US President Donald Trump issued two executive orders on August 6, 2020, mandating a ban on transactions with ByteDance Ltd. (ByteDance) and Tencent Holdings Ltd. (Tencent), the companies owning TikTok and WeChat, respectively. Executive Orders (EO) 13942 and 13943 (the Executive Orders) authorized US Secretary of Commerce Wilbur Ross to specify the types of prohibited transactions with Tencent (relating to WeChat) and ByteDance, including their subsidiaries, by persons or involving property subject to the jurisdiction of the United States (Affected Entities).
On September 18, 2020, the US Secretary of Commerce released the list of transactions involving WeChat and TikTok that will be covered under the Executive Orders. The prohibitions were scheduled to take effect on September 20 and 27, respectively, but are now suspended due to preliminary injunctions issued by federal courts in favor of WeChat and TikTok. Despite the suspensions, Affected Entities with ties to the named Chinese technology companies should prepare to take action with respect to any relationships or activities that may be subject to the Executive Orders.
On August 6, 2020, President Trump, pursuant to the International Emergency Economic Powers Act (50 USC 1701 et seq.) (IEEPA) and other authorities, issued EO 13942 and 13943. The Executive Orders are based on the national emergency the President declared in EO 13873 of May 15, 2019 with respect to the information and communications technology and services supply chain. EO 13873 creates a framework for imposing restrictions on the acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service (transaction) by any US person or others subject to US jurisdiction involving any property in which any foreign country or national has any interest.
To address concerns of the Administration regarding data collected by TikTok and WeChat and other stated concerns, the President ordered that the following activities be prohibited:
- EO 13942: “any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with ByteDance (a.k.a. Zìjié Tiàodòng), Beijing, China, or its subsidiaries, in which any such company has any interest”; and
- EO 13943: “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd. (a.k.a. Téngxùn Kònggǔ Yǒuxiàn Gōngsī), Shenzhen, China, or any subsidiary of that entity.”
Status of the Executive Orders
The Executive Orders required the Secretary of Commerce to identify the types of transactions that would be subject to the Executive Orders. Even though the Secretary of Commerce did clarify the scope and impact of the prohibited transactions on September 18, 2020, the implementation of the Executive Orders was halted by federal judges shortly before they were slated to take effect.
ByteDance was previously the subject of another executive order, issued on August 14, 2020, which requires it to divest its interests in TikTok within 90 days. Since then, there have been reports of one or more US companies seeking to purchase TikTok, which would allow TikTok to continue operating.
On September 19, 2020, Treasury spokesperson Monica Crowley announced that the President has reviewed a deal among Oracle, Walmart, and TikTok Global to address the national security implications allegedly posed by TikTok’s operations. In the deal, Oracle will be responsible for key technology and security responsibilities to protect all US user data. Formal approval by the Committee on Foreign Investment in the United States (CFIUS) is still required, subject to a closing with Oracle and Walmart. If TikTok is no longer owned by or otherwise affiliated with ByteDance, EO 13942, which prohibits transactions with ByteDance and its subsidiaries, should be less consequential for ByteDance.
In light of the evolving deal, the Secretary of Commerce delayed the effective date of the prohibited transactions for TikTok under the Executive Orders from September 20 to September 27 at 11:59 PM. However, hours before the ban was scheduled to begin, a DC federal judge granted TikTok’s motion for preliminary injunction blocking President Trump’s ban. The order does not cover the provisions that are expected to take effect on November 12, 2020 (see below). The opinion states that the TikTok ban “stop[s] U.S. users from communicating (and thus sharing data).” As a result, TikTok has “demonstrated that they are likely to succeed on their claim that the prohibitions constitute indirect regulations of ‘personal communication[s]’ or the exchange of ‘information or informational materials.'” Such regulation is prohibited under IEEPA, the authority that President Trump relied on in issuing the Executive Orders.
Similar to the current status of TikTok, a federal judge in California also issued a nationwide preliminary injunction blocking the Trump administration’s ban on WeChat. The judge’s order cites “serious [First Amendment] questions” and was released the day before the full suite of sanctions were set to take effect on September 20.
The injunctions enable both TikTok and WeChat to continue to function as usual, pending further developments with the proceedings in court.
Transactions identified by the Secretary of Commerce
As of September 20, 2020 (effective date suspended, see above), the following transactions are prohibited under the Executive Orders:
- Any provision of service to distribute or maintain the WeChat or TikTok mobile applications, constituent code, or application updates through an online mobile application store, or any online marketplace where mobile users within the land or maritime borders of the US and its territories may download or update applications for use on their mobile devices; and
- Any provision of services through the WeChat mobile application for the purpose of transferring funds or processing payments to or from parties within the US.
In addition, the following transactions are prohibited as of September 20, 2020 (effective date suspended, see above), for WeChat and as of November 12, 2020, for TikTok:
- Any provision of internet hosting services (e.g., file hosting, domain name server hosting, cloud hosting, and virtual private server hosting) enabling the functioning or optimization of the mobile applications in the US;
- Any provision of content delivery network services enabling the functioning or optimization of the mobile applications in the US;
- Any provision of directly contracted or arranged internet transit or peering services enabling the functioning or optimization of the mobile applications within the US; and
- Any utilization of the mobile applications’ constituent code, functions, or services in the functioning of software or services developed and/or accessible within the US.
The identified provisions apply only to parties in business-to-business transactions. Additional transactions relating to WeChat or TikTok may be prohibited at a future date, pursuant to the Executive Orders.
The identified prohibitions do not apply to:
- payment of wages, salaries, and benefit packages to employees or contractors;
- the exchange between or among the mobile applications’ users of personal or business information using the mobile applications, which includes the transferring and receiving of funds for WeChat;
- activities related to mobile applications intended for distribution, installation, or use outside of the US by any person, including but not limited to any person subject to US jurisdiction, and all ancillary activities, including activities performed by any US person, which are ordinarily incident to, and necessary for, the distribution, installation, and use of mobile applications outside of the US; or
- the storing of mobile application user data in the US.
As indicated above, there are numerous moving parts to the implementation of these prohibitions, further contributing to uncertainties for those involved with WeChat and TikTok. Nevertheless, Affected Entities should consider the potential implications on their respective businesses as a result of the identified transactions and take steps to ensure that they are well-positioned to address any compliance risks and obligations that follow.
In sum, the US government appears focused on ramping up pressure on Chinese technology companies, and these Executive Orders may be the tip of the regulatory iceberg if the US-China technology war continues to intensify. For the time being, it is advisable for Affected Entities to evaluate whether their business dealings run afoul of the abovementioned prohibitions and to plan business continuity measures accordingly.
We will continue to monitor these developments and provide updates, as needed.