Trump Administration Continues to Target TikTok and Huawei

In separate actions that will weigh heavily on already fraught relations between the United States and China, the Trump Administration has moved to force ByteDance essentially to divest the U.S. business of its subsidiary TikTok and to close the remaining door that permitted sales of products to Huawei incorporating U.S.-origin technology. The Administration cited threats to U.S. national security as the rationale for moving against the companies; the ByteDance order aims to protect personal data of U.S. persons, while the Huawei restrictions are intended to further limit Huawei’s ability to benefit from U.S. technology. Coming on the heels of other recent steps to isolate these companies from U.S. commerce, the new actions add to the legal risks faced by U.S. and non-U.S. companies doing business in China and the United States—and perhaps more importantly, they portend a volley of blunt actions in both countries to forcibly realign their economic ties.

ByteDance/TikTok

On August 14, 2020, President Trump issued an Executive Order prohibiting retroactively ByteDance’s 2017 acquisition of Musical.ly, a U.S. social media company. Following the acquisition, ByteDance merged Musical.ly’s lip-syncing app with ByteDance’s TikTok to create a single, integrated app that became wildly popular globally, with an estimated 49 million daily users in the United States alone.¹ The August 14 Order followed the unanimous recommendation of the Committee on Foreign Investment in the United States (CFIUS), the interagency committee tasked with reviewing investments and acquisitions in the U.S., to assess national security risk. This is the fourth time President Trump has blocked an investment transaction for national security reasons and only the seventh time a president has exercised such authority.

The order requires ByteDance to divest all of its rights and interests in any assets or property used to enable or support the operation of TikTok in the U.S., and any data obtained or derived from TikTok or Musical.ly users in the U.S., no later than 90 days from the date of the order (November 12, 2020). The order also directs ByteDance to certify upon divestment that it has destroyed all data obtained from users in the U.S. Finally, the order effectively gives CFIUS veto power over the ultimate buyer by prohibiting a sale without notification to and non-objection by CFIUS.

This divestment order is particularly notable because it came only a week after President Trump issued Executive Order 13942, effective September 20th, prohibiting transactions involving TikTok by any person or involving any property subject to U.S. jurisdiction. See our prior alert — President Trump Issues Executive Orders Prohibiting Transactions with TikTok and WeChat. According to press reports, ByteDance has already been in discussions with various U.S. companies to sell TikTok, including Microsoft², Twitter³, and Oracle⁴. The Executive Order effectively adds requirements to and places a hard deadline on a sale process that was already in process.

Huawei

On August 20, 2020, the Commerce Department’s Bureau of Industry and Security (BIS) issued a final rule expanding already broad U.S. export controls applicable to Huawei. Specifically, BIS enlarged the scope of the “foreign-produced direct product rule” as applied to Huawei, by limiting Huawei’s ability to procure foreign products manufactured using certain U.S. software and technical know-how and to acquire foreign-produced items that are manufactured using certain U.S.-designed manufacturing equipment.

The Commerce Department first restricted Huawei’s access to U.S. products in May 2019, when BIS designated Huawei and 68 of its affiliates on the “Entity List,” followed by 46 additional Huawei affiliates in August 2019. Those designations effectively imposed a license requirement on exports to the Huawei entities of all items (commodities, software, and technology) “subject to the Export Administration Regulations” (EAR), with a presumption that BIS would deny any such license application.

The original 2019 Entity List designations made it difficult for Huawei to purchase U.S.-origin items. The new rule restricts Huawei’s ability to buy foreign-made items if those items are produced using certain U.S. technical know-how or design software. (The rule expands a previous interim final rule that BIS issued in May. See our prior alert - United States Expands Export Controls Targeting Huawei’s Access to US Technology.)

In addition to the changes to the foreign-produced direct product rule, BIS also designated 38 additional non-U.S. affiliates of Huawei to the Entity List, and implemented a limited authorization, in place of an existing temporary general license, permitting exports to designated Huawei entities for cybersecurity research and vulnerability disclosure purposes.

The final rule became effective on August 17 (prior to its publication in the Federal Register on August 20), but with two exceptions. First, the rule related to items that are direct products of certain U.S. technical know-how does not apply to items otherwise covered that had already been shipped on August 17. Second, the rule for items that are direct products of a U.S.-designed plant, or of a U.S.-designed major component of a plant, does not apply to items that (i) were in production prior to August 17 and (ii) shipped before September 14, 2020.

¹ ByteDance offers a twin app, Douyin, in China and certain other countries. There are an estimated 800 million active TikTok and Douyin users globally. Available here.

² Microsoft to continue discussions on potential TikTok purchase in the United States, (Aug. 2, 2020) available here.

³ Twitter, TikTok Have Held Preliminary Talks About Possible Combination, (Aug. 8, 2020), available here.

⁴ Oracle enters race to buy TikTok’s US operations, (Aug. 17, 2020) available here.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, Theodore W. Kassinger, an O’Melveny of counsel licensed to practice law in the District of Columbia and Georgia, David J. Ribner, an O’Melveny counsel licensed to practice law in the District of Columbia and New York, Mary Pat Dwyer, an O’Melveny counsel licensed to practice law in the District of Columbia and Pennsylvania, and Paras Shah an O’Melveny associate licensed to practice in New York, contributed to this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted. 

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