Xiaomi Corp. v. Dep't of Def.
| Decision Date | 12 March 2021 |
| Docket Number | Civil Action No.: 21-280 (RC) |
| Parties | XIAOMI CORPORATION, et al., Plaintiffs, v. DEPARTMENT OF DEFENSE, et al., Defendants. |
| Court | United States District Courts. United States District Court (Columbia) |
This matter comes before the Court on Plaintiffs' motion for a preliminary injunction. Plaintiffs, Xiaomi Corporation ("Xiaomi") and individual Xiaomi shareholders Bin Lin, Peng Lin, and Stephen Sean English (collectively, "Plaintiffs") seek an order enjoining the Department of Defense from enforcing its designation of Xiaomi as a Communist Chinese military company ("CCMC") pursuant to Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 ("NDAA FY99"), Pub. L. 105-261, 112 Stat. 2160 (Oct. 17, 1998) (as amended) ("Section 1237"). Such designation forbids all U.S. persons from purchasing or otherwise possessing Xiaomi's publicly traded securities or any derivatives of said securities. Without preliminary injunctive relief, these restrictions will begin to go into effect on March 15, 2021 at 9:30 am. The Court finds that the issuance of a preliminary injunction here is an appropriate exercise of its discretion, given that Plaintiffs have shown both a high likelihood of success on the merits on their Administrative Procedure Act ("APA") claims and that, absent relief, they will suffer irreparable harm in the form of serious reputational and unrecoverable economic injuries. Accordingly, for the reasons detailed below, Plaintiffs' motion for preliminary injunction is granted.
This suit concerns Xiaomi's designation as a CCMC under Section 1237 of the National Defense Authorization Act for Fiscal Year 1999, as amended. Pursuant to this provision, the President is authorized to exercise International Emergency Economic Powers Authority ("IEEPA") against [CCMCs].1 See NDAA FY99, § 1237(a)(b). Section 1237, in turn, defines a CCMC as any person who "is owned or controlled by, or affiliated with, the People's Liberation Army or a ministry of the government of the People's Republic of China or that is owned or controlled by an entity affiliated with the defense industrial base of the People's Republic of China." NDAA FY99 § 1237(b)(4)(B)(i). The statute further defines the People's Liberation Army ("PLA") as "the land, naval, and air military services, the police, and the intelligence services of the Communist Government of the People's Republic of China, and any member of any such service or of such police." Id. § 1237(c).
Section 1237 directs the Secretary of Defense, with the input of the Attorney General, the Director of the Federal Bureau of Investigation, and the Director of Central Intelligence, to identify "[CCMCs] that operate directly or indirectly in the United States or any of its territories or possessions." Id. §1237(b). This list is to be published in the Federal Register, and also provided to the Committee on Armed Services of the U.S. House of Representatives, theCommittee on Armed Services of the U.S. Senate, the Secretary of State, the Secretary of the Treasury, the Attorney General, the Secretary of Commerce, the Secretary of Energy, and the Director of the Central Intelligence Agency. Id.
While originally enacted with the directive to update the list annually, the Department of Defense published its first list of designated CCMCs on June 24, 2020, designating twenty companies as falling within this category. Fifteen additional companies would receive this designation by the end of the 2020 year. On January 14, 2021, the Department of Defense made its most recent listing of designated CCMC companies, a list which included Plaintiff Xiaomi.
Xiaomi is a multinational consumer electronics corporation that is headquartered in China and incorporated in the Cayman Islands. Am. Compl. ¶ 15, ECF No. 9. The corporation is the third-largest smartphone manufacturer in the world by volume, and "provides consumer electronic products for civilian and commercial use, including smartphones, televisions, and laptops." Id.; Decl. of Bin Lin ("Bin Lin Decl.") ¶ 5, ECF No. 14-2. Xiaomi is publicly traded on the Hong Kong Stock Exchange, and it is widely held, with more than half of the company's shares owned by investors who own one percent or less of the company. Bin Lin Decl. ¶¶ 16, 21. The company has a significant presence in the United States, with two U.S. subsidiaries, an office in California, and over $300 million in revenue generated in the United States in the past five years. Id. ¶ 11.
Xiaomi is effectively controlled by two of the company's cofounders, Lei Jun and Plaintiff Bin Lin, who together own three-quarters of the company's voting rights. Bin Lin. Decl. ¶ 14. The company is also overseen by a board of seven directors. Id. ¶ 18.
On November 12, 2020, then-President Trump issued Exec. Order No. 13959, Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies, (Nov. 12, 2020) ("E.O. 13959"). The President declared a national emergency under IEEPA due to the security threat posed by "civilian Chinese companies" that support the People's Republic of China's ("PRC") military and intelligence activities. Id. The order described that through a "national strategy of Military-Civil Fusions," the PRC compels civilian Chinese companies to support its military and intelligence activities, and these companies in turn "raise capital by selling securities to United States investors . . . exploit[ing] United States investors to finance the development and modernization of [the PRC's] military." Id. The President concluded that these actions "allow the PRC to directly threaten the United States homeland and United States forces overseas, including by developing and deploying weapons of mass destruction, advanced conventional weapons, and malicious cyber-enabled actions against the United States and its people." Id.
As a result, E.O. 13959 prohibited all United States persons from engaging in select investment activities with any CCMC, including a blanket prohibition on any "transaction in publicly traded securities, or any securities that are derivative of, or are designated to provide investment exposure to such securities of any [CCMC]." Id. § 1(a). The order was later updated to expressly require all United States persons to fully divest of any securities of a CCMC within 365 days of a company's designation as a CCMC. Exec. Order No. 13974, Amending Executive Order 13959—Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies (Jan. 13, 2021). For the purposes of the order and resulting restrictions, a CCMC was defined as "any person that the Secretary of Defense, in consultationwith the Secretary of the Treasury, publicly lists as a Communist Chinese military company meeting the criteria in section 1237(b)(4)(B) . . . and that operates directly or indirectly in the United States or any of its possessions." Id. § 2.
On January 14, 2021, the Department of Defense submitted to Congress, pursuant to Section 1237, a list of designated CCMC companies that included Xiaomi. See Qualifying Entities Prepared in Response to Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 (PUBLIC LAW 105-261). At the time, no explanation for the designation was provided. In the course of this litigation, Defendants have since supplied the decision document relied upon by the Department of Defense in making the CCMC designation decision for Xiaomi. See Exhibit A to Decl. of Andrew J. Pahutski ("DoD Memo"), ECF No. 16-1. The short, two-page document shows that the Department of Defense based Xiaomi's CCMC designation on two factual grounds. First, the document notes that Lei Jun, Xiaomi's CEO, had been recognized as an "Outstanding Builder[] of Socialism with Chinese Characteristics," by the PRC's Ministry of Industry and Information Technology, an organization that purportedly "helps manage military-civil fusion for the state." Id. at 1. Second, the document describes Xiaomi's five-year plan to invest in 5th generation telecommunication capabilities ("5G") and Artificial Intelligence ("AI"), both "[c]ritical [t]echnologies essential to modern military operations," according to the 2019 DoD Industrial Capabilities Report. Id. The decision memo concludes by stating perfunctorily that "Xiaomi meets the criteria" for CCMC classification. Id. at 1.
On January 29, 2021, Plaintiffs filed this lawsuit, see Compl., ECF No. 1, amending the complaint shortly thereafter to add the individual Plaintiffs and President in his official capacity, Am. Compl. The Amended Complaint challenges the CCMC designation of Xiaomi on fivegrounds, asserting the government's actions violate the APA (Count I-II), exceed the Department of Defense's authority under Section 1237 (Count III-IV), and constitute a deprivation of a property and liberty interest without due process in violation of the Fifth Amendment (Count V). See Am. Compl.
On February 17, 2021, Plaintiffs filed their motion for emergency injunctive relief, arguing that Xiaomi was incorrectly designated as a CCMC and seeking a preliminary injunction against enforcement of the restrictions. See Pls.' Mem. Supp. Mot. Prelim. Inj. ( ), ECF No. 14-1. Defendants have opposed the motion, see Defs.' Opp'n to Pl.'s Mot. for Prelim. Inj. ( ), ECF No. 16, and Plaintiffs have filed a reply, see Reply Mem. Supp. Pls.' Mot. Prelim. Inj. ( ), ECF No. 19.2 The Court heard oral argument on March 9, 2021 to consider the parties' positions. Plaintiffs' motion is accordingly fully briefed and now ripe for decision.
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