By: Thad McBride

The Committee on Foreign Investment in the United States (CFIUS) has been sued.  CFIUS is the U.S. government inter-agency committee that reviews foreign investment in the United States.  (For more information about CFIUS, including its operations and recent actions, please look here.)

According to a filing in U.S. District Court for the District of Columbia, Ralls Corp is requesting a Temporary Restraining Order and Preliminary Injunction to enjoin CFIUS from prohibiting Ralls from developing and operating a wind farm in Oregon.  Ralls is owned by executives of Sany Group Co., a Chinese company that, among other things, manufactures wind turbine generators.  In recent years, CFIUS has tended to be especially cautious with respect to transactions involving China.

In a court filing, Ralls asserted the following:

CFIUS violated … well-established law when it issued an order on August 2, 2012, subjecting Ralls to draconian obligations in connection with Ralls’s acquisition of four small Oregon companies whose assets consisted solely of windfarm development rights, including land rights to construct the windfarms, power purchase agreements, and necessary government permits. Without identifying any evidence or providing any explanation, CFIUS concluded that the acquisition was a “covered transaction” subject to its authority and that “there are national security risks to the United States that arise as a result of the acquisition.”

According to Ralls, after it notified CFIUS of the transaction in June 2012, CFIUS responded by introducing such substantial conditions on the transaction that the value of the transaction was largely decimated.  CFIUS subsequently introduced additional conditions that, Ralls asserts, further limited Ralls’ ability to take advantage of its investment.  Ralls is claiming that CFIUS both overreached its authority in terms of the conditions the agency imposed on Ralls and made the decision to impose such conditions arbitrarily and capriciously under the Administrative Procedure Act.  Ralls emphasizes that CFIUS took action without an articulated rationale for those actions, and points to this as evidence that the decision did not comport with the APA.  Ralls also stresses that the Federal Aviation Authority and the U.S. Navy were aware of and seemingly condoned Ralls’ acquisition of the property on which the windfarms would be built.

In its filing with the District Court, CFIUS noted that Ralls only submitted its notification to CFIUS upon the invitation of CFIUS itself.  This may have put Ralls in a difficult situation from the outset since CFIUS encourages voluntary notifications of – or, at the least, informal communications about – a transaction before and not after it occurs.  CFIUS also explained that national security concerns were triggered by the proximity of Ralls’ proposed location to restricted air space relied upon by the U.S. military for training exercises.

On September 18, 2012, during a hearing on Ralls’ motion, the United States announced that the President would likely rule on whether or not the deal can proceed by September 28.

To date no decision has been made.

Whatever the decision, it is likely to be hard to overturn.  At the September 18 hearing, the U.S. District Court judge stated that, due to the amount of deference she must show to the President on issues of national security, she “can’t review the president’s decision if he stops it.”  (Of course even if she reaches that conclusion, Ralls might choose to appeal the matter.)

The suit bears watching.  It will of course be of interest to those in the CFIUS bar and those involved in any sale of a U.S. business to a non-U.S. buyer.  But the outcome of the suit may also be of interest to other potential plaintiffs considering, perhaps, suing the U.S. Treasury Department Office of Foreign Assets Control (OFAC), another agency with significant jurisdiction over international business and a history of interpreting that jurisdiction very broadly.