On July 14, the U.S. Court of Appeals for the District of Columbia Circuit decided Ralls Corporation v. Committee on Foreign Investment in the United States — the first ruling by a federal circuit court on a CFIUS case.  Ralls, a U.S. company owned by two Chinese nationals, sued CFIUS in connection with an order by issued by President Obama upon CFIUS’s recommendation that prohibited Ralls from owning certain Oregon wind farm project companies located in the vicinity of restricted airspace associated with a U.S. Navy facility.

The DC Circuit, reversing the district court, held that the presidential order deprived Ralls of a constitutionally protected property interest without due process of law.  The DC Circuit further found that due process entitled Ralls to review an unclassified version of the evidence on which the President relied in making his determination and to have an opportunity to rebut that evidence.

There are three key lessons from the Ralls decision:

1. The decision affirms the importance of fairness and transparency even in a process predicated on protecting national security and inherently based on classified information.  Not only is the U.S. system open to foreign investment, but it also offers strong protections for investors — even when the authority of the executive branch is involved in a national security issue.

2. The decision does not limit in any respect whatsoever the President’s authority to suspend or prohibit transactions that present unresolvable risks to national security, nor does it limit  CFIUS’s underlying authority to determine the impact of a transaction on national security.  The court carefully limited the scope of its decision to the adequacy CFIUS’s processes and did not question the authorities of either CFIUS or the President.

3. The decision calls for more transparency in the CFIUS process and more meaningful engagement with transaction parties.  CFIUS could comply with the DC circuit’s decision by making small but meaningful adjustments to its processes, such a permitting the CFIUS agencies with the greatest equities in a case to engage more directly with the parties and to discuss potential options to mitigate any national security risk.

Seen in this light, the Ralls decision is perhaps best understood as a positive decision for foreign investors — and one with positive process-related implications — but not as signaling a sea change in the CFIUS process or in the President’s authority to protect U.S. national security.

On remand, the district court will consider the scope of CFIUS authority to impose interim mitigation measures to protect national security during the pendency of an ongoing CFIUS review.  This is particularly important because it goes squarely to the policy balance that underlies the CFIUS statute and process.  It would be surprising if the district court concludes on remand that CFIUS lacks authority to impose interim mitigation to protect national security in cases where transaction parties close a transaction without filing with CFIUS — as Ralls did — and the resulting transaction in turn threatens the national security.  Please see our client alert on the subject.