Industry Should Expect More Restrictions, CFIUS Reviews of Chinese Tech Companies, Lawyers Say

The Trump administration will likely continue to impose restrictions on transactions with large Chinese technology companies, particularly as the Committee on Foreign Investment in the U.S. places more scrutiny on Chinese investments involving personal data, trade lawyers said. Industry should prepare for more announcements similar to President Donald Trump’s executive orders on TikTok and WeChat (see 2008070024), one lawyer said.

“In my view, the TikTok [order] is just the first of many that we're likely to see in this space,” said Richard Sofield, a Wiley Rein lawyer and former Justice Department official who worked closely with CFIUS. Sofield, speaking during an Aug. 25 webinar hosted by Wiley Rein, said CFIUS is becoming increasingly concerned about foreign companies -- especially Chinese entities -- with access to personal data on U.S. citizens. “That's going to be virtually every app,” Sofield said. “We're anticipating the possibility of seeing other big Chinese internet companies being subject to these types of executive orders.”

Sofield said Alibaba, the Chinese technology and e-commerce company, is a prime target. “The government has already expressed national security concerns regarding Alibaba,” he said. “I think that company could be a potential candidate for one of these executive orders.”

Although Trump’s orders banned certain transactions with ByteDance and Tencent, the parent companies of TikTok and WeChat, respectively, the Commerce Department has yet to release regulations on the restricted transactions. Sofield said those regulations likely will be complicated by a lawsuit filed earlier this week by TikTok, which accused Trump of misusing national security authorities and criticized CFIUS for an unfair review process (see 2008240031).

“Commerce is putting these regulations together as we speak … but how they play out will also be shaped by the litigation,” Sofield said. “So now we're going to see the courts getting involved in determining what the limit of the government's ability to use executive orders to regulate in this space might be.”

In addition to scrutinizing companies collecting personal data, CFIUS is also targeting transactions involving critical technologies, which are partly defined as emerging and foundational technologies that are export-controlled by Commerce. But because Commerce has yet to issue many controls on emerging technologies and has not yet released any controls on foundational technologies, CFIUS does not have a clear set of technologies to target (see 2008240017).

Sofield said Congress has suggested allowing CFIUS to designate its own emerging or foundational technologies, but said that would create complications for industry. “Companies would have no way of knowing beforehand whether CFIUS is going to designate a particular technology as emerging or foundational,” he said. “So it would really put [companies] at a disadvantage in determining what their regulatory risk might be or how to address those concerns.”

Along with more scrutiny of Chinese investments, the administration is also increasing restrictions on exports that might be sent to foreign militaries or state-owned companies. Lori Scheetz, an export controls and sanctions lawyer with Wiley Rein, said industry is still “grappling” with an April Commerce rule that imposed more license requirements on exports to military end-users and for military end-uses in China (see 2004270027). That rule created uncertainty for some in industry who viewed the due diligence requirements as unclear (see 2007090075 and 2007020035). Industry is still “trying to determine how broadly [Commerce’s Bureau of Industry and Security] is going to interpret these controls,” Scheetz said during the webinar.

Scheetz pointed to a recent list issued by the Defense Department of Chinese companies with ties to the country’s military (see 2006250024), saying it is unclear if shipments to those companies will be captured by BIS’s April rule. BIS issued a guidance for the rule in June and said it may issue more, including advisory opinions (see 2006290045). “It's not clear yet that BIS will take the same view of these entities and view them as military end-users under the [Export Administration Regulations],” Scheetz said. “There's a lot of uncertainty right now.”