Further Action On TikTok Divestment and Ban But No Changes

TikTok sues to block the CFIUS order that it divest and the Trump Administration files an appeal of an injunction.

Even though the Trump Administration’s efforts to implement its ban of TikTok have gone nowhere as numerous courts have enjoined the enforcement of the orders, TikTok filed suit against the related order that the company divest Musical.ly primarily on the grounds that the technology that supposedly threatens United States (U.S.) national security is unrelated to the acquisition. Moreover, the day after this suit was filed, a key U.S. agency announced a delay of the divestment order. In a related action, the Trump Administration filed to appeal one of the injunctions blocking it from moving forward on banning the People’s Republic of China (PRC) app. Depending on how long it takes for the federal court to resolve this suit, a Biden Administration Department of Justice (DOJ) may take a different tack than the Trump DOJ.

The day before the divestment order was set to take effect, TikTok asked the United States Court of Appeals for the District of Columbia to review “the Presidential Order Regarding the Acquisition of Musical.ly by ByteDance Ltd., 85 Fed. Reg. 51,297 (Aug. 14, 2020) (the “Divestment Order”), and the related action of the Committee on Foreign Investment in the United States (CFIUS), including its determination to reject mitigation, truncate its review and investigation, and refer the matter to the President.” TikTok asserted:

The Divestment Order and the CFIUS Action seek to compel the wholesale divestment of TikTok, a multi-billion-dollar business built on technology developed by Petitioner ByteDance Ltd. (“ByteDance”), based on the government’s purported national security review of a three-year- old transaction that involved a different business. This attempted taking exceeds the authority granted to Respondents under Section 721, which authorizes CFIUS to review and the President to, at most, prohibit a specified “covered transaction” to address risks to national security created by that transaction. Here, that covered transaction was ByteDance’s acquisition of the U.S. business of another Chinese- headquartered company, Musical.ly—a transaction that did not include the core technology or other aspects of the TikTok business that have made it successful and yet which the Divestment Order now seeks to compel ByteDance to divest.

TikTok also made claims that CFIUS violated the Due Process Clause of the Fifth Amendment, violated the Administrative Procedures Act, and is proposing a “taking” illegal under the Fifth Amendment.

And yet, the Department of the Treasury, the lead agency in the CFIUS process, issued a statement, explaining that the deadline for divestiture had been pushed back by 15 days:

The President’s August 14 Order requires ByteDance and TikTok Inc. to undertake specific divestments and other measures to address the national security risk arising from ByteDance’s acquisition of Musical.ly.  Consistent with the Order, the Committee on Foreign Investment in the United States (CFIUS) has granted ByteDance a 15-day extension of the original November 12, 2020 deadline.  This extension will provide the parties and the Committee additional time to resolve this case in a manner that complies with the Order.   

The Trump Administration may successfully argue that a delay of the order means the court cannot rule on TikTok’s suit. Consequently, this suit may well get pushed into a Biden Administration.

TikTok issued this statement along with the filing of its suit:

For a year, TikTok has actively engaged with CFIUS in good faith to address its national security concerns, even as we disagree with its assessment. In the nearly two months since the president gave his preliminary approval to our proposal to satisfy those concerns, we have offered detailed solutions to finalize that agreement—but have received no substantive feedback on our extensive data privacy and security framework.

Of course, because of the CFIUS divestment order, ByteDance seems to have reached an agreement with Oracle and Walmart, but what they exactly agreed to remains an open question.

In mid-September, the Trump Administration paused its notice for implementing the Executive Order (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. In the weekend before the EO has set to take effect, 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 after word of a deal leaked “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.

A day later, 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.”

On a related note, the DOJ filed a notice of appeal of an injunction barring the implementation of the TikTok issued in late October. Three TikTok influencers had filed suit and lost their motion for a preliminary injunction. However, after District Court of the District of Columbia granted TikTok’s request to stop the Department of Commerce from enforcing the first part of the order implementing the ban, the three influencers revised their motion and refiled.

Judge Wendy Beetlestone found that the Trump Administration exceeded its powers under the International Emergency Economic Powers Act (IEEPA) in issuing part of its TikTok order effectuating the ban set to take effect on 12 November:

  • Any provision of internet hosting services, occurring on or after 11:59 p.m. eastern standard time on November 12, 2020, enabling the functioning or optimization of the TikTok mobile application[;]
  • Any provision of content delivery network services, occurring on or after 11:59 p.m. eastern standard time on November 12, 2020, enabling the functioning or optimization of the TikTok mobile application[;]
  • Any provision of directly contracted or arranged internet transit or peering services, occurring on or after 11:59 p.m. eastern standard time on November 12, 2020, enabling the functioning or optimization of the TikTok mobile application[;and]
  • Any utilization, occurring on or after 11:59 p.m. eastern standard time on November 12, 2020, of the TikTok mobile application’s constituent code, functions, or services in the functioning of software or services developed and/or accessible within the land and maritime borders of the United States and its territories.

Beetlestone found that the limit on the use of IEEPA powers to regulate information is clearly implicated by Commerce’s order, which proposes to do just that. Consequently, this is not a legal use of IEEPA powers. The judge also found the plaintiffs would be irreparably harmed through a loss of their audiences and brand sponsorships:

Plaintiffs challenge the Commerce Identification on both statutory and constitutional grounds. First, they contend that the Commerce Identification violates both the First and Fifth Amendments to the U.S. Constitution. They then contend that the Commerce Identification violates the Administrative Procedure Act,5 U.S.C. §701 et seq.,as it is both arbitrary and capricious, see id.§706(2)(A), and ultra vires, see id. § 706(2)(C). Plaintiffs’ ultra vires claim consists of three separate arguments: (1) the Commerce Identification contravenes IEEPA’s “informational materials” exception, 50 U.S.C. § 1702(b)(3); (2) the Commerce Identification contravenes IEEPA’s prohibition on the regulation of “personal communication[s] . . . not involv[ing] a transfer of anything of value,” id. § 1702(b)(1), and (3) the Commerce Identification is not responsive to the national emergency declared in the ICTS Executive Order, and therefore requires the declaration of a new national emergency to take effect, see id. §1701(b).

In the first injunction granted against the TikTok ban, the court found that TikTok’s claims on the misuse of IEEPA, 50 U.S.C. §§ 1701–08, the primary authority President Donald Trump relied on in his executive order banning the app, were unpersuasive. The court conceded “IEEPA contains a broad grant of authority to declare national emergencies and to prohibit certain transactions with foreign countries or foreign nationals that pose risks to the national security of the United States.” But, the court noted “IEEPA also contains two express limitations relevant here: the “authority granted to the President . . . does not include the authority to regulate or prohibit, directly or indirectly” either (a) the importation or exportation of “information or informational materials”; or (b) “personal communication[s], which do[] not involve a transfer of anything of value.” The court concluded:

In sum, the TikTok Order and the Secretary’s prohibitions will have the intended effect of stopping U.S. users from communicating (and thus sharing data) on TikTok. To be sure, the ultimate purpose of those prohibitions is to protect the national security by preventing China from accessing that data and skewing content on TikTok. And the government’s actions may not constitute direct regulations or prohibitions of activities carved out by 50 U.S.C. 1702(b). But Plaintiffs have demonstrated that they are likely to succeed on their claim that the prohibitions constitute indirect regulations of “personal communication[s]” or the exchange of “information or informational materials.”

After considering the risks of irreparable harm to TikTok and the equities and public interest, the court decided:

Weighing these interests together with Plaintiffs’ likelihood of succeeding on their IEEPA claim and the irreparable harm that Plaintiffs (and their U.S. users) will suffer absent an injunction, the Court concludes that a preliminary injunction is appropriate.

© Michael Kans, Michael Kans Blog and michaelkans.blog, 2019-2020. Unauthorized use and/or duplication of this material without express and written permission from this site’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Michael Kans, Michael Kans Blog, and michaelkans.blog with appropriate and specific direction to the original content.

Photo by Olivier Bergeron from Pexels

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