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U.S. Scheduled Bans on TikTok and WeChat Apps Delayed

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U.S. Scheduled Bans on TikTok and WeChat Apps Delayed

China-based smartphone apps, TikTok and WeChat, have each received a reprieve from the respective bans, which were originally ordered by President Trump on August 6, 2020, against both parties and were scheduled to take effect on September 21, 2020. Please see our previous post covering the Executive Orders. Pursuant to the Executive Orders banning the apps on national security grounds, the U.S. Department of Commerce (“Commerce”) published final rules for implementing the bans on September 19, 2020, which were subsequently withdrawn. Commerce then delayed the order to withdraw TikTok from U.S. app stores until September 27, 2020, at 11:59 pm. Meanwhile, Commerce’s order to withdraw WeChat has been suspended temporarily due to an injunction granted by the U.S. District Court for the Northern District of California.

In an effort to come into compliance with the Executive Order and avoid the ban, TikTok’s parent, ByteDance Ltd. (“ByteDance”), negotiated a deal with Oracle and Walmart to keep TikTok operating in the United States. Under the terms of the agreement, based on media reports, TikTok will be spun off into a U.S.-based company majority-owned by its Chinese parent ByteDance, while Oracle and Walmart will take up to a twenty (20) percent stake of the new U.S. company. ByteDance will maintain control over the app’s algorithm, while user data will be stored in the U.S.  It is possible that the ban on TikTok may be formally lifted once the deal is finalized since President Trump has given his personal approval of the agreement, though that is unclear at this time.

A judge from the U.S. District Court for the Northern District of California granted a nationwide injunction on September 19, 2020, temporarily suspending Commerce’s order for Apple and Google to remove WeChat from their app stores. Plaintiffs U.S. WeChat Users Alliance, et al. allege that the ban violates First Amendment rights, especially for Chinese Americans. Judge Beeler stated that the plaintiffs “have shown serious questions going to the merits of the First Amendment claim” and that “the balance of hardships tips in the plaintiffs’ favor”.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

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Winter 2019 U.S.- China Cybersecurity Update

It is difficult to accurately speculate on the progress of U.S.-China trade negotiations, as media reports on the status of key policy proposals seemingly differ each day depending on the transparency and messaging agenda of the sources involved. However, what has been certain during the winter of 2019 is that major updates to U.S. and Chinese cybersecurity regulations are in the process of being implemented, and these developments stand to set key precedents for the intersection of applicable foreign investment and cybersecurity regulations in the U.S. and China.  

Building on our previous two articles regarding U.S. economic espionage concerns and updated U.S. foreign investment restrictions, this article will provide an overview of notable cybersecurity legislative and investigative developments that will likely dictate the near future of critical facets of U.S.-China relations in the 21st century, including (1) the implementation of China’s revised cybersecurity legislation known as the Multi-Level Protection Scheme (“MLPS 2.0”); (2) the Committee on Foreign Investment in the United States (“CFIUS”) reported investigation into the popular social media app TikTok; and (3) the race to implement 5G infrastructure and ongoing speculation regarding Huawei’s licensing status.

1. Implementation of China’s Multi-Level Protection Scheme (MLPS 2.0)

In 2017, China implemented comprehensive cybersecurity legislation commonly referred to as China’s Cybersecurity Law (“CCL”) in efforts to consolidate authority over and standardize regulation of the internet and cyberspace. The CCL includes strict prohibitions on how companies, particularly U.S. and other foreign companies, can store data and interact online.  For example, the CCL requires that network operators in China cooperate with and provide support to government agencies in support of safeguarding national security, and additional provisions have been passed in recent years under the CCL that provide broad authorizations for law enforcement agencies to inspect and monitor internet service providers and computer network data centers. Foreign companies and human rights organizations have criticized the CCL as regressive legislation that fosters state censorship and surveillance and lacks sufficient privacy protections.

Article 21 of the CCL codified China’s requirements for network operators to implement a cybersecurity “multi-level protection system” that includes mandates to implement and adopt certain technical measures and security protocols to monitor and record network activity. Article 37 imposes certain data localization requirements and requires “critical information infrastructure” operators to store personal information and important data gathered or produced within the mainland territory of China.

On December 1, 2019, MLPS 2.0 will take effect, and will impact how U.S. companies and other foreign companies can do business online and store electronic data in China. A draft of the new regulations was first released in June 2018, and the revised MLPS 2.0 incorporates three information security technology standards that in effect will broaden the Chinese government’s authority, particularly that of the Ministry of Public Security, to proactively supervise, manage, and enforce cybersecurity regulations and restrictions on companies operating in China.

The expanded monitoring and enforcement authorities that MLPS 2.0 provides the Chinese government has provoked increasing privacy concerns for foreign firms, particularly those handling sensitive data. The regulations provide stringent mandates on how foreign companies must secure their networks, utilize local sever systems, and cooperate with government authorities. As the new law enters into effect on December 1, 2019, it will be critical for U.S. companies operating in China to understand how the new laws will impact their operations. Companies that store and utilize sensitive personal data, U.S.-regulated technology or technological data, or proprietary intellectual property and trade secrets will have to ensure compliance with both U.S. and Chinese regulations governing privacy, export controls, and cybersecurity regulations. 

2. CFIUS Takes on TikTok

We previously provided an overview of the updated CFIUS regulations concerning foreign investment restrictions scheduled to take effect in the U.S. in February 2020. However, that does not mean that CFIUS, the inter-agency committee tasked with the authority to review, modify and reject certain types of foreign investment that could adversely impact U.S. national security, is dormant in terms of its current investigations. In fact, on November 1, 2019, Reuters reported that CFIUS has launched a national security review of the popular social media and video-streaming app TikTok, related to the acquisition of social media app Musical.ly (since rebranded as “TikTok”) by Beijing ByteDance Technology Co. in 2017 for $1 billion. TikTok earlier this year said that approximately 60% of its 26.5 million monthly active users are located in the United States.

U.S. lawmakers first raised national security concerns related to the TikTok platform, particularly its Chinese parent company’s collection of user data and purported censorship of user content.  For example, Senators Chuck Schumer and Tom Cotton sent a bi-partisan letter to the Acting Director of National Intelligence in October voicing concerns over TikTok’s data collection practices, highlighting Chinese laws that “compel Chinese companies to support and cooperate with intelligence work controlled by the Chinese Communist Party.” While it is unclear what the outcome of this particular review will be, it puts a spotlight on the types of industries and practices that CFIUS is currently scrutinizing and provides a useful case study for what types of mitigating measures we may see imposed by the Committee down the road.

The updated CFIUS regulations set to take effect in February 2020 expressly expand the jurisdiction of CFIUS to include reviews of non-controlling foreign investments in companies that store and have access to sensitive personal data of U.S. citizens. But the CFIUS review into TikTok is only the latest investigation by the Committee into burgeoning technology apps that store sensitive personal data. CFIUS has previously targeted the proposed acquisition by the Chinese Kunlun Group of the U.S. dating application “Grindr” for data privacy concerns regarding its individual users, and similarly forced the Chinese digital healthcare company iCarbonX to divest from it its investment in the U.S. healthcare startup “PatientsLikeMe.” 

These recent cases ultimately show that CFIUS is increasingly focused on the protection of the sensitive personal data of U.S. citizens in emerging technological applications, particularly when Chinese investment is involved.  All U.S. companies considering foreign investment will have to take heed of the current and soon-to-be updated CFIUS regulations and increase their due diligence efforts, particularly where Chinese investment is concerned.

3. 5G Supremacy: Timeline on Huawei Restrictions and Licensing Still Unclear

Finally, a critical ongoing area of U.S.-China cybersecurity relations is the debate over the role that China’s telecommunications leader Huawei will have in developing and implementing global 5G technology and data networks. Huawei was placed on the U.S. Department of Commerce “Entity List” over national security concerns in May 2019, which restricts U.S. companies from doing business with it, and a licensing regime was put into place for U.S. companies that seek to engage with Huawei and certain of its subsidiaries. While no such licenses have been issued to date, U.S. Secretary of Commerce Wilbur Ross recently indicated that at least some of the 260 license applications their office has received will be granted and issued shortly.  

U.S. critics believe that allowing Huawei to take the lead on 5G and similar data network equipment will potentially give the Chinese government the ability to collect data of the users of Huawei products. However, Huawei is a global leader in 5G technology, and despite pressure from the U.S. government, countries like Germany, Hungary, and Norway have decided against banning Huawei from their 5G networks. The inherent difficulties and concerns in having the global leader in 5G technology also be closely connected to the Chinese government is an issue that every country seeking to develop 5G infrastructure will have to address, and will likely be a focal point in the U.S.-China trade war as well as in global cybersecurity relations for years to come. 

If you have any questions about U.S.-China trade relations as it relates to CFIUS, cybersecurity regulatory compliance, or U.S.-imposed licensing restrictions, please contact a member of Baker Donelson’s Global Business Team below.

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Joe D. Whitley is a shareholder at Baker Donelson and chairs the Firm’s Government Enforcement and Investigations Group. He can be reached at jwhitley@bakerdonelson.com. 

Alan Enslen is a shareholder with Baker Donelson and leads the International Trade and National Security Practice and is a member of the Global Business Team. He can be reached at aenslen@bakerdonelson.com. 

Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues. He can be reached at jbodie@bakerdonelson.com. 

Frank Xue is an associate with Baker Donelson who assists Chinese clients with matters in the U.S. related to foreign direct investments, mergers and acquisitions, and private equity/venture capital. He can be reached at fxue@bakerdonelson.com. 

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1. CCL Translation: “Cyber-security Law of the People’s Republic of China,” Dezan Shira and Associates. https://www.dezshira.com/library/legal/cyber-security-law-china-8013.html.

2. CCL Article 9; see also Laney Zhang, China: New Regulation on Police Cybersecurity Supervision and Inspection Powers Issued, Library of Congress (November 13, 2018) (discussing Measures of Internet Security Supervision and Inspection by the Public Security Organs, (Sept. 15, 2018, effective Nov. 1, 2018)) https://www.loc.gov/law/foreign-news/article/china-new-regulation-on-police-cybersecurity-supervision-and-inspection-powers-issued/.

3. See, e.g., China: Abusive Cybersecurity Law Set to be Passed, Human Rights Watch (November 6, 2016) https://www.hrw.org/news/2016/11/06/china-abusive-cybersecurity-law-set-be-passed; China adopts cyber security law in face of overseas opposition, Reuters (November 6, 2016) https://www.reuters.com/article/us-china-parliament-cyber-idUSKBN132049.

4. Draft Cybersecurity Classified Protection Regulations, China Ministry of Public Security (June 27, 2018) http://www.mps.gov.cn/n2254536/n4904355/c6159136/content.html?from=timeline&isappinstalled=0.

5. See, e.g. Simone McCarthy, Will China’s revised cybersecurity rules put foreign firms at risk of losing their secrets?, South China Morning Post (October 13, 2019) https://www.scmp.com/news/china/diplomacy/article/3032649/will-chinas-revised-cybersecurity-law-put-foreign-firms-risk.

6. Greg Roumeliotis, Yingzhi Yang, Echo Wang, Alexandra Alper, Exclusive: U.S. opens national security investigation into TikTok, Reuters (November 1, 2019) https://www.reuters.com/article/us-tiktok-cfius-exclusive/exclusive-u-s-opens-national-security-investigation-into-tiktok-sources-idUSKBN1XB4IL.

7. Reuters,  How TikTok, Caught in U.S. Regulatory Crossfire, Rose to Global Video Stardom, The New York Times (November 4, 2019) https://www.nytimes.com/reuters/2019/11/04/business/04reuters-tiktok-cfius-factbox.html.

8. See, e.g. Senator Marco Rubio Letter to Secretary of Treasury Steven Mnuchin https://www.rubio.senate.gov/public/_cache/files/9ba023e4-2f4b-404a-a8c0 e87ea784f440/FCEFFE1F54F3899795B4E5F1F1804630.20191009-letter-to-secretary-mnuchin-re-tiktok.pdf

9. Senators Charles E. Schumer and Tom Cotton Senate Letter (October 23, 2019) https://www.democrats.senate.gov/imo/media/doc/10232019%20TikTok%20Letter%20-%20FINAL%20PDF.pdf.

10. See, e.g., Christiana Farr and Ari Levy, The Trump administration is forcing this health start-up that took Chinese money into a fire sale, CNBC (April 4,  2019) https://www.cnbc.com/2019/04/04/cfius-forces-patientslikeme-into-fire-sale-booting-chinese-investor.html; Echo Wang, China’s Kunlun Tech agrees to U.S. demand to sell Grindr gay dating app, Reuters (May 13, 2019) https://www.reuters.com/article/us-grindr-m-a-beijingkunlun/chinas-kunlun-tech-agrees-to-u-s-demand-to-sell-grindr-gay-dating-app-idUSKCN1SJ28N.

11. Huawei Entity List and Temporary General License Frequently Asked Questions, Department of Commerce (September 18, 2019) https://www.bis.doc.gov/index.php/documents/pdfs/2447-huawei-entity-listing-faqs/file

12. Philip Heijmans and Haslinda Amin, Ross Optimistic on China Deal, Trump Wants It Signed in U.S., Bloomberg (November 3, 2019) https://www.bloomberg.com/news/articles/2019-11-03/ross-optimistic-on-china-trade-deal-says-huawei-licenses-coming?srnd=premium.

13. See, e.g., Associated Press, Hungary Says Huawei to Help Build Its 5G Wireless Network, New York Times (November 5, 2019) https://www.nytimes.com/aponline/2019/11/05/business/bc-eu-hungary-huawei.html; Chloe Taylor, Germany set to allow Huawei into 5G networks, defying pressure from the US, CNBC (October 16, 2019) https://www.cnbc.com/2019/10/16/germany-to-allow-huawei-into-5g-networks-defying-pressure-from-the-us.html.