On July 14, the U.S. Court of Appeals for the District of Columbia Circuit decided Ralls Corporation v. Committee on Foreign Investment in the United States — the first ruling by a federal circuit court on a CFIUS case.  Ralls, a U.S. company owned by two Chinese nationals, sued CFIUS in connection with an order by issued by President Obama upon CFIUS’s recommendation that prohibited Ralls from owning certain Oregon wind farm project companies located in the vicinity of restricted airspace associated with a U.S. Navy facility.

The DC Circuit, reversing the district court, held that the presidential order deprived Ralls of a constitutionally protected property interest without due process of law.  The DC Circuit further found that due process entitled Ralls to review an unclassified version of the evidence on which the President relied in making his determination and to have an opportunity to rebut that evidence.  For more information on the presidential order and the district court decision, please see our earlier analyses here and here.

There are three key lessons from the Ralls decision:

  1. The decision affirms the importance of fairness and transparency even in a process predicated on protecting national security and inherently based on classified information.  Not only is the U.S. system open to foreign investment, but it also offers strong protections for investors — even when the authority of the executive branch is involved in a national security issue.
  2. The decision does not limit in any respect whatsoever the President’s authority to suspend or prohibit transactions that present unresolvable risks to national security, nor does it limit  CFIUS’s underlying authority to determine the impact of a transaction on national security.  The court carefully limited the scope of its decision to the adequacy CFIUS’s processes and did not question the authorities of either CFIUS or the President.
  3. The decision calls for more transparency in the CFIUS process and more meaningful engagement with transaction parties.  CFIUS could comply with the DC circuit’s decision by making small but meaningful adjustments to its processes, such a permitting the CFIUS agencies with the greatest equities in a case to engage more directly with the parties and to discuss potential options to mitigate any national security risk.

Seen in this light, the Ralls decision is perhaps best understood as a positive decision for foreign investors — and one with positive process-related implications — but not as signaling a sea change in the CFIUS process or in the President’s authority to protect U.S. national security.

On remand, the district court will consider the scope of CFIUS authority to impose interim mitigation measures to protect national security during the pendency of an ongoing CFIUS review.  This is particularly important because it goes squarely to the policy balance that underlies the CFIUS statute and process.  It would be surprising if the district court concludes on remand that CFIUS lacks authority to impose interim mitigation to protect national security in cases where transaction parties close a transaction without filing with CFIUS — as Ralls did — and the resulting transaction in turn threatens the national security.  Please see our client alert on the subject.

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Photo of David Fagan David Fagan

David Fagan co-chairs the firm’s top ranked practices on cross-border investment and national security matters, including reviews conducted by the Committee on Foreign Investment in the United States (CFIUS), and data privacy and cybersecurity.

Mr. Fagan has been recognized by Chambers USA and…

David Fagan co-chairs the firm’s top ranked practices on cross-border investment and national security matters, including reviews conducted by the Committee on Foreign Investment in the United States (CFIUS), and data privacy and cybersecurity.

Mr. Fagan has been recognized by Chambers USA and Chambers Global for his leading expertise on bet-the-company CFIUS matters and has received multiple accolades for his work in this area, including twice being named Dealmaker of the Year by The American Lawyer for 2016 and 2019. Clients laud him for providing “excellent advice,” “know[ing] everything there is to know about CFIUS” and being “extremely well regarded” by key regulators. (Chambers USA)

In the foreign investment and national security area, Mr. Fagan is known for his work on matters requiring the mitigation of foreign ownership, control or influence (FOCI) under applicable national industrial security regulations, including for many of the world’s leading aerospace and defense firms, private equity firms, and sovereign investors, as well as telecommunications transactions that undergo a public safety, law enforcement, and national security review by the group of agencies known as “Team Telecom.”

Mr. Fagan’s practice covers representations of both foreign and domestic companies before CFIUS and related national security regulators. The representations encompass matters in which the principal assets are in the United States, as well as those in which there is a smaller U.S. nexus but where solving for the CFIUS issues – including through proactive mitigation and carve-outs – is a critical path for the transaction. Mr. Fagan is also routinely called upon to rescue transactions that have run into challenges in CFIUS, and to negotiate solutions with the U.S. government that protect national security interests, while preserving shareholder and U.S. business interests.

Reflecting his work on U.S.-China investment issues and his experience on complex U.S. national security matters intersecting with China, Mr. Fagan is regularly engaged by multi-national companies, including the world’s leading technology companies, to advise on strategic legal projects, including supply chain matters, related to their positioning in the emerging competition between the U.S. and China. Mr. Fagan also has testified before a congressional commission regarding U.S. national security, trade, and investment matters with China.

In the privacy and data security area, Mr. Fagan has counseled companies on responding to some of the most sophisticated documented cyber-based attacks on their networks and information, including the largest documented infrastructure attacks, as well as data security incidents involving millions of affected consumers. He has been engaged by boards of directors of Fortune 500 companies to counsel them on cyber risk and to lead investigations into cyber attacks, and he has responded to investigations and enforcement actions from the Federal Trade Commission (FTC) and state attorneys general. Mr. Fagan has also helped clients respond to ransomware attacks, insider theft, vendor breaches, hacktivists, state-sponsored attacks affecting personal data and trade secrets, and criminal organization attacks directed at stealing personal data, among other matters.

In addition, he routinely counsels clients on preparing for and responding to cyber-based attacks on their networks and information, enhancing their supply chain and product development practices, assessing their security controls and practices for the protection of data, developing and implementing information security programs, and complying with federal and state regulatory requirements. He also frequently advises clients on transactional matters involving the transfer of personal data.

Photo of Jonathan Wakely Jonathan Wakely

Jonathan Wakely practices at the intersection of national security and the private sector, advising clients on a range of significant international trade, cross-border investment, national security, supply chain security, and public policy matters.

Mr. Wakely has been recognized by Chambers USA for his…

Jonathan Wakely practices at the intersection of national security and the private sector, advising clients on a range of significant international trade, cross-border investment, national security, supply chain security, and public policy matters.

Mr. Wakely has been recognized by Chambers USA for his leading expertise in securing national security-related regulatory approvals for foreign investments. He regularly represents clients before the Committee on Foreign Investment in the United States (CFIUS), the Committee for the Assessment of Foreign Participation in the United States Telecommunications Services Sector (better known as “Team Telecom”), and the Defense Counterintelligence and Security Agency (DCSA) in proceedings related to the mitigation of foreign ownership, control, or influence (FOCI). He was deeply involved on behalf of clients in the development of the Foreign Investment Review Modernization Act of 2018 (“FIRRMA”), which reformed CFIUS’s authorities, and its implementing regulations.

Mr. Wakely has advised on transactions with an aggregate value in excess of $250 billion across virtually all sectors, including semiconductors, telecommunications, financial services, software, IT services, energy, and real estate. His recent representations include successfully defending Qualcomm against the attempted hostile takeover by Broadcom, securing approval for the acquisition of Genworth Financial by China Oceanwide, and representing Ford Motor Company in connection with a $2.6 billion investment by Volkswagen in Ford’s autonomous driving subsidiary, Argo AI. He has negotiated and advised companies on compliance with many of the most significant, complex, and sensitive national security agreements of the past decade.

Mr. Wakely also regularly advises clients on public policy and government relations matters involving international trade, cross-border investment, and national security. He has represented trade associations, Fortune 100 companies, and sovereign states before Congress and the executive branch, including by designing and executing government relations campaigns to achieve policy, regulatory, and legislative goals.

Mr. Wakely is an adjunct professor at the Georgetown University Law Center, where he teaches a course on national security and the private sector. He has also published extensively on matters related to the regulation of foreign investment; his articles have appeared in the Harvard National Security Journal, The International Lawyer, and the Global Trade and Customs Journal. Before joining Covington, he served as a political analyst with the Central Intelligence Agency (CIA), where he provided strategic analysis to the President and other senior policymakers.