Preliminary Injunction Halts Xiaomi’s Designation as a Communist Chinese Military Company

Good afternoon. My name is George Thompson. I’ve been getting a number of questions regarding Xiaomi, a Chinese telecom manufacturer. In particular, people are asking about the district court’s preliminary injunction. The court’s action halted enforcement of the Defense Department’s designation of Xiaomi as a Communist Chinese military company. Without the injunction, United States persons would have been prohibited from investing in Xiaomi as of March 15th, so this really is a big deal.

Here’s the background. The National Defense Authorization Act of 1999 requires the Defense Department to identify Chinese Communist military companies. It also authorizes the President to impose sanctions on those firms under the International Emergency Economic Powers Act, or IEEPA. The NDAA’s requirement was pretty much ignored until 2020, when DOD began identifying those Chinese companies that it considered to have ties to that country’s military establishment.

Using his IEEPA authorization, President Trump imposed sanctions on any Chinese military companies named by the Defense Department. The sanctions prevent new investments in them by United States persons and require divestiture of old ones. The purpose is to thwart the Chinese government’s supposed use of civilian entities for development of military capabilities.

Xiaomi went to federal district court to get the decision halted.

It argued that it is strictly a consumer electronics company having no affiliation with the Chinese military, and the court agreed to do so. It applied the general standards for preliminary injunctions, two of which are important here.

First, the court found that Xiaomi was likely to succeed on the merits of its claim. Indeed, the court was very critical of the Defense Department’s decision, finding that it wasn’t supported by substantial evidence in the administrative record.

That’s an important finding, because there will not be a trial or other evidentiary hearing where DOD presents is case. Instead, the court reviews the facts that were before the agency at the time it designated Xiaomi, and found they were insufficient. In addition, DOD’s explanation for designating Xiaomi was inadequate, because it failed to connect the facts with the decision. On top of that, the court affirmatively found that Xiaomi did not meet the criteria for Chinese Communist military companies in the first place.

In addition to its likely success on the merits of the case, the court also determined that Xiaomi would be irreparably harmed if the investment prohibition went into effect, because of the financial damage it would cause.

The decision is important for Xiaomi, of course, but it may also provide a blueprint for challenges by other Chinese companies that may believe that they too have been improperly designated. The same deficiencies the court found regarding Xiaomi seem to be systemic in DOD’s approach in general.

Whether the Biden administration wishes to double down in going after supposed civilian-military fusion companies is an open question.

Not that I want to give them any ideas, of course, but perhaps a different option would be to bypass the NDAA process altogether and simply act directly under IEEPA. That may allow designations to sidestep judicial review altogether. For now, though, a key piece of the U.S.’s confrontational approach toward China has been blunted.