Qualcomm Litigation Update

Corporations, Securities, & Antitrust and International & National Security Law Practice Groups Teleforum

Listen & Download

On March 5, the committee on Foreign Investment in the United States (CFIUS) raised objection to the hostile take over a bid of Qualcomm by Broadcom. Shortly there after, the administration announced that it was blocking the deal altogether. Join us for a detailed analysis of these decisions, and what they mean for U.S. national security and business.

Stewart Baker, Partner, Steptoe & Johnson LLP
John Shu, Attorney and Legal Commentator
Teleforum calls are open to all dues paying members of the Federalist Society. To become a member, sign up here. As a member, you should receive email announcements of upcoming Teleforum calls which contain the conference call phone number. If you are not receiving those email announcements, please contact us at 202-822-8138.

Event Transcript

Dean Reuter:                     Welcome to the Federalist Societies Practice Group Podcast. The following podcast, hosted by the Federalist Society's Corporation Securities and Antitrust, and International Law, National Security of Law Practice Groups, was recorded on Wednesday, February 28th, 2018, during a live TeleForm conference call, held exclusively for Federal Society members.

                                                Welcome to the Practice Group's TeleForm conference call, as today we consider the CFIUS and Trump administration action on the attempt to take over of Qualcomm by Broadcom. I'm Dean Reuter, Vice President of General Council, and Director of Practice Groups, here at the Federalist Society. Please note that all expressions of opinion are those of the experts on today's call. Also, this call is being recorded for use as a podcast in the future, and will very likely be transcribed.

                                                We're very pleased to welcome two returned guests to TeleForm today. Stewart Baker is a partner of Steptoe & Johnson. He's also the author of Skating on Stilts, a book that deals, at least in part with, today's topic. Skating on Stilts available on Amazon.com, and other book sellers everywhere. He'll give us opening remarks of about 10 minutes, followed by John Shu. He's an attorney and legal commentator, who will also give us about 10 minutes of opening remarks.

                                                We're going to hear first, generally on CFIUS, and then more about this decision and action in particular, but as always, we'll be looking to the audience for your questions, so please have those in mind for when we get to that portion of the program. With that, Stewart Baker, the floor is yours.

Stewart Baker:                  Well, thank you. CFIUS, as we call it, the committee on foreign investment in the United States, is an institution that has been around since the 1970s. It was legislatively blessed in the 1980s, with the Exon–Florio Act. It's response to a gradual globalization of the US economy in a series of ways of foreign investment, that have sparked unease and policy concern, as they've occurred. In the 1980s it was Japanese investments, the Rockefeller Center, a bunch of California golf courses we purchased by Japanese investors, and the US expressed its concern about its role in the world by intensifying its review of foreign investments in the most legitimate context, and the most ordinary context, a review of inward investment to determine whether the investments might have an impact on the national security of the United States.

                                                The most obvious examples of investments that could raise those concerns, are when a foreign company buys a US military contractor, or a domestic civilian company, whose production is nonetheless extraordinarily important for US performance, in the event of a military emergency. CFIUS exists to review transactions in which foreign companies acquire control over US companies to examine whether the transaction might have national security implications.

                                                The Act has been shaped, first by the concerns abour Japanese investment in the 80s, and then again, and this is what I talk about in Skating on Stilts, after 9/11, there was an investment in US port facilities by Dubai Port World, which was, as it sounds, a Dubai organization. And considerable political angst was expressed about having a Mid-East Arab country acquire access to our ports, where port security was a major concern. It created a giant flap, which I still have the scars from, and I tell the story of the event in the book. In the end, that resulted in changes in legislation, which we are operating under today.

                                                They're relatively modest, but the legislation did institutionalize one of the innovations from earlier years, and that is the creation of mitigation agreements, in which investors are allowed to invest, but make promises about future behavior, that addressed the national security concerns, that have come up in the course of the investigation. The institution itself, if most interesting, because it's not an agency on its own, to a very substantial degree. It is an inter-agency process, in which different agencies come to the table with a very different set of perspectives, so that traditionally, the USTR, and the State Department, come to express views favorable to foreign investment.

                                                And DOD, DHS, and DOJ, come bearing considerable skepticism about foreign investment and its impact on their mission to protect the United States. And the inter-agency process essentially works through those disagreements in the way that inter-agency process is always do, which is by federally escalating the debate until it reaches the cabinet secretaries in very serious debates. The organization is chaired by the treasury department, rather than by the traditional White House National Security Council, or National Economic Council principles, but it functions, in many respects, like those institutions. Treasury has become more institutional recently, taking a larger role in negotiating and in ruling on how to approach particular transactions.

                                                So, that's the background, what has happened in the last year, as we are now in another wave of anxiety about foreign investment, particularly Chinese investment, and we have an administration that resonates to that anxiety to a degree we haven't seen in many years. As a result, the committee has taken a much more aggressive action to saying no to a wide variety of transactions, particularly those involving China in one way or another. That's sets, I think, the scene for the Broadcom, Qualcomm fight, which will draw on many of these themes. I guess before I do that, before I hand it over to John to talk about that, I will say the other development that has shaped this environment, is that a Chinese investor that wanted to acquire some wind farm property, ran into, consider this the Rawls Case, ran into considerable difficulty with CFIUS under the last administration

                                                And rather than quietly accepting the determination that the company could not acquire, a US set of properties, that's included properties close to military bases, Rawls went to court and challenged the decision refusing to allow the transaction to be maintained. And one, on the ground that they had not been given procedural due process. As a result of that, Treasuries lawyers and the committee in general, have reshaped their internal processes to make sure that they will never again be successfully accused of failing to grant procedural due process. While, if anything, making it more likely that they will on substance, say no to the transaction. That is where things stood when Broadcom decided to make a hostile tender for Qualcomm. John?

John Shu:                             Thank you Stewart. And for those who are unfamiliar with Stewart's book, you should note that it's a five star review Amazon.com, so it's worth the money.

Stewart Baker:                  It's a policy book you can take to the beach.

John Shu:                             Stewart deserves a lot of credit for incorporating DHS into CFIUS in '75 when president Ford essential created it, and then in '88 when congress codified it. There was no Homeland Security at the time, and of course Homeland Security now is an important part of the committee. So for those of you who are not completely familiar with the deal, what happened was, in short, in the fall, Broadcom, which was a chip maker, originally based here in Irvine, California, but eventually bought out by an entity in Singapore, decided to make a hostile takeover offer for Qualcomm, which is America's number one 5G chip maker, and 5G company. And Qualcomm is based also here, in San Diego, California.

                                                5G is a very important technology, it's the next step in cellular technology. For those who would think about, how do you control your car, or your house temperature, whatever, that's all 5G. And 5G is very important, not just for the civilian side, but also for the military side, and Qualcomm does have a lot of contracts and agreements with the United States government in various capacities. The head of Broadcom in Singapore is a US citizen, Mr. Tan, and he lobbied very heavily. He and the company lobbied very heavily, through O'Melveny & Myers and other groups. He even came to the White House in November of 2017, met with President Trump. They had a press conference together, and that was to improve Broadcom's buyout of Brocade Communications, which is another chip maker, that one based in San Jose.

                                                And there, Mr. Tan announced that Broadcom was going to redomicile from Singapore to the United States. Now, the reason that's important for the Broadcom Qualcomm deal, is because the law requires looking at a foreign entity. And I guess the Broadcom view was that if they were domicile in the United States, they would no longer be considered a foreign entity, and therefore be out of CFIUS review. But of course, that didn't happen. And both companies got their lobbying and engines going. There was a lot congressional pushback on the deal, republicans and democrats, and not just California republicans. Senator Cornyn from Texas, and Senator Cotton from Arkansas, also were raising questions about the deal, and strongly recommended CFIUS review.

                                                I would said Cornyn in particular is important, because last year Senator Cornyn and Senator Feinstein cosponsored a legislation regarding CFIUS and international review. So these were people were knowledgeable about it, not just local politicians who wanted to keep Qualcomm in San Diego. So the short of it is, CFIUS made a recommendation to the president to stop it, and he did. And the president's decision to stop a merger, and acquisition, a hostile takeover, is not reviewable by the courts. His decision is his decision. And so that was the end of it. Part of the reason, I believe, that the Treasury Department, and the committee, and the president decided to kill this deal, number one, the redomiciliation didn't actually occur, and there was no guarantee that it would occur.

                                                Number two, CFIUS had specifically instructed all parties to stand down in what they were doing. But Broadcom ignored that. Broadcom, for some unknown reason, they decided to take some significant actions in Singapore, not in the United States, but in Singapore, to move on their redomiciliation efforts. And third, there were other parties involved. Not just Broadcom, Qualcomm. So, Broadcom had support from Silver Lake Partners, which a private equity group, also in Silicon Valley, and also JANA Partners, which is another activist investor group. Both of them have significant ties to foreign entities and foreign monies. And also both of them have a history of breaking up companies and selling them piece by piece.

                                                It's kind of like Julia Roberts did in Pretty Woman, you steal cars and you sell them for parts. I think all of that combined convinced CFIUS and the president that this is a deal that could not go through. The national security implications, especially for the 5G, was just way too serious. Qualcomm is by far in a way the number one company in America, and we as a country, we do not want to fall behind, specifically the Chinese, or even the Japanese [inaudible 00:15:50] in the 5G area. So the deal is dead, and that's where it is right now.

Stewart Baker:                  And if I can just jump in, there are a lot things that are novel here, or relatively novel. It was always assumed that CFIUS filings were a voluntary matter. If you didn't want to file, then you didn't file, and you took your chances that maybe at some point someone would decide there was a national security problem with your transaction. But the idea that it was voluntary was fundamental to the early year of CFIUS. But for a variety of reasons, CFIUS, especially after Dubai Port World, began to take the view that they had ways of making what was supposed to be voluntary, more or less mandatory. If they told you you had to file, you either filed, or they filed for you, and began the investigation on their own, which was going to have an outcome you wouldn't like.

                                                And so, as a practical matter now, people have discovered that CFIUS is not a voluntary filing when the government chooses to exercise control. They exercise control here, because Qualcomm made a unilateral filing, saying, "We think we're about to be taken over, and we think CFIUS should get involved." This usually, of course, does not happen because these acquisitions are voluntary transactions that both sides support, but in this case, Qualcomm didn't like the transaction and wanted to stop it, and decided to bring CFIUS in on the side of incumbent management. And CFIUS accepted that invitation. That is, while it is not a change from what CFIUS practitioners knew was possible, it was a surprise to a lot of people.

                                                The decision was based on ... well what happened was, there was an extraordinary intense eight day period, in which the CFIUS went from having a unilaterally referred case to first saying, "Okay, we're taking this case. We're going to take interim measures. No one is to take any action that will lead to the change of control, or elect a new directors, and we want to make sure that Broadcom doesn't take any action to become an American company until we have resolved this issue." Then within a few days, when Broadcom had taken some actions that seemed to be moving toward becoming an American company, the CFIUS said, "We have grave national security concerns about this case. You have 24 hours to give us your best case for why we shouldn't block this transaction," and within 24 hours, the transaction was blocked.

                                                And it was blocked on grounds that hadn't been seen much of before. Not, we think that the Chinese are going to take over this company, it was after all a Singapore company that had a lot of American ties. But because we think that Broadcom's private equity style of investment will not leave enough for research and development by Qualcomm, and if it doesn't have enough money for research and development, then it will lose the prominent place that it has in setting 5G standards, and that place will be taking over by companies from China. That will have an impact on national security, and therefore we are not going to allow a private equity style takeover of Qualcomm. Very granular, and not at all focused on the particular character of the buyer, but rather the economic style that the buyer had shown in past transactions.

                                                All of that was new, the rapidity, the style of analysis, the unilateral nature, all of those things combined to make this a highly unusual case.

Dean Reuter:                     Very good. Let's open the floor to questions. I have a couple questions or two of my own. But I'd like to get the audience queuing up. In a moment we'll all hear an announcement that will say will the floor mode is on. After you hear that announcement, if you have a question for either or both of our guests, push the star button, and then the pound button on your telephone. So once again, if you have a question, push the star button, and then the pound button on your telephone. We'll get to as many questions as possible. We've got almost 40 minutes left. There's a lot on the table here, and my first question goes, I suppose, would go to Stewart Baker's most recent comment about some of the unique aspects of this series of events. Having said all that, what's the reaction in the international community and [inaudible 00:21:50], is there anyone contending that this wasn't a warranted finding by CFIUS, and action by the president of the United States?

                                                To me, this sort of feels like a modern day corollary of selling Boeing, or some other national security asset when you're talking about chip makers.

Stewart Baker:                  Yes and no. At first, because Broadcom accepted the outcome, recognizing that it didn't have a lot of options for keeping its campaign alive, the debate has been somewhat muted. And I would say that for those of us in the CFIUS bar, no one thing about this was a surprise, and it is rare enough occasion that one party opposes a transaction and uses CFIUS to stop it, while another party is trying to close the deal, that most of us who practice in front of CFIUS don't expect to see a lot of this. That said, I think there is also a kind of sneaking admiration for how Qualcomm pulled this off. That is to say, they had a proxy fight to name directors that they thought they were going to lose. And they found a way to defeat the hostile takeover that was pretty creative. And so, Qualcomm's lawyers deserve a lot of credit, and the CFIUS bar is probably thinking to itself, "Well, that's something I could think about for my clients if I ever need to do it."

                                                That does not address the policy issue. I think the policy issue is harder, because in a fight of this kind, the defender, the management side of the debate, has a lot of resources they can draw on to do lobbying. And they will draw on them without reserve. This turns quickly into a political and a lobbying fight, not exclusively that. But, a lot of the enthusiasm for stopping the transaction has very little to do with national security, and a lot to do with other issues that the incumbent management can raise. So you can easily imagine that decisions like this would be tilted improperly by those political considerations. That is something we ought to be concerned about. I'm not saying that happened here. I appreciate the determination that was made, but several people have observed that this is a case in which China was the reason that the transaction was rejected, and China is nowhere to be found on either side of the transaction.

                                                It's a looming of stage presence. If it can be the basis for turning down this transaction, it could be the basis for turning an awful lot of transactions. And that is cause for reflection at least.

Dean Reuter:                     But again, those are transaction limited that involve foreign investment in US companies.

Stewart Baker:                  Well yes, although, one of the reasons why CFIUS acted so quickly, I believe, is they were concerned that they would lose jurisdiction because Broadcom repatriate itself, point to the fact that its share holders are mostly Americans, its management was pretty heavily American. It was as American as Qualcomm, I'm sure it would have said. And rather than have allow that to happen, CFIUS substantially advanced the time table for making a decision, and left Broadcom without any opportunity to do that. It is true, if Broadcom had started out as an American company, this would not have been an issue. It may be that Broadcom, in the course the Brocade transaction that John mentioned, had created some ill will in CFIUS that helped to explain this outcome. I can't say that for sure.

Dean Reuter:                     I want to hear from John Shu on this, and then we'll get to the audience questions. John as you respond to anything you've heard so far, it's interesting to me that one, at least consideration, was the idea that the acquiring company had a history of breaking up companies that it had acquired. And you do a lot of banking work, and there's this notion, banking, too big to fail, this almost seems like the inverse of that, where the American interest, the US government interest here, was keeping a big company all together so that it could continue it's business model of research and development.

John Shu:                             Well the research [crosstalk 00:27:54]. Thank you Dean, thank you for that. The research and development part is certainly important. And from a practice perspective, I would say that any entity that's undergoing a merger, or acquisition, or whatever ... we traditionally look at an antitrust view, or a Hart–Scott–Rodino view, just as a matter of course. And I think now that the world is so interconnected, people should look at a potential CFIUS action just as a matter of course. There have been a number of companies that failed to do that, or failed to properly analyze it, stretching all the way back to the '80s, and they paid the price. I think one mistake that Broadcom did, was focus so much on it's domicility. I mean, focus so much that they violated the CFIUS order, which is just dumb.

                                                And the reason that domicility isn't the only issue that should be analyzed, is because number one, even if it's a US domicile company, if it's a foreign entity, especially a country like China, or Saudi Arabia, or whatever, that has control over the group, or over the funding, that is enough for a CFIUS review. Number two, imagine this, imagine that Norinco, which is a huge Chinese defense contractor, that they decided to redomicile in Kansas. And now all of sudden they want to buy out Raytheon, or General Dynamics, or whatever. There's going to be CFIUS review there, even though it's domiciled now in the United States. And that's because it essentially is a state-owned enterprise. So the domicility factor of it, while it's definitely important, is not the only one to consider.

                                                The other thing that I would point out is, now we're talking about high tech, but Stewart correctly points out that there have been high tech transactions that most democrats and republican administrations have either approved in the past, Brocade, President Trump approved Brocade, or denied. So it isn't so much a protectionist issue, certainly not in the same sense as steel in the '80s, as it is a national security issue, and that of course is where CFIUS comes in, for national security. In 2005, when CFIUS essentially blocked CNOOC, which is the Chinese national petroleum company, to buy Unocal, most people don't even remember that Unocal exists now. But Unocal was a huge oil company in the United States. One problem, and CNOOC had hired all kinds of people. They had [inaudible 00:30:49], they even hired Charlie Black, the republican consultant.

                                                But they couldn't get around the fact that, CNOOC is essentially a state-owned enterprise, and was receiving, even though their offer was all cash, they had received something like two and half billion dollars in cash, interest free, directly from the Chinese government. That's a big deal. And also, people think of Unocal as primarily and oil company, which it is, but what they didn't realize was, but what CFIAS did, was that Unocal also owned subsidiaries that were involved in rare-earth minerals. And that is much more of a national security issue than just straight oil. So you have to look beyond the parties that are just involved, you have look at the background, you have to look at what other parties are involved, and particularly what other parties may have control.

                                                And then you also may have to look at what else do the companies own beyond what they're primarily known for. Those are very important factors for practitioners to analyze and to remember.

Stewart Baker:                  If I could just add one bit of emphasis to what John said, is that at bottom, there is a cultural clash that the people who are following this field need to be aware of. The deal lawyers, who mostly construct these deals, believe there is no set of considerations that can't be addressed by structuring the deal properly. And often, no set of legal restrictions that can't be addressed by properly structuring the deal. And CFIUS, as a creature of Washington, has great respect for how clever those deal lawyers can be, and also is determined to make sure that no matter how clever they are, CFIUS can always reach a transaction it wants to reach. And so if CFIUS ever feels that it is getting structuring, rather than deference to its judgements when it's dealing with parties, as soon as they feel that, they begin to ratchet down their control of the transaction.

                                                And that could have happened here, they may have felt that the effort to re-patriot Broadcom on an accelerated basis was an attempt to defeat CFIUS's jurisdiction, and they were absolutely determined that no one would use matters of form to defeat CFIUS's jurisdiction once it had taken control of the case.

John Shu:                             Dean, excuse me, may I also add, that there's a misconception out there that CFIUS recommends yay, nay, and the president decides yay or nay. That's really a little simplistic. First of all, the president does not have to follow the CFIUS recommendation. He can do whatever he wants. Number two, it isn't just a yes no answer. A fairly recent example is in 2006, under 43's administration. Alcatel, which is a French company, they wanted to buy Lucent Technologies, and it came under CFIUS review. Now, President Bush approved it, but it was a conditional approval. In other words, number one, Alcatel had to agree to what's known as a special security arrangement, and Alcatel agreed that it would not have full access to the sensitive work of Bell Labs, which was Lucent's research division.

                                                It also agreed that it would not have access to the US communications infrastructure. And last, but not least, Alcatel agreed that CFIUS could reopen their review anytime it felt like, if it believed that the combined company materially failed to comply with any aspect of this special security arrangement. So the president has an enormous, enormous discretion, enormous power, and it isn't just limited to a yes no decision.

Dean Reuter:                     We do have one caller who has been waiting with a question for quite a while, if he'd like to join the queue, push the star button, and then the pound button on your telephone. Let's now check in with that very patient caller.

Ron:                                       Hello, this is Ron [inaudible 00:35:39]. Question about the process, the administrative law side of it. Is CFIUS essentially and agency under the APA? Or is it just an advisory board to the president, whose decision is un-reviewable?

Stewart Baker:                  I would have said that it's the president, is who is the agency in question here. I think that position may be gradually undercut by CFIUS's growing institutionalization and authority to take action on its own, without sending that decision through to the White House for ratification. But, as a practical matter, it moves fast enough that it might be hard to get review of anything other than the final decision.

Ron:                                       My question is really a question of law. Is CFIUS an agency under the APA? And if not, I understand your answer, but if it is, then there's a process, and the decision has to be on the record, and potential challenges under the APA might come about. But it sounds like it's not, is that true?

Stewart Baker:                  That's been my understanding, and that's how I believe the Rawls Case played out. It was a challenge to the president's action on due process grounds, and the judicial review here is very limited to the point of not existing at all. So it may be that what we usually think of as APA review, is simply not available right now because of the statutory restrictions on review, which may be why the Rawls cart when to a due process constitutional analysis.

Ron:                                       So the same is true for notice-and-comment, or anything about the submissions by the parties, none of those submissions are available to the public. Is that right?

Stewart Baker:                  So there are regulations, I'm sure they went through notice-and-comment, they're issued by the treasury, and I know they went through notice-and-comment. But the individual decisions, as far as I know, I have not been subject to challenge.

Ron:                                       Interesting.

Dean Reuter:                     Once again, if you have a questions, push the star button, then the pound button on your telephone. Our lines are wide open if you have a question. This Dean Reuter again, of course, but I feel like I seem some daylight between your two positions on the question of CFIUS jurisdiction. I think I've heard John Shu argue that domicility is not, per se, definitive. That is even if, in this instance, Broadcom changes domicile, CFIUS would have retained jurisdiction. I thought I heard otherwise from Stewart Baker, that indeed CFIUS acted quickly, because Broadcom had made some noise, or taken some actions about changing its domicile, and there was concern that CFIUS would lose its jurisdiction, so-

Stewart Baker:                  So we may be closer than you think. I think we would both agree that domicile by itself, doesn't determine whether this is a foreign purchaser or not. The US subsidiary of a foreign company is domicile here, but would be treated as a foreign purchaser. What was unusual about Broadcom, was that it had been a US company, it had a lot of US shareholders, it was publicly held company, so as a practical matter, it looked, for domicile, a lot like Qualcomm. Lots of US managers, lots of US shareholders. And so domicile was more important in that context than it would be if there were other indicia of foreign control.

John Shu:                             And again, that's why when CFIUS examines a deal, it doesn't just look at the primary entities. It looks at any kind of side agreement, it looks at any kind of partnership agreement, it looks at subsidiaries, investors, even individual investors. For example, if there's two entities that are emerging, and both are domicile of the United States, but for one of the entities, the primary investor is an individual who's a bad actor, in hiding, in some unknown jurisdiction, I think CFIUS would be pretty upset about that. And I think that's reasonable.

Stewart Baker:                  Yes, the notion of control, acquisition on control by a foreign person, is also stretched pretty far. Now, a 15% interest will be treated as control for purposes of granting CFIUS jurisdiction over a particular transaction, again, to make sure that CFIUS can take account of unusual cases where the control is exercised in unusual ways. I think we had a transaction where 3Com was going to be sold, in large part to Bain, which is a US company, but there were a variety of Chinese companies that were going to have minority interest, plus they were supplying many of 3Com's components, and they were buying a large chunk of what 3Com manufactured. And CFIUS ultimately said, "The combination of shareholding, plus supplier, plus customer relationships constitutes control by a foreign company, and we're going to review, and indeed reject the transaction."

Dean Reuter:                     Let me make another call for questions, we've got almost 20 minutes left. Push the start button, then the pound button if you have a questions. I will carry on with a question or two. We've heard a lot about how powerful the president is, and the fact that CFIUS itself can sort of reach, I guess sua sponte, and review a proposed deal. My question goes to the president's authority to act unilaterally, and this is of course hypothetical, if CFIUS passes on something, doesn't say yes or no, but doesn't even review a proposed transaction, does the president have the authority to block it?

Stewart Baker:                  The assumption has always been that the president, as commander and chief, has considerable national security authority, and if he invokes national security, and says, "This transaction has damaged national security and has to be undone," then he could do it. And it's the fear that he might do that in unanticipated circumstances, that for a long time drove the voluntary submissions under CFIUS, because the assumption was that the CFIUS process allowed those considerations considered, and if the president approved a transaction after CFIUS review, you could be reasonably confident that you would not have a dead of the night national security determination from the president.

                                                To my knowledge, that's never happened. Usually there are enough security hawks to get any transaction that the president wants to see to his desk. And so you could be reasonably sure that CFIUS will bring transactions the president wants to see to the White House so that he can take the action that he wants to take.

Dean Reuter:                     We also heard-

John Shu:                             I agree with-

Dean Reuter:                     Go ahead John. John Shu, go ahead.

John Shu:                             I was just going to say I agree with Stewart, and I would also add that what happens sometimes is that the local congressman, his district might be affected one way or the other, local congressman will often make us think about it, either in the public press, or he may send a letter directly to the secretary of the treasury. And I say the secretary of the treasury because he is the one who is chairman of the CFIUS committee. And usually what happens then, is that he sends the letter, and then he leaks it. So that's very common, and part of the reason we have the CFIUS now is so that the president doesn't have to. He is not in the position where he has to, all by himself laterally, make a decision without some sort of bureaucratic coverage. And if we did not have CFIUS, it would probably run through treasury, or Homeland Security, or Department of Defense.

                                                As a matter of fact, there have been suggestions in the past that the chairman of CFIUS be the secretary of defense instead of the secretary of the treasury. Some people more recently have suggested that it should be the secretary of commerce, because of all the intellectual property issues involved. But because at it's core, it's deal making, I believe that it's appropriate for the secretary of the treasury to chair CFIUS, and I believe that will continue to be for quite sometime.

Dean Reuter:                     And I take it, give it back to my hypothetical about a president acting without CFIUS having acted, it is the action of CFIUS that insulates the ultimate decision from judicial review, is that correct? In other words, if a president acted unilaterally, that might be subject to judicial review?

Stewart Baker:                  Yes. I think you at least have the Steel Seizure review process available. You're quite right.

Dean Reuter:                     Interesting.[crosstalk 00:46:32]

John Shu:                             Well I would also add that, and I think Stewart is correct, that the Youngstown Steel Seizure Case is always in the background when you exercise presidential power in this way. But the proposed legislation that I mentioned before, that Senator Cornyn and Senator Feinstein are cosponsoring, that actually expands CFIUS power in many ways. And it also expands the definition of critical technologies. The statute, as it is, talks about critical infrastructure, because in '88 nobody could picture and iPhone. But now, the issue that's involved, critical technologies, is very, very important, and in some ways, I would say more important that steel, which is what the Japanese were concerned about in the '80s. And it also gives CFIUS the power to exempt certain transactions if a certain list of criteria are met.

                                                So the movement is towards, actually, expanding CFIUS power and CFIUS authority, and I would say that the more it gets expanded, if this legislation ever goes through, which it's not really a priority right now, but the more it's expanded, I think the less judicial review is going to be available. Especially because as it is, it's absolutely minimal, the chances for judicial review. I think courts are loathe to touch anything involving national security if they don't have to.

Stewart Baker:                  I would second the idea that the spirit of the times favors an expansion of CFIUS because of the concerns about the military and economic challenge that Chinese present, and if for those who are following this on policy grounds, there are are two steps that are likely to come about. I actually think that Senator Cornyn's bill has a fighting chance to become law. It's got backing from the Trump Administration, he's done a good job at making it a bipartisan proposal, and he has accommodated criticism without gutting his bill. So I think that there's a real possibility that it will pass, although you can usually make money in Washington betting legislation won't pass, so we'll have to see.

                                                But, more certain is that there will be new restrictions on at least Chinese investment, adopted as part of the president's response to what he would describe as Chinese cheating on international trade. You will remember that he announced last week that he was planning 60 billon dollars in tariffs on Chinese goods. Less attention was paid to the fact that he also ordered the secretary of treasury to come up with limits on Chinese investments as a further punitive effort, and that set of limits is likely to resemble CFIUS in many respects.

John Shu:                             And we are here because of the huge amount of what we refer to as FDI, foreign direct investment, by the Chinese. And it isn't just a Chinese issue, for example, instead of China, if it was Russia, or Saudi, or Nigeria, that was dumping in billions of dollars in foreign direct investment, the same issues would exist. So it's not just focused on China, because people don't like Chinese people, it's not like that. And I would also say, what's interesting to me, is that in the '80s, it wasn't just Japanese steel, but a Japanese company wanted to buy Fairchild Semiconductor, and CFIUS stepping and stopped that transaction. And here we are 30 years later, where again, we're dealing with semiconductor transactions, just a different country.

                                                So, Vanilla Ice may not be cool anymore, or scrunchies, but national security still is very important, and I think we need to continue focusing on that as the technologies, and as the world becomes more financially interconnected. President Trump also stopped a MoneyGram deal. That wasn't semiconductors, but nobody wants to Chinese government to have direct access to the treasury and banking system. So, that was kind of a no-brainer. But that did not raise the same controversies that this Broadcom deal did. Maybe it was because of the size, the Broadcom deal was huge. It was valued somewhere between 117 to 140 some billion dollars. There's no minimum or maximum size for CFIUS. CFIUS can step in regardless of the size of the deal.

Dean Reuter:                     Well, I am out of questions. It looks like our audience is out of questions as well. I'm going to give each of you, in the order we began, a chance to wrap up or express a final thought. With that, Stewart Baker, final thought?

Stewart Baker:                  Sure, I think, CFIUS, we will always have with us as we've seen, it serves many purposes, and we are in a stage of redefining our relationship with the global economy, and with the Chinese economy. My last word on this would be a bit of pleading on behalf of President Trump, who as usual is getting terrible press for every decision he makes, and John said, he's been accused of doing things that no president has ever done. I think this, as in so many areas of policy, it's not hard to predict President Trump's views. If you ask what Walter Reuther, the head of the UAW in the 1970s, would have thought about an issue, it's almost certain to be what President Trump think about it as well. Reuther was enthusiastic about ... well, was deeply skeptical about the impact of foreign trade, and aggressive about protecting against investments from foreign parts that might undermine American national security.

                                                This is a mainstream democratic position from the '70s, retread by President Trump, as in so many other areas. You can disagree with that, but you can hardly say it's unprecedented.

Dean Reuter:                     Final thought from John Shu.

John Shu:                             Just that CFIUS is, in its actions, are completely bipartisan in the sense that both democrat and republican presidents have used it to stop or approve certain transactions. Number two, a lot of the reporting in the mainstream press has not been accurate, or certainly not legally accurate. And then most important, for the practitioners out there, you yourself have to investigate beyond who the entities are to make sure that there aren't any other side parties or hidden parties that could affect the deal, and you should treat CFIUS, or CFIUS potential action, as you would treat any other routine action. Whether it's Hart–Scott–Rodino, or an SEC review, or whatever, this is not something that a practitioner can just ignore.

Dean Reuter:                     Well gentlemen, I'm going to thank you on behalf of the Federalist Society. Again, Stewart Baker, author of the five-star award-winning book Skating on Stilts, and John Shu, attorney and legal commenter. I also want to thank our audience for dialing in, and thank you for your thoughtful questions. A reminder to our audience about our next scheduled TeleForm conference call, that's tomorrow at 3:00 p.m. eastern time at this same number. We'll be discussing and important second circuit case that might well be headed to the supreme court, cert is pending. That concerns the jurisdiction of US courts, and it's a case brought by victims of terrorism against the Palestinian Liberation Organization, that's tomorrow 3:00 p.m. eastern time. But until the next call, we are adjourned. Thank you very much everyone.

                                                Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast, and other Federalist Society multimedia, please visit The Federalist Society's website, at fedsoc.org/multimedia.