Welcome everybody to another episode of Ganbei, I'm your host Art Dicker. And today we have an old friend of the program, Tim O'Toole.Tim is a co-host of Embargoed! which is a great podcast about let me start that over again. Okay, welcome everybody. To another episode of gun Bay. I'm your host Art Dicker. Today. We have the pleasure to be joined by Tim O'Toole. Tim is a partner at Miller and Chevalier boutique regulatory firm in DC, and he is head of the white collar defense practice there.
Welcome Tim.
Tim: Thanks Art.I'm really happy to be on the show and thanks for having me. Yeah.
Art: We have a,quite a symbiotic relation with you and as Brian Fleming as well, who you're,both co-hosts of another podcast called Embargoed! which I'm a big fan of. And I encourage everybody here to check it out.
Tell us a little bit about the show.
Tim: So on Embargoed! we try to talk about trade, current trade issues. We'll mostly focus on sanctions and export controls issues. And for much of the last year, our show has been, 70, 80% devoted to issues related to China. So it's been a really interesting time for those sorts of issues.
It's a little less so now but I think in a good way,
Art: Yeah, we had a real firestorm of cases and rules coming out. And we're going to get into some of those today as they, as the been taken over and the baton has been handed over to the Biden administration on the first of those topics.
So we've got basically two topics today. First, we're goingto talk about the Xiaomi case which was basically Xiaomi and then a company called Lukung, they are a local is a mapping technology company. Xiaomi, of course it's the big brand name,which even a lot of folks in the U S I think I've heard of before making mobile phones and on other devices show me at least set up the intro just a little bit here.
Xiaomi successfully filed a suit in us federal court toblock from the implementation of a ban that would have prevented US persons from essentially investing in publicly traded stocks of Chinese companies as defined in a list by the US Department of Defense as Communist Chinese MilitaryCompanies.
Now before we get into the details, we're going to talk about that case and the Luokung case. And then we're gonna follow up with a new rule that's come out on supply chain. It's not so new. It's been out a couple of months, but we're going to get an update on where that's headed.
Big picture I want to set up because I think it's confusing sometimes for the audience who doesn't follow this as closely as I do, or especially you do, on a big picture on the overall rules that are out there in the media these days. Because I think it's easy to confuse them. So I will let me just take 30 seconds to frame that as I understand and Tim please correct me if I'm wrong.
There are basically now rules, which forbid, and those havebeen on the books for some time now forbid Chinese companies from buying certain kinds of US companies, which are essentially sensitive for national security and those fall under CFIUS and now FIRRMA. And for the audience, you might have heard of cases about the Tik Tok case being looked at by the Trump administration for buying Musical.ly that's bucket number one.
Then we have rules on US companies that prevent US companiesfrom selling or licensing certain kinds of technology to Chinese companies.That's a lot of the rules that the news that's come out off and on about Huawei. And those are generally calledexport control rules.
And the third bucket we have, which we're going to get into is rules that prevent US companies from buying certain kind of cover technologyand services from Chinese companies. That's what we’ll talk about in the second half.
First off though, we're going to talk about, again, the rules that prevent US persons from investing in certain Chinese companies that are somehow affiliated with the Chinese military.
Now, I just wanted to set all that up for the audience so that you don't have to do it at Tim and save your energy for the heart of the discussion here. Can you walk us through a little bit about these two cases that have been come up recently with XIaomi and Luokung and I know Xiaomi has come up with a settlement and Luokung just got a favorable ruling.
Can you walk us through what those cases have been about?
Tim: Absolutely. And that was a really good summary of a lot of the different little trade rulesthat the U S has come up with many of which came at the tail end of the Trump administration. Although as we'll talk about it, I'm sure some of these rules have continued on into the Biden administration, but starting with Xiaomi.
So in back 20 years ago, you really need to start this story 20 years ago, the U S Congress passed a law that, that really didn't have much of an effect on trade. Didn't have much of an effect, period. But it did require the Department of Defense to make a list within six months of the law, which was passed in 1999 of companies operating in the United States that were owned controlled or affiliated with the Chinese military andin the US and I don't know if it's the same way in China.
Sometimes Congress passes laws and nothing happens. And this was a good example of Congresspassing a law where nothing happened at all for 20 years, but last summer and I think at the instigation of a couple of very anti-China senators in our US Senate, the Department of Defense decided that it was going to start listing those companies operating in the U S that were owned, controlled, or affiliated with the Chinese military.
And it came out with a preliminary list last June. So June of 2020, almost a year ago. And then in August, it came out with a fewadditional companies on that list. And again, it was just a list. So it didn't really have much consequence, but it was a list that the Department of Defense put together.
And then it, presumably what Congress intended back 20 yearsago is that there would be a list and then Congress would study whether there should be any consequences for being on the list. But instead of that happening in November of 2020, President Trump issued an executive order thatincorporated that list, but then essentially made it, and that the order went through several changes.
Cause I think it was put together so quickly that theyhadn't really figured out exactly what they were trying to prohibit. But at theend of the day, what they prohibited was they prohibited US persons, so that's, US citizens, green card holders companies organized in the United States from owningand then essentially purchasing or trading in the shares, the publicly traded shares of companies that were on this list.
So that was a big deal, especially for companies as it is anystock market. It's not just the U S markets, but it's markets around the world.So at that point US investors are a significant portion of the world investment market, and that made it much more difficult for US investors to invest inthose stocks.
Art: Pension people got know, you got like pension funds. Yeah, exactly. Huge institutional funds.
Tim: Exactly, soany fund that was a US person was at that point, prohibited from investing in the stocks of these companies now as I said, it took 20 years for the Department of Defense to come up with a list.
And the Department of Defense in the U S system is notreally an entity that makes lists our Treasury Department. And really it's the Office of Foreign Assets Control has some real professional staffers who have years and years of experience with deciding, looking at the information, looking atthe intelligence.
Trying to figure out whether or not a company or a person meets the criteria for being on a list, going through a process to make sure that that determination is accurate and then coming out with a list. And so when OFAC puts a company or person onto a blacklist, there's been a lot of thought put into it.
I'm not saying they always get it right. But they actually are professionals who really have done this before many times and are trying their best to get it right. The Department of Defense doesn't have any mechanism like that. And so the listing criteria were really, they weren't transparent.
And at the time they made the lists, it wasn't even clearthat the lists had any consequence and they didn't do the sorts of things thatyou would expect, or it was we've come to expect agencies like OFAC to do for example, they wouldn't get the name of the company. A company like Huawei has,precise corporate organizations that make up Huawei.
So they have the Huawei company in it, in China that, thathas a headquarters and has a formal corporate name. And when OFAC lists acompany like that, they'll use the formal corporate. Name they'll put the address. They will make sure that when they put a company on the list, thatit's Huawei this particular organization located at this place.
If they want to list a Huawei subsidiary, they put the formal name of the subsidiary and the address of the subsidiary. So you knowwho they're talking about, the Defense Department list, as we'll talk about had misspellings, they just, when they listed Huawei, they just said Huawei, which is not an a company at all.
And so it was a really odd list. Companies in the U S that were put onto the list and particularly Xiaomi, which was put on the list a little bit later than the original listings, but was put on after the President's executive order and was facing the possibility that us persons would not be able to invest in their securities.
Xiaomi brought a lawsuit in the United States and theybrought a lawsuit under both the Administrative Procedures Act, which is a law that allows companies and persons to challenge agency actions. So actions of agencies like the Department of Defense and also under our US constitution in which guarantees due process.
So if they're going to essentially affect a property interests, like the property interests of Xiaomi. Xiaomi has a right to challenge whether or not the process was fair. And so Xiaomi brought a lawsuit in US district court and challenged the fairness of the process. And really what they said was that the law here that Congress passed and that, that was the basis of President Trump's executive order.
Required that a for a company to be put on this list, they had to be owned controlled or affiliated with the Chinese military. And wedon't think the Defense Department did enough process to determine this. And they pointed to the two page memorandum. The Defense Department had puttogether making this determination that didn't really say much other than that.
Xiaomi was a Chinese company and it had some undefined connection with the Chinese military. But then in addition we don't think theyuse the right definition of “affiliated.” So the term affiliated everybody agreed that Xiaomi is not owned or controlled by the Chinese military, but thequestion was, were they affiliated with the Chinese military and Xiaomi took the position and ultimately it was successful that they were not.
That the right definition of affiliated is that it's effectively controlled by another. So there's owned or controlled, or essentially effectively controlled by another, or under common ownership or control.So even if, if you're not formally owned or controlled by the Chinese military to be affiliated, you have to be effectively controlled by the Chinese military, that it is much broader than just having some undefined connection to the Chinese military.
And the court accepted that definition. And that was reallyi mportant because once it accepted that definition, it was really clear that Xiaomi,which was a publicly traded company, produced products for civilian use controlled by an independent board of directors and shareholders was not effectively controlled by the Chinese military.
And that's what the court found. And so the court, and then the U S the way that the way that you challenge these determinations is you bring what's called a preliminary injunction motion. So you say, look, this is really important. And it's urgent. And the urgency here was the Xiaomi that theorder was going to be become effective for Xiaomi in March.
I think this was taking place a little bit before that. And so the, if the court didn't rule, then Xiaomi was going to be injured by having US persons not being able to trade it, irreparably harmed. Exactly. Irreparably harmed because of this, essentially they would face this harm and theycouldn't, there would be no way to measure it.
So they, Xiaomi said we're going to be irreparably harmed.And the other factor there's four factors, but the main two are irreparableharm. As you said, Art. And then likelihood of success. So how likely is it that Xiaomi is going to win? And the court found that Xiaomi had met the staff, met the standard of likelihood of success because there really was no showing in the Defense Department memo that they were affiliated under the proper definition of the term with the Chinese military.
And so that the court ordered the. Defense department and the Treasury Department, which is the one that now implements the DefenseDepartment list to not apply this rule to Xiaomi, that is that Xiaomi would have faced no prohibition on the buying and selling. There's now a preliminaryjunction means that order stands throughout the course of the litigation.
So until the litigation ended the Xiaomi was going to be allowed to continue to sell its shares. It would do what they call preserve the status quo. Meaning the rule now in the rule of the started, the case was the Xiaomi could buy and sell that US persons could buy and sell Xiaomi shares.
So that would be the rule until the case was decided. And then recently or earlier this month after this ruling Xiaomi settled with the Departmentof Defense and the settlement was not really a settlement at all. It's basically the Department of Defense agreed that Xiaomi won the case and was not going to be on the list and was not going to be subject to this prohibition.
Art: And it's fascinating in the background. These are companies are live in publicly trading, and they did new, this is material news that affects their stock price. So you could see the stock jumping and falling as this was going on. And there was this news coming out.
Tim: Absolutely.You can and it went both ways, right?
So when Xiaomi is put on the list, it really hurt their stock quite severely. And then as soon as that Xiaomi wins the case, the stock went way up because now investors know that Xiaomi is not going to be facing this prohibition on the buying and selling of its stock. So to the extent that expectation was earlier built into the market, it completely went away.
Art: So I've got tons of questions on this. And I think this is absolutely fascinating, both of these cases, which are similar cases, show me and law home. And I don't actually, don't honestly, don't know where to start because I'm trying not to, I'm not trying to try not to get too excited about it because obviously I'm a lawyer and I just think it's a beautifully written case as we were talking about.
Just from standpoint and the logic that's used. I thinkfirst of all, it's a tribute and I just want to say to our system, I thinkhonestly, if you take a step back for a second, that a Chinese company can bring a suit like this in US federal court and win. And I just, it's just shows you the robust system.
I think a lot of people let's just say outside of the United States, right? What might be surprised or at least still somewhat? Yeah, I guess surprised is the right word that for example, Xiaomi could bring this case and they, and the government would have to actually devolve. The doc that two pager that she said, the document that shows the factual analysis that they used to make this determination of putting them on the list, but that's publicly has to be disclosed or at least has to be disclosed to a party bringing the litigation.
I think that's one remarkable thing that we shouldn't jus tnecessarily take for granted that companies able to do that second that. Thatthe judge is essentially yeah, they're appealing to due process under the constitution that, even foreign companies, have the right to bring these kinds of cases, if they're effected and potentially irreparably harmed and so forth.
I wonder what you think about this being a crack that's opening up for firms to, to see a light at the end of the tunnel or at least see a playbook here.
Maybe let's talk about the specific rule. Do you see othe rcompanies, either going to the Department of Defense directly now and saying,look, our facts are very similar to Xiaomi.
We would like to quote, settle with you as well about this list, or do you think it's so fact-specific that some, that all cases will haveto go similarly go through a litigation like this. How do you see futurecompanies using this ruling?
Tim: So I think there'll be a little bit of both. On the one hand you have a Defense Departmentthat does not have the institutional kind of buy-in that the earlier DefenseDepartment did.
The Biden Defense Department did not put these companies onthe list for the most part. And so they're not going to be as invested as in defending this list as the earlier Defense Department might've been. So I think there is some likelihood that with respect to companies where it's clear that they don't meet Judge Contraras his definition in shall me of affiliated that you'll probably have the Defense Department settling those cases.
I do think that. One thing. And we'll talk about it also inconnection with the ICTS rules the Biden administration has bought in at leastin some ways to some of these Trump Administration rules. And so the Biden administration has certainly not abandoned the sanctions program with respect to companies affiliated with the Chinese military.
There was some chance that it would, but it doesn't appear to be doing that. And so I think that there will be cases where there is moreof a dispute. Whether or not the company is meets Judge Contrarez’s definition of affiliated with the Chinese military that will still go to litigation. But I do expect to see more litigation in this area in part, because not only have.
Xiaomi was successful. Now Luokung was successful, but we'vehad a number of other Wechat and other companies have been successful inchallenging some of these national security orders. That is a big deal in the US because I can tell you, two years ago and certainly four or five years ago, the idea that a company could go to U S courts and challenge an order that was based on national security grounds and win quickly like these cases have done It was really unheard of. And now it's happened, at least four times that I can count in the last in the last year. And that means that there will be more challenges because many of these orders have gone. I think, beyond what the usgovernment used to do in this area.
Art: That definitely begs the question. Yeah. Peeling back the onion a bit, certainly they're like Biden divided in administration, I think for sure is not going to have this necessarily the same appetite to extend these lists or to fight to the bitter end, to keep everyone on the list if there's a challenge.
But at the same time, as you said, they're not. I thinkmaybe it's politically more books, but then the first one of them may be alittle less no one's going to necessarily track every single company that comes on or off the list. But to have this mechanism in place it's still there.
So do we think that there'll be appetite to quote, fix these rules as well? So for example, the case with Shammy and walk home had a clearweakness among other weaknesses they had, which we talked about already.
You mentioned the affiliated with them language where thenatural as the Department of Defense argued. Look, we want this interpretation,which is basically means associated with the Chinese military and Xiaomi said, no, it should mean what's more common practice in the commercial contract world, which is means common ownership, common control, standard definition ofaffiliates that I see every day in my practice of defining affiliates.
And the analysis was that you go with the Department ofDefense's definition, very broad definition, that would essentially be a rabbithole, or that would be such a broad definition that you could almost throw every company into that definition by the nature of how China works.
And probably even other countries would, you'd have a similar situation. So if there is what now appears to be again, a quote “hole”in this regulation where lots of companies that were on the list could maybe no longer be put on the list. We see the appetite for going back to these. Or going back to these rules and amending the language or the Department of Defense, be more careful in the factual analysis that they prepare, knowing it's likely to have to be disclosed to a court at some point.
Tim: Yeah. So on the last question I'll take that one first. I definitely think the DOD will become more careful because it's lost twice in court. I think they've seen now that they're not going to get away with just like throwing any explanation out there and having a court say it's national security, so we're not going to really review this closely.
If the Department of Defense says that they meet the definition, we're just going to go along with that, which is what agenciesparticularly the Department of Defense had been used to for years. And so I think having these two losses in succession, to the extent that they keep the same definition, they're going to have to work a lot harder to get it right.
And then they'll probably be a lot more cautious and a lot more careful than they were in the past in connection with whether or notthey'll change the definition, that'll be harder because to the definition that Judge Contrares’ use came from a statute. So Congress passed the statute, the Presidentsigned the statute and in our system, because it's so hard to get the House of Representativesand the Senate and the President to agree on virtually anything.
They need to go back and get a new law in order to change that definition. And I just don't see. Then being able to say, the definition that Judge Contrares used of affiliated was just so narrow that we can't put any companies in, into this list, even though they're really closely tied to the Chinese military.
It still leaves a lot of room to, if what we're trying to do is essentially stop us financial support that is going to Chinese military.Good companies that are closely affiliated with the Chinese military. Thisdefinition works fine, and it's going to, it strikes me as hard for Congress to come up with some sort of emergency that we don't just need to get companies that are affiliated.
We need to get any company that has any connection whatsoever however, tenuous with a Chinese military, that just strikes me as ahard sell good happened, but I just don't see the momentum politically for that happening anytime soon.
Art: Got it. I completely agree. And I think one of the struggles that folks drafting these rules face, and I think we're going to get into it in the second half of the conversation as well is definitions, right?
Because living in China. I know whether you're trying to define, the right entity, for example, on an export control list, or you'ret rying to define a term that covers the proper scope. In China, the system is a bit different, right? It's a, is it as it is a capitalist system or at least school, the more politically correct way to describe it as a market oriented system.
But there is a lot of involvement of the state. And that's by choice that's by design. And so it is a bit harder to separate things here,I think. And so I do have some sympathy for trying to craft rules that that are, not too broad, but not too narrow and not having too many again, quote, holesin it.
It's a bit of a game of whack-a-mole I think in some ways,especially as I've in my experience, dealt with export control lists over the years because If you really want that end, that list should almost be updated in real time because you have, it's so easy to reincorporate or to get the names wrong.
In fact, one of the, as we were joking about before joking,we were making light of the fact that the judge in this case right up frontvery quickly off the bats. Acknowledged that the comp that the Department of Defense got the name wrong of the company in the case of Luokung, the Chinesewould be Luokuang and I have sympathy for that even as well, because you would do.
And I think the explanation was theirs that they got the transliteration wrong, which is true. I think they still is not actually quitea good excuses as a, as I saw it, but yeah. There are different ways to put the name in from Chinese characters into a Romanized alphabetic spelling. So I don't, I guess my overall, my point is if I have some sympathy for these poor folks that do have to try to come up with these rules and define things, but I still think the judge was right to say, look, you could go to the company's site.
This is the list of traded name of the company. It's pretty easyto get the name right. And that, by the fact that you didn't get the nameright. Is it a sign this was all done in a haphazard manner? I do think that's the point the judge was trying to get across.
Tim: Yeah, no, Icompletely agree. I think that you could imagine a different set of facts where the judge had eh where the Department of Defense had gotten the name wrong. Cause transliteration issues are difficult and, One of the reasons that OFAC, which is much more careful about this, not only uses Western spelling, but also uses the Chinese characters whenever it puts somebody on a list, because they're trying to make sure that there's no kind of ambiguity about what they're doing.
You can imagine a set of circumstances where the DefenseDepartment got the name, spelling wrong. And, but the memorandum itself was so careful that the judge viewed it as just a typo that anybody could make, as opposed to just a, one of the many symbols of the fact that these guys really know nothing about locum, the other than that, it's in China and it has some undefined connection to the Chinese military, which could be said about many companies in China, and that's not pointing a finger at China.
It could be said about many companies in the United States.There are many companies here in the States that have some undefined connection to our U S military. We spent a lot of money on the military and there's a lot of UScompanies that sell things to the military or do things with the militaryhere that are not affiliated in any formal sense of the term for the U S military, but certainly have enough of a connection to the U S military that if China were to make a similar list, it could put it.
Put those companies on a list of us companies affiliated with the U S military in the same way. So it's one of those things where if. Ifthe Defense Department had been really careful and this had been an isolated slip, I think the judge wouldn't have even mentioned it. It would look petty, but where the, where they were so completely careless and it was just we think you'll buy off on anything.
So we don't even have to get their name. I think the judge decided to say, if you want to be that sloppy with me, I'm going to call you on it.
Art: Fair. Veryfair. I think that's exactly right. That normally yeah, they wouldn't, but if,but it just, this one, one other fact that shows the overall kind of approach that they took to making up this list and for putting this company on it I want to switch over now that thanks.
That was a great analysis. This is really a two-part so wewant to switch over to ICTS which is the Information and Communications Technologyand Services Supply Chain. It's an executive securing the information and the communications technology and services, supply chain, executive order.
Let me also save you, let you save your energy, Tim, a bit for the real analysis and and value add. And I'll take care of the nuts andbolts here off the top. The department of commerce has authority under this rule to prohibit certain ITTS transactions, which have been designed, developedmanufactured or supplied by persons owned by controlled, by or subject to the jurisdiction or direction of foreign adversaries.
And that posed basically an undue or unacceptable risk. Sothe United States and foreign dversaries are listed as countries like China,Russia, Iran, the usual suspects. That's pretty broad. I think we'll, we can get into that in in, in a second. But basically it's going after acquisitions, importation or installation dealing in or use of covered technologies or services in layman's term terms.
It prohibits us purchasers from buyers, from purchasing technologyor services from China that could pose certain security risks. I think that isa better way to sum it up. Tim, what is this rule about? And it sounds like it could have a really. Broad application. And I think even the doc itself in the rulemaking process, in the, in what they put out and put out in the federal register, admits it such, it could be extremely broad potentially.
So how is this ever going to actually get implemented in practice?
Tim: It remains tobe seen because as you point out Art, this rule is incredibly broad. It givesthe secretary of commerce, the ability to basically stop or mitigate virtually any transaction that takes place in the information and communications technology sector, which is a huge, sector of both the Chinese and the U S economies that, that involves what the.
The rule defines as foreign adversaries. And so essentially the premise of this rule is that there are countries that the us has anadversarial relationship with that make things that are within the ICT supply chain. That's a critical sector of the U S economy. And to protect the supply that supply chain will allow the secretary of commerce to really prohibit any transaction within that sector now is how many of those transactions, then there's millions and millions of these transactions. How many is the secretary of commerce going to look at much less prohibit? I think it remains to be seen, but I think it's going to be a very small number.
And so it's this broad rule that essentially says thesecretary of commerce can do anything he, or she wants with respect to a hugenumber of transactions and we're going to be left to find out as time goes on what those transactions are. And honestly, I think that's not a very good way to run a railroad.
And I think it's going to be, depending upon what thesecretary of commerce does, it's going to be an area that's ripe, like the typewe saw in the Xiaomi case and the Luokung case.
Art: Yeah, thatwas going to be my next question. It seems like it seems just waiting for this to come to become a final rule.
And then and actually has an implementation rules, more implementimplementation rules come out and it's, this seems open for challenge. Similarprocess then I guess is what would be some of the, could the grounds be constitutional grounds or would they be, would they have to actually wait for acase to for a decision to be brought by doc?
Tim: Yeah, I thinkthis is one where there's going to have to be a case. And I think that's very different from, there was a similar process that took place in the, at the end of the Trump administration with respect to we-chat and Tiktok. And those allowed the secretary of commerce to essentially do virtually anything that he, then it was Wilbur Ross wanted to do with respect to prohibiting transactions involving TikTok and Wechat and they came out with some rules after that, that, that were then enjoined, but those regulations pertain directly to particular companies. And those companies were able to enjoy those rules, I think because they were very broad, but they were also directed at those companies. And so a court could say, okay, so here's what you know is going to happen or could potentially happen to those companies.
This rule is so broad that I think it's going to bedifficult for anybody to challenge it until we really see what is happeningwith it? Because I think in this area, I think a court, our courts are going toaccept the premise that the information communication technology sector is a critical one, that, and that there are national security concerns that could be raised by certain transactions involving these adversarial countries in that sector.
So I don't think they're going to look at this and say, thisis just this rule doesn't have any logical basis whatsoever. I do thinkthere'll be concerned by how broad it is, but what our courts generally do when they see a broad law like that is they say let's see what the agency does. Let's see how the agency enforces it.
And if it comes in and it basically says, we're not going togive you any guidance, we're just going to, be as arbitrary as a lightningstrike and go after companies that we think have done something, but don't tell you what the criteria are. I think the courts will be concerned by that if the commerce department, lays out guidance, works with companies to try and make.
To mitigate any of these risks is reasonable in implementingthis, or at least an enforcing this, I think they'll do better than they'vedone in the Xiaomi case and the Wechat and the Tiktok case, if they are, if they're as arbitrary as they were in those cases or a sloppy as they were in those cases, I think there will be litigation and they'll.
They'll have a tough time because this rule is on its facequite broad. And it's, the powers are really, I wouldn't say unprecedented, butthey're pretty broad and there's not a lot of precedent for them.
Art: I can almostsee, cause I actually had an internship back in the department of commerce many years ago when I was in law school in DC at the international trade administration.
And I can just imagine some of the folks there's a cringingas they see this rule come out, maybe as of course I imagine how CFIUS. Thefolks are poorly understaffed folks that at Cepheus when FIRRMA came out and just, again, going back to the word floodgates, just thought that, Oh my gosh, how are we going to have the bandwidth to deal with all this?
And I would think the same would apply in this case. Do youthink it will behoove folks there too to put out either, what will it looklike? Some, like you said, some guidance with a grant, maybe some general licenses. Cause you know what I should, they also don't want to have a whole string of companies, like in the hallway case, where everyone would run the export controls, where everyone was lining up to get an exemption.
Tim: Yeah, I thinkthat's exactly right. I they are supposed to set up a licensing process and I think in connection with that licensing process, there will be some general licenses. So there will be, or something that looks like that.
And, for those of you who aren't totally conversant in thegeneral license terminology, it's just a license that agency issues that says.If you meet these certain criteria, you can do what is otherwise prohibited and you don't have to ask us for permission. So the specific license, you come in and you file a license request and you have to get a license that's particular to you.
The general license applies to everybody who meets thecriteria. And I think there will be some form of that where, whether it'sguidance or a formal general license, it will be the commerce department saying we don't. If you meet these standards, don't come in and ask us for license. We don't care about those sorts of transactions.
And I'm hoping that will be a big category because this rulecovers so much that otherwise I think commerce is going to be worried that it'sgoing to be bombarded with license requests. And with companies, any company trying to be cautious is going to say we're within the scope of this.
Should we just get a license request so that we can havesome certainty that this is going to be okay, because the risk, if you don't goget a license or go, don't go try and get review. Is that you'll do the transaction and then commerce. Come back, come after you, after the transaction is done and it, and unwind it.
And that is enough of a risk that I think at least at first,unless commerce is careful and provides a lot of guidance as to what's. Okay.What they're not worried about. They're going to have just people onboarded with license applications at the beginning.
Art: Yeah, it'scause in some ways with some of these rules, especially this one and having been here in China for 14 years, I almost feel like some of these rules are being are taking the playbook from China as far as they draw as the drafting style and being quite broad.
Of course, as we talked about already, you need to be broadbecause in, especially in this. In technology space, things are moving so fast.Things are changing so fast. It's hard to, it's a moving target, but to give this kind of discretion yeah, I think it would cause a lot of angst for companies in the U S for free for us companies doing business in China.
That's a known risk and this, that this kind of overalltendency of there being a lot of gray area in the law and kind of regulatoryambiguity, and a lot of discretion in the regulators. That's just kind ofsomething that over the years, companies have gotten accustomed to here, but that does, that would still feel quite not normal, in the U S and yeah, I could see companies lining up to, to get that license if it's not such an arduous process to apply for. And then again, the flood Gates would open with requests.
Art: One thingthat I know by law is required the when they come up with these rules they haveto come up with a, I think it's like an economic impact analysis, particularly for SMEs, small, medium size enterprises.
And it's striking to me and the rules in the federalregister on this one. They actually just come out and admit they have a hugerange of the potential impact on small, medium sized businesses. Because as we just talked about. The potential actual application of this could be very narrow or it could be very broad.
And that will determine the impact, on these companies. Butin the act, in that summary of that report in the federal register, theyactually basically admit. Don't worry, small and medium sized companies, because it's almost like you are not the drones we're looking for and it is not going to be as bad as you think it will be because we're not really going to implement this rule.
Like everyone is afraid. We're going to. And so that kindof, to me, just begs the question. Why are you drafting the rule in this way?This place, right? Can't you be a little more conscious on the front end, right? Let's describe something that's more workable on the front end.
Tim: Yeah, I hatethis sort of what it's I haven't heard it from the commerce department, butI've heard it from OFAC.
And it's a similar principle here, this sort of strategicambig ambiguity, where they essentially make a rule that is so broad thatnobody knows what's prohibited. And what they expect to happen is thatcompanies won't know what they're doing now. Here are the, apparently the expectation is the companies won't know what's okay.
And what's not. Okay. So they'll just do it anyway. Worry about that in part, because I'm notsure it's true. I do think that, even small and medium sized companies now arefocused enough on compliance that they're going to try and get it right there. They're likely to see this and try and get it right.
What I worry more about is that they won't know what to doand they'll get it wrong. And most of them won't face any consequences, butnow, and again, there will be this, Really serious enforcement action against a company that didn't do anything to comply with this rule. And you won't be able to tell where it comes from.
And so it will be, it will be one out of a million, but theone out of a million we'll get hurt really badly and not have done anythingdifferent than the other, 999,999 companies have done. And so it seems, it just creates the potential for a huge amount of money, fairness and uncertainty.
So I really, that's why I really hope that there is somereally clear guidance as to what commerce is looking for. Beyond the generalDown's of the regulation and the executive order.
Art: Another analogy, which I know you're, you'd be familiar with as well as the foreigncorrupt practices act, right?
Because the foreign corrupt practices act is also quite abroad rule. That's been on the books for decades now. And I know the Yes. Inthe DOJ on once in a while to make it to make the point that you are not exempt either, just because you're small and you think you might make, might fly underthe radar.
Now, maybe that's not exactly the best. Paris and big,buying Chinese technology compared to, corrupted bribery acts, maybe not quiteanalogous, but the idea is still there that the, small companies, not as can't necessarily take comfort right. Based on the fact that they'll think they'llfly under the radar.
Tim: No, I thinkthat's a great analogy. And I also think that it, one of the things about theFCPA is how it's evolved over time. I definitely think that when the FCPA out, I'm not sure that, the commerce department said it at the time, but. There certainly wasn't the expectation that small and medium sized companies would really pay a lot of attention to it.
That it was really aimed at bigger companies, but as apractical matter now, every company that does business outside the UnitedStates is very worried about the FCPA, whether you're small, medium, large, or somewhere in between, because there've been such extensive enforcement of that. Very broad.
I think it's the same way here. Whether small companies areworried about this at first if it's this law is enforced at all, like the FCPA has been, they will be worried about it in the long run. And so I, that's why I said, I'm not sure it's realistic to really expect that there won't be a lot of attempts at compliance with small companies, because I do think that they're much more focused on compliance now than they were 25 years ago.
Art: So Tim, let's take it home on, on one kind of big overarching question, because I think as Imentioned at the top, I summarize some of the rules in a bit in layman's terms about new CFIUS firma. The general export controls, which have been applied to Huawei. The one we've talked about just now ICTS on supply chain security forUS purchasers.
And then we've got, we talked about the Xiaomi cases for andLuokung cases for us persons investing in Chinese companies that have aaffiliation with the Chinese military. Now that the Biden administration is here. Do we see, and I know a lot of these stem from IEPPA, right? A lot ofthese all come from the same basic regulatory framework.
Do we see the Biden administration making any new rulesstemming from IEPPA or otherwise? Have we seen the last of these kind ofoffspring of that framework come into place with these executive orders and so forth? Or can we expect still more to come through the Biden administration?
Tim: I'm not surethat the Biden administration is going to be as I'd say aggressive is the rightword, that the Trump administration was very aggressive in its use of Aida. Andeven used it against the international criminal court at some point. And so Idon't think we're going to see anything like that.
The one exception is I do think particularly in light ofrecent events President Biden already has to some extent, and I think we'llcontinue to use Aida in the cyber area. I don't think it's going to be a trade issue, but I think that the cyber invasion issue is becoming more and more salient.
And honestly, although I would dispute. And, a lot of thefindings of an, of a national emergency that had been made under by, I thinkthat if the president were to make a finding with respect to cyber and under IBA, I think that would be justifiable at this point. And so I think that's the one area where I'd see it, but otherwise I don't think we're going to they'll they might take.
Some of the orders that they inherited from the Trumpadministration. And to be clear, president Biden, I think last week renewed theemergency that president Trump found with respect to with respect to the I CTS. So it is it, he is taking the emergency and keeping the order from presidentTrump, but in terms of his own executive orders, I think it will be much more rare for him to find an emergency and issue an executive order.
And it'll be. Limited to things that are I think much morewithin the mainstream of what people think are our actual emergencies.
Art: That's goodto know. And I think that's, that sounds like a I don't want to say hope, butat least. That's I think yes, one of the things we talked about through thiswhole episode is that all of these rules came out in a kind of a haphazard way.
So maybe now folks have a little time to catch their breath.We're past a presidential election cycle. And the rules can be made morecomprehensively, thoughtfully and so forth, but we'll see only we'll just have to see what comes, if anything next and and then how these existing rules getimplemented that are already on the books.
So Tim really fantastic to have you on, I can't imaginealmost any one else that could talk about a whole range of these issues as youcould and did so really appreciate it. Fantastic analysis, and we're so fortunate to have you on the show.
Tim: Thanks somuch for having me art. It's been a real pleasure.
undefined
Art: Yeah. And Tim, please check them out again. Embargo with Brian Fleming, the two of them.They have a great fun show. I'm a big fan. Check it out and it's on all majorpodcast networks. And you will not regret it. It's an excellent. From start to finish please check it out. And Tim also just one of the things I ask every guest, of course, if folks have questions or maybe even want to engage you as counsel on some of these issues that come up, export controls CFIUS and these other rules, we've talked about how what's the best way to reach out to you or you're on the firm's website or LinkedIn.
Tim: LinkedIn fromwebsite. And the firm website has my email. It has my cell phone number. Feelfree to give me a call. If you want to talk about these issues.
Art: Okay. Great.Thanks again, Tim and pleasure having you on the show.
Tim: All right,art. Thanks a lot.