By Fatema Merchant, Brian Weimer, Harris Gao, Kirsten Ryan and Yuanmei Lu on August 8, 2020
On August 6, 2020, Trump issued two separate executive orders that will severely restrict TikTok and WeChat’s business in the United States. For weeks, the media has reported on Trump’s desire to “ban” TikTok, and the Chinese American community is becoming increasingly anxious about whether they can continue to use WeChat in the U.S., which has become the most important tool for many of them to maintain connection with friends and family not only in China, but also in the United States.
We break down the impact of the Orders below.
Both Executive Orders provide the Secretary of Commerce broad authority to prohibit transactions involving TikTok and WeChat, with limitations on which transactions yet to be defined.
The TikTok EO prohibits “any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with ByteDance Ltd. (a.k.a. Zìjié Tiàodòng), Beijing, China, or its subsidiaries, in which any such company has any interest, as identified by the Secretary of Commerce”
The WeChat EO prohibits “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, as identified by the Secretary of Commerce.”
Both Executive Orders will take effect 45 days after issuance of the order (September 20, 2020), by which time the Secretary of Commerce will have identified the transactions subject to the Orders.
Until the Secretary of Commerce identifies the scope of transactions prohibited by the Executive Orders, the ultimate ramifications of these Orders remain unclear. However, given what we do know, we have some initial thoughts on how these new prohibitions may play out. The following are some preliminary answers to the burning questions at the forefront of every Chinese American’s mind.
Do these Orders totally ban the use of TikTok or WeChat by individuals in the United States?
The Orders probably do not ban the use of TikTok or WeChat by individuals in the United States, particularly if such use is purely for communication purposes, and does not involve any payments, such as WeChat Pay or subscription-based games. The Orders ban any “transaction” involving TikTok and WeChat, and the ordinary meaning of “transaction” is buying or selling something, and does not necessarily encompass non-commercial use. Furthermore, the Orders were all issued under the International Emergency Economic Powers Act (IEEPA), which provides the President broad authority to regulate mostly commercial transactions, such as foreign exchange, credit, payment, and securities. Finally, we note that in Executive Order 13873 issued on May 2019 that broadly prohibits the use of information and communications technology or service owned or controlled by a foreign adversary of the United States, a much broader language,namely, “acquisition, importation, transfer, installation, dealing in, or use,” is used.
What are likely banned by these Orders?
While the Orders do not necessarily ban the use of TikTok or WeChat itself, the app (or any future software updates) may no longer be available for download in the Google or Apple app stores in the U.S.,WeChat Pay and subscription-based services may no longer be available in the U.S., and U.S. companies may not be able to purchase advertising on the social media platform – which renders the operation of those apps in the United States uneconomic.
Will all transactions with ByteDance Ltd. and Tencent Holdings Ltd. (TikTok and WeChat’s parent companies, respectively) be prohibited?
Given the broad language in the Orders, it does appear that U.S. app stores, carriers, or internet service providers (ISPs) will likely not be able to continue carrying the services while TikTok and WeChat are owned by these Chinese entities. However, it is unlikely that the goal is to prohibit all transactions with these companies as a deterrent or punishment tool – which would essentially amount to designating them as Specially Designated Nationals (SDNs) – the Orders clearly contemplate some limitations to be imposed on the types of transactions subject to the Order by the Secretary of Commerce. Furthermore, the national security policy rationale for such restrictions will not be present in all transactions (i.e. if the concern is the ability of Chinese entities to access personal data of U.S. citizens in a manner that could be used against the interests of the United States, then presumably transactions in which ByteDance Ltd. and Tencent Holdings Ltd. do not have access to such data should be permissible.). So while we do not know exactly what the scope of prohibited transactions will be, it would appear that the goal is to restrict these entities’ access to U.S. data and any transactions that would facilitate or allow such access.
What does “any property, subject to the jurisdiction of the United States” mean?
Normally, the idea behind such language is to limit the prohibited transactions to those with a clear nexus to the United States: any U.S. person or person within the United States, or involving property within the United States. It is unlikely that transactions conducted wholly outside the United States by non-U.S. entities would be impacted. From a policy perspective, it would make sense that the prohibitions be limited to transactions that would facilitate these Chinese entities getting access to U.S.-person data through the use of TikTok and WeChat.
What about the reported sale of TikTok?
There is a chance the restrictions outlined in the TikTok EO will become moot. Reportedly, Microsoft is in talks with ByteDance to acquire TikTok’s business in the United States and a few other jurisdictions. If the scope of prohibited transactions are tailored to those involving access to U.S. person data and if a U.S. company can assure that U.S. user-data will be protected, then the national security concerns of continued use of the app would be mitigated. Unless and until such acquisition takes place, U.S. companies investing in TikTok or utilizing it for advertising such be prepared for the restrictions to take effect.
The WeChat EO prohibits any transaction that is “related to” WeChat…what does that mean?
The WeChat prohibition is more ambiguous and could have significantly wider impact on U.S. business interests. WeChat is widely used in the United States, particularly by people of Chinese descent, for both social interaction and business transactions, including communicating with, and making mobile payments to, various service providers. The WeChat EO prohibits “any transaction that is related to WeChat” with Tencent Holdings Ltd., or any of its subsidiaries. Unlike TikTok, WeChat’s services extend beyond social media. While the language of the ban is vague and the prohibited transactions are yet to be determined, it appears likely that using WeChat for payments or subscription-based services may carry significant legal risk. It is also unclear if the WeChat prohibition will extend to other businesses tied to Tencent, WeChat’s parent company, including major gaming companies Epic Games (publisher of the extremely popular “Fortnite”), Riot Games (“League of Legends”), and Activision Blizzard, all in which Tencent has substantial ownership interests. While arguments can be made that Tencent’s ownership of shares in those entities are not directly related to WeChat, a large percentage of revenues generated by WeChat is derived from games made by those companies. Like with TikTok, its possible advertising within these games may be prohibited.
Until the Secretary of Commerce issues its list of transactions prohibited under these Executive Orders, the scope and effect of these Orders is conjectural. While the language of these Executive Orders does not suggest a total ban of individual use of TikTok and WeChat in the U.S., this Administration’s all-in posture towards China would suggest that it could interpret the prohibitions very broadly. Of course, there is an election right around the corner and a new Administration may bring significant change to related foreign, trade and technology policy. Thoughtful planning for a variety of scenarios is highly recommended.
This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship. Please contact your Sheppard Mullin attorney contact for additional information.
