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

The U.S. District Court for the District of Columbia granted a preliminary injunction for Chinese big data processing technology company Luokung Technology Corp., temporarily blocking the company's designation as a Chinese military company. Judge Rudolph Contreras issued the injunction in a May 5 ruling, finding it likely Luokung would prevail in its case against the designation. The publicly traded Chinese tech giant claims that the Communist Chinese Military Company (CCMC) designation issued by the Department of Defense was made in violation of the Administrative Procedure Act, was arbitrary and capricious, and that the evidence in hand was not substantial enough to support a finding of state control over the company.

Pointing to the government's lack of evidence in support of designating Luokung as a military company, Contreras ruled against DOD's designation despite the "heightened deference" given to agencies in cases that involve national security. The judge found no real security threat in the designation and highlighted the irreparable economic and reputational harm that would befall Luokung given the designation's continuation. Trading of Luokung stock was due to be suspended on Nasdaq on May 7 at 8 p.m. EDT, but following communication between Luokung and Nasdaq senior management, the delisting order has been withdrawn. The company's shares will continue to trade on Nasdaq, Luokung said in a news release.

Contreras expressed skepticism over the consequences of allowing DOD's designation to continue. "The Court is far more persuaded by the countervailing policy argument raised by Plaintiffs, that if Defendants’ preferred, extremely broad definition for 'affiliated with' is adopted, that it would have almost no limiting principle," Contreras said. DOD had no answer for the judge when he asked in oral argument how the definition of affiliation used on Luokung would not apply to all Chinese government contractors. In its designation, DOD relied on five pieces of evidence that were all "public, non-classified data seemingly pulled from general news articles or Luokung's own company website." The court addressed each in its memorandum opinion, finding that the DOD's conclusions did not match the record evidence.

Contreras for similar reasons also granted a preliminary injunction against a CCMC designation on consumer electronics giant Xiaomi (see 2103150035). After examining the evidence in both cases, Contreras said DOD had failed to evidence a link between the military and each company and expressed a skepticism about the "national security" grounds for each designation. It was Xiaomi's preliminary injunction that led the Treasury's Office of Foreign Assets Control to allow continued stock in Luokung to be traded on U.S. exchanges until May 8 (see 2103160017).

In response to the injunction, OFAC also published a new submission on its Frequently Asked Questions page relating to Luokung's CCMC designation. The FAQ said the CCMC designation does not apply to Luokung "pending further order of the Court." The DOD must submit its Administrative Record to the court by June 7.