Another Court Loss for President’s TikTok Ban, Questions Loom About the Future

On December 7, 2020, Judge Carl Nichols of the D.C. District Court issued a preliminary injunction barring the federal government from enforcing a ban on the social media site TikTok. The opinion from the D.C. District Court is the second federal proceeding that suspended the ability of the Department of Commerce to enforce a ban on the short-loop video-sharing site. This decision comes amidst a fluid situation for Chinese tech companies and U.S. companies that work with them. More broadly, these cases illuminate legal issues under relevant statutes and may inform future litigation and compliance.

Background

In August of 2020, the President issued Executive Order 13942, which relies on the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act and delegates authority to the Secretary of Commerce to broadly prohibit transactions involving information and communications technology or services of “foreign adversaries.” The order alleges that TikTok, the video-sharing app owned by the Chinese company ByteDance Ltd. (ByteDance), “automatically captures vast swaths of information from its users, including Internet and other network activity information such as location data and browsing and search histories,” which “threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information – potentially allowing China to track the locations of Federal employees and contractors, build dossiers of personal information for blackmail, and conduct corporate espionage.” To mitigate these risks, the President directed the Secretary of Commerce to identify and list prohibited transactions with ByteDance and its subsidiary TikTok, and ordered ByteDance to divest itself of TikTok’s U.S. operations, to include any interests the company would have in U.S. user data.

In September, TikTok and ByteDance sued the Department of Commerce, alleging the government’s actions violate the Administrative Procedure Act (APA), the First Amendment, the Due Process Clause of the Fifth Amendment, exceeded the President’s and Commerce Secretary’s authority under IEEPA, and violated the Takings Clause of the Fifth Amendment. Siding with the plaintiffs, Judge Nichols found the government’s actions banning TikTok likely exceeded the scope of authority granted by IEEPA, and Commerce’s failure to consider viable alternative mitigations likely violated the requirements of the APA. 

Testing the Limits on Executive Authority Under IEEPA, and Indirect Regulation

Central to Judge Nichols’ most recent opinion was a thorough examination of IEEPA and the extent to which the executive branch can regulate international transactions involving personal communications and informational materials.

IEEPA grants the President peacetime authority “to deal with any unusual and extraordinary” foreign “threat” to U.S. “national security” so long as “the President declares a national emergency with respect to such threat.” The act further allows the President to regulate, prevent or prohibit transactions, related to the national emergency, between foreign entities and the U.S. However, IEEPA expressly limits the ability of the government to “directly or indirectly” regulate:  1) personal communications, that do not involve the transfer of anything of value, or 2) the importation of information or informational materials, regardless of format or medium, including but not limited to items like publications, films and artwork. 

In reviewing the statutory exemptions and legislative intent, Judge Nichols found that the Department of Commerce’s TikTok restrictions indirectly regulated both the transfer of personal communications and the importation of informational material, all in violation of IEEPA.  Specifically, District Court found:

• The regulatory goals of Commerce’s prohibitions were clearly articulated by the Executive Order and supporting documentation. These documents, the court reasoned, demonstrated that the intent of the prohibition was directed at two threats: the risk that U.S. user data would be provided to China and the transmission of Chinese government propaganda into the United States. The Court found that Commerce’s action had an indirect impact on items congress expressly exempted from regulation under IEEPA.  

• “IEEPA’s grant of authority does not include the ‘authority to regulate or prohibit, directly or indirectly . . . any . . . personal communication, which does not involve a transfer of anything of value.’”  The court found that “[i]t is undisputed that the Secretary’s prohibitions will prevent Americans from sharing personal communications on TikTok, including those that spread ‘disinformation’ and ‘propaganda.’” While the government asserted that communications sent on TikTok’s platform did have an intrinsic worth to the company, the clear intent of IEEPA’s “of value” language was to cover the substance of the conversation and not the value to the medium that facilitated the conversation.

• “IEEPA’s informational-materials limitation deprives the President of authority to regulate or prohibit—‘directly or indirectly,’ ‘regardless of format or medium of transmission,’ and ‘whether commercial or otherwise’—the importation or exportation of ‘informational materials.’” While the government argued that the prohibition was directed at the medium of transmission and not the exchange of “informational materials” per se, the result of Commerce’s action was an indirect regulation of material that fell outside of Commerce’s permissible authority under IEEPA.  

The Court Found that Commerce Likely Violated the APA by Not Considering Reasonable Alternatives

As a general matter, the APA prohibits agency actions that are “arbitrary, capricious,…or otherwise not in accordance with the law.” The D.C. Circuit has held that under IEEPA, agency decision-making processes to implement executive orders are subject to review APA and will be held to the “arbitrary and capricious” standard. 

The District Court held that “the Secretary did not consider any alternatives before effectively banning TikTok from the United States, nor did the Secretary articulate any justification (rational or otherwise) for failing to consider any such alternatives.” The court noted that concurrent to the litigation, TikTok and ByteDance were negotiating a divestiture process with the Committee on Foreign Investment in the United States (CIFUS). Such a divestiture, if approved through the CIFUS process, would have mitigated the national security concerns by severing the company’s connection with the Chinese Communist Party, which the Department of Commerce cited as a foundational concern in the IEEPA action. In the end, “the Secretary did not consider making his prohibitions contingent upon the failure of the divestment process. […]  But instead of scheduling the prohibitions to take effect only after divestiture deals fell through, the Secretary opted to effectively ban TikTok on November 12, 2020.” Thus, because Commerce failed to consider “reasonable alternatives” in the IEEPA action, the Court held that the plaintiffs were likely to succeed on their APA claims.

Industry Should Understand the Limits of the Court’s Opinion

While the District Court’s opinion does give some clarity to the application of the Executive Order and administrative actions against TikTok’s U.S. operations, broad authorities remain available to the President in regulating technology transfers. Courts often defer to the judgment of the Executive Branch in matters of national security, and where an administrative record can better support the conclusions of a department or agency, regulatory prohibitions have a better chance of withstanding judicial scrutiny. Over the past several years, the administration has implemented a complex framework of executive orders and regulations that utilize the broad authority of the IEEPA to govern a wide array of technology-related foreign transactions. Understanding the scope and limitations of this authority, and the importance of the administrative processes implementing these orders, can help companies guard against burdensome regulatory actions that could inhibit cross-border activity and prohibit the international exchange of innovation and technology.

Wiley is advising on these issues and continues to closely monitor the U.S. government’s efforts to address the growing political, economic, and military competition from China and the impact of such efforts on U.S. and non-U.S. companies. This includes changes that may take place in a Biden Administration.  Should you have any questions on the Executive Orders and their implications, please do not hesitate to contact one of the attorneys listed on this alert.