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.
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