On March 12, 2021, the U.S. District Court for the District of Columbia issued a preliminary injunction which prohibits the Department of Defense (DOD) from enforcing its January 2021 designation of Xiaomi Corporation (Xiaomi) of China as a Communist Chinese Military Company (CCMC) pursuant to Executive Order (EO) 13959 and Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 (NDAA). Under EO 13959, U.S. persons are prohibited from conducting any transaction in publicly traded securities, or securities that are derivative of, or are designed to provide investment exposure to such securities of any CCMC, subject to wind-down timelines. For additional background on this U.S. prohibition on investment in CCMCs, see Updates of November 24, 2020, and January 15, 2021.
On January 14, 2021, DOD listed Xiaomi (a smartphone manufacturer) and other Chinese firms as CCMCs. Shortly after, Xiaomi filed a lawsuit challenging the listing and claiming that DOD provided no explanation for the designation. The complaint alleges that DOD violated the Administration Procedures Act (APA) on several points: (i) that the explanation for the designation is “inadequate”; (ii) that Xiaomi fails to meet the Section 1237 statutory criteria for the CCMC classification; (iii) that the designation decision lacks the required “substantial evidence” necessary under the APA for an agency to arrive at a factual conclusion. In issuing its Memorandum Opinion, the Court agreed on all three points. During briefing on the matter, DOD produced only a two-page document to the Court in support of the designation; a memorandum which the Court found “begins on a shaky ground” with errors that “do not inspire confidence in the fastidiousness of the agency’s decision-making process.” Ultimately, the Court found that any “required rational connection—or any connection—is lacking” in connecting Xiaomi’s designation to the statutory requirements of Section 1237 of the NDAA. Thus, the Court issued an order preliminarily enjoining the implementation and enforcement of the E.O. 13959 prohibitions against Xiaomi. The case is Xiaomi Corporation v. Department of Defense (Case No. 1:21-cv-00280-RC).
With this ruling, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) has issued related FAQs and stated that as a result of the Court’s opinion, the prohibitions in E.O. 13959 “do not apply with respect to Xiaomi pending further order of the Court.”