Industry News

Xiaomi Removed from DOD Blacklist

May 18, 2021
By: Meaghan E. Vander Schaaf

After a legal battle in the U.S. District Court for the District of Columbia, the U.S Defense Department (DOD) will remove China's Xiaomi Corp from the agency’s blacklist of “Communist Chinese Military Companies” (CCMC). This is a direct challenge to one of Donald Trump’s last anti-China Executive Orders.

When former President Trump issued Executive Order (EO) 13959 on November 12, 2020, it became the basis for the CCMC sanctions program administered by the U.S. Treasury Department Office of Foreign Assets Control (OFAC). Under this program, U.S. persons are prohibited from purchasing or holding CCMC publicly traded securities or the derivatives of such securities. On January 14, 2021, Xiaomi and eight other Chinese companies were designated by the DoD as CCMCs under EO 13959. In response, Xiaomi filed a lawsuit in the U.S. district court in Washington, D.C. seeking emergency injunctive relief and claiming that Xiaomi was incorrectly designated as a CCMC.

On March 12, 2021, the district court granted Xiaomi’s preliminary injunction. There were three reasons cited by the court. First, the DoD failed to sufficiently explain the designation of Xiaomi as a CCMC. There was no explanation provided in the original designation as a CCMC and the internal document presented by the DoD contained no reasoning between the facts presented and the conclusion that “Xiaomi meets the criteria” of a CCMC. Second, the court found Xiaomi did not meet the CCMC criteria under the relevant statutory provision in the National Defense Authorization Act for Fiscal Year 1999 (NDAA). Xiaomi is not “owned or controlled” by any of the prohibited Chinese entities, but the DOD claimed that it is “affiliated with the Chinese military and defense establishment.” Ultimately, the court was not persuaded by the DoD’s evidence and found Xiaomi is “a publicly traded company that produces commercial products for civilian use, is controlled by its independent board and controlling shareholders, and is not effectively controlled or associated with others under the ownership or control of the PRC or its security services.” Finally, the court found that DoD’s designation of Xiaomi lacked “substantial evidence.” The 5G and AI technologies that Xiaomi invests in may have military applications, but this was not enough to support a conclusion that Xiaomi is a CCMC. The DoD also presented Xiaomi’s statement in its 2019 Annual Report that its founder and CEO was awarded the title of “Outstanding Builder[] of Socialism with Chinese Characteristics” by the Chinese government. This did not persuade the court that the company was a CCMC because Xiaomi explained that this award was granted to private sector entrepreneurs in recognition of contributions to China’s economic development, there were over 500 entrepreneur recipients of the award since 2004, and any purported link to the Chinese Ministry of Industry and Information Technology is “tenuous” because award recipients are not selected directly by that ministry.

In a recent Joint Status Report for the district court case, the DoD and Xiaomi “agreed upon a path forward that would resolve this litigation without the need for contested briefing.” Instead, the DoD decided not to appeal the preliminary injunction and opinion and agreed to a final order vacating the designation of Xiaomi Corporation as a CCMC.

The Xiaomi resolution will likely prompt additional lawsuits challenging former President Trump’s regulatory actions involving sanctions and export controls. U.S. laws and regulations grant the government deference in matters related to national security and legal challenges have been generally fruitless. However, between September and December 2020, multiple federal courts enjoined portions EOs 13942 and 13943 (the proposed bans on U.S. persons from using TikTok and WeChat because sensitive U.S. user data could be accessed by the Chinese government) because the courts determined these EO overstepped the president’s statutory authority. The position of the current administration as expressed by Emily Horne, a spokeswoman for the White House National Security Council, is that "the Biden Administration is deeply concerned about potential U.S. investments in companies linked the Chinese military and fully committed to keeping up pressure on such companies." However, without more guidance from the Biden administration on the regulatory actions against specific Chinese companies, additional court challenges are inevitable.

If you have any questions relating to CMCC designations, sanctions, or export controls do not hesitate to contact an attorney at Barnes, Richardson & Colburn LLP.