TikTok Deal Struck And WeChat Wins Injunction

A TikTok deal may be taking shape even though there are indications the details have not been hammered out entirely. A federal court blocked implementation of the WeChat ban.

Over the weekend with the 20 September effective dates looming on the TikTok and WeChat notices, there were separate developments that delayed implementation of the bans on the two apps from the People’s Republic of China (PRC). It appeared the Trump Administration, ByteDance, and potential United States (U.S.) partners were closing in on a deal even as there continued to be disputes as to the composition and nature of the new entity that would house TikTok in the U.S. The ban against WeChat was blocked by a U.S. court, a decision sure to be appealed.

On 19 September, a magistrate judge in San Francisco granted a preliminary injunction against the Trump Administration’s implementation of the WeChat order. As explained in a footnote, “[t]he plaintiffs are U.S. WeChat Users Alliance, a nonprofit formed to challenge the WeChat Executive Order, and individual and business users.” In short, they contended that the WeChat ban

(1) violates the First Amendment to the U.S. Constitution,

(2) violates the Fifth Amendment,

(3) violates the Religious Freedom Restoration Act, 42 U.S.C. § 2000bb(1)(a),

(4) was not a lawful exercise of the President’s and the Secretary’s authority under the International Economic Emergency Powers Act (“IEEPA”) — which allows the President to prohibit “transactions” in the interest of national security — because the IEEPA, 50 U.S.C. § 1702(b)(1), does not allow them to regulate personal communications, and

(5) violates the Administrative Procedures Act (“APA”) because the Secretary exceeded his authority under the IEEPA and should have promulgated the rule through the notice-and-comment rulemaking procedures in 5 U.S.C. § 553(b).

The judge granted the motion for a preliminary injunction “on the ground that the plaintiffs have shown serious questions going to the merits of the First Amendment claim, the balance of hardships tips in the plaintiffs’ favor, and the plaintiffs establish sufficiently the other elements for preliminary-injunctive relief.” The judge seemed most persuaded by this claim and summarized the plaintiffs’ argument:

• First, they contend, effectively banning WeChat — which serves as a virtual public square for the Chinese-speaking and Chinese-American community in the United States and is (as a practical matter) their only means of communication — forecloses meaningful access to communication in their community and thereby operates as a prior restraint on their right to free speech that does not survive strict scrutiny.
• Second, even if the prohibited transactions are content-neutral time-place-or-manner restrictions, they do not survive intermediate scrutiny because the complete ban is not narrowly tailored to address the government’s significant interest in national security.

The Trump Administration will almost certainly appeal this decision, but it remains to be seen how quickly the case moves through the court system.

Also, over the weekend, the Trump Administration paused its notice for implementing the EO against TikTok because of agreement in principles of a deal that would permit Oracle and Walmart to control a certain percentage of TikTok in the U.S. However, the details of which entity would control what remain murky with ByteDance arguing that U.S. entities will not control TikTok, but assertions to the opposite being made by the company’s U.S. partners. Over the weekend, it appeared Oracle and Walmart would be able to take a collective 20% stake in a new entity TikTok Global that would operate in the U.S. Walmart has been partnering with Microsoft, but when the tech giant failed in its bid, Walmart began talks with Oracle. ByteDance would have a stake in the company but not majority control according to some sources. However, ByteDance began pushing back on that narrative as President Donald Trump declared this morning “if we find that [Oracle and Walmart] don’t have total control, then we’re not going to approve the deal.” Moreover, $5 billion would be used for some sort of educational fund. However, it is hard to tell what exactly would occur and whether this is supposed to be the “finder’s fee” of sorts Trump had said the U.S. would deserve from the deal.

On 19 September, the U.S. Department of Commerce issued a statement pushing back the effective date of the order against TikTik from 20 September to 27 September because of “recent positive developments.” The same day, the U.S. Department of the Treasury released a statement, explaining:

The President has reviewed a deal among Oracle, Walmart, and TikTok Global to address the national security threat posed by TikTok’s operations. Oracle will be responsible for key technology and security responsibilities to protect all U.S. user data. Approval of the transaction is subject to a closing with Oracle and Walmart and necessary documentation and conditions to be approved by Committee on Foreign Investment in the United States (CFIUS). 

TikTok also released a statement, asserting

We’re pleased that today we’ve confirmed a proposal that resolves the Administration’s security concerns and settles questions around TikTok’s future in the US. Our plan is extensive and consistent with previous CFIUS resolutions, including working with Oracle, who will be our trusted cloud and technology provider responsible for fully securing our users’ data. We are committed to protecting our users globally and providing the highest levels of security. Both Oracle and Walmart will take part in a TikTok Global pre-IPO financing round in which they can take up to a 20% cumulative stake in the company. We will also maintain and expand the US as TikTok Global’s headquarters while bringing 25,000 jobs across the country.

Walmart issued its own statement on 19 September:

While there is still work to do on final agreements, we have tentatively agreed to purchase 7.5% of TikTok Global as well as enter into commercial agreements to provide our ecommerce, fulfillment, payments and other omnichannel services to TikTok Global. Our CEO, Doug McMillon, would also serve as one of five board members of the newly created company. In addition, we would work toward an initial public offering of the company in the United States within the next year to bring even more ownership to American citizens. The final transaction will need to be approved by the relevant U.S. government agencies.

The same day, Oracle and Walmart released a joint statement:

• The President has announced that ByteDance has received tentative approval for an agreement with the U.S. Government to resolve the outstanding issues, which will now include Oracle and Walmart together investing to acquire 20% of the newly formed TikTok Global business.
• As a part of the deal, TikTok is creating a new company called TikTok Global that will be responsible for providing all TikTok services to users in United States and most of the users in the rest of the world. Today, the administration has conditionally approved a landmark deal where Oracle becomes TikTok’s secure cloud provider.
• TikTok Global will be majority owned by American investors, including Oracle and Walmart. TikTok Global will be an independent American company, headquartered in the U.S., with four Americans out of the five member Board of Directors.
• All the TikTok technology will be in possession of TikTok Global, and comply with U.S. laws and privacy regulations. Data privacy for 100 million American TikTok users will be quickly established by moving all American data to Oracle’s Generation 2 Cloud data centers, the most secure cloud data centers in the world.
• In addition to its equity position, Walmart will bring its omnichannel retail capabilities including its Walmart.com assortment, eCommerce marketplace, fulfillment, payment and measurement-as-a-service advertising service.
• TikTok Global will create more than 25,000 new jobs in the Unites States and TikTok Global will pay more than $5 billion in new tax dollars to the U.S. Treasury.
• TikTok Global, together with Oracle, SIG, General Atlantic, Sequoia, Walmart and Coatue will create an educational initiative to develop and deliver an AI-driven online video curriculum to teach children from inner cities to the suburbs, a variety of courses from basic reading and math to science, history and computer engineering.
• TikTok Global will have an Initial Public Offering (IPO) in less than 12 months and be listed on a U.S. Exchange. After the IPO, U.S. ownership of TikTok Global will increase and continue to grow over time.

Today, Oracle went further in a statement to the media claiming, “ByteDance will have no ownership in TikTok Global,” which is a different message than the one the company was sending. For example, in a blog post, ByteDance stated “[t]he current plan does not involve the transfer of any algorithms or technology…[but] Oracle has the authority to check the source code of TikTok USA.”

Late last week, the Trump Administration issued orders barring TikTok and WeChat pursuant to executive orders issued an “Executive Order on Addressing the Threat Posed by TikTok” and an “Executive Order on Addressing the Threat Posed by WeChat” that bar any transactions with the companies that made, distribute, and operate TikTok and WeChat respectively. The U.S. Department of Commerce (Commerce) issued orders effectuating the executive orders, which were set to take effect this past weekend. In a press release, Commerce explained:

As of September 20, 2020, the following transactions are prohibited:

1. Any provision of service to distribute or maintain the WeChat or TikTok mobile applications, constituent code, or application updates through an online mobile application store in the U.S.;
2. Any provision of services through the WeChat mobile application for the purpose of transferring funds or processing payments within the U.S.

As of September 20, 2020, for WeChat and as of November 12, 2020, for TikTok, the following transactions are prohibited:

1. Any provision of internet hosting services enabling the functioning or optimization of the mobile application in the U.S.;
2. Any provision of content delivery network services enabling the functioning or optimization of the mobile application in the U.S.;
3. Any provision directly contracted or arranged internet transit or peering services enabling the function or optimization of the mobile application within the U.S.;
4. Any utilization of the mobile application’s constituent code, functions, or services in the functioning of software or services developed and/or accessible within the U.S.

Commerce added:

Any other prohibitive transaction relating to WeChat or TikTok may be identified at a future date. Should the U.S. Government determine that WeChat’s or TikTok’s illicit behavior is being replicated by another app somehow outside the scope of these executive orders, the President has the authority to consider whether additional orders may be appropriate to address such activities. The President has provided until November 12 for the national security concerns posed by TikTok to be resolved. If they are, the prohibitions in this order may be lifted.

Commerce has submitted notices to be published this week in the Federal Register identifying the transactions that will be illegal regarding TikTok and WeChat:

• Pursuant to Executive Order 13942, the Secretary of Commerce is publishing the list of prohibited transactions by any person, or with respect to any property, subject to the jurisdiction of the United States, with ByteDance Ltd. (a.k.a. Zìjié Tiàodòng), Beijing, China, or its subsidiaries, including TikTok Inc., in which any such company has any interest, to address the national emergency with respect to the information and communications technology and services supply chain declared in Executive Order 13873, May 15, 2019 (Securing the Information and Communications Technology and Services Supply Chain), and particularly to address the threat identified in Executive Order 13942 posed by mobile application TikTok.
• Pursuant to Executive Order 13943, the Secretary of Commerce is publishing this Identification of Prohibited Transactions related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd. (a.k.a. Téngxùn Kònggŭ Yŏuxiàn Gōngsī), Shenzhen, China, or any subsidiary of that entity, to address the national emergency with respect to the information and communications technology and services supply chain declared in Executive Order 13873, May 15, 2019 (Securing the Information and Communications Technology and Services Supply Chain), and particularly to address the threat identified in Executive Order 13943 posed by mobile application WeChat.

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