Contributing Author: Bryan Sullivan
On Thursday, August 6, 2020, Donald Trump signed two executive orders addressing the “threat” of Chinese-owned and developed apps TikTok and WeChat. These sweeping orders, which declare the spread of such mobile apps a threat to the “national security, foreign policy, and economy of the United States,” would ban “any transaction,” by “any person…subject to the jurisdiction of the United States” with parent companies ByteDance Ltd. and Tencent Holdings Ltd. or any subsidiaries. While Secretary of Commerce Wilbur Ross has 45 days to “identify” the transactions this order applies to, this move could prove to have far-ranging, immediate, and unpredictable consequences as U.S. companies rush to determine their exposure and minimize the risk of penalties.
Most will likely play it safe and the actual impact will be out of the administration’s control. Apps owned or developed by ByteDance and Tencent may be removed from the Apple and Google stores, or even disabled entirely for U.S. users. To complicate things, Tencent’s massive holdings also include significant and/or controlling stakes in popular game developers and studios, film productions, Snapchat, music companies like Universal Music Group and Spotify, and a 5-year, $1.5 billion dollar streaming deal with the NBA. The determination by the Commerce Secretary of what constitutes a “transaction” will be crucial in seeing just how wide of an impact the orders will have, but many companies may be facing difficult decisions on how to operate. Banks may stop transmitting payments to the related companies, and Apple and Google may remove apps from their platforms or take other actions, as was seen with Huawei in 2019. In-app purchases and advertising may vanish, and companies who have already paid for ad campaigns may be unable to get refunds, if that is considered a “transaction.” The NBA may find itself with a significant cash shortage during a disastrous pandemic that is already seeing teams struggle, and Spotify’s streaming payments may dry up while musicians are still unable to tour.
The basis of the orders is the International Emergency Economic Powers Act (IEEPA) (PDF), which grants the President authority to regulate international commerce to address any “unusual and extraordinary threat.” The Trump administration justifies these orders on the basis that the exposure of the personal data of U.S. citizens to a company under the control of an antagonistic foreign power, with broad ranging power to utilize any personal data collected by TikTok or Tencent, is a threat to national security.
Tencent has said that it “is reviewing the executive order to get a full understanding.” TikTok, for its part, intends to fight what it considers a massive (and potentially unlawful) overstep by the administration. “We are shocked by the recent Executive Order, which was issued without any due process. For nearly a year, we have sought to engage with the US government in good faith,” the company said in a statement. “There has been, and continues to be, no due process or adherence to the law… This executive order risks undermining global businesses’ trust in the United States’ commitment to the rule of law… We will pursue all remedies available to us in order to ensure that the rule of law is not discarded and that our company and our users are treated fairly—if not by the Administration, then by the US courts.”
This case raises several significant legal issues, many of which are of first impression. One example is whether Trump’s order is justified under the IEEPA—does TikTok’s collection of private information present a risk to national security? This likely will require the Court to make various discovery rulings on the disclosure or production of national security information, and implicate an issue known in legal circles as “graymail,” which is the threatened revelation of state secrets in order to manipulate legal proceedings.
A second issue is how the Secretary of Commerce will define “parent company,” which is a key term in the executive order. A parent company is not a bright line term because a company that owns 51% or more of another company may have a controlling interest in another company but a large enough company could own 5% of a company, but be so important to the company so as to control the operations of that company. In this case, Tencent could be found by the Secretary of Commerce to have a controlling interest in numerous companies.
A third issue is the vagueness of the executive order itself and its grant of what appears to be unlimited discretion to the Secretary of Commerce. By reading of the order, U.S. companies cannot determine whether their interactions with Tencent or ByteDance will violate the executive order. Moreover, even if the Secretary of Commerce sets forth the criteria he will use to determine the reach of the executive order, under the terms of the executive order, he can change that criteria any time in his sole discretion.
A final issue that likely will be raised in this case is how much Trump’s executive orders were motivated by his political situation as opposed to national security concerns. Many former administration officials (i.e., Trump’s former National Security Advisor John Bolton) have expressed shock at how Trump put his own re-election agenda ahead of national security. Here is an executive order that specifically takes aim at TikTok, an app that recently angered Trump when it was utilized by worldwide users to embarrass Trump’s campaign, inflating expected attendance numbers for Trump’s June 20, 2020 rally in Tulsa, Oklahoma. Some have claimed that rally contributed to the surge in coronavirus cases in the area and the death of former Republican presidential candidate Herman Cain. This raises the question of whether Trump is merely issuing this order out of spite for TikTok as opposed to any real national security concerns.
Ultimately, given the amount of money at issue for TikTok, Tencent, ByteDance, and any company that may be adversely impacted by the executive order, it is anticipated to be heavily litigated and likely will involve arguments before the U.S. Supreme Court and potential actions before the World Trade Organization. Moreover, because China is likely to retaliate in some form, the far reaching economic consequences of these executive orders may be catastrophic for many companies, something that the Trump Administration has not thought about, or simply does not care about.
Bryan Sullivan, Partner at Early Sullivan Wright Gizer & McRae, advises and represents his clients as a legal strategist in all their business affairs. He has significant experience on the litigation and appeals side of the practice, as well as with entertainment and intellectual property contracts, investment and financing agreements, and corporate structure documents on the dealmaking side.