A federal appeals court Tuesday issued a landmark ruling that weakened President Barack Obama’s ability to block foreign firms’ purchase of American companies on national security grounds.
A three-judge panel of U.S. Circuit Court of Appeals for the District of Columbia said Obama violated the constitutional due process rights of Chinese-owned Ralls Corp. in a September 2012 order voiding its purchase of an Oregon wind-farm company.
“This lack of process constitutes a clear constitutional violation,” the court wrote in an unusually blunt and hard-hitting decision.
The ruling, which the government will likely appeal to the U.S. Supreme Court, undermines a decision Obama heralded in the stretch run of his 2012 re-election campaign as a sign of his willingness to stand up to China.
Obama’s move was the first time in 22 years that a president had blocked a foreign acquisition of an American company for national security reasons.
The judges reversed a lower-court decision in ruling that Obama failed to provide Ralls, which is headquartered in Delaware and has its main operations in Georgia, the evidence underlying his decision and the opportunity to refute it.
“We conclude that the Presidential Order deprived Ralls of its constitutionally protected property interests without due process of law,” the court wrote.
“As the preceding discussion makes plain, due process requires, at the least, that an affected party be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence,” it wrote.
The due-process clause of the Constitution’s Fifth Amendment provides that no person shall be “deprived of life, liberty, or property, without due process of law.”
The judges noted that Ralls had acquired $6 million in assets as part of the disputed purchase, giving it “significant property interests” subject to constitutional protections.
The judges emphasized that they were not challenging the national security merits of Obama’s decision, but rather the way in which he implemented it.
Ralls is owned by two Chinese businessmen, Dawai Duan and Jialiang Wu.
Obama acted after the Navy objected that power-generating windmills Ralls planned to build would interfere with its flight tests for drones and bomber squadrons at a naval site in northern Oregon.
The ruling Tuesday was especially significant because the judges who issued it were appointed by three different presidents from both parties: Judge Karen LeCraft Henderson, by Republican President George H.W. Bush; Judge Janice Brown, by Republican President George W. Bush; and Judge Robert L. Wilkins, by Obama, a Democrat.
Ralls’ purchase of Project Companies, a conglomerate of four American-owned wind-farm firms, had been reviewed by a secretive multi-agency federal committee that vets foreign purchases for potential national security risks.
The Committee on Foreign Investment in the United States, established by President Gerald Ford in 1975, has increasingly focused in recent years on the growing number of Chinese acquisitions.
The committee, whose work is classified and which goes by its acronym CFIUS, is chaired by the Treasury secretary and made up of the secretaries of Homeland Security, Commerce, Defense, State and Energy, along with the Attorney General.
CFIUS briefly burst into the news in 2006 when lawmakers criticized its approval of the sale of port-management firms in six major U.S. coastal cities to Dubai Ports World, a government-owned company based in the United Arab Emirates.
After lawmakers moved to block the deal, Dubai Ports World pulled out, selling its American interests to a U.S. firm.
Christopher Brewster, a Washington lawyer with Stroock & Stroock & Lavan who represents Chinese and other foreign firms seeking to buy American companies, said the court ruling Tuesday was significant.
“What makes it a landmark ruling is that for the first time, a court has held that the parties before CFIUS are entitled to procedural due process and that court review is available to them,” Brewster told McClatchy.
The ruling was surprising, Brewster said, because presidential decisions under the CFIUS process were widely believed to be beyond the reach of federal courts.
The three appellate judges agreed, but only in part.
The law authorizing CFIUS activity states that presidential actions _ decisions whether to approve or block foreign acquisitions on national security grounds _ “shall not be subject to judicial review,” according to the judges.
But the panel determined that the restriction does not extend to constitutional issues raised by CFIUS transactions.
“To the contrary, and as the Supreme Court recognized long ago, interpreting the provisions of the Constitution is the role the Framers entrusted to the judiciary,” the judges wrote.
In 2012, the last year in which CFIUS filed an annual report with Congress, China surpassed Great Britain for the first time as the country with the most foreign investments subject to the national security review.
The Ralls case is unusual in several ways.
It is one of the few foreign transactions that have reached the White House. In most instances, when CFIUS informs overseas firms that a deal could be scuttled on national security grounds, they either drop it or make “mitigating” changes to address national security concerns.
Ralls, however, contested the CFIUS opposition to its purchase, forcing a decision by Obama. After Obama backed the committee and blocked the deal, Ralls then took the still rarer step of filing suit against the president.
Another unusual aspect of the Ralls case was that CFIUS intervened after the purchase had been completed. The committee normally acts upon pending sales.
Brewster said that Ralls rolled the dice with its legal gambit and came up winners, at least for now.
“Companies usually don’t look to buck the process and force the issue when it appears clear what the results are going to be,” he said.
Ralls hired powerful Washington lawyers to represent it, among them former U.S. Solicitor General Paul Clement and former Assistant Attorney General Viet Dinh.