Authors：Aaron Wolfson，Meg UtterbackNew York Office, King & Wood Mallesons
On Thursday, August 6, 2020, U.S. President Donald Trump issued two executive orders directed at two Chinese companies that own two popular mobile apps.
The first executive order issued, titled “Executive Order on Addressing the Threat Posed by a popular mobile app owned by a Chinese company” (the “First Order”), will prohibit, as of September 20, 2020 and “to the extent permitted under applicable law,” “any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with the said Chinese company … or its subsidiaries, in which such company has any interest, as identified by the Secretary of Commerce … .”
The second executive order issued, titled “Executive Order on Addressing the Threat Posed by a popular mobile app owned by a Chinese company” (the “Second Order”), is similar. It will prohibit, as of September 20, 2020 and “to the extent permitted under applicable law,” “any transaction that is related to the said mobile app by any person, or with respect to any property, subject to the jurisdiction of the United States, with the said Chinese company … or any subsidiary of that entity, as identified by the Secretary of Commerce … .”
On their faces, the two executive orders prohibit anyone subject to U.S. jurisdiction, which includes Chinese nationals when they are physically present in the United States,[1] from engaging in any transactions with the said Chinese company or its subsidiaries as of September 20, 2020. However, the scope of the transactions banned under each order remains unclear because the Secretary of Commerce (“Secretary”) is required to identify the transactions that will be prohibited by September 20, 2020.[2] Furthermore, both of the orders contemplate the possibility of the Secretary granting licenses to permit certain transactions.[3] Thus, it remains to be seen which of the many types of arrangements the two Chinese companies have in the United States—e.g., terms-of-service agreements with users, in-app purchases, arrangements with the Google and Apple app stores, employment contracts, commercial leases, commercial loans, etc.—will be prohibited.
Common Provisions in the Orders
Both of the executive orders also prohibit U.S. persons[4] from evading, or attempting or conspiring to evade, the orders’ prohibitions.[5]
Both of the executive orders apply notwithstanding contracts entered into, or licenses or permits granted, before August 6, 2020, so having a preexisting contract or license with the said Chinese companies will not excuse violations of the orders that occur after they go into effect on September 20, 2020.
As noted above, further clarification on which transactions will be subject to the executive orders will be forthcoming, as both of the executive orders require the Secretary to identify the transactions subject to the orders by September 20, 2020.
Differences between the Orders
The Second Order differs from the First Order in that it targets transactions related to the said Chinese mobile app rather than to the said Chinese company itself, whereas the First Order directly targets transactions with the said Chinese company.
The Second Order also includes a provision stating that no prior notice of being identified by the Secretary shall be given to persons “who might have a constitutional presence in the United States”—meaning persons who might be entitled to due process of law before being deprived of life, liberty, or property under the Fifth and Fourteenth Amendments of the U.S. Constitution—because giving such prior notice would render the measures ineffectual. It is not clear why this provision was included in the Second Order but not in the First Order, but it may be due to the fact that the said Chinese company mentioned in the Second Order has ownership interests in U.S. corporations which are protected by U.S. constitutional privileges. It could lead U.S. persons prohibited from engaging in transactions with the said Chinese company to argue that they should be entitled to prior notice and a hearing before having to comply with the prohibition. U.S. persons prohibited from engaging in transactions related to the said mobile app mentioned in the Second Order, on the other hand, would have a more difficult time making such an argument due to the presence of this provision in the Second Order.
Besides those two differences, the two executive orders are virtually identical outside of their preambles.
Legal Authority and Rationale for the Orders
Both orders were issued under the authority of the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act. IEEPA authorizes the executive branch to block the property of and prohibit transactions with non-U.S. persons where the president has declared a national emergency.[6] IEEPA is typically invoked when the executive branch creates programs to impose sanctions on non-U.S. persons. Notably, the orders do not require U.S. persons to block (freeze) the property of the said Chinese companies as is common in executive orders imposing sanctions.
In each order, President Trump relies on a previously declared national emergency “with respect to the information and communications technology and services supply chain,” which was declared in Executive Order 13873 of May 15, 2019. Each order explains that “the spread in the United States of mobile applications developed and owned by companies in the People’s Republic of China (China) continues to threaten the national security, foreign policy, and economy of the United States.” Each order also states that the apps capture “vast swaths of information from its users [which] threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information” and raises concerns that content in the apps is reportedly censored by the Chinese Communist Party.
Implications of the Orders
Neither of the orders makes clear what the implications will be for the millions of people in the United States and abroad who use the said popular mobile apps or for those who engage in transactions with the said Chinese companies. It will depend on which transactions the Secretary designates as being subject to the orders and on any carveouts or general licenses created by any regulations implementing the two orders.
For persons subject to U.S. jurisdiction who are in any way engaged in transactions with the said Chinese company or related to the said Chinese mobile app mentioned in the Second Order and those transactions are identified by the Secretary, those transactions must cease as of September 20, 2020, regardless of whether they are governed by a preexisting contract. These executive orders could lead to the said Chinese companies being prohibited from using the U.S. financial system.
Conclusion
There is a significant amount of uncertainty because the orders are extremely broad and require the Secretary to identify which transactions will be subject to the orders. KWM will continue to follow these developments over the next 45 days and provide additional updates. Our U.S. and China regulatory compliance teams have extensive experience in economic sanctions and helping clients navigate the everchanging U.S.-China regulatory compliance landscape. We are available to discuss the implications of the First Order and the Second Orders and the steps to take going forward. Please contact:
Aaron Wolfson at aaron.wolfson@us.kwm.com, or
Meg Utterback at Meg.Utterback@us.kwm.com with any questions.
[1] Under U.S. long-arm jurisdiction, a non-U.S. person may even be subject to U.S. jurisdiction for conduct occurring outside the United States but having an effect within the United States.
[2] See Section 1(c) of each executive order.
[3] See Section 1(b) of each executive order.
[4] Defined in each executive order to include U.S. citizens and permanent residents, entities organized under the laws of the United States (including foreign branches), and any person—including Chinese nationals—in the United States. See § 3(c) of the First Order and § 4(c) of the Second Order.
[5] Section 2 of each executive order (prohibiting “any transaction by a U.S. person or within the United States that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the prohibition” in the orders).
[6] See 50 U.S.C. §§ 1701–1702.