Foreign Purchases of U.S. Businesses, Presidential Power, and National Security: Ralls Corp. v. CFIUS

By Lauren Bateman
Friday, April 11, 2014, 11:00 AM

When then-Representative Barney Frank contemplated the ability of foreign interests to acquire American companies at the expense of national security, he made the following statement:

There is no right to buy.  You do not have to file [with the Committee on Foreign Investment in the United States (CFIUS), but by not filing, you do not immunize yourself from a finding that the transaction could be canceled on security grounds.

But Representative Frank's interpretation of the law remains judicially under-theorized.  How---and under what circumstances---may the Executive cancel foreign purchases?  The Committee on Foreign Investment in the United States (CFIUS) may review “any merger, acquisition, or takeover … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.”  And the President may unilaterally block any investment where he finds “credible evidence that leads [him] to believe that the foreign interest exercising control might take action that threatens to impair the national security.”  The extent of CFIUS’s and the President’s power in this arena is currently being litigated before the D.C. Circuit in Ralls Corporation v. CFIUS.

Two years ago, Ralls Corporation, an American company with Chinese ownership, purchased four small companies in Oregon on which to develop windfarms.  CFIUS ordered Ralls to sell off the companies, destroy the construction, stay off the land, and refrain from selling its goods.  In response, Ralls filed suit alleging that the CFIUS order violated due process and the Administrative Procedure Act.  Subsequently, President Obama issued an order stating that he had “credible evidence” that, by exercising control over the Oregon companies, the owners of Ralls "might take action" that "threaten[ed] to impair the national security of the United States."  The Presidential order stopped the deal, ordered Ralls to divest, and gave federal agents access to all Ralls facilities in the United States in order to perform inspections.

Ralls’ brief argues that Ralls has protected property interests in the windfields that would require President Obama to make specific findings particular to the national security implications of the transaction, rather than obliquely citing national security grounds.  And given the dearth of explanation, appellants insinuate that the real animating force behind the President’s Order might be “simple economic protectionism.”

The government's brief contends that the D.C. Circuit has no jurisdiction to review the President’s Order---but even if it did, the President is under no constitutional or statutory obligation to release the information upon which he based his decision to Ralls.  Specifically, the government refers to Section 721 of the Defense Production Act---also known as the “Exion- Florio Amendment” and codified at 50 U.S.C. §1270(e)---in which Congress articulated that the President’s authority to review such transactions would not be subject to judicial review.  Thus, property interests grounded in state law are preempted by the President’s statutory authority to review foreign transactions.  The rationale for this unitary voice on federal policy regarding foreign direct investments, the government maintains, is that the focus of the states on the economic benefits of FDI unduly obscures national strategic interests.

As for the due process argument, the government asserts that there exists no right for “foreign businessmen . . . to acquire property in the United States, which cannot be interfered with unless they are afforded sufficient opportunity to present evidence to the President and are provided access to the President’s national security reasoning behind his conclusions.”

The government’s brief also emphasized that there was no unfair surprise: parties to a transaction have a safe harbor if they voluntarily notify CFIUS of the deal; otherwise, they run the risk that later CFIUS review will result in the voiding of the transaction.

Ralls’ reply brief counters that Section 721 does not evince any Congressional intent to gut Ralls and similarly-situated corporations of due process protections.  In sum, they argue, “Congress has not imposed a blanket prohibition on all property ownership by foreign-controlled companies or banned all property ownership anywhere near restricted airspace. Rather, Congress elected to restrict property ownership only where the President makes particularized findings about the possible actions of specific foreign-controlled parties.  In that situation, procedural due process assures that an accused party has an opportunity to know about the possible grounds for the contemplated action and to respond in a meaningful fashion.”

Oral arguments are currently scheduled for Monday, May 5.  Judges Henderson, Brown, and Wilkins will sit on the panel.