MofCOM’s New Blocking Rule: A Dangerous Weapon or a Necessary Remedy?

On January 9, 2021, MofCOM released the Measures to Block the Improper Extraterritorial Application of Foreign Laws and Measures, (Docket Number 1)(中华人民共和国商务部令 二〇二一年 第1号)(the “Rule”).  The Rule was promulgated with “approval from the State Council.”  The Rule may be used to support litigation in Chinese courts against foreign extraterritorial measures, including court cases and perhaps USITC Sec. 337 cases. It might also be used to retaliate against export controls    Being the first MofCOM rule in the new year, during a period of transition in the United States, with immediate application, circumventing usual legislative procedures for 30 days notice and comment and delayed implementation, with an English translation simultaneously released by MofCOM, I assume that it is  intended to be understood by Americans, and to send a political signal to the President-elect’s trade team.  It is also the first significant step taken to address trade sanctions and other measures imposed by the United States since Wang Wentao, a “defense technocrat”, became the new MofCOM Minister (Dec. 26, 2020).  Its legal basis, however, is less clear.

The Rule is a ministerial measure promulgated by a State Council agency, or  “banfa” (办法).  It is cloaked in language of representing the central government in its enactment, beginning with the unusual introduction that it was promulgated with State Council approval.   I anticipate that the State Council may yet publish an approval document on its website.  References to national authorities are found throughout the text.  For example, the operative legislation the Rule is implementing is the National Security Law (Art. 1).  Interagency mechanisms for implementing the law are also contemplated (Art. 4). 

MofCOM  did not tarry with the usual legislative procedure in preparing this Rule.  For example, a relevant SPC rule (2009) requires that rules need to be promulgated under delegated authority of the State Council to be a basis for judicial decision making.   (最高人民法院关于裁判文书引用法律、法规等规范性法律文件的规定 (Art. 5).  Although the State Council apparently “approved” the Rule, it is unclear if an explicit delegation of “authority” was obtained that should otherwise be necessary for the judicial procedures contemplated by the Rule to be effective .  The National Security Law similarly simply authorizes the State Council and its constituent agencies to issue regulations (fagui) and rules (guizhang) (Art. 37), and does not explicitly provide for circumvention of the Law on Legislation.  The State Council Regulation on Procedures for Enacting Rules 规章制定程序条例 requires 30 days advance notice of proposed rules and a 30 day delayed implementation period, neither of which appears to be the case here.  This State Council Regulation also requires that a joint rule making which requires other agencies’ involvement is invalid if it is not drafted together with these agencies (Secs. 3,4, 9, 15).   In light of the shortcuts taken, I assume that the Minister deemed it highly important to pass this Rule early in his tenure and quickly.

Although overseas court cases are not mentioned as a target, the Rule applies to “foreign laws and other measures being applied extraterritorially contrary to international law”. It specifically authorizes court cases to obtain compensation (“Where a judgment or ruling made on the basis of foreign laws within the scope of a prohibition order causes losses to Chinese citizens, legal persons, or other organizations, the citizens, legal persons, or other organizations may initiate litigation in the people’s courts in accordance with law, requesting compensation for losses from the parties benefiting from that judgment or ruling”).   One “hot” target could be the extra-territorial jurisdiction of foreign courts in the recent spate of standards essential patent cases – at least to the extent they have not already been addressed by anti-suit injunctions or other measures.  Doug Clark has written an excellent article on some of these developments,  I also blogged about more recent anti-suit injunctions.  Former Federal Circuit Paul Michel’s amicus brief also pointed out due process concerns in China in Ericsson v. Samsung here.

Another target of the Rule may be USITC Section 337 litigation.  Cases involving trade secrets where the US has imposed US law and exercised jurisdiction over misappropriation of trade secrets that occurred within the territory of China have aroused the ire of MofCOM in recent years.  In its amicus brief in support of the petition for Cert in the Sino Legend case, MofCOM argued “The ITC’s disregard for the sovereignty of China risks the very international discord underlying the presumption against extraterritorial application of U.S. law.” 

One consideration is that the Rule is by its own terms limited to harm caused to “third country” markets (Arts. 2 and 5). However, at a press conference of January 10, 2021, “third country” harm was only discussed once. The dominant theme was “extraterritoriality” 域外, which is mentioned 19 times.

Blocking measures against the extraterritorial exercise of export controls also have a long history.  Canada’s Foreign Extraterritorial Measures Act is one such example of such blocking legislation, which was applied to the US embargo against Cuba.  China has stated in the press conference of January 10, 2021 that it looked at blocking measures of other countries. A blocking measure by China would likely pose a different degree of risk to US exporters than a Canadian blocking measure. The United States and Canada closely cooperate on export control matters. If US export control laws for dual use technology, including those that prohibit re-export to third countries, are threatened to be blocked by China, it could further reduce confidence in China as an end destination for licensed exports. This could provoke another downward spiral in sales of controlled goods or technology to China.

This blog was updated January 10, 2021 to include reference to the news conference of even date, and to address the possibility that the Rule by its explicit terms is focused on third country impacts.