Constitution and Context in the TikTok and WeChat Executive Orders

President Trump has now issued three Executive Orders (EOs) prohibiting  WeChat and TikTok from transacting business in the United States.  The first two EOs were issued on August 6 pursuant to the International Emergency Economic Powers Act (IEEPA), the National Emergencies Act (NEA) and  3 USC Sec. 301.  The statutory bases for the two Executive Orders are identical.  On August 14, another EO was issued pursuant to the Defense Production Act (which governs the Committee on Foreign Investment in the United States) (50 USC Sec. 4565).  The latter EO requires ByteDance, the parent company of TikTok, to divest all of its assets in the United States.

The TikTok EOs are milestones in the ongoing investigation by the Committee on Foreign Investment (“CFIUS”) in the United States calling for retroactive divestment by TikTok.  The WeChat order is more unexpected. True to its CFIUS parentage, the second TikTok order specifically requires divestment of “any tangible or intangible assets or property, wherever located, used to enable or support ByteDance’s operation of the TikTok application in the United States…and… any data obtained or derived from TikTok application or Musical.​ly application users in the United States.” This second TikTok EO also falls within prior CFIUS precedents regarding Chinese internet platforms accessing US data, including Chinese acquisitions of the gay dating site Grindr and the medical data platform PatientsLikeMe.

Prof. Robert Chesney in his Lawfare blog has observed that the wording of the WeChat EO is potentially broader than the (first) Tiktok EO since it applies more generally to the parent company, TenCent, and TenCent has widespread U.S. investments apart from its WeChat operation.  The WeChat order specifically extends to “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 …”   Through its expansion to the parent company, the WeChat EO attempts to place a broader restriction on the operations of the Chinese company in the US, and potentially has broad-reaching impacts on IP rights as well.

The three EOs seek to limit the risks posed by Chinese access to US data.  While the EOs refer to “property,” no order specifically refers to traditional intellectual property: patents, trademarks, copyrights or trade secrets.  Such rights, however, are also likely to be affected by these EOs.  The USPTO database reveals that Tencent is listed as an owner or assignee of 2,124 US patents as of August 11, 2020.  Bytedance has 18.  The Tencent portfolio is especially broad, covering communications, video games, video and sound transmission and encoding, etc.  In addition, Tencent has important licensing arrangements with the NBA, Warner Music, and others.   Both companies may also be licensees of other US technological goods and services.  Efforts to strip them of their licensing activity for US interests in China could be especially regrettable.

IEEPA has imposed limitations on IP rights in the past.  Typically, patents and other IP rights had been considered property subject to a sanctions regime, although a license is typically granted or available for prosecution or maintenance of the right.   See Iranian Sanctions (2012), Bacardi Rum WTO case.  During WWI practice had been to sell off patent rights of an enemy, much as happened to Bayer’s patent rights in aspirin during WW I.  The President retains considerable discretion in the exercise of his administrative authority to affect the interests of regulated entities, even if an EO or regulation does not specifically encompass patents.  Regulation of patents as property is arguably contemplated by the patent law itself, which states: “patents shall have the attributes of personal property” (35 USC Sec. 261).  Although the  Supreme Court in the Oil States decision  (2018) held that patents are “public franchises,” not property rights, this may not have great impact on expansive national security rule making.

The IEEPA basis of the first two EOs is evidenced by comparison to the subsequently stated authorities which are more general in nature.  The NEA (50 USC  Secs. 1601 –1651) is an omnibus law for regulating Presidential declarations of emergencies.  Title 3 gives the President general authority to delegate responsibilities.   IEEPA authorizes the President to regulate international commerce after declaring a national emergency in response to any unusual and extraordinary threat to the United States which has its source in whole or substantial part outside the United States  (50 USC Sec. 1701 et seq.).  Usually IEEPA is administered by the Office of Foreign Assets Control at Treasury.   For unexplained reasons, the  EOs delegate IEEPA authority in these matters to the Department of Commerce.  Perhaps this was because Treasury Secretary Mnuchin reportedly did not support this action, or because of the impending action under CFIUS affecting TikTok.

These three EOs are part of the continuing weaponization by the Trump administration’s practice of US national emergency laws.   The motivations behind these efforts may, however, be clearer than the legal research underpinning them.  As my colleague at Berkeley, Jim Dempsey, has noted in a blog on Lawfare, “the latest moves [are] … part of a comprehensive strategy to purge anything Chinese from the U.S. telecommunications and internet ecosystem and to degrade the attractiveness of Chinese-made communications products and services to overseas buyers as well.”

Importantly, IEEPA is oriented towards economic actions.  It principally regulates “transactions”.  The two earlier EOs similarly are directed to “transactions”.  Secs. 1(c).  These two EOs require Commerce to identify regulated “transactions” within 45 days.    The second TikTok EO requires divestment within 90 days of “any tangible or intangible assets or property, wherever located, used to enable or support ByteDance’s operation of the TikTok application in the United States, as determined by the [CFIUS]; and …  any data obtained or derived from TikTok application or Musical.​ly application users in the United States.” Although these and other actions taken by the Administration overlap in complex ways, the two earlier EOs primarily cause divestment through prospective regulation of “transactions”, while the second TikTok EO  impacts the prior investment in ByteDance by TikTok.

Based on prior OFAC practice, the definition of “transactions” under the first two EOs should include “(i) any transactions in foreign exchange, (ii) transfers of credit or payments between, by, through, or to any banking institution, to the extent that such transfers or payments involve any interest of any foreign country or a national thereof, (iii) the importing or exporting of currency or securities.” Absent any regulatory exceptions, these traditional subjects of IEEPA regulation should capture payments made for a WeChat account or service, social marketing transactions facilitated via WeChat, or license fees for copyrighted content.

To the extent it reaches into content regulation, the Administration’s approach under IEEPA raises other, challenging legal issues.  Does  use of the App and/or transferring information to WeChat/TikTok in the form of using the App, constitute a financial “transaction” if no payment is involved?   What rights do we have in the US to disclose our private information?  In the absence of comprehensive national privacy legislation, how should we understand the Administration’s singling out of TikTok and WeChat?  What type of precedent does this establish for censorship in the United States of the Internet, Apps, and further creation of a parallel Internet with China, or “splinternet”, etc.? Why did the Trump Administration choose a national security route for regulation, rather than insisting on ahderence to verifiable standards and reciprocity?

There may also be constitutional limitations on how the Administration can regulate apps pursuant to IEEPA.  IEEPA denies authority to the President to “regulate or prohibit, directly or indirectly – any postal, telegraphic, telephonic, or other personal communication, which does not involve a transfer of anything of value” (emphasis supplied) and should thereby exempt digital communication.  There are other related constitutional carve-outs and related exceptions to IEEPA.  The Berman Amendment to IEEPA also created a carve-out for imports of informational materials from embargoed countries.  Regulation of software imports is analogous to the Berman exception carveout on informational materials. Precedent under the Export Controls regime has held that software source code (for cryptography) is a kind of free speech with attached First Amendment rights, including limitations on prior restraints (Bernstein v. United States).  The court in the Bernstein decision also interestingly referred to copyright law as a body of law which also views software as a creative expression.  The Electronic Freedom Foundation (EFF) has also properly identified serious constitutional concerns: TikTok Ban: A Seed of Genuine Security Concern Wrapped in a Thick Layer of Censorship (August 4, 2020).  As EFF has noted:

“The word ‘Indirectly’ here is important, because many possible bans would not speak of the TikTok messages, but the app or the company. Jarred Taylor’s 2012 law review article Information Wants to be Free (of Sanctions) cogently explains why this amendment means the President cannot prohibit foreign access to social media under U.S. export regulations. Likewise, the President cannot prohibit American access to foreign social media.”

How important are these apps to freedom of expression in the United States? Initial evidence shows a 41% spike in downloads of WeChat after the EOs were announced, as well as in downloads of an encryption partner to WeChat, Signal, and a WeChat alternative owed by Tencent, QQ.  QQ downloads tripled.  Finally, downloads of TikTok video-sharing alternatives have also increased.

One may also question the Administration’s selection of TikTok and WeChat for risk mitigation. Huawei technology arguably carries similar risks to use of a TikTok or WeChat app.  By comparison, there is no ban on using  Huawei consumer technology in the United States.  Amazon has a Huawei store on its US platform.  An even greater concern might be all the China-manufactured Internet-connected consumer devices that most of us have.  Some commentators have also suggested that the President’s singling out of TikTok was due to the use of TikTok to undermine Trump’s Tulsa rally,

The “transaction” restriction under IEEPA may also create serious problems for US companies in China that may be prohibited from using WeChat or including the WeChat app in phones. Law firms marketing to or providing services to TikTok to WeChat may also face problems in the United States.  For example, one might represent a country or individual in court that is the subject of an IEEPA or other OFAC-administered embargo (e.g., Trading with the Enemy Act) but due to the “transaction restriction” one may not be paid absent a license.

A more thoughtful approach might have been to enact legislation regarding privacy or confidentiality of international communications of US entities, similar to Europe or California, and/or to ensure that servers are located in countries where privacy and confidentiality might be compromised.  Additionally, the Administration might have insisted on reciprocity for all US Internet companies operating in China.

There are also technical workarounds to these prohibitions for individuals prohibitions, such as via VPN’s – although their legality may depend on how the Administration decides to define “transaction” and how extensively it wishes to enforce.  Although WeChat and TikTok have millions of users in the United States, if the Administration believes it has a legal basis to pursue users, I personally take little comfort in workarounds.  Pervasive use of an illegal software product is not a sufficient obstacle to enforcement.  An analogy might be made to the 35,000 Napster/Grokster copyright cases brought by the recording industry, which potentially implicated millions of users in copyright infringement.  Moreover, US export control agencies have gone after “small fry” to make a point.  The Bernstein case, noted above, involved a graduate student/plaintiff at UC Berkeley.   It is prudent to consider how to preserve contact information and channels of communication if their usage does become blocked.

The Administration’s determination to further separate US dependency on Chinese technology is not likely to end with TikTok and WeChat.  On August 15, 2020, President Trump suggested that he may begin pressuring other Chinese tech companies, such as Alibaba, after TikTok.

Update of August 24, 2020: At least three court cases have already been filed challenging these bans in California.  Here are the complaints: WeChat users,TikTok, and Ryan vs Trump. 

The IP Theft Nexus in the Houston Consulate Closing

Among the purported reasons for closing the Houston Consulate of the PRC were violations of the Vienna Convention regarding consular affairs and  IP theft. According to various press reports, the spokesperson for the State Department, Morgan Ortagus, stated that “We have directed the closure of PRC Consulate General Houston in order to protect American intellectual property and American’s [sic] private information.” This blog looks at the possibility that the consulate was involved in state-sponsored economic espionage.

This Administration (like Obama’s) has been very frustrated by the degree of state involvement in economic espionage matters coming from China and the lack of any effective traditional tools. For example, neither Obama nor Trump (nor any predecessors) took a WTO case pursuant to Article 39 of the TRIPS Agreement which obligates states to protect trade secrets, perhaps because the WTO is perceived as too weak, or that “everyone does it.”  Still, if the extent of state-sponsored trade secret misappropriation was as great as the Administration alleges, a WTO case may have helped gather multilateral support and air US concerns multilaterally.  In other displays of frustration, both Trump and Obama have pursued with some fanfare cases against state actors in absentia.  This has  led to good media coverage against actors such as the People’s Liberation Army, and pyrrhic ex parte convictions.

The Administration also faces another dilemma: criminal economic espionage cases have proven quite difficult since there needs to be a demonstrated state nexus. DOJ has increasingly appeared to be filing or plea bargaining to settle on  “easier” cases – such as traditional trade secret cases which do not require a state nexus or has filed cases involving government grant conflict of interests, fraud, money laundering, etc.   The Administration has also sought to address this through other means such as the Section 301 investigation and tariffs, trade negotiations, strengthening US export controls and CFIUS regulation, and even placing companies on the Commerce entity list where there have been allegations of overseas trade secret theft benefiting China (Fujian Jinhua/theft of Micron technology).

If an economic espionage matter were really the motivation for this sudden evacuation of the consulate and not election-year politics, a good place to look would be for a contemporaneous motivating event.  The closing of the consulate announcement may be timed with an indictment in Washington State 22 hours earlier – which did have one Texas victim nexus and does allege a comprehensive international state-supported economic espionage and personal data theft scheme, including vaccine-related espionage. Two Chinese hackers who are alleged to have had support from the Ministry of State Security in Guangdong were indicted. The hackers were indicted in absentia, once again leaving the US with very limited recourse except pyrrhic ex part convictions. However, no one individual in the Houston Consulate is mentioned – and I imagine that in the usual course of things if a consular official were identified he would have been “PNG’d”, that is, made persona non grata and asked to leave.

Another, more intriguing alternative is that it could also be related to two cases recently discussed by FBI Director Wray, which do have a clear Texas consulate nexus. As Wray mentioned in his July 7 speech before the Hudson Institute:

“Hongjin Tan, for example, [is] a Chinese national and American lawful permanent resident. He applied to China’s Thousand Talents Program and stole more than $1 billion—that’s with a “b”—worth of trade secrets from his former employer, an Oklahoma-based petroleum company, and got caught. A few months ago, he was convicted and sent to prison.

“Or there’s the case of Shan Shi, a Texas-based scientist, also sentenced to prison earlier this year. Shi stole trade secrets regarding syntactic foam, an important naval technology used in submarines. Shi, too, had applied to China’s Thousand Talents Program, and specifically pledged to “digest” and “absorb” the relevant technology in the United States. He did this on behalf of Chinese state-owned enterprises, which ultimately planned to put the American company out of business and take over the market.

“In one of the more galling and egregious aspects of the scheme, the conspirators actually patented in China the very manufacturing process they’d stolen, and then offered their victim American company a joint venture using its own stolen technology. We’re talking about an American company that spent years and millions of dollars developing that technology, and China couldn’t replicate it—so, instead, it paid to have it stolen.”

Notwithstanding these cases theere may be other factors at play, notably:, election-year politics, a general decline in bilateral relations, and national security issues.  The Administration may also have decided on an aggressive escalation at this time to show support for countries like the UK and India as these countries have become more hawkish towards China, such as by not procuring Huawei equipment (the UK), or limiting the use of Chinese social media platforms (India), or opposition to the National Security Law in Hong Kong (UK and many others), and/or by opposing Chinese maneuvers in the South China Sea (UK and many others).

We have limited information to guess at the involvement of the Houston Consulate in any economic espionage activities, nor do we have any sense of the role of various Chinese intelligence agencies in this recent development, or what are the specific kinds of malfeasance that trigged this reaction by the Administration.  According to the New York Times, David Stilwell at the State Department has called the Houston consulate the “epicenter” of research theft.

In terms of Chinese ministry involvement, the US indictment in Washington State points to a key role of the Ministry of State Security in technology misappropriation.   If scientific research is the key focus, China’s  Ministry of Science and Technology is another important agency, which has knowledgeable officials overseas and is engaged in a range of open, legitimate, and highly important collaborative activities.  MoST is probably the diplomatic presence with the greatest depth in any of these accused technologies.  However,  MoST is rarely mentioned as an espionage actor by the Administration and is not even indexed as an espionage actor in recent books by Roger Faligot and Mattis/Brazil on “Chinese Spies” and “Chinese Communist Espionage”, respectively.  According to the Ministry of Science and Technology, there are 75 such MoST offices overseas, including one in Houston.

It is conceivable that some of MoST’s work may not be consistent with US ethics, expectations or laws despite its overall positive role and could have been some part of the decision to retaliate.  As one intriguing example of a role that could lead to conflict, by operation of Chinese law, Chinese science and technology departments in Chinese missions overseas are also in charge of vetting proposed patent prosecutions of Chinese students and patents derived from Chinese technology projects overseas, potentially placing the confidentiality of the patent disclosure at risk.  Moreover, the vague rule requires in certain circumstances that the Chinese inventor (or, presumably, co-inventor) own or apply for the patent if it is not a “service invention” thereby placing these inventors in potential conflict with their host institutions overseas. See the 1986 rule “Concerning Completion of Invention Patents Overseas by Chinese Students Studying Abroad”  关于我国学者在国外完成的发明创造申请专利的规定, promulgated by the Chinese Patent Office, the Ministry of Foreign Affairs and the State Science and Technology Commission (the predecessor of MoST). This 1986 rule outlines a scenario not altogether different from the facts involved in the Shan Shi conviction – applying for a patent in China for an invention made in the United States – notwithstanding the contribution or expectation of others.  Interestingly, Shan Shi was also convicted of trade secret theft by a Houston, Texas federal court.

Another reason to retalitate may have simply been that since US consulates have been thinly staffed and the Wuhan consulate had been closed, there may be an element of consular placement politics which has occurred in the past with regard to China.  The United States has also been complaining about lack of reciprocity with China in access by our diplomats.  The State Department may have also calculated that even if China retaliates this was a lose-lose scenario, where China will lose more than the United States.  A similar calculation may have occurred with respect to these efforts regarding reciprocity or asking Chinese journalists to leave.

Election-year politics may have been an important part of the choice of how to retaliate, even if these political motivations were not the original factor in deciding that retaliation was necessary. Closing a US consulate in retaliation for IP theft should also lead observers to question whether the Phase 1 Trade Agreement, which was intended to address “IP theft” and lead to “structural changes” had achieved its core, motivating goals.  The Houston consulate closing could thus be seen as a crude acknowledgment that the Administration had failed in the primary motivations for its trade war with China.  The prospects for a Phase 2 Agreement are growing darker by the day.

We may never know all the motivations for the Houston closing.  Two things are clear: closing consulates can greatly damage bilateral relations, and we cannot anticipate when this cycle of accusations and reactions will de-escalate.

Update of July 24, 2020:  Matt Peterson in a July 24 article in Barron’s quotes a former USTR official, Clete Willems, who took issue with this blog:

The administration cited intellectual-property theft in its decision to close the consulate in Houston. Mark Cohen, a law professor who worked for the U.S. Patent and Trademark office in Beijing, wrote about that: “Closing a U.S. consulate in retaliation for IP theft should also lead observers to question whether the phase-one agreement, which was intended to address ‘IP theft’ and lead to ‘structural changes’ had achieved its core, motivating goals. The Houston consulate closing could thus be seen as a crude acknowledgment that the administration had failed in the primary motivations for its trade war with China.” What do you make of that?

My quick reply: Indeed, most of the accomplishments on IP in Phase 1 were in domestic Chinese reform and there was nothing as I recall on diplomats. That would have been highly unusual.  However, most of the significant IP reforms in fact occured before the Phase 1 Agreement, in the spring of 2019 or even in 2017 (on pharma).  One could argue there isn’t that much new IP in the Phase 1 Agreement.  As I have explained elsewhere, it “adds much less than its appearance would suggest.”  The focus of the Phase 1 Agreement had already migrated to other issues, such as market access. 

This does not mean that economic espionage or international issues were not at the core of the stated reasons for the trade war and to suggest otherwise is an exercise in historical revisionism.  The predecessor  301 investigation conducted by USTR and the subsequent Phase 1 Agreement explicitly sought to resolve “cyber-enabled theft” and “global espionage” in USTR’s own words.  See predecessor 301 Report Update at pp. 10-21. The incentives to steal trade secrets – whether due to Made in China 2025 or an array of other industrial policies and subsidies  – were not however discussed in the Phase 1 Agreement. Despite the imposition of punitive tariffs, these programs were not dismantled.  The “groundbreaking provisions in an area of critical importance to the United States: protecting intellectual property” that the President trumpeted in announcing the agreement, hardly addressed these core concerns.   There was also no improvement in transparency or other rule of law imperatives, no demends for cooperation between law enforcement authorities on criminal trade secret matters, etc.  that could have affected China’s handling of state-sponsored trade secret theft.  Some important laws were amended, but no sweeping “structural change” to back the state out of the extensive incentives that exist for IP misappropriation was accomplished. 

The Phase 1 Agreement wasalso not an agreement focused purely on domestic Chinese law.  For example, cross-border counterfeiting and Customs measures were part of the package, not simply “counterfeiting in China.” A perverse example of how much international IP theft, including state sponsored esiponage, was of core importance to the agreement and the messages we imparted to China:  Americans are being sued in China for trade secret infringement pursuant to the harsher laws that the US has encouraged China to implement, and Chinese criminal law is being amended to specifically impose harsher penalties when trade secrets are stolen on behalf of foreign parties, based on provisions that mimic our Economic Espionage Act. 

It is unclear to me if the Houston consulate closing was truly about these same issues or if the closing will have any impact on them.  The stated reason for closing was, indeed, trade secret theft and economic espionage.  This does suggest that the US might have felt that it had exhausted other remedies, and is a further indication of a failure to address key motivating reasons for the trade war in the Phase 1 Agreement.   Why else would we have discussed these IP theft issues at such great length, with such economic pain, and with such high expectations?  I agree that hopefully discussions will continue between our countries on trade – considering the volume of trade and investment, it is harder to dismantle those relationships than packing up a consulate.  Discussions should be conducted, however, via a plurality of engagements – not simply USTR – to ensure resiliency.

Further update of July 24, 2020: Here is an interview with me on KHOU on July 24, 2020 on the Houston consulate closing.


 

Webinars, Comments and An Encomium

The Webinars: There several useful webinars that are scheduled for this month.  On July 23, 2020 the USPTO will be hosting a webinar on using overlapping rights to protect your products (10:30 AM-12:30 EST).  China has many efficient and low cost means for protecting design and other rights, including design patents, 3D trademarks,  applied art (copyright), as well as relevant anti-unfair competition law and civil law provisions.  This is an important and useful topic.  On July 28, the World Intellectual Property Review and Wanhuida law firm are co-hosting a webinar on how to deal with bad faith trademark registrations on (4 PM British Summer Time),  a topic that is also dear to my heart.  Both webinars are free.

Berkeley’s China IP series is over for 2020 and we are now planning on 2021.  Recordings of all sessions will be made available to the public in 90 days.  If you have any suggestions on how to further develop this successful program, please write to me.

The Comments: The post-Phase 1/post-pandemic lockdown flurry in China of legislation has elicited comments from the public.  The copyright law comments in China alone elicited  51,165 comments and 167,196 legislative suggestions.  Prof. Andy Sun’s comments on the copyright law are found through this link (Chinese only).  The ABA has also commented to the USPTO on the judicial interpretations recently released for public comment, which may be found through this link.  Please send us any comments that you have prepared!

The Encomium:  July 1 was the 90th birthday of Prof. Jerome A. Cohen.  Jerry’s fans are legion, and I am also grateful for his support of my own efforts in academia.  Here is a recording of the opening webinar we did on April 22, 2020 at Berkeley on developments in Chinese law with Jerry Cohen,  Susan Finder and Sean Randolph.  I join Jerry’s many admirers in wishing him many more years of health, happiness and helping to make the world a better place.  Here is one encomium that was written by Jim McGregor.