Federal Judge Temporarily Blocks Xiaomi's 'Military Company' Designation

The U.S. District Court for the District of Columbia temporarily blocked Chinese consumer electronics giant Xiaomi's designation as a Chinese military company, in a March 12 ruling. Judge Rudolph Contreras said the Department of Defense's decision to designate Xiaomi, thus forbidding U.S. citizens from purchasing Xiaomi securities, lacked substantial evidence. He said DOD provided an “inadequate” explanation as to why its decision was made and the source of authority for making the designation.

Contreras ruled against DOD's designation in this case even over the "heightened deference" given to agencies in cases that involve national security, instead pointing to the government's lack of evidence in support of designating Xiaomi as a military company. “The Company believes that the decisions of designating it as a [Communist Chinese Military Company] are arbitrary and capricious, and the judge agrees,” Xiaomi said in a statement. “The Company will continue to request that the court permanently remove the designation.”

Xiaomi -- the third-largest smartphone manufacturer by volume in the world -- launched its lawsuit Jan. 29 to fight the military company designation, arguing that the DOD's claim had no “factual basis” and that the company could face “irreparable harm” from the designation that was set to go into effect March 15 (see 2102010046). The designation was based on two pieces of evidence: (1) one of Xiaomi's owners, Lei Jun, had been honored by China's Ministry of Industry and Information Technology, which helps manage military-civil fusion for the state and (2) the company's five-year plan to invest in 5G and artificial intelligence, technologies “critical” to modern military operations.

Contreras said the agency could not prove any definitive ties between Xiaomi and the Chinese military. He noted that the award Lei received had been given to over 500 Chinese entrepreneurs since 2004, many of whose industries are wholly unrelated to military-civil fusion. As for the company's five-year plan, the court said Xiaomi's investments in 5G and AI technologies is not enough to designate it as a military company. “To simply refuse to keep up with the market and develop these technologies would render Xiaomi’s products obsolete,” Contreras explained.

Contreras also expressed a skepticism about the “national security” grounds for the designation, saying DOD failed to identify any transfers of technology from Xiaomi to the Chinese government. Contreras said the authority to designate Chinese companies as military owned had gone unused for the past 20 years only to see a flurry of activity in the final days of the Donald Trump administration. “This lack of use also undermines the notion that the designation process is critical to maintaining this nation’s security,” the judge wrote.

The decision to grant a temporary injunction against the designation was also made on the grounds that it would have caused Xiaomi “irreparable harm” to both its reputation and finances. To evidence this harm, Xiaomi said that as of Feb. 16 its stock had dropped 9.5% since the Jan. 14 designation, resulting in a loss of about $10 billion in market capitalization, loss of contracts, damaged ability to recruit and retain top talent, and other harm indicators.

The Department of Justice declined to comment on the preliminary injunction.