Federal Court Affirms Broad, Largely Unreviewable Presidential Powers to Force Divestment of Foreign Investments in U.S. Businesses

In its two decisions in Ralls Corporation v. Committee on Foreign Investment in the United States, the U.S. District Court for the District of Columbia became the first court in the nation to address (1) the breadth of the President’s remedial powers under section 721 of the Defense Production Act of 1950, as amended (Exon-Florio), and (2) whether judicial review is available for an order by the President under that law requiring a foreign person to divest a U.S. business. Together, the two decisions stand for the propositions that the President has very broad remedial powers under Exon-Florio that are largely unreviewable by the courts.

This client alert summarizes the key components of the two Ralls decisions. The full text of the court’s decisions are available here¹ and here.²

Exon-Florio Process

Under Exon-Florio and its implementing regulations, the power to review the national security effects of any particular foreign investment in the United States is vested in the President acting through the Committee on Foreign Investment in the United States (CFIUS). CFIUS is a committee composed of the U.S. Attorney General, the heads of the Office of U.S. Trade Representative and Office of Science & Trade Policy, and the Secretaries of the U.S. Departments of Treasury, Homeland Security, Commerce, Defense, State and Energy (or their respective designees). Other designated offices, such as the National Security Council and the National Economic Council, observe and, as appropriate, participate in CFIUS' activities. The Director of National Intelligence and the Secretary of Labor serve as non-voting members of CFIUS and repre­sen­ta­tives of other government agencies or departments may join CFIUS as the President determines is appropriate.

A review can be initiated voluntarily by the parties to a transaction or by any CFIUS member that is aware of it. Once a review has been initiated, CFIUS has 30 days in which to determine the transaction’s effects on national security. If CFIUS finds that the transaction threatens national security (and the national security concerns have not been mitigated), or if the transaction falls into certain specific categories, then CFIUS proceeds to a 45-day investigation phase. As part of the investigation, CFIUS has the authority to negotiate, impose and enforce any agreement or condition it believes is necessary to mitigate the threat to national security.

At the end of the 45-day investigation period, CFIUS can decide to take no further action (effectively allowing the transaction to go forward with whatever mitigation agreements the parties have negotiated with CFIUS) or it may submit the matter to the President for further consideration. The President has 15 days in which to announce his decision on matters sub­mit­ted to him. Exon-Florio grants the President the authority to “take such action for such time as the President considers appropriate to suspend or prohibit” the transaction in question. If a transaction is submitted to CFIUS for review and CFIUS or the President permits the transaction to proceed, then the President may not subsequently order the foreign buyer to divest the acquired business. On the other hand, and critically important in the Ralls case, if a transaction involving a foreign buyer and an effect on national security is not submitted to CFIUS for review, it is possible for the President to order divestiture or other relief at any time, even after the transaction has closed.

Ralls Background

In March 2012, Ralls Corporation (Ralls) purchased four limited liability companies (Project Companies) with wind farm projects in north-central Oregon. Ralls, a Delaware corporation, is owned by two Chinese nationals who are also senior executives of Sany Group, a Chinese manufacturing company. Three of the wind farm sites owned by the Project Companies are near restricted airspace used by U.S. military aircraft. The fourth is within that restricted airspace. The transactions were not submitted to CFIUS for pre-acquisition review.

In early June 2012, the U.S. Treasury Department learned about the transaction and asked Ralls to make a “voluntary” CFIUS submission; it also advised Ralls that the U.S. Department of Defense would initiate CFIUS review if Ralls did not do so. On June 28, 2012, Ralls submitted a voluntary notice to CFIUS seeking review of the wind farm acquisition and then met with CFIUS the next day.

On July 25, 2012, within the 30-day review period mandated by Exon-Florio, CFIUS commenced the investigation phase and issued an interim order (CFIUS Order) broadly requiring Ralls to cease all activities at the four wind farm sites, to remove items from those sites, to restrict access to those sites to U.S. citizens approved by CFIUS, to refrain from selling any items manufactured by Sany to third parties, and to refrain from selling the wind farm projects to any third parties without prior notice to (and consent from) CFIUS. On September 13, 2012, within the 45-day deadline for completing an investigation, CFIUS transmitted a report to the President. The government did not provide a copy of the report (or even excerpts thereof) to Ralls (as none was required to be provided under Exon-Florio or the implementing rules).

On September 28, 2012, the President issued his own order making certain findings and requiring certain actions (Presidential Order). The President found that there was credible evidence that led him to believe that Ralls, Sany and others, through the control of the wind farms “might take action that threatens to impair the national security of the United States” and that provisions of existing law did not mitigate these threats. The Presidential Order did not identify what those actions or threats were. The Presidential Order also replaced the CFIUS Order’s restrictions and imposed its own, similar restrictions.

First Ralls Decision

On September 12, 2012 (i.e., the day before CFIUS’ 45-day investigation period ended and prior to the issuance of the Presidential Order), Ralls filed a complaint against CFIUS in the U.S. District Court for the District of Columbia. After the issuance of the Presidential Order, Ralls amended its original complaint to add the President as a defendant. The amended complaint alleged that the CFIUS Order exceeded CFIUS’ statutory authority and was arbitrary and capricious (Counts I and II), that the President’s actions were ultra vires (Count III), and that the CFIUS Order and the Presidential Order unconstitutionally deprived Ralls of property without due process of law (Count IV) and also violated its equal protection rights (Count V).

In a case of first impression, the court dismissed Counts I and II as moot (since the Presidential Order replaced the CFIUS Order subject to these counts) and addressed Counts III, IV and V of the amended complaint as they related to the Presidential Order.

Count III: Ultra Vires. The court first turned its attention to Ralls’ contention that certain aspects of the Presidential Order were ultra vires. Initially, the court observed as a general matter that executive actions—even those that implicate national security—are not inherently unreviewable. The court concluded that precedent suggests “that there is non-statutory authority permitting a court to interpret the legislation in question and articulate the boundaries of a statutory grant of power to the executive.”³

The court noted that the U.S. Court of Appeals for the District of Columbia Circuit had previously found that there is a presumption of judicial review and that there must be “clear and convincing” evidence that Congress intended to cut off such review. In Ralls, however, the court found this evidentiary standard was satisfied easily because Exon-Florio expressly contemplates limits on judicial review: “The actions of the President under paragraph (1) of subsection (d) of this section and findings of the President under paragraph (4) of subsection (d) of this section shall not be subject to judicial review.”⁴

In sum, in the court’s view, the President’s findings pursuant to paragraph (4) of subsection (d) of Exon-Florio (i.e., that there was credible evidence leading him to conclude that the foreign interest might take action that impairs national security and that other provisions of law do not provide adequate and appropriate authority to protect national security) were not judicially reviewable. Once those findings were made, the President had the unreviewable authority to “take such action for such time as the President considers appropriate to suspend or prohibit any covered transaction that threatens to impair the national security of the United States.”

The court also rejected Ralls’ argument that the President could only suspend or prohibit a transaction and, therefore, could not impose restrictions on the sale of the projects or the disposition of the turbines. The court found that Exon-Florio granted the President extremely broad authority and allowed the President “to do what he deems necessary to accomplish or implement the prohibition—not merely to issue it.”⁵

Count IV: Due Process. Although the court found that Congress intended to preclude review of the ultra vires and (as described below) equal protection claims, the court did not similarly conclude that Congress intended to divest the courts of any ability to hear a due process claim related to Exon-Florio. The court denied the motion to dismiss Count IV, but later considered a second motion to dismiss Count IV, as discussed below.

Count V: Equal Protection. Ralls styled Count V as a constitutional challenge under the Equal Protection Clause. Its claim in this regard was that it had been unjustly accorded treatment that was different from the treatment accorded to others who were similarly situated. However, the court found that “at bottom [this claim] asks the Court to review the merits of the President’s decision.”⁶ The court found that, to adjudicate this claim, it would have had to review the President’s findings and the reasons behind them, which it already had found it was prohibited from doing.

Second Ralls Decision

In its decision dated October 10, 2013, the court addressed a second motion to dismiss Count IV and the two questions left open by the court’s earlier decision: (1) whether Ralls had acquired any constitutionally-protected interests when it acquired the wind farm assets and (2) whether, if it had, Ralls had been afforded the process that it was due.

As to the first question, the court answered emphatically that Ralls had not in fact acquired any protected interests when it acquired the Project Companies. Largely adopting the government’s analysis, the court observed that Ralls “undertook the transaction and voluntarily acquired those state property rights subject to the known risk of a Presidential veto.”⁷ Moreover, because Ralls had been afforded—but declined—the opportunity to obtain a pre-acquisition review of the transaction, the court concluded it was inappropriate to apply the due process analysis that would have applied if there was no opportunity for pre-acquisition review. Finally, given the President’s broad and unreviewable discretion to prohibit a covered transaction, the court found that Ralls did not acquire any property interest in a particular outcome (i.e., permanent ownership of the Project Companies) that merited due process protection under the Constitution.

As to the second question, the court found that, even if Ralls had acquired a protected interest entitled to due process, it had received sufficient due process. As the court held, “[a]ll that is required before the deprivation of a protected interest is ‘notice and opportunity for hearing appropriate to the nature of the case.’”⁸ In this particular case, the court found that the undisputed facts revealed that Ralls was given notice before a decision was made and that its views were submitted to CFIUS. These findings left merely the argument that Ralls was entitled to know the President’s unclassified reasons for prohibiting the transaction and to have an opportunity to rebut those reasons. The court concluded that, in light of the process that Ralls was already afforded and the limited nature of the additional process that it sought, the factors “in this case weigh overwhelmingly in favor of the government.” The court, therefore, dismissed the remaining count of Ralls’ complaint.

Conclusion

The court’s decisions in Ralls represent a complete (or at least near complete) endorsement of a broad executive power under Exon-Florio and a significant victory for the federal government. The case highlights the potential dangers of failing to seek CFIUS clearance where a foreign buyer is seeking to acquire U.S. assets even when the primary national security issues are unclear and the governmental interest might be mere physical proximity to military installations or other sensitive installations.

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1. 926 F. Supp. 2d 71(D.D.C. 2013) (Ralls I).

2. No. 12-1513 (ABJ), 2013 WL 5583847 (D.D.C. Oct. 10, 2013) (Ralls II).

3. Ralls I at 86.

4. 50 U.S.C. app. § 2170(e).

5. Id. at 89.

6. Ralls I at 92.

7. Ralls II at 7 (emphasis added).

8. Id. at 10, quoting Cleveland Bd. of Educ. v. Loudermill, 470 U.S. 532, 542 (1985).