China

Bringing More Due Process to CFIUS: An Overview of the D.C. Circuit's Opinion in Ralls

By Raffaela Wakeman
Thursday, July 17, 2014, 6:00 PM

Tuesday’s opinion in Ralls v. Committee on Foreign Investment in the United States came as quite a surprise. For the first time, a federal court considered the relationship between due process, on the one hand; and, on the other, the Committee on Foreign Investment in the United States (CFIUS), an interagency mechanism with which the executive branch reviews foreign acquisitions of U.S. property for possible national security risks.

As Lawfare-ers have described here (and here, and here, and here), the CFIUS process is unique, as Ralls itself illustrates. The company, owned by two Chinese nationals, had acquired four American-owned companies in Oregon in order to develop windfarms.  The deal raised national security concerns---the windfarms notably were situated not far from a U.S. military installation---and the President accordingly issued a rare executive order ordering Ralls to divest of any interests in the Oregon businesses. Crying foul, Ralls brought suit against CFIUS in the United States District Court for the District of Columbia, which last year dismissed the suit on jurisdictional grounds.

A three-judge panel of the D.C. Circuit, composed of Circuit Judge Karen LeCraft Henderson (who authored the opinion), and Circuit Judges Janice Rogers Brown and Robert L. Wilkins, heard oral arguments back in May (read Yishai’s recap here).  The panel this week sided with Ralls, concluding that President Obama’s 2012 order violated the company’s due process rights.

Below the fold I offer a summary of the opinion, followed by some preliminary thoughts on its potential impact on the government’s review of corporate transactions implicating national security.

Background

The Ralls opinion opens with a review of the history and timeline: the initial decision (known as the “CFIUS Order”) that the by-then consummated transaction posed a national security threat; CFIUS’ launch thereafter of a 45-day investigation, and its imposition of interim measures intended to mitigate any national security concerns; and, ultimately, the President’s Order requiring divestment by Ralls of its interests in the four companies.

The court of appeals next sums up the lower court’s conclusions.  The latter concluded that Ralls lacked a constitutionally-protected interest, because it “voluntarily acquired those state property rights subject to the known risk of a Presidential veto” and “waived the opportunity . . . to obtain a determination from CFIUS and the President before it entered into the transaction.” The timing mattered.  By filing with the interagency committee after it had already finalized the transaction, the district court reasoned, Ralls had given up any rights it might have had. The district court also thought nevertheless that any process due to Ralls already had been provided by CFIUS, both through notification of the committee’s requirement that the transaction be reviewed, and through Ralls’s own submission of evidence to CFIUS.

In the appeals court, however, things play out a bit differently.

Jurisdiction

Naturally it must find that the D.C. Circuit has jurisdiction to review Ralls’s due process challenge.  There is an apparent problem there: the statute establishing CFIUS, the Defense Production Act (DPA), contains an outright ban on judicial review of CFIUS determinations. Yet past cases, in the panel’s view, say that statutory bars of the DPA-variety don’t apply to constitutional challenges, absent a clear indication of Congress’s intent to block them along with all other lawsuits.  And it turns out the DPA’s text doesn’t have anything to say about claims under the Constitution; the legislative history of the DPA also doesn’t provide guidance on that score, either. Accordingly the opinion concludes that the DPA poses no obstacle for Ralls’s constitutional claim.  The government’s next argument---that congressional oversight supplanted judicial oversight of CFIUS reviews---is also unconvincing to the court: “[w]e hardly think that, by reserving to itself such limited review of presidential actions and critical technology assessments, the Congress intended to abrogate the courts’ traditional role of policing government procedure for constitutional infirmity and perform that function itself.”

Next, the court considers the government’s argument that Ralls’s claim raises a non-justiciable political question. No dice here, either, for Ralls seeks review only of the process that led to the President’s Order, not of the President’s decision to mandate divestment itself. The latter would certainly raise justiciability concerns under the framework set forth by Baker v. Carr, says the court. Here, it refers to its 1999 opinion in People’s Mojahedin Organization of Iran v. Department of State, where the D.C. Circuit reviewed the process by which foreign terrorist organizations (FTOs) are formally designated. The judiciary, the D.C. Circuit had concluded in that case, can certainly review the Secretary of State’s compliance with the statutory requirements of the designation---that the entity is foreign and that it engages in terrorist activity, among other things---but courts cannot question whether the entity actually constitutes a national security threat. For its part, Ralls only seeks court review of CFIUS procedure prior to the president’s determination; the company thus escapes death-by-political-question-doctrine.

The Merits

Having found it indeed has jurisdiction to consider Ralls’s claim, the court moves on to the merits. Here, the timeline in the case is particularly important: Ralls completed the transaction and acquired the U.S. companies, and only then submitted a voluntary filing with CFIUS. It is this key fact on which Ralls’ due process claim turns: by the time CFIUS began its review, Ralls already had a property interest in the companies, so the Due Process Clause had been triggered.  The opinion contrasts Ralls’s interest here with that of the petitioner in the storied 1981 case of Dames & Moore v. Regan, where the petitioner’s attempt to attach property belonging to the sanctioned Iranian government was too contingent to “support a constitutional claim for compensation” under the Takings Clause. But Ralls’s case is different.  Because its property interest is fully-vested, the company is better situated, for constitutional purposes, than the petitioner in Dames & Moore.

The court then quickly bats away the government’s argument that Ralls waived its property interest by failing to seek review before it completed the transaction. Here, the court need only look to CFIUS’s own regulations, which permit either pre- or post- consummation review. Says the court: “we do not think the failure to seek pre-approval works a waiver when the regulatory scheme expressly contemplates that a party to a covered transaction may request approval – if the party decides to submit a voluntary notice at all – either before or after the transaction is completed” (emphasis in original).

Having determined that Ralls has a property interest, the court sees no impediment in determining that CFIUS’s procedure flunks due process requirements. In that regard, the opinion applies the Mathews v. Eldridge three-factor balancing test, requiring the consideration of: the private interest that is affected by government action; the risk of an “erroneous deprivation” of that interest through the procedure, and the probable value of additional/replacement procedural safeguards; and the government’s interest and the burdens of additional/alternative procedures.

In contemplating what minimum procedure is due, courts require at bottom that parties receive the factual basis for the action, and the opportunity to rebut the evidence supporting the action. For processes implicating national security, this requires only that unclassified evidence be disclosed, even when the court is doubtful that the petitioner could actually rebut the government’s evidence---as a petitioner had done before, in a case involving FTO designation. Even though some material must be handed over, the court emphasizes that it is not requiring the government to disclose classified evidence that supports its decision to block this or that transaction.

Applying this regime to the case at hand, the court concludes that giving Ralls the opportunity to present evidence to the interagency committee was insufficient, given that CFIUS effectively had stripped Ralls of its property rights already.  To pass muster the government must also provide, in advance of official action---here, the President’s Order blocking the transaction---unclassified evidence on which the President relies;and then Ralls must have the opportunity to rebut the evidence before the President can impose an order prohibiting the transaction. (Here and in passing, the court rebukes the government for its “belated” assertion of executive privilege with regard to evidence sought in connection with Ralls’s case: having not claimed such a privilege in the court below, the government is not permitted to bring it up on appeal.  The government is welcome to raise that issue when the case is remanded.)

Mootness

One final issue: determining whether the President’s Order, which revoked the property-divesting CFIUS Order---moots Ralls’s constitutional arguments. Interestingly, the government and Ralls agree that the President’s Order expressly revoked the previous, interim CFIUS Order and as a result mooted Ralls’s CFIUS Order-related claims.  But Ralls argues nevertheless that its claims fall under a longstanding exception to mootness doctrine, for wrongs “capable of repetition yet evading review.”  The court here agrees with Ralls once more: CFIUS orders typically cannot last longer than 90 days.  And that isn’t long enough, in order to allow a litigant like Ralls to pursue its CFIUS challenge all the way to final resolution by the Supreme Court.  Because the order, and thus an objecting company’s case, would almost certainly lapse in the meantime, the legal injury in play will “evade review.” And there’s bound to be “repetition” here, too: Ralls stated repeatedly that it intends to purchase wind farms all over the country, so there is “some likelihood” that CFIUS will take similar action regarding an acquisition by Ralls in the future. (Interestingly, the court engages in some conjecture about the thinking behind the CFIUS order: the opinion says that CFIUS’s decision likely wasn’t based solely on the geographical proximity of the target companies’ windfarms to a U.S. military base.)

With that, the panel remands to the district court, and orders both that Ralls receive the unclassified evidence which informed President’s ultimate decision, and that it be provided with an opportunity to respond to such evidence. The panel leaves for the district court any remaining issues that arise on remand, including the government’s late-stage argument for executive privilege.

The Case’s Significance

A key fact in Ralls’s favor was that, by the time the President issued his divestment order, Ralls already had completed its transaction---and thus acquired a legally recognized property interest. That has at least something to do with CFIUS regulations, which currently permit either pre- or post-consummation review.  But CFIUS could rewrite its regulations, so as to require parties to seek CFIUS review before a transaction is finalized. Such a move wouldn’t completely resolve the matter for CFIUS, however, as CFIUS oftentimes reaches out to transacting parties while deals are still coming together, in order to alert them of CFIUS’ authority to review deals---thus also prompting reviews in situations when the parties themselves might not have sought CFIUS’ blessing voluntarily.  At any rate, companies wishing to push the envelope may now opt to file for CFIUS review more frequently after their deals have been completed, in order to trigger the property interest that won Ralls its case. Of course, an upper hand in the courtroom might not make for one in the marketplace; it is an open question whether the process the D.C. Circuit has imposed on CFIUS will benefit companies in the long run.

The President’s Order in the Ralls case is not the norm in CFIUS assessments: in fact the process rarely reaches the final step of presidential review. That is in part a function of the procedure’s informal, fluid nature: often, when a company learns that CFIUS plans to recommend that the President block a transaction, it may quit the transaction altogether.  That unattractive outcome is still probably better than the alternative: an executive order branding the company a national security threat.  In part because of this dynamic, the order in Ralls marked the only time the President had reviewed a transaction between 2008 and 2012. Over that period, 168 45-day CFIUS investigations had taken place, 38 of which had been interrupted by the parties’ withdrawal from the process. Because it confers greater procedural protection, the D.C. Circuit’s decision might now embolden parties to go all the way through the review process, thereby forcing the executive branch’s hand and ensuring access to unclassified evidence with which to prepare a rebuttal.  Still, even that would be a risky endeavor: an executive order stopping a transaction amounts to a blaring and very public stamp of disapproval, a proclamation that the company itself poses a threat to the U.S. national security. Going forward, that prospect might or might not be too much for some companies to bear.

It is likewise too early to answer some broader questions: it remains to be seen whether Ralls announces a more skeptical judicial stance towards the executive branch, in cases affecting national security; or whether it more modestly announces a procedural adjustment to a CFIUS process that, in the court’s view, was out of balance.