US Commerce Department Identifies Prohibited Transactions with WeChat But Implementation Delayed

On September 18, 2020, the United States Department of Commerce announced prohibitions on certain transactions relating to the mobile application (“app”) WeChat that were slated to take effect on September 20, 2020.¹ These prohibitions would ban new downloads of the app by consumers in the United States and effectively disable the functionality of the app for existing US users, including by preventing updates to the app and limiting the ability to send or receive money through WeChat. However, just a day after the Commerce Department’s announcement, a federal district court issued a preliminary injunction halting the implementation of the WeChat prohibitions. In this Legal Update, we provide important background to the Commerce Department’s announcement, assess the scope of the prohibited transactions identified in the September 18 announcement and the potential impact on the business community, and address the uncertainty surrounding the implementation of Commerce’s action.

I. Background

WeChat is an app owned and developed by the Chinese company Tencent Holdings Ltd. that counts over 1.2 billion users worldwide. The multipurpose app is used for messaging, audio and video calls, payments, news, gaming, food delivery and ride-sharing. US companies use WeChat to facilitate transactions and engage consumers in China. It is estimated that there are 19 million daily active users of WeChat in the United States.² Many in the Chinese-American and Chinese-speaking communities in the United States use WeChat to “communicate, socialize, and engage in business, charitable, religious, medical-related, and political activities with family, friends, and colleagues” both within the United States and around the world.³ Because most social media apps popular in the United States are blocked in China, WeChat is a key platform for these users to reach their networks in China.⁴

On August 6, 2020, President Trump issued Executive Order 13943, titled “Addressing the Threat Posed by WeChat, and Taking Additional Steps to Address the National Emergency With Respect to the Information and Communications Technology and Services Supply Chain.”⁵ The WeChat executive order, along with an executive order targeting TikTok issued on the same day, are the latest in a series of Trump administration efforts aimed at Chinese companies operating in the information and communications technology and services sectors. They are part of a more comprehensive effort by the current administration to address various national security concerns related to China. Specifically, the executive orders targeting WeChat and TikTok were issued as “additional steps” to deal with the national emergency declared in Executive Order 13873 of May 15, 2019, which addresses securing the United States’ information and communications technology and services (ICTS) supply chain by essentially establishing a new framework for conducting national security reviews and unwinding transactions involving ICTS with ties to foreign adversaries (including China). (For more information on Executive Order 13873 please see our Legal Update.) Although the Commerce Department has sought public comment on a proposed rule to implement regulations pursuant to Executive Order 13873, to date no regulations have been implemented. That said, the proposed rule does not have to go into effect for the Commerce Department to take action against any transaction covered by the proposed rule.

In the WeChat executive order (the “Executive Order”), President Trump expressed concern that “WeChat automatically captures vast swaths of information from its users,” which “threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information.”⁶ Section 1(a) prohibits people and property subject to US jurisdiction from carrying out “transactions” with Tencent or its subsidiaries that are “related to WeChat” after 45 days of the Executive Order’s issuance (i.e., September 20, 2020). The Executive Order directs the Secretary of Commerce to identify the transactions that will be prohibited. The limiting of the Executive Order to transactions with Tencent related to WeChat is purposeful and reflects the broader range of Tencent’s US dealings that the administration is not currently targeting.⁷ Section 2(a) prohibits any transaction “by a United States person or within the United States” that evades, avoids, or violates the uncertain prohibition in Section 1(a). The definition in the Executive Order of “United States person” appears to be borrowed from US sanctions regulations and means “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”

The Executive Order does not define “transaction” but rather directs the Secretary of Commerce to identify the transactions that are subject to the Executive Order’s broad prohibitions. The secretary has significant discretion in defining the term “transaction” for purposes of the Executive Order. The underlying statutory authority cited in the Executive Order—the International Emergency Economic Powers Act (“IEEPA”)—provides extremely broad authority to investigate, regulate, or prohibit activities with a particular target based on national security grounds. We note that the courts have generally been highly deferential to the Executive Branch in its adoption of extremely expansive interpretations of IEEPA to impose virtually comprehensive restrictions on trade to address a declared threat to US national security (including in contexts involving free speech and due process-related challenges). However, as illustrated by the preliminary injunction to halt the implementation of the WeChat ban described further below, this deference is not unlimited.

II. Identified Prohibited Transactions

On September 18, 2020, the Commerce Department issued a press release announcing its identification of transactions prohibited under the Executive Order and posted an advance copy of the implementing Federal Register Notice (the “Notice”) for public inspection.⁸ The Notice identified the following six specific transactions as prohibited:

1. Any provision of services to distribute or maintain the WeChat mobile app, constituent code, or mobile app updates through an online mobile app store or any online marketplace where mobile users within the land or maritime borders of the United States and its territories may download or update apps for use on their mobile devices
2. Any provision of internet hosting services enabling the functioning or optimization of the WeChat app within the land and maritime borders of the United States and its territories
3. Any provision of content delivery services enabling the functioning or optimization of the WeChat mobile app within the land and maritime borders of the United States and its territories
4. Any provision of directly contracted or arranged internet transit or peering services enabling the functioning or optimization of the WeChat mobile app within the land and maritime borders of the United States and its territories
5. Any provision of services through the WeChat mobile app for the purpose of transferring funds or processing payments to or from parties within the land or maritime borders of the United States and its territories
6. Any utilization of the WeChat mobile app’s constituent code, functions, or services in the functioning of software or services developed and/or accessible within the land and maritime borders of the United States and its territories

The Notice included important limitations on the scope of prohibited transactions. First, the Commerce Department has drawn a bright line between transactions within the United States and those outside of the United States. The list of prohibited transactions apply only to activities “within the land or maritime borders of the United States and its territories.” Furthermore, the identified prohibitions do not apply to:

Activities related to mobile applications intended for distribution, installation or use outside of the United States by any person, including but not limited to any person subject to U.S. jurisdiction, and all ancillary activities, including activities performed by any U.S. person, which are ordinarily incident to, and necessary for, the distribution, installation, and use of mobile applications outside of the United States (emphasis added).

This makes clear that the use of WeChat and other transactions related to WeChat that occur outside of the United States, even where such uses are by US persons, are not prohibited. This is an important limitation for the many US businesses that use WeChat in China to communicate with customers, employees, and other business partners as well as to market to customers and make and receive payments. Moreover, even certain “ordinarily incident and necessary” support of such uses that may occur within the United States would qualify for exclusion from the prohibitions. The term “ordinarily incident to, and necessary for” has long been used in the US sanctions context and allows for activity by US persons or with some connection or nexus to the United States that are in support of or facilitate activities that have been authorized by a license but would otherwise be prohibited. This carve out is particularly helpful for US companies with subsidiaries in China that use WeChat as it would allow their US person employees in China to engage in the companies’ transactions related to WeChat outside of the United States. This language also indicates that US person employees, wherever located, who have roles in a company’s WeChat uses and related transactions occurring outside of the United States would not be subject to the prohibitions provided that their involvement qualifies as “ancillary activities … ordinarily incident to, and necessary for[,]” the distribution, installation, and use of WeChat’s app.

Second, the Notice expressly stated that the identified prohibitions only apply to “the parties to business-to-business transactions.” Reflecting this targeting of business-to-business activities, the identified prohibitions do not apply to users of the app within the United States. The Notice provided that the following falls outside the scope of identified prohibitions: “The exchange between or among WeChat mobile application users of personal or business information using the WeChat mobile application, to include the transferring and receiving of funds.” This is in line with a September 16 Department of Justice filing in federal court stating that the Commerce Department “does not intend to take actions that would target persons or groups whose only connection with WeChat is their use or downloading of the app to convey personal or business information between users.” The Department of Justice added that such users would not be exposed to “criminal or civil liability.”⁹ An unnamed senior Commerce Department official noted that some users will find ways to continue using the app, and it does not intend to prosecute anyone for doing so. According to the official, the Commerce Department’s aim is to decrease the use of the app over time.¹⁰

III. Looking Ahead

On August 21, 2020, a complaint was filed in the Northern District of California by the nonprofit U.S. WeChat Users Alliance and several WeChat users in a bid to block the Executive Order.¹¹ The WeChat Users Alliance is a nonprofit organization made up of WeChat users in the United States who want to continue to using WeChat in the United States. The six individual plaintiffs consist of WeChat users residing throughout the United States who use WeChat for personal and business purposes, as well as an online retailor that uses WeChat to deliver its targeted marketing and advertising services. The plaintiffs filed an amended complaint on September 18, 2020, after the Commerce Department posted the Notice. The plaintiffs claim the Executive Order is unconstitutional and that the Trump administration did not provide sufficient evidence to support its claims that WeChat raises a national security threat. Specifically, the plaintiffs allege that the ban (1) violates the First Amendment to the US Constitution; (2) violates the Fifth Amendment; (3) violates the Religious Freedom Restoration Act, 42 U.S.C. § 2000bb(1)(a); (4) was not a lawful exercise of the president’s and the secretary’s authority under IEEPA—which, as noted above, allows the president to prohibit “transactions” in the interest of national security—because IEEPA, 50 U.S.C. § 1702(b)(1), does not allow them to regulate personal communications; and (5) violates the Administrative Procedures Act because the secretary exceeded his authority under IEEPA and should have promulgated the rule through the notice-and-comment rulemaking procedures in 5 U.S.C. § 553(b). The plaintiffs seek declaratory and injunctive relief.

The plaintiffs filed a motion for a preliminary injunction on August 28, 2020, against the implementation of the Executive Order, and they filed a supplemental motion for preliminary injunction on September 18, 2020, following the Commerce Department’s posting of the Notice on that day. On September 19, 2020, the court granted the plaintiffs’ motion for a nationwide injunction—limited to the secretary of commerce’s identification of prohibited transactions published on September 18, 2020—“on the ground that the plaintiffs have shown serious questions going to the merits of the First Amendment claim, the balance of hardships tips in the plaintiffs’ favor, and the plaintiffs establish sufficiently the other elements for preliminary-injunctive relief.”¹² The court found that the plaintiffs established “that there are no viable substitute platforms or apps for the Chinese-speaking and Chinese-American community” and that the Secretary of Commerce’s identification of prohibited transactions does not survive intermediate scrutiny for content-neutral restriction of speech because “the prohibited transactions burden substantially more speech than is necessary to serve the government’s significant interest in national security, especially given the lack of substitute channels for communication.”¹³ The court reasoned:

Certainly the government’s overarching national-security interest is significant. But on this record—while the government has established that China’s activities raise significant national-security concerns—it has put in scant little evidence that its effective ban of WeChat for all U.S. users address those concerns. And, as the plaintiffs point out, there are obvious alternatives to a complete ban, such as barring WeChat from government devices, as Australia has done, or taking other steps to address data security.¹⁴

On September 24, 2020, the Department of Justice filed a motion to stay the preliminary injunction pending any appeal to the Ninth Circuit and, if necessary, any further review by the Supreme Court.¹⁵ If the court does not revise or stay the entire injunction order, the Department of Justice requests in the alternative that the court stay at least Paragraph 1 of the Commerce Department’s identification of prohibited transactions, which prohibits “[a]ny provision of services to distribute or maintain the WeChat mobile application … through an online mobile application store, or any online marketplace where mobile users within … the United States … may download or update applications for use on their mobile devices.”¹⁶ On October 2, 2020, the Department of Justice appealed the district court’s preliminary injunction order to the US Court of Appeals for the Ninth Circuit. A hearing on the government’s motion to stay the preliminary injunction order pending appeal is scheduled for October 15, 2020.

The implementation of the Executive Order remains uncertain. For the time being, it remains on hold due to the preliminary injunction, though the Department of Justice has filed a motion to stay preliminary injunction pending any appeal of the district court ruling. The Commerce Department has withdrawn the Notice from public inspection on the Federal Register.¹⁷ While it remains to be seen how the ongoing litigation will affect the Executive Order’s implementation, US businesses should use the current pause to conduct a global assessment of the potential business and operational impacts in the event the list of identified prohibited transactions and exceptions in the Notice are implemented. We will continue to monitor developments related to the Executive Order and its impact on US companies’ operations and use of WeChat.