The Trump administration demonstrated an unprecedented willingness to use IEEPA to address broader economic issues related to trade and technology transfer. In May 2019, President Trump issued an executive order under IEEPA—Securing the Information and Communications Technology and Services Supply Chain—which provided broad authority to the Secretary of Commerce to prohibit “any acquisition, importation, transfer, installation, dealing in, or use of” telecommunications technologies or services by any “foreign adversary.”¹⁹¹ The order was primarily viewed as an effort to prohibit importation of 5G equipment from the Chinese telecommunications group Huawei.¹⁹² Although limited to a certain set of information technologies, the order grants the Department of Commerce broad leeway in reviewing transactions that would not have been covered under CFIUS.¹⁹³

President Trump signaled a willingness to enact even more expansive trade controls under IEEPA, tweeting in August 2019: “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”¹⁹⁴ When challenged on the legal basis for such an order, the President astutely tweeted: “For all of the Fake News Reporters that don’t have a clue as to what the law is relative to Presidential powers, China, etc., try looking at the Emergency Economic Powers Act of 1977. Case closed!”¹⁹⁵ While IEEPA has never been used to impose tariffs, its delegation of powers is sufficiently broad to enable the President to impose restrictions on trade.¹⁹⁶

President Trump’s proposed use of IEEPA here, while controversial, would almost certainly have been upheld as constitutional.¹⁹⁷ Although courts have yet to define the full scope of executive power under IEEPA, existing precedent would suggest that courts are likely to grant significant deference to the President on issues of national security and international trade.¹⁹⁸ Many of the national emergencies declared over the past forty years invoking IEEPA are quite broad.¹⁹⁹ Nevertheless, to date, no executive order invoking IEEPA has been struck down through judicial review.²⁰⁰

The Court has reasoned that “[m]atters intimately related to foreign policy and national security are rarely proper subjects for judicial intervention.”²⁰¹ When evaluating whether presidential emergency powers are valid, the Court has traditionally turned to the test articulated in Justice Jackson’s concurring opinion in Youngstown Sheet & Tube Co. v. Sawyer (Steel Seizure),²⁰² in which the Court invalidated President Truman’s order to seize and operate steel mills under federal direction during a labor dispute.²⁰³ Under Justice Jackson’s framework, “[w]hen the President acts pursuant to an express or implied authorization of Congress, his authority is at its maximum, for it includes all that he possesses in his own right plus all that Congress can delegate.”²⁰⁴ Conversely, “[w]hen the President takes measures incompatible with the expressed or implied will of Congress, his power is at its lowest ebb.”²⁰⁵ Because Congress expressly delegated IEEPA’s broad powers to the executive, courts have granted significant deference to IEEPA national emergencies.²⁰⁶ IEEPA’s open-ended delegation would almost certainly be broad enough to encompass the power to review foreign investments.

4. China, TikTok, and WeChat: An Emerging IEEPA and CFIUS Nexus

Through his final year in office, President Trump used IEEPA to directly address the threats posed by Chinese companies, suggesting that IEEPA could be used concurrently with the traditional CFIUS process to regulate investments in the future. Citing the United States’ dependence on China for rare earth minerals, the Trump administration declared a national emergency under IEEPA: Addressing the Threat to the Domestic Supply Chain from Reliance on Critical Minerals from Foreign Adversaries.²⁰⁷ Under IEEPA, the order directs a plethora of government agencies to implement programs, including loan guarantees and subsidies, to expand domestic supply chains of critical minerals.²⁰⁸ Later in November 2020, the Trump administration declared another national emergency under IEEPA: Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.²⁰⁹ This order uses IEEPA to prohibit US persons from investing in a list of “Communist Chinese military companies” specified by the Secretary of Defense under a mandate from Congress.²¹⁰

However, perhaps most significantly, in August 2020, President Trump issued a pair of executive orders prohibiting TikTok and WeChat, two mobile applications owned by Chinese companies.²¹¹ These IEEPA orders stated that the applications posed a security threat by allowing the Chinese government to access users’ personal and proprietary data and by enabling Chinese Communist Party censorship and disinformation.²¹² TikTok and WeChat users immediately challenged the orders in federal court, and were successful in temporarily halting the bans while courts determine the legality of the dual orders.²¹³

Nevertheless, while TikTok and WeChat succeeded in delaying a ban, the Trump executive orders appear to be substantively well within the scope of IEEPA.²¹⁴ Litigation by the WeChat and TikTok parent companies appears to be a delaying tactic aimed at buying time for the companies to negotiate divestments of the applications to interested US companies, thereby avoiding a “fire sale” situation.²¹⁵ Notably, the TikTok ban was issued roughly one week prior to the CFIUS order directing ByteDance to divest the application.²¹⁶ This suggests that the Trump administration issued its IEEPA order as a “stick” to hasten the divestment of TikTok rather than actually seeking to enforce an outright ban of the application.²¹⁷ This interplay between CFIUS and IEEPA suggests that the two authorities could be used as complements—“different tools in the toolbox,” with IEEPA being the blunter instrument—rather than direct substitutes in the realm of foreign investment regulation.²¹⁸

II. CFIUS Drawbacks

The CFIUS process has served as the primary means of screening foreign investment for national security risks for over four decades. The committee has been subject to periodic criticism, which has led Congress to continually strengthen CFIUS review through new legislation. Nevertheless, several drawbacks to the current process are broadly recognized by investors, practitioners, and scholars alike.

A. Undefined Scope and Investor Uncertainty

CFIUS is commonly described by critics as a “black box” given the secrecy surrounding the review process and its ambiguous criteria for assessing national security risks.²¹⁹ Because parties to a transaction usually abandon the deal if they perceive excessive scrutiny by CFIUS, the committee is rarely required to articulate why a transaction has been blocked.²²⁰ Although FIRRMA contains new provisions clarifying when reviews are required and when filings are mandatory, significant ambiguity remains in the process.²²¹

One opportunity to narrow and clarify the scope of CFIUS review came when Congress authorized CFIUS to apply particular scrutiny to transactions involving “countr[ies] of special concern” in the FIRRMA statute.²²² CFIUS consequently had the opportunity to introduce a “blacklist” of certain countries, putting investors from these countries on notice that their transactions would be subject to additional scrutiny.²²³ Instead, CFIUS’s implementing regulations opted for a softer “white list” approach, exempting certain investors from Canada, the UK, and Australia from CFIUS review over noncontrolling investments and certain real estate transactions.²²⁴

Consequently, under FIRRMA, investors from US allies such as Israel and Japan are in theory subject to the same scrutiny as those from China and Russia. Although any reasonable observer could conclude that CFIUS’s increased scrutiny over the past five years is in direct response to the security challenges created by Chinese investment, the CFIUS regulations remain facially neutral.²²⁵ This is concerning because the broad scope of CFIUS’s authority, coupled with its authority to torpedo prospective deals, could have a chilling effect on foreign investments from friendly countries that pose no security threats.²²⁶ By failing to explicitly impose heightened scrutiny against Chinese investors, CFIUS sweeps nonthreatening investors into a void of uncertainty.

In addition to creating investor uncertainty, CFIUS’s broad scope also threatens to overburden the limited adjudicative resources of its member agencies. With growth in the number of CFIUS reviews in recent years, committee members have faced an increased workload leading to resource constraints.²²⁷ These constraints are exacerbated by the proliferation of complex technologies subject to review, including artificial intelligence and robotics.²²⁸ Similarly, the structure of international transactions has grown more complex, at times obfuscating the ultimate owner.²²⁹ While some agencies have increased CFIUS staffing to address these challenges, staffing levels have not increased in line with the number of reviews.²³⁰

CFIUS will likely face further resource limitations as FIRRMA’s implementing regulations introduce mandatory filing requirements²³¹ and expand the scope of review to cover noncontrolling investments and real estate.²³² CFIUS’s caseload has already increased significantly due to the mandatory declarations required by FIRRMA.²³³ Notably, FIRRMA introduced filing fees for the first time to cover the cost of CFIUS reviews.²³⁴ Although the current filing fees are modest, they could nevertheless have their own chilling effect on foreign investments.²³⁵

B. Regulatory Lag and Statutory Gaps

Congress must approve updates to the CFIUS review, subjecting the committee to a lengthy legislative process followed by the protracted rulemaking (notice and comment) process.²³⁶ The FIRRMA legislation was first introduced in November 2017, yet its implementing final regulations were only published in February 2020.²³⁷ By contrast, executive orders may be issued with minimal delay. Minimizing regulatory delays is critical in the realm of foreign investments due to constant advances in technology, which may require immediate action.

The US government was initially caught flatfooted by Huawei’s rapid development of 5G technology and largely failed to contain the global proliferation of Huawei hardware, with even close allies in Europe declining to ban Huawei products.²³⁸ Notably, the Trump administration resorted to the use of an IEEPA-based executive order to ban the importation of Huawei telecommunications equipment.²³⁹ Investment in Huawei, labeled a “Communist Chinese military company,” was later prohibited through a separate executive order.²⁴⁰ The Trump administration’s efforts to encourage US allies to ban Huawei 5G technology belatedly gained traction in 2020 amidst growing global skepticism regarding China’s overseas investments.²⁴¹ Amidst rising tensions with China, the urgency of countering Huawei 5G has only grown in salience. In October 2020, the Department of Defense announced that it would provide $600 million in direct funding to test 5G technology on military bases,²⁴² in a move reminiscent of Cold War era industrial policy making that could presage greater military oversight over 5G development.²⁴³

Some security experts are concerned that China could achieve a similar breakthrough in quantum computing technology.²⁴⁴ Quantum technology would enable the development of supercomputers capable of defeating virtually all existing forms of encryption technology, posing a obvious security threat to both the US government’s classified systems and proprietary commercial networks.²⁴⁵ In recent years, the Chinese government has invested an immense $10 billion in quantum research, and China is widely recognized as a global leader in the field.²⁴⁶ Fears of falling behind China in the race for quantum technology led Congress to commit over $1.2 billion in funding for quantum research in fiscal years 2019 through 2023.²⁴⁷ Under the same law, President Trump established a quantum advisory committee in August 2019 consisting of industry, academic, and government representatives to coordinate quantum research and development.²⁴⁸ In October 2019, Google achieved a significant breakthrough in quantum computer development, outpacing its rivals, including China.²⁴⁹ Nevertheless, in December 2020, Chinese scientists claimed to have developed a quantum machine ten billion times faster than Google’s prototype.²⁵⁰ Regardless of the veracity of these claims, this intensifying arms race is likely to make the acquisition of quantum know-how a key priority for Beijing, whether through outright economic espionage or investments in US research entities. FIRRMA’s failure to grant CFIUS jurisdiction over “greenfield” investments is particularly concerning here, as Chinese state-owned enterprises have invested in US start-ups to acquire knowledge in other cutting-edge fields such as artificial intelligence and blockchain.²⁵¹ Decisive government action will almost certainly be necessary to protect these fledgling innovations in the race for a quantum computer.

To mitigate legislative delays in addressing new risks, CFIUS’s governing statutes and regulations are broadly written in an attempt to allow for some degree of flexibility regarding implementation.²⁵² However, this comes at the expense of clarity.²⁵³ Additionally, even where statutory language is broad enough to permit the Department of the Treasury to adopt new regulations, proposed rulemakings are still subject to the time-consuming notice and comment requirements contained in the APA.²⁵⁴

C. Judicial Review

The D.C. Circuit’s ruling in Ralls introduced legal uncertainty into the CFIUS review process by upholding a due process challenge to a CFIUS determination.²⁵⁵ The court’s ruling has attracted criticism for intruding upon the legislative and executive branches’ traditional authority over foreign policy²⁵⁶ by rejecting the Obama administration’s contention that its CFIUS order was a nonjusticiable political question.²⁵⁷ Congress almost certainly did not intend to permit judicial review of CFIUS determinations, based upon the plain statutory language specifying that CFIUS orders “shall not be subject to judicial review,” as well as its longstanding inclination towards increasing the committee’s power through statute.²⁵⁸ Nevertheless, the D.C. Circuit held that “neither the text of the statutory bar nor the legislative history of the statute provides clear and convincing evidence that the Congress intended to preclude judicial review of Ralls’s procedural due process challenge.”²⁵⁹

The Ralls holding is problematic on several levels. The Chinese-owned Ralls Corporation’s acquisition of wind farms located near a military facility was precisely the type of transaction the new real estate provisions of FIRRMA are intended to prevent.²⁶⁰ By upholding Ralls’s due process challenge, the D.C. Circuit has introduced uncertainty into the implementation of these provisions, leaving them potentially open to challenge by future litigants. By encouraging foreign companies to challenge CFIUS orders in court, the Ralls decision is likely to lead to costly and prolonged litigation, draining agency resources and delaying the implementation of orders that may be vital to national security. TikTok parent company ByteDance filed a due process challenge in response to the Trump administration’s CFIUS divestment order, with litigation still ongoing as of December 2020.²⁶¹ Such litigation against a major technology company will almost certainly prove to be prolonged and costly for the government, while leaving the underlying issue of TikTok data privacy unresolved for the time being.

Additionally, the Ralls holding that due process required the disclosure of unclassified, but not classified,²⁶² information is likely to encourage overclassification by CFIUS agencies, leading to even less transparency in the already opaque CFIUS process.²⁶³ Finally, the issue of whether executive privilege shields CFIUS evidence from disclosure was left undetermined in the Ralls opinion, creating yet more ambiguity over the processes of CFIUS.²⁶⁴ The D.C. Circuit’s judicial foray into the realm of CFIUS reviews and the prospect of case-by-case procedural challenges to presidential orders has created yet more uncertainty in a field where bright lines are desperately needed for the sake of both efficiency and national security.

III. Proposed Article II Regulatory Framework

This Comment proposes aggressively utilizing the President’s Article II powers under IEEPA as a means of addressing the shortcomings of the existing CFIUS process. Under this framework, a series of executive orders, similar to the telecommunication supply chain executive order²⁶⁵ and the order prohibiting investment in Communist Chinese military companies,²⁶⁶ would explicitly prohibit specified categories of investments. These orders would target China and other malign actors such as Russia to supplement, not replace, the existing CFIUS process. CFIUS would retain residual authority to review transactions not explicitly barred by the executive orders. While the Trump administration was defined by an increased willingness to utilize IEEPA to stem the economic influence of large Chinese enterprises, its prohibitions appeared to be ad hoc efforts targeting specific companies.²⁶⁷ A broader, more systematic use of IEEPA powers would be necessary to introduce order and certainty to the process of regulating foreign investments.

The constitutionality of such an approach, from a substantive standpoint, is not in doubt. Legal experts are in general agreement that IEEPA powers are broad enough to permit even the blanket ban on outgoing investments in China contemplated by the President in August 2019.²⁶⁸ IEEPA national emergencies have been granted significant deference by the courts, and the use of IEEPA to block foreign investments would fit favorably within the Youngstown framework for assessing the validity of executive orders.²⁶⁹ Additionally, courts have acknowledged that the President’s own constitutional powers may give him the authority to regulate international commerce, even absent IEEPA.²⁷⁰ Legal experts broadly agree that the TikTok and WeChat lawsuits challenging the Trump administration’s IEEPA-based ban stand little chance of success on the merits.²⁷¹ To date, no executive order invoking IEEPA has been struck down through judicial review.²⁷²

A. An Emerging Political Consensus

Just a year ago, the aggressive use of executive orders to impose restrictions on Chinese investment would have faced significant political opposition, particularly from Fortune 500 corporations and trade associations such as the US Chamber of Commerce that have historically benefitted from trade with China.²⁷³ However, over the past year, United States–China tensions have increased markedly for various reasons, including (but not limited to) China’s suppression of pro-democracy protests in Hong Kong contrary to international law, lack of transparency regarding the spread of the novel coronavirus, false accusations that US troops brought the coronavirus to Wuhan, and mass detention of Uighur Muslim minorities in reeducation camps.²⁷⁴ As a result, a bipartisan consensus has emerged in favor of tougher US policies towards China. In the trade realm, these polices include prohibiting Chinese 5G equipment, limiting the export of sensitive US technologies to China, and limiting the access of Chinese state-owned enterprises to US capital markets.²⁷⁵

The 2020 presidential campaign was marked by accusations by both President Trump and then-former-Vice President Biden that their opponent would be soft on China.²⁷⁶ One telling episode occurred in April 2020 when the Trump campaign issued an attack ad accusing then-former-Vice President Biden of “stand[ing] up for China” as the coronavirus outbreak intensified.²⁷⁷ A week later, the Biden campaign countered with its own anti-China attack ad, accusing President Trump of having “rolled over for the Chinese,” to the surprise of many left-leaning activists.²⁷⁸ These developments suggest that the Biden administration will almost certainly maintain the Trump administration’s tough stance on Chinese trade and investments.²⁷⁹ While the use of executive orders to limit Chinese investments is perhaps somewhat less likely under the Biden administration relative to the former Trump administration, it remains a realistic possibility.

B. Reducing Investor Uncertainty

The most significant benefit of the proposed IEEPA approach would be clarity. Executive orders grounded in IEEPA would provide a bright-line rule by explicitly stating which types of investment from which countries are forbidden, placing potential investors on notice. This would be somewhat akin to the “blacklist” that was originally contemplated—but never implemented—in FIRRMA.²⁸⁰ Residual investments not covered by these prohibitions would still be subject to CFIUS regulatory review. Tellingly, the CFIUS statutory language seems to acknowledge the possibility of such a dual-tiered system approach: the President is only permitted to block a foreign investment using CFIUS after finding that “provisions of law, other than this section and the [IEEPA] . . . provide adequate and appropriate authority for the President to protect the national security in the matter before the President.”²⁸¹ This approach would serve to reduce the existing uncertainty as to whether a transaction will be selected for review and legal expenses for potential investors.

Critics of such an approach may note that the potential scope of CFIUS review would remain unchanged even if certain categories of investments were barred by executive order. This would lead many harmless investors to continue incurring the legal costs of voluntarily filing for CFIUS review out of an abundance of caution. However, provided the executive orders and FIRRMA’s mandatory filing requirements would be broad enough to cover most threatening investments, CFIUS could remove its voluntary filing process altogether. Investments not explicitly “blacklisted” would be presumed harmless, with CFIUS only initiating unilateral review in extraordinary cases.

This approach is similar to the regulatory scheme used to implement export controls with its ten categories of regulated dual-use technologies (e.g., lasers and sensors) being listed on a single, unified Commerce Control List.²⁸² Technologies not on the lists may still be restricted based on end-use or end-user criteria.²⁸³ This regulatory scheme, a product of the Obama administration’s efforts to introduce “bright line[s]” to the export control process, replaced an earlier system in which dual-use technologies were controlled based on design intent.²⁸⁴ The Department of the Treasury’s decision to link mandatory CFIUS filings with whether the technology in question would be covered by export control regulations suggests that the CFIUS regulations are already consistent with such an approach.²⁸⁵

Barring certain categories of investments outright through executive orders would limit the number of transactions CFIUS is forced to review, alleviating resource constraints. Investment-restricting executive orders would most likely be targeted towards Chinese investments in the most sensitive technological fields (e.g., telecommunications, personal data and social media, and artificial intelligence). These transactions would also be the most resource intensive to review. Taking these transactions off the table would ease the burden on CFIUS resources and enable it to complete its remaining reviews with greater speed. These factors would foster a more favorable investor climate for investments not barred under IEEPA orders.

C. Increasing Regulatory Agility

The greatest advantage of regulation by executive order is procedural agility. Approximately twenty-seven months elapsed between when FIRRMA was introduced in Congress and when the Department of the Treasury published its final regulations implementing the statute.²⁸⁶ By contrast, exactly two days elapsed between Twitter’s decision to fact-check a tweet by President Trump alleging mail ballot fraud²⁸⁷ and the promulgation of a President Trump’s Executive Order on Preventing Online Censorship.²⁸⁸

Executive orders are not only exempt from the legislative process, but they are also exempt from the notice and comment requirements of the APA.²⁸⁹ While final agency regulations implementing the contents of an executive order are still subject to the APA’s notice and comment requirements for rulemaking,²⁹⁰ such orders would allow agencies to immediately implement interim regulations while providing long term regulatory certainty.²⁹¹ Applied to the realm of foreign investments, this regulatory agility would permit the President to quickly address emerging threats, similar to the action against Huawei 5G, without waiting months or years for the statutory and rulemaking processes to occur.

D. Limiting Judicial Review

Substantive challenges to restrictions on foreign investments stand virtually no chance of success. Judicial review of CFIUS determinations is expressly prohibited by the CFIUS statutory language.²⁹² While the court in Ralls held that this language did not bar constitutional due process claims, it also held that the language was sufficient to bar final CFIUS determinations by the President.²⁹³ Similarly, executive orders issued under IEEPA would be evaluated on a case-by-case basis to assess whether the executive actions fall within the scope of IEEPA’s statutory delegation.²⁹⁴ Because the Supreme Court has endorsed the view that “[t]he language of IEEPA is sweeping and unqualified,”²⁹⁵ lawsuits seeking to overturn IEEPA orders stand little chance of success.²⁹⁶

Any successful challenge to restrictions on foreign investment would likely turn on procedural grounds. Ralls introduced legal uncertainty when the D.C. Circuit permitted a due process challenge to the CFIUS review process.²⁹⁷ While courts have declined to enforce statutory bars to judicial review in cases involving constitutional claims,²⁹⁸ they have also traditionally proven deferential to the exercise of Article II powers under IEEPA.²⁹⁹ A due process takings claim challenge to IEEPA failed in Dames & Moore, despite the fact that the plaintiffs arguably had a significantly stronger claim than the Ralls Corporation.³⁰⁰ While a limited set of case law makes it difficult to state definitively how courts will handle due process challenges to CFIUS orders versus IEEPA orders in the future, Dames & Moore is a precedent much more favorable to government agencies than Ralls. If nothing else, the use of IEEPA would allow agencies to avoid the precedent from Ralls.

E. IEEPA Safeguards

While critics of an IEEPA-grounded regulatory approach to foreign investments may decry the expansion of executive power, both the legislative and judicial branches retain ample opportunities to check the exercise of such power. Under the NEA, Congress retains the ability to terminate a declaration of national emergency with the passage of a veto-proof joint resolution.³⁰¹ Additionally, Congress could amend IEEPA to automatically sunset declarations of national emergency or to require congressional ratification of any new emergency.³⁰² Finally, the President is afforded broad deference in the exercise of IEEPA powers because the Court has granted such deference.³⁰³ Faced with hypothetical challenges to the arbitrary exercise of IEEPA powers, the Court could always narrow the scope of the deference afforded in Dames & Moore.³⁰⁴ The fact that Congress and the judiciary have historically neglected to exercise these safeguards on IEEPA regulation suggests a general acquiescence in the strong exercise of executive power over foreign trade and investments.

Conclusion

The legacy CFIUS review process, governed by statute and regulation, is limited by its broad scope, an absence of transparency regarding process, its dependence on the ponderous legislative and rulemaking processes to make regulatory changes, and uncertainty regarding the potential for judicial review. As the threats posed by Chinese economic aggression become more salient, so will these CFIUS shortcomings. Bright-line rules governing foreign investments are necessary to promote a stable investment climate while ensuring national security. The President should supplement CFIUS by utilizing his Article II powers under IEEPA to narrowly tailor bans on specific foreign investments, while rapidly adjusting for changing technological circumstances. This two-tier framework for restricting harmful investments would increase legal certainty and alleviate CFIUS’s resource constraints. Most importantly, it would acknowledge the obvious: the national security threats posed by foreign investment are largely a product of Beijing’s geopolitical ambitions. Codifying this fact into policy through China-specific prohibitions will better enable government agencies to address these security threats, without chilling friendly foreign investment. Although the Trump administration ultimately declined to take such an approach when evaluating its options in the summer of 2018, it later demonstrated second thoughts by using IEEPA orders to target specific Chinese companies.³⁰⁵ It remains to be seen whether a future administration will complete the work of bringing bright lines to the black box.

Category: Print Issues

Applying Bright Lines to the "Black Box": Article II Powers as a Tool for Reducing Uncertainty in CFIUS Reviews

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