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. 

Counterfeits in Microchannel Marketing … and Case Law

Amidst the escalating focus on online counterfeiting, piracy and patent infringement, online social media, such as WeChat are also becoming a source of infringing products, as documented in a Wall Street Journal article and other journals.  

James Luo (罗正红), a prominent IP lawyer in China, has been following these developments in his blog, where he recently reported on a Supreme People’s Court promoting of  ten model cases that promote “core socialist values” (最高人民法院关于弘扬社会主义核心价值观典型案例). One model case involved a couple that sold counterfeit goods through WeChat Moments, which was held to  constitute the crime of selling commodities bearing counterfeit registered trademarks 微信朋友圈销售假冒注册商标的商品案)。

The reason for the insertion of the case according to the court, was to promote “honesty in business.” As the court noted:

The case was a typical case of selling via microchannel marketing circle of friends, goods bearing counterfeit trademarks. …Compared with the traditional IPR criminal cases, the perpetrators of such crimes use relatively covert means, but the scope of their promotion and sale of counterfeit goods is broad with an adverse social impact.  …Currently, the “Consumer Protection Law” and the “Rules for Network Transaction Management” do not have specific provisions addressing microchannel shopping, and microchannel marketers do not have to register their business with the State Administration for Industry and Commerce.  The relevant laws and regulations need further improvement in this area. “

本案是一起通过微信朋友圈销售假冒注册商标的商品的典型案例。,利用微信朋友圈等新平台售假者也越来越多。与传统侵犯知识产权犯罪案件相比,这类犯罪作案手段相对隐蔽,但传播面广及推广速度快,销售假冒注册商标的商品涉及面广,社会影响恶劣。目前,消费者权益保护法和《网络交易管理办法》在微信购物方面还没有明文规定,而且微商没有经过工商注册登记,相关法律法规还需要进一步完善。

As the accused had intentionally sold a relatively large amount of counterfeit goods, the defendants were found guilty of the crime of selling commodities bearing counterfeit registered trademarks by the Shaoguan Zhengjiang District People’s Court of Guangdong Province.  Sentences were imposed of  6 – 7 months and a fine of RMB 15,000.

In my opinion, this case appears to be headed in the right direction in terms of addressing the use of social media to commit IP crimes.  The court suggests that the case was important to fill in the gaps in the current legislative regime based on technological changes – the way in which criminals do business online.  This is a typical evolution for IP-related case law in the United States, where courts have a record of using existing statutory provisions to address emerging technologies or ways of doing business.

Why this case was categorized as promoting core socialist values?  Perhaps it promotes socialist core values because it addresses problems in the market of unscrupulous unlicensed individuals who transact business without basic principles of good faith and fair dealing and is thus intended to send a policy signal to other courts and the legislative agencies.

How do these cases compare to other types of cases that the court is promoting?  In my opinion, China is paying more attention to cases to guide judicial decisions and create a more predictable legal environment, with 20,000,000 court cases available on line and new regulations on publishing cases in effect.  China is seeking  to develop a Chinese style system of precedent, and has elicited  much government and academic involvement, including scholarship in journals.  These cases need to be compared to the efforts to become more transparent, promote “model cases”, the system of guiding cases,  judicial interpretations, etc., which are all part of an evolving system intended to insure greater consistency of judicial decision making and address emerging issues.

Addendum of 1/1/2017: Here is a useful blog by Jeremy Daum  from 31 August 2016 on the Beijing IP Court’s experiment in precedent, which lines up nicely with the perspective in my blog.