January 16, 2025 • 32 mins
In this episode, Richard Hoeg explores the US Department of Defense's CMC designation and its business impacts on Tencent Holdings. He covers legal background, executive orders, and insights from Bloomberg, analyzing market reactions and clarifying misunderstandings. The discussion includes the National Defense Authorization Act, Trump's executive orders, and more. Hoeg provides historical context, examines Tencent's situation, and the Department of Defense's role in US-China relations. He also considers potential actions by the future administrations and their effects on Tencent's global market presence, concluding with national security debates and possible legal proceedings.
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Episode Transcript
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(00:14):
Hello, and welcome to another episode ofVirtual Legality.
I'm your host, Richard Hogue, managing memberof the Hogue Law Business Law Firm of
Northville, Michigan.
And today, we're gonna talk about aninteresting story at the intersection of
international politics, technology, and videogames.
Namely, as The Verge puts it here, that the UShas designated Tencent as well as CATL as
Chinese military companies.
(00:35):
The designation could make it harder for theowner of Riot Games, Tencent, and the world's
largest EV battery maker, CATL, to do businessin the US.
So one of the leading questions that I hadreading these articles, and I saw them in IGN,
I saw them in CNN, I saw them in other placesacross the Internet, is what does this mean for
these companies?
How did it happen?
What does it not mean?
(00:55):
And how might they fight it if they feel likeit's an unfair characterization of what, at
least in 10¢ respect, is ostensibly anentertainment company more than anything else?
And so let's go on a journey through the USFederal Register and a complex web of
interlocking laws and designations.
So as The Verge puts it, the US Department ofDefense has added tech giant Tencent and
(01:16):
lithium ion battery maker CATL to its list ofChinese military companies as reported earlier
by Bloomberg, and we'll check out that articlein just a second.
The designation doesn't impose sanctions or aban, but it could make it more difficult for
the companies to do business in the US.
So importantly, from a legal perspective, thereare laws and lists and designations with
respects to imports and exports and investmentthat the United States has passed that says
(01:40):
thou shall not engage in these activities ifyou appear on this list.
We know these in terrorist lists.
We know this in export controls and other areasof the law.
This is not one of those things.
You are named a Chinese military company, butas The Verge says here, the designation doesn't
have a separate sanction or ban attached to it,but it could make it more difficult because,
(02:00):
honestly, it's harder to attract investors.
It's harder to enter into business deals if theUS government has labeled you as effectively a
part of the Chinese military infrastructure.
So it is important and we'll see as part ofthis story that the companies are going to
object to the deleterious effects on theirbusiness propositions, on their investments,
and everything else that happens when they'reincluded on this list and whether or not the US
(02:23):
government is doing it appropriately.
The designations as stated here by The Vergeoriginate from president-elect Donald Trump's
executive order in 2020, but I've highlightedthis in red particularly because this appears
to be in error.
Now I don't blame the author here in The Verge.
I don't blame the author in Bloomberg that saysthe same thing because this is a series of
interlocking laws.
It's very confusingly written by the USgovernment, and I don't pretend here to be an
(02:47):
expert on these international designations atthe Department of Defense.
But I was able to do research on this, and I dothink looking at the links that are provided
here and the references made in Bloomberg, thatthis particular reference is an error.
We'll talk about why in just a minute.
But this goes on to talk about lawsuits andthings that other companies have entered into
with respect to this issue, and we'll get tothose at the end of this video.
(03:08):
Now for the primary source material, theBloomberg article here says, CATL, a major
supplier to Tesla, joined Tencent on a federalregister of entities deemed to have ties with
the People's Liberation Army, the military armof the Chinese government.
Now this in and of itself is a little bitreductive.
It's a little bit ambiguous to what's actuallyhappening in the law.
(03:30):
We'll see that when we look at the legallanguage itself.
But, again, I really am sympathetic tojournalists who aren't looking at these things
every day, trying to articulate in clearcertain terms for their audience what's
happening here when, as we will see in just aminute, the law is really unclear itself.
They do note that Tencent stock slid more than7% in Hong Kong, notching its biggest drop
(03:53):
since October.
So even though there are no sanctions or nodirect legal ramifications to this designation,
it does matter to these companies.
CATL's shares fell about 3%.
While the Pentagon's blacklist carries nospecific sanctions, it discourages US firms
from dealing with its members.
While we understand the market's panicreaction, says one Citigroup analyst, we also
(04:14):
believe its inclusion in the list does notnecessarily suggest that there is sufficient
evidence to confirm the decision was thecorrect one.
So the US government, the Department of Defensegoes out there and says, these entities are all
part of the Chinese military infrastructure.
This analyst, I think rightly, says, well, wedon't have to assume that's the end of the
story that just because the deputy director ofdefense says this in a document that they're
(04:38):
ultimately gonna be ruled as having some kindof problematic relationship to China.
But reasonable minds can differ even on thatscore, and we see that this Bloomberg article
discusses the ramifications a little bitfurther.
They say China's foreign ministry condemned theUS sanctions and vowed to defend its company's
rights.
These are just designations, not sanctions, butokay, Bloomberg.
And they also say as part of this article thatthe Chinese military company list stems from an
(05:05):
order signed by Trump in late 2020 that barredAmerican investment in Chinese firms owned or
controlled by the military.
Now interestingly, this article in and ofitself as well as The Verge article seems to
identify its own error in writing this upinsofar as it says there are no sanctions,
there are no prohibitions, there are no thingsthat are barred from being designated on this
(05:26):
list, and then later says that it goes back toa Trump executive order that barred American
investment in Chinese firms controlled by themilitary.
Those seem to be against each other.
It's one of the reasons that it was flagged forme to research as part of this video.
And if we actually look at the primary sourcematerial, we'll understand a little bit better
what happened in this reporting.
So in the federal register, this is where wesee 10¢.
(05:47):
This is where we see CATL.
It says that section 1260 h, remember thatsection number, of the William m Thornberry
National Defense Authorization Act for fiscalyear 2021 never accused the US government of
writing too short of a title for theirappropriation acts, requires the secretary of
defense to identify and publish a list ofChinese military companies annually until
(06:10):
December 31, 2030.
The deputy secretary of defense has determinedthat the following entities qualify as Chinese
military companies in accordance with section1260 h.
And if we look at this list, we will see CATL,we will see Tencent Holdings.
If we scroll a little bit on here, there's 100of these companies.
Contemporary Amperex Technology CompanyLimited, CATL, is listed there, and Tencent
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Holdings Limited is listed there.
They also say that entities that are includedon this list may request reconsideration.
Of course, they don't actually identify whatthey were basing this decision on in this
document, so it's a little bit of an oddprocess as it stands.
You usually see a little bit more due processfor American entities in other context rather
than just being named on a list, a blacklist asBloomberg puts it.
(06:54):
But they do have some legal recourse as we willsee.
But everything related to this list is listedas happening under section 1260 h of the 2021
authorization act.
But if we go and we look at the Trump articleshere, Trump bans investments in companies that
White House says aids Chinese military aslinked to by The Verge will see reference to a
(07:18):
different act.
President Donald Trump on Thursday signed anexecutive order barring Americans from
investing in a collection of Chinese companiesthat the White House believes support Beijing's
military.
We can link this entire article that The Vergeagain linked to as part of their reporting to
this executive order that was issued onNovember 12, 2020, executive order 13959 that
says that president Trump, by the power vestedin him under the International Emergency
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Economic Powers Act or IEEPA, which you'll seereferenced in other places as part of this
video, says that Americans can't invest inthese various Chinese companies as defined in
section 4 a one of this order.
So we're gonna follow along in this executiveorder to 4 a one, and we will see that a
communist Chinese military company for purposesof this executive order are those companies
(08:04):
designated pursuant to section 1237 of publiclaw 105261.
Now importantly, public laws, the way the actsare actually passed in Congress, they can
change their numbering as they go into variousstatutes in various places in the federal
register.
But here, section 1237 is actually describingsomething completely different from section
(08:26):
1260 h.
So when we go and we look at the executiveorder and what the DOD releases part of the
designation of companies under section 1237, wesee a completely different list under different
defined terms under a different act, theNational Defense Authorization Act of fiscal
year 1999.
So a different year, a different section, adifferent act, a different list.
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And, yes, if you're sitting there saying, ho,this is crazy.
The US government keeps very similar lists ofvery similar companies with a lot of overlap
under different parameters, under differentlaws, and uses them differently under executive
orders and otherwise, I say, yes.
That's crazy, but that's what they do.
That's what I found in this research.
That that's what we will see as we look alittle bit further on on this concept.
(09:08):
In order to understand this a little bitbetter, I did reference other think tank type
content, that I found to be very helpful inunderstanding this.
This is from a website called Loft Bear, whichis done in connection with the Brookings
Institution, which we'll take a look at interms of their bona fides in just a minute.
Chinese military civil fusion and section 1260h.
Remember, that's the list we're talking about.
(09:30):
Congress incorporates defense contributors, andthey go over a lot of what happened here.
One provision of the William M ThornberryNational Defense Authorization Act for fiscal
year 2021 requires the US Department of Defenseto publish an annual list of Chinese military
companies as we saw referenced in thatparticular designation.
(09:51):
Congress passed section 12 37 of the NDAA forfiscal year 1999 to ensure Americans would know
whether their tax dollars were funding thePeople's Liberation Army.
And here's where you start to see howBloomberg, how The Verge, how others on the
Internet got a little bit confused on thispoint because section 1237 really does point
with specificity to the funding of the People'sLiberation Army.
(10:14):
Congress directed the defense department toidentify communist Chinese military companies
operating in the United States through apublicly published list.
Section 1237 was amended twice.
Section 1260 h seeks to build on the foundationlaid by section 1237 as amended by creating an
entirely new reporting framework to pinpointcompanies connected to the Chinese military.
(10:35):
So it's a different set of definitions.
We'll see how they differ in just a minute, butit's important to understand that when Trump
issues that executive order, says Americanscan't invest in these companies, it's a
different list on different parameters thanwhat we're talking about with respect to
Tencent and CATL.
That's why 10¢, we'll see as part of thisvideo, goes out there trying to explain things
(10:55):
a little bit, trying to say this doesn'tactually affect our productivity, doesn't
actually affect our sales because it onlyreally affects really only impacts sales that
might be made to the US Department of Defense,and we don't sell stuff to the US Department of
Defense.
Reporting requirements.
According to the official summary of theamendment, section 1260h introduced during the
(11:15):
house Armed Services Committee markup processby representative Liz Cheney and included as
part of an en bloc amendment to the 2021 NDAAextends and modernizes the Defense Department's
reporting requirements regarding ChineseCommunist Party military companies operating in
the United States.
The provision specifies the list must besubmitted annually to the Congressional Armed
Services Committees 45 days after the secretaryis required to deliver the c m CCMC report
(11:41):
under section 1237.
And this article is a a few years old, so thisis actually at the end of Trump's term before
the Biden administration takes over.
So we don't actually have how this is used forthe past couple of years, but we do have an
understanding of how these two statutesinteract as part of this article.
Section 1268 works in tandem with section 1237to create a parallel reporting framework for
(12:03):
identifying these Chinese military companies.
The definitions are different.
After clarifying that CMCs are not naturalpersons, the provision explains that a CMC
includes any company that is, this is 1260 hnow, directly, indirectly, or beneficially
owned, controlled, or acting on behalf of thePeople's Liberation Army, that's where you
might see the Bloomberg reference again, or anyother organization subordinate to the Central
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Military Commission, or, and this is the reallyimportant part because it seems to be the only
place where Tencent might be implicated here,that is identified as a military civil fusion
contributor to Chinese defense industrial baseand engaged in providing commercial services
manufacturing, producing, or exporting.
In the new law, the language only specifiesorganizations subordinate to the Central
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Military Commission and not other ministriesfor the People's Republic of China, which 1237
does reference.
So in this sense, the new definition under12/68 is significantly narrower than the old
definition of CCMC's under section 12 37.
Even as the provision adopts a more focuseddefinition overall, it adds a new class of
(13:09):
companies, which this article says is to tailorit even further.
I don't see this as tailoring.
Again, this article is from the Law FairInstitute in cooperation with Brookings, and I
think it takes a fairly positive tack to whatthis law is.
I'm going to try to not editorialize too much,but this is a political question here.
So reasonable minds can differ as to whetherthis entire process and these definitions are a
(13:30):
good thing.
But in this article, the author seems to besuggesting that they are.
Additionally, it creates this entirely newclass of companies, military civil fusion
contributors to Chinese defense industrial baseas ones that need to be listed here.
And though it isn't separately defined in thestatute what a military civil fusion
contributor is, it does include a list of whatthese companies might be.
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And that list is entities knowingly receivingassistance from the government of China or the
Chinese Communist Party through science andtechnology efforts initiated under the Chinese
military industrial planning apparatus,entities affiliated with the Chinese Ministry
of Industry and Information Technology,including research partnerships and projects
and affiliated with also not defined, gives acertain amount of broad authority to the
(14:15):
Department of Defense to make thesedesignations.
Entities receiving assistance, operationaldirection, or policy guidance from the State
Administration for Science Technology andIndustry for National Defense.
Any entities or subsidiaries defined as adefense enterprise by the state council of the
People's Republic of China.
So that's a designation that would happen inChina if it has that designation.
If it gives certain control to the Chinesegovernment itself or these various other
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ministries, then it could be listed as one ofthese fusion companies.
And it is awarded with receipt of militaryproduction licenses by the government of China,
entities residing in or affiliated with amilitary civil fusion enterprise zone, entities
that advertise on national, provincial, andnongovernmental military equipment procurement
platforms in the People's Republic of China, orand here's where the rubber really hits the
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road to me.
Any other entities the secretary determines isappropriate.
Now we've talked about it in virtual legalityand in other context in the past, but Congress
likes to write these laws with an umbrellaprovision at the end to say we've we've listed
everything we could think of, but we don't knowwhat we don't know, and we don't know what we
can't think of right now.
So we wanna give one of these agencies, in thiscase, the Department of Defense, some broad
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authority to say, okay.
On this list, maybe you didn't cover thisexactly right, but it would be appropriate for
this company to be included for reason x.
The last category in the class of MCFCs asdescribed here by Brookings and Lawfare
Institute Institute, leaves a great deal ofdiscretion to the secretary of defense.
However, given that this category comes after alist of more specific categories, the canon of
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legal interpretation known as usidemgenerous ofthe same kind, which provides that when a list
when a law lists a class of person or thingsany general language after it is interpreted in
line with that list will likely guide its use.
And, again, this takes a very kind of genteelapproach to congressional law drafting.
Right?
This takes a very generous kind of assertion ofhow courts will interpret these things.
(16:08):
We saw during the COVID pandemic and otherareas of emergency designations and legal
declarations by governors and and presidentsacross our country that perhaps this language
here is interpreted a little bit more broadlyby the courts than this particular article
would suggest.
Again, reasonable minds can differ as towhether or not that's a good thing here,
(16:28):
whether the Chinese military company issue isimportant enough that the secretary of defense
needs to be able to essentially list whoeverthey want as long as they determine it's
appropriate by whatever means they might thinkis appropriate in that particular context.
But I don't really agree with this paragraph aspart of this article that says this is terribly
limiting based on everything else that's inthis list.
(16:49):
Suffice it to say, the notion that theDepartment of Defense appears to be advancing
here is that Tencent, by virtue of its creationof artificial intelligence or other
technological infrastructures for video games,media, or otherwise, may well be aiding the
Chinese military in ways that are difficult forthe United States to see just based on the
(17:10):
structure of the company itself.
And I have no idea whether that's happening atTencent.
I don't know that the Department of Defenseactually has any idea whether that's happening,
but it is part of this story.
It remains to be seen what executive action theBiden Harris administration will take.
Again, this is years ago that this article waswritten.
But the Trump administration likely wanted tomaintain maximum flexibility when it targeted
these military companies under 1237, leaving itto declare a national emergency and employ the
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broad authority provided by IAEPA using itsauthority under 1237 rather than simply using
its authority under 1237 a one.
That decision means that the Biden Harrisadministration could amend the Trump era
executive orders.
There's no indication in my research that thathappened.
But absent further executive action, section1260 h is still likely to have a large impact
simply by naming and shaming CMCs.
(17:55):
Section 1260 h appears to be one piece of anever increasing mosaic of naming and shaming
efforts by the United States vis a vis China.
In the context of Chinese military companies,Congress began assembling this mosaic more than
20 years ago with section 1237.
Now that sanctions have been levied, Congressmay not have included a sanctions regime with
section 1260 h because the president couldsimply amend the existing CCMEC executive
(18:19):
orders to cover CMCs under his IEP authority.
Said another way, Trump decided to use 1237 forthis purpose based on those definitions.
1260h was not used, but the Bidenadministration could amend those executive
orders or issue a new executive order including12 60 h, or the next Trump administration could
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do the same and have those same prohibitionsapplied to a list like this using that very,
very broad, IEPA authority, basically, thatthere's an economic emergency that can be
handled through his presidential authority.
And, again, I've had issues in virtual realityin other locations about the broad discretion
given to things like executive orders at boththe governors and presidential levels, but
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reasonable minds can differ on that as well.
More importantly, says this article, section1260 h's narrow and tailored language, and I
again object to that description of what we'veseen here in the definitions, likely
demonstrates the US government's desire to callout the specific issue of Chinese military
companies and the MCF, that's the fusiondevelopment strategy from a more precise and up
to date angle.
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Moreover, the inclusion of the military civilfusion contributor subcategory gives the
Department of Defense another avenue to defineChinese entities that are connected to Chinese
military and defense apparatus, but not bebound by some of the definitions in the earlier
designation.
Even so, this article admits, some aspects ofsection 1260 h's designation remain
intentionally or unintentionally ambiguous dueto broad drafting.
(19:47):
More precise terms or the adoption of aspecific definition for these various terms
might help clear this up.
But as we will see, the Department of Defensehas done this list now for a few years and has
resulted in legal action in a couple ofinstances.
But the most important thing to take away fromthis is understanding that there are 2 sets of
designations, 2 sets of statutes, and that whatis implicated by 10¢ inclusion on 12 60 h's
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list is not the same as being included onsection 12 30 seven's list, and that the Trump
executive order doesn't discuss 12 60 h at all.
I also wanna mention here, as I said, theBrookings Institute is listed by many as
centrist, conservative, liberal, center right,and center left as Wikipedia reports here.
(20:34):
So it's not really very useful analysis forunderstanding where they're coming from
politically.
An academic analysis of congressional recordsfound that Brookings was cited by conservative
politicians almost as often as liberalpoliticians earning a score of 53 on a 1 to 100
scale with 100 representing the most liberalscore.
So it's hard to place them in any specificbucket.
Although reading that article is I will link inthe description in the podcast version of this
(20:56):
video.
You do get the at least indication that theyare definitely okay with more aggressive
listing, naming, shaming, whatever else youwanna call it with respect to Chinese
interactions in the United States economy.
That all said, if we look a little bit further,we can understand that what 1260 h does is it
prohibits the Department of Defense fromentering into a contract with an entity on that
(21:20):
list starting on June 30, 2026, or purchasingdirectly or indirectly goods and services that
include goods or services sourced from anentity on that 12 60 h list starting in June
2027.
So the Department of Defense will be bound.
They will be prevented from buying, League ofLegends, currencies, various other things to
(21:42):
the extent 10¢ Holdings stays on that list forpurposes of 12 60 h.
That doesn't really make much of a differenceto 10¢ bottom line on the whole.
But the fact that they're included on this listand the fact that an executive order might be
amended or issued by the Trump administrationat really any time to include the companies
listed on that list in the prohibition ofAmerican investment concept does lead to a
(22:05):
reduction in their stock price, probably leadsto a reduction in their business opportunities,
partnerships, potential licenses that theycould enter into with folks operating in the
United States.
And that they might think is a problem.
Because Tencent, if you don't know, and Isuspect that you do, is a real big company.
As Wikipedia says, founded in 1998, itssubsidiaries globally market various Internet
(22:26):
related services and products, including inentertainment, artificial intelligence, and
other technology.
Tencent is the world's largest video gamevendor as well as one of the largest companies
in the world by market capitalization.
Its services include social networks, music,web portals, ecommerce, mobile games, Internet
services, payment systems, smartphones, andmultiplayer online games.
They're conglomerate, but they're conglomeratefocused on what we might consider
(22:50):
entertainment.
And in the video game landscape, they own partsof practically everything that you can think
of.
They wholly own Funcom, Riot Games, Sumo Games,Grinding Gear Games if you're enjoying Path of
Exile 2 right now.
They own controlling interests in visual arts,Turtle Rock Studios, Tequila Works, Klay,
(23:12):
others.
They own majority shares and also controllinginterest in Supercell.
They own plurality of shares in places likeDontnod, Pocket Gems, ShiptUp, Epic, Bloober,
Marvelous, and more.
They have important interest in Remedy fromsoftware.
Kadokawa, you saw us reference in virtualreality earlier, this year.
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And so basically, they're a major player withtheir fingers in all sorts of different video
game pies, and that rubs a lot of people thewrong way.
And I'm not gonna tell them they're wrong, butit does mean that inclusion on this list could
have a deleterious effect on a whole host ofaspects of the video game industry, which leads
us to the last point that I wanted to talkabout as part of this particular issue, legal
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action.
So a number of places reported after that theUS designated Tencent, a Chinese military
company, with the list serving as a warning toAmerican companies and organizations about the
risks of doing business with Chinese entities,that Tencent threatens legal proceedings if the
US doesn't overturn decision to label it as aChinese military company.
Now I was interested in what it meant tothreaten a legal proceeding of this type.
(24:22):
I suspected it was just the standard end of astatement, and I was proved right.
When we look at the statement here, Tencentresponded to this by saying, hey.
The company noted that the US Department ofDefense has scheduled to publish the notice of
availability of designation of Chinese militarycompanies on 7 January 2025.
Pursuant to the notice that the the deputysecretary of defense has included the company
(24:43):
in this list, as the company is neither aChinese military company nor a military civil
fusion contributor to the Chinese defenseindustrial base, it believes that its inclusion
in the CMC list is a mistake.
Unlike other lists maintained by the USgovernment for sanctions or export control
measures, inclusion in this list relates onlyto US defense procurement, which does not
affect the business or the group.
So this is essentially a statement toinvestors.
(25:06):
Right?
Our share price is going down.
This is a bad thing that were included on thislist, but you should know this is not what
Bloomberg reported.
This is not the Trump prohibition list.
This is only about defense departmentprocurement.
The CMC list is distinct from non SDN Chinesemilitary industrial complex list maintained by
the US Office of Foreign Assets Control, adifferent list that the US government uses.
(25:26):
And inclusion in the CMC list will not prohibitany persons other than the Department of
Defense from business dealings with thecompany, including transacting in the
securities of the company.
So don't feel like you are going to losewhatever value your equity position in 10¢
might have due to our inclusion on this list.
Obviously, there is some confusion.
There was confusion in the reporting.
There's probably confusion at the shareholderlevel, and so we feel the need to make this
(25:48):
statement.
The company intends to initiate areconsideration process to correct this
mistake.
But from a legal perspective, that same entitythat made this initial designation is in charge
of the reconsideration process, so probablywe're not holding out a lot of hope for that
process to bear fruit.
During the process, it, Tencent, will engage indiscussions with the US Department of Defense
to resolve any misunderstanding.
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And if necessary, will undertake legalproceedings to remove the company from the CMC
list.
The company will make further announcements asand when appropriate.
So this, if necessary, will undertake legalproceedings to remove the company from the CMC
list is shown by these journalists asthreatening legal proceedings if the US doesn't
overturn decision.
But from a legal perspective, from a lawyer'sperspective, this is what you put at the end of
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a demand document or a letter to the opposingcounsel that says, look.
We're gonna ask you to do this the right way.
We're gonna use your process if necessary.
But just because we're using your process, justbecause we are exceeding to this particular set
of demands, it doesn't mean that we're givingup our legal rights in the future.
So Tencent here to my ear is effectivelysaying, hey.
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We'll go through your reconsideration process.
But if that doesn't work, we will undertakelegal proceedings to remove the company from
the list if necessary.
So this isn't really threatening legalproceedings if they don't remove them as much
as it's saying, we'll use your process, andthat doesn't mean that we're giving up the
right to sue you in the future.
And, also, hey.
Some folks have had some success suing you.
(27:12):
Now this is the DJI drone company complaintthat The Verge published and linked to in that
initial article that we looked at at the topthis video, but I wanted to highlight for you
what a lawsuit, what legal proceedings mightlook like on this particular account.
And the basic nature of this is in the contextof this particular instance, DJI says the
Department of Defense didn't talk to us aboutincluding us on the list, didn't respond to our
(27:35):
answers or the reconsideration process thatsays why we shouldn't be on this list and is
acting arbitrarily and capriciously under theirauthority given to them by Congress.
And that's important for US law underadministrative law.
These agencies, these executive branch parties,the Department of Defense in this case, are not
allowed to just take their authority thatCongress gives them and use it willy nilly.
(27:57):
They're not allowed to act arbitrarily orcapriciously in legal parlance.
And so this lawsuit alleges that that's what'shappening here.
The The statute invoked by defendants does notauthorize their action because we don't fall
under any of the definitions provided.
Defendants have authority under section 1260 hto identify each entity the secretary
determines based on the most recent informationavailable is operating directly or indirectly
(28:20):
in the United States or any of its territoriesand positions that is a Chinese military
company, but that they shall make additions ordeletions to that list on an ongoing basis
based on the latest information available.
Section 1260 h permits the secretary of defenseto designate the companies if one of either two
conditions is met.
First, the secretary may designate a company ifit is directly, indirectly, or beneficially
owned, controlled, or acting on behalf of thePeople's Liberation Army or any other
(28:43):
organization subordinate to the CentralMilitary Commission, but we are not owned,
controlled, or acting on behalf of the People'sLiberation Army.
2nd, the secretary may designate a company as aCMC if it is a military civil fusion
contributor.
We saw that description in the law fair articlewe read earlier, but we do not fit in any
categories listed by the statute.
Therefore, we do not qualify as a CMC.
(29:03):
And in failing to remove us from the list,defendants failed to abide congress's mandatory
command that they shall make deletions on anongoing basis based on the latest information
available.
Defendant's designation is therefore arbitrary,capricious, and abuse of discretion or
otherwise not in accordance with law and is inexcess of statutory jurisdiction authority or
limitations under the Administrative ProceduresAct.
(29:24):
And they say there's other violations here.
They failed to articulate a a satisfactoryexplanation for designating us as a CMC, which
this list process itself doesn't really givethese companies enough information in my view
to feel like they're getting due process underUnited States law.
And you can feel one way or the other aboutthat to the extent that these companies are
(29:44):
interacting with or helping the Chinesemilitary.
But we do have rules in the United States aboutthese agencies acting arbitrarily and
capriciously.
I think that's part of this story.
Whereas DJI says in their lawsuit, reasondecision making requires that an agency
articulate a satisfactory explanation for itsaction with a rational connection between the
facts found and the choice made.
(30:06):
Defendant's conclusory analysis does notprovide a rational connection between the facts
found and decision to designate us as a CMC.
This includes, but is not related to,defendant's failure to make the legal
conclusion necessary under 12 60 h, under thosetwo categories that we just talked about.
An agency's factual findings must be supportedby substantial evidence.
Here, the evidence that defendants report torely upon is either false, contravened by the
(30:29):
public record, or DJI's delisting petition, orinsufficient to support defendant's factual
finding that we are a CMC.
So this is what Tencent might look likefighting this particular designation.
Again, from my perspective, editorializing alittle bit here, this is the kind of thing that
the US government is doing realistically on anarbitrary basis on its own to the extent that
(30:53):
the Department of Defense is just providingthat list and not otherwise providing any
information about any of the entries on thatlist, that they're immediately blacklisted,
described as such by Bloomberg, that theirshare price immediately goes down based on this
sole authority to designate by the secretary ofdefense.
But a reasonable mind can look at this and saythat's necessary for the national security, and
I think that you can have a good reason debateon that topic.
(31:16):
Please do in the comments or otherwise shouldyou see fit.
But this is what that lawsuit would look like,and I am trying to make these videos 30 minutes
or less.
I don't know that I'm gonna make it this time,but I do wanna leave you with that information
and let you know that if you enjoy and findthese conversations informational, educational,
and helpful, please do consider supporting thechannel at PlayYour or Patreon.
I'll have links in the description or throughmemberships to the channel, super chats, and
(31:38):
the like on live streams.
Otherwise, you can find me on PlayYour,formerly Utreon, at a website like this one to
to watch your videos there, otherwise, supportthe channel.
And questions or comments are welcomed, to thecomments to this video.
I do try to respond to as many as I cansubstantively, when I get the chance to after
these videos.
Otherwise, just telling folks about thischannel, telling your friends every little bit
(32:00):
helps.
So thank you so much.
I hope this was informative to you, and I willcatch you on the next episode of Virtual
Legality.
Virtual Legality is a YouTube video series withaudio podcast versions presented as commentary
and for education and entertainment purposesonly.
It does not constitute legal advice and doesnot create an attorney client relationship.
(32:24):
If you have legal questions about the topicsdiscussed, please consult your own legal
counsel.
Hello, and welcome to another episode ofVirtual Legality.
I'm your host, Richard Hogue, managing memberof the Hogue Law Business Law Firm of
Northville, Michigan.
And today, we're gonna talk about aninteresting story at the intersection of
international politics, technology, and videogames.
Namely, as The Verge puts it here, that the UShas designated Tencent as well as CATL as
Chinese military companies.
(00:35):
The designation could make it harder for theowner of Riot Games, Tencent, and the world's
largest EV battery maker, CATL, to do businessin the US.
So one of the leading questions that I hadreading these articles, and I saw them in IGN,
I saw them in CNN, I saw them in other placesacross the Internet, is what does this mean for
these companies?
How did it happen?
What does it not mean?
(00:55):
And how might they fight it if they feel likeit's an unfair characterization of what, at
least in 10¢ respect, is ostensibly anentertainment company more than anything else?
And so let's go on a journey through the USFederal Register and a complex web of
interlocking laws and designations.
So as The Verge puts it, the US Department ofDefense has added tech giant Tencent and
(01:16):
lithium ion battery maker CATL to its list ofChinese military companies as reported earlier
by Bloomberg, and we'll check out that articlein just a second.
The designation doesn't impose sanctions or aban, but it could make it more difficult for
the companies to do business in the US.
So importantly, from a legal perspective, thereare laws and lists and designations with
respects to imports and exports and investmentthat the United States has passed that says
(01:40):
thou shall not engage in these activities ifyou appear on this list.
We know these in terrorist lists.
We know this in export controls and other areasof the law.
This is not one of those things.
You are named a Chinese military company, butas The Verge says here, the designation doesn't
have a separate sanction or ban attached to it,but it could make it more difficult because,
(02:00):
honestly, it's harder to attract investors.
It's harder to enter into business deals if theUS government has labeled you as effectively a
part of the Chinese military infrastructure.
So it is important and we'll see as part ofthis story that the companies are going to
object to the deleterious effects on theirbusiness propositions, on their investments,
and everything else that happens when they'reincluded on this list and whether or not the US
(02:23):
government is doing it appropriately.
The designations as stated here by The Vergeoriginate from president-elect Donald Trump's
executive order in 2020, but I've highlightedthis in red particularly because this appears
to be in error.
Now I don't blame the author here in The Verge.
I don't blame the author in Bloomberg that saysthe same thing because this is a series of
interlocking laws.
It's very confusingly written by the USgovernment, and I don't pretend here to be an
(02:47):
expert on these international designations atthe Department of Defense.
But I was able to do research on this, and I dothink looking at the links that are provided
here and the references made in Bloomberg, thatthis particular reference is an error.
We'll talk about why in just a minute.
But this goes on to talk about lawsuits andthings that other companies have entered into
with respect to this issue, and we'll get tothose at the end of this video.
(03:08):
Now for the primary source material, theBloomberg article here says, CATL, a major
supplier to Tesla, joined Tencent on a federalregister of entities deemed to have ties with
the People's Liberation Army, the military armof the Chinese government.
Now this in and of itself is a little bitreductive.
It's a little bit ambiguous to what's actuallyhappening in the law.
(03:30):
We'll see that when we look at the legallanguage itself.
But, again, I really am sympathetic tojournalists who aren't looking at these things
every day, trying to articulate in clearcertain terms for their audience what's
happening here when, as we will see in just aminute, the law is really unclear itself.
They do note that Tencent stock slid more than7% in Hong Kong, notching its biggest drop
(03:53):
since October.
So even though there are no sanctions or nodirect legal ramifications to this designation,
it does matter to these companies.
CATL's shares fell about 3%.
While the Pentagon's blacklist carries nospecific sanctions, it discourages US firms
from dealing with its members.
While we understand the market's panicreaction, says one Citigroup analyst, we also
(04:14):
believe its inclusion in the list does notnecessarily suggest that there is sufficient
evidence to confirm the decision was thecorrect one.
So the US government, the Department of Defensegoes out there and says, these entities are all
part of the Chinese military infrastructure.
This analyst, I think rightly, says, well, wedon't have to assume that's the end of the
story that just because the deputy director ofdefense says this in a document that they're
(04:38):
ultimately gonna be ruled as having some kindof problematic relationship to China.
But reasonable minds can differ even on thatscore, and we see that this Bloomberg article
discusses the ramifications a little bitfurther.
They say China's foreign ministry condemned theUS sanctions and vowed to defend its company's
rights.
These are just designations, not sanctions, butokay, Bloomberg.
And they also say as part of this article thatthe Chinese military company list stems from an
(05:05):
order signed by Trump in late 2020 that barredAmerican investment in Chinese firms owned or
controlled by the military.
Now interestingly, this article in and ofitself as well as The Verge article seems to
identify its own error in writing this upinsofar as it says there are no sanctions,
there are no prohibitions, there are no thingsthat are barred from being designated on this
(05:26):
list, and then later says that it goes back toa Trump executive order that barred American
investment in Chinese firms controlled by themilitary.
Those seem to be against each other.
It's one of the reasons that it was flagged forme to research as part of this video.
And if we actually look at the primary sourcematerial, we'll understand a little bit better
what happened in this reporting.
So in the federal register, this is where wesee 10¢.
(05:47):
This is where we see CATL.
It says that section 1260 h, remember thatsection number, of the William m Thornberry
National Defense Authorization Act for fiscalyear 2021 never accused the US government of
writing too short of a title for theirappropriation acts, requires the secretary of
defense to identify and publish a list ofChinese military companies annually until
(06:10):
December 31, 2030.
The deputy secretary of defense has determinedthat the following entities qualify as Chinese
military companies in accordance with section1260 h.
And if we look at this list, we will see CATL,we will see Tencent Holdings.
If we scroll a little bit on here, there's 100of these companies.
Contemporary Amperex Technology CompanyLimited, CATL, is listed there, and Tencent
(06:32):
Holdings Limited is listed there.
They also say that entities that are includedon this list may request reconsideration.
Of course, they don't actually identify whatthey were basing this decision on in this
document, so it's a little bit of an oddprocess as it stands.
You usually see a little bit more due processfor American entities in other context rather
than just being named on a list, a blacklist asBloomberg puts it.
(06:54):
But they do have some legal recourse as we willsee.
But everything related to this list is listedas happening under section 1260 h of the 2021
authorization act.
But if we go and we look at the Trump articleshere, Trump bans investments in companies that
White House says aids Chinese military aslinked to by The Verge will see reference to a
(07:18):
different act.
President Donald Trump on Thursday signed anexecutive order barring Americans from
investing in a collection of Chinese companiesthat the White House believes support Beijing's
military.
We can link this entire article that The Vergeagain linked to as part of their reporting to
this executive order that was issued onNovember 12, 2020, executive order 13959 that
says that president Trump, by the power vestedin him under the International Emergency
(07:42):
Economic Powers Act or IEEPA, which you'll seereferenced in other places as part of this
video, says that Americans can't invest inthese various Chinese companies as defined in
section 4 a one of this order.
So we're gonna follow along in this executiveorder to 4 a one, and we will see that a
communist Chinese military company for purposesof this executive order are those companies
(08:04):
designated pursuant to section 1237 of publiclaw 105261.
Now importantly, public laws, the way the actsare actually passed in Congress, they can
change their numbering as they go into variousstatutes in various places in the federal
register.
But here, section 1237 is actually describingsomething completely different from section
(08:26):
1260 h.
So when we go and we look at the executiveorder and what the DOD releases part of the
designation of companies under section 1237, wesee a completely different list under different
defined terms under a different act, theNational Defense Authorization Act of fiscal
year 1999.
So a different year, a different section, adifferent act, a different list.
(08:48):
And, yes, if you're sitting there saying, ho,this is crazy.
The US government keeps very similar lists ofvery similar companies with a lot of overlap
under different parameters, under differentlaws, and uses them differently under executive
orders and otherwise, I say, yes.
That's crazy, but that's what they do.
That's what I found in this research.
That that's what we will see as we look alittle bit further on on this concept.
(09:08):
In order to understand this a little bitbetter, I did reference other think tank type
content, that I found to be very helpful inunderstanding this.
This is from a website called Loft Bear, whichis done in connection with the Brookings
Institution, which we'll take a look at interms of their bona fides in just a minute.
Chinese military civil fusion and section 1260h.
Remember, that's the list we're talking about.
(09:30):
Congress incorporates defense contributors, andthey go over a lot of what happened here.
One provision of the William M ThornberryNational Defense Authorization Act for fiscal
year 2021 requires the US Department of Defenseto publish an annual list of Chinese military
companies as we saw referenced in thatparticular designation.
(09:51):
Congress passed section 12 37 of the NDAA forfiscal year 1999 to ensure Americans would know
whether their tax dollars were funding thePeople's Liberation Army.
And here's where you start to see howBloomberg, how The Verge, how others on the
Internet got a little bit confused on thispoint because section 1237 really does point
with specificity to the funding of the People'sLiberation Army.
(10:14):
Congress directed the defense department toidentify communist Chinese military companies
operating in the United States through apublicly published list.
Section 1237 was amended twice.
Section 1260 h seeks to build on the foundationlaid by section 1237 as amended by creating an
entirely new reporting framework to pinpointcompanies connected to the Chinese military.
(10:35):
So it's a different set of definitions.
We'll see how they differ in just a minute, butit's important to understand that when Trump
issues that executive order, says Americanscan't invest in these companies, it's a
different list on different parameters thanwhat we're talking about with respect to
Tencent and CATL.
That's why 10¢, we'll see as part of thisvideo, goes out there trying to explain things
(10:55):
a little bit, trying to say this doesn'tactually affect our productivity, doesn't
actually affect our sales because it onlyreally affects really only impacts sales that
might be made to the US Department of Defense,and we don't sell stuff to the US Department of
Defense.
Reporting requirements.
According to the official summary of theamendment, section 1260h introduced during the
(11:15):
house Armed Services Committee markup processby representative Liz Cheney and included as
part of an en bloc amendment to the 2021 NDAAextends and modernizes the Defense Department's
reporting requirements regarding ChineseCommunist Party military companies operating in
the United States.
The provision specifies the list must besubmitted annually to the Congressional Armed
Services Committees 45 days after the secretaryis required to deliver the c m CCMC report
(11:41):
under section 1237.
And this article is a a few years old, so thisis actually at the end of Trump's term before
the Biden administration takes over.
So we don't actually have how this is used forthe past couple of years, but we do have an
understanding of how these two statutesinteract as part of this article.
Section 1268 works in tandem with section 1237to create a parallel reporting framework for
(12:03):
identifying these Chinese military companies.
The definitions are different.
After clarifying that CMCs are not naturalpersons, the provision explains that a CMC
includes any company that is, this is 1260 hnow, directly, indirectly, or beneficially
owned, controlled, or acting on behalf of thePeople's Liberation Army, that's where you
might see the Bloomberg reference again, or anyother organization subordinate to the Central
(12:26):
Military Commission, or, and this is the reallyimportant part because it seems to be the only
place where Tencent might be implicated here,that is identified as a military civil fusion
contributor to Chinese defense industrial baseand engaged in providing commercial services
manufacturing, producing, or exporting.
In the new law, the language only specifiesorganizations subordinate to the Central
(12:49):
Military Commission and not other ministriesfor the People's Republic of China, which 1237
does reference.
So in this sense, the new definition under12/68 is significantly narrower than the old
definition of CCMC's under section 12 37.
Even as the provision adopts a more focuseddefinition overall, it adds a new class of
(13:09):
companies, which this article says is to tailorit even further.
I don't see this as tailoring.
Again, this article is from the Law FairInstitute in cooperation with Brookings, and I
think it takes a fairly positive tack to whatthis law is.
I'm going to try to not editorialize too much,but this is a political question here.
So reasonable minds can differ as to whetherthis entire process and these definitions are a
(13:30):
good thing.
But in this article, the author seems to besuggesting that they are.
Additionally, it creates this entirely newclass of companies, military civil fusion
contributors to Chinese defense industrial baseas ones that need to be listed here.
And though it isn't separately defined in thestatute what a military civil fusion
contributor is, it does include a list of whatthese companies might be.
(13:54):
And that list is entities knowingly receivingassistance from the government of China or the
Chinese Communist Party through science andtechnology efforts initiated under the Chinese
military industrial planning apparatus,entities affiliated with the Chinese Ministry
of Industry and Information Technology,including research partnerships and projects
and affiliated with also not defined, gives acertain amount of broad authority to the
(14:15):
Department of Defense to make thesedesignations.
Entities receiving assistance, operationaldirection, or policy guidance from the State
Administration for Science Technology andIndustry for National Defense.
Any entities or subsidiaries defined as adefense enterprise by the state council of the
People's Republic of China.
So that's a designation that would happen inChina if it has that designation.
If it gives certain control to the Chinesegovernment itself or these various other
(14:38):
ministries, then it could be listed as one ofthese fusion companies.
And it is awarded with receipt of militaryproduction licenses by the government of China,
entities residing in or affiliated with amilitary civil fusion enterprise zone, entities
that advertise on national, provincial, andnongovernmental military equipment procurement
platforms in the People's Republic of China, orand here's where the rubber really hits the
(14:59):
road to me.
Any other entities the secretary determines isappropriate.
Now we've talked about it in virtual legalityand in other context in the past, but Congress
likes to write these laws with an umbrellaprovision at the end to say we've we've listed
everything we could think of, but we don't knowwhat we don't know, and we don't know what we
can't think of right now.
So we wanna give one of these agencies, in thiscase, the Department of Defense, some broad
(15:23):
authority to say, okay.
On this list, maybe you didn't cover thisexactly right, but it would be appropriate for
this company to be included for reason x.
The last category in the class of MCFCs asdescribed here by Brookings and Lawfare
Institute Institute, leaves a great deal ofdiscretion to the secretary of defense.
However, given that this category comes after alist of more specific categories, the canon of
(15:45):
legal interpretation known as usidemgenerous ofthe same kind, which provides that when a list
when a law lists a class of person or thingsany general language after it is interpreted in
line with that list will likely guide its use.
And, again, this takes a very kind of genteelapproach to congressional law drafting.
Right?
This takes a very generous kind of assertion ofhow courts will interpret these things.
(16:08):
We saw during the COVID pandemic and otherareas of emergency designations and legal
declarations by governors and and presidentsacross our country that perhaps this language
here is interpreted a little bit more broadlyby the courts than this particular article
would suggest.
Again, reasonable minds can differ as towhether or not that's a good thing here,
(16:28):
whether the Chinese military company issue isimportant enough that the secretary of defense
needs to be able to essentially list whoeverthey want as long as they determine it's
appropriate by whatever means they might thinkis appropriate in that particular context.
But I don't really agree with this paragraph aspart of this article that says this is terribly
limiting based on everything else that's inthis list.
(16:49):
Suffice it to say, the notion that theDepartment of Defense appears to be advancing
here is that Tencent, by virtue of its creationof artificial intelligence or other
technological infrastructures for video games,media, or otherwise, may well be aiding the
Chinese military in ways that are difficult forthe United States to see just based on the
(17:10):
structure of the company itself.
And I have no idea whether that's happening atTencent.
I don't know that the Department of Defenseactually has any idea whether that's happening,
but it is part of this story.
It remains to be seen what executive action theBiden Harris administration will take.
Again, this is years ago that this article waswritten.
But the Trump administration likely wanted tomaintain maximum flexibility when it targeted
these military companies under 1237, leaving itto declare a national emergency and employ the
(17:34):
broad authority provided by IAEPA using itsauthority under 1237 rather than simply using
its authority under 1237 a one.
That decision means that the Biden Harrisadministration could amend the Trump era
executive orders.
There's no indication in my research that thathappened.
But absent further executive action, section1260 h is still likely to have a large impact
simply by naming and shaming CMCs.
(17:55):
Section 1260 h appears to be one piece of anever increasing mosaic of naming and shaming
efforts by the United States vis a vis China.
In the context of Chinese military companies,Congress began assembling this mosaic more than
20 years ago with section 1237.
Now that sanctions have been levied, Congressmay not have included a sanctions regime with
section 1260 h because the president couldsimply amend the existing CCMEC executive
(18:19):
orders to cover CMCs under his IEP authority.
Said another way, Trump decided to use 1237 forthis purpose based on those definitions.
1260h was not used, but the Bidenadministration could amend those executive
orders or issue a new executive order including12 60 h, or the next Trump administration could
(18:40):
do the same and have those same prohibitionsapplied to a list like this using that very,
very broad, IEPA authority, basically, thatthere's an economic emergency that can be
handled through his presidential authority.
And, again, I've had issues in virtual realityin other locations about the broad discretion
given to things like executive orders at boththe governors and presidential levels, but
(19:04):
reasonable minds can differ on that as well.
More importantly, says this article, section1260 h's narrow and tailored language, and I
again object to that description of what we'veseen here in the definitions, likely
demonstrates the US government's desire to callout the specific issue of Chinese military
companies and the MCF, that's the fusiondevelopment strategy from a more precise and up
to date angle.
(19:25):
Moreover, the inclusion of the military civilfusion contributor subcategory gives the
Department of Defense another avenue to defineChinese entities that are connected to Chinese
military and defense apparatus, but not bebound by some of the definitions in the earlier
designation.
Even so, this article admits, some aspects ofsection 1260 h's designation remain
intentionally or unintentionally ambiguous dueto broad drafting.
(19:47):
More precise terms or the adoption of aspecific definition for these various terms
might help clear this up.
But as we will see, the Department of Defensehas done this list now for a few years and has
resulted in legal action in a couple ofinstances.
But the most important thing to take away fromthis is understanding that there are 2 sets of
designations, 2 sets of statutes, and that whatis implicated by 10¢ inclusion on 12 60 h's
(20:14):
list is not the same as being included onsection 12 30 seven's list, and that the Trump
executive order doesn't discuss 12 60 h at all.
I also wanna mention here, as I said, theBrookings Institute is listed by many as
centrist, conservative, liberal, center right,and center left as Wikipedia reports here.
(20:34):
So it's not really very useful analysis forunderstanding where they're coming from
politically.
An academic analysis of congressional recordsfound that Brookings was cited by conservative
politicians almost as often as liberalpoliticians earning a score of 53 on a 1 to 100
scale with 100 representing the most liberalscore.
So it's hard to place them in any specificbucket.
Although reading that article is I will link inthe description in the podcast version of this
(20:56):
video.
You do get the at least indication that theyare definitely okay with more aggressive
listing, naming, shaming, whatever else youwanna call it with respect to Chinese
interactions in the United States economy.
That all said, if we look a little bit further,we can understand that what 1260 h does is it
prohibits the Department of Defense fromentering into a contract with an entity on that
(21:20):
list starting on June 30, 2026, or purchasingdirectly or indirectly goods and services that
include goods or services sourced from anentity on that 12 60 h list starting in June
2027.
So the Department of Defense will be bound.
They will be prevented from buying, League ofLegends, currencies, various other things to
(21:42):
the extent 10¢ Holdings stays on that list forpurposes of 12 60 h.
That doesn't really make much of a differenceto 10¢ bottom line on the whole.
But the fact that they're included on this listand the fact that an executive order might be
amended or issued by the Trump administrationat really any time to include the companies
listed on that list in the prohibition ofAmerican investment concept does lead to a
(22:05):
reduction in their stock price, probably leadsto a reduction in their business opportunities,
partnerships, potential licenses that theycould enter into with folks operating in the
United States.
And that they might think is a problem.
Because Tencent, if you don't know, and Isuspect that you do, is a real big company.
As Wikipedia says, founded in 1998, itssubsidiaries globally market various Internet
(22:26):
related services and products, including inentertainment, artificial intelligence, and
other technology.
Tencent is the world's largest video gamevendor as well as one of the largest companies
in the world by market capitalization.
Its services include social networks, music,web portals, ecommerce, mobile games, Internet
services, payment systems, smartphones, andmultiplayer online games.
They're conglomerate, but they're conglomeratefocused on what we might consider
(22:50):
entertainment.
And in the video game landscape, they own partsof practically everything that you can think
of.
They wholly own Funcom, Riot Games, Sumo Games,Grinding Gear Games if you're enjoying Path of
Exile 2 right now.
They own controlling interests in visual arts,Turtle Rock Studios, Tequila Works, Klay,
(23:12):
others.
They own majority shares and also controllinginterest in Supercell.
They own plurality of shares in places likeDontnod, Pocket Gems, ShiptUp, Epic, Bloober,
Marvelous, and more.
They have important interest in Remedy fromsoftware.
Kadokawa, you saw us reference in virtualreality earlier, this year.
(23:35):
And so basically, they're a major player withtheir fingers in all sorts of different video
game pies, and that rubs a lot of people thewrong way.
And I'm not gonna tell them they're wrong, butit does mean that inclusion on this list could
have a deleterious effect on a whole host ofaspects of the video game industry, which leads
us to the last point that I wanted to talkabout as part of this particular issue, legal
(23:59):
action.
So a number of places reported after that theUS designated Tencent, a Chinese military
company, with the list serving as a warning toAmerican companies and organizations about the
risks of doing business with Chinese entities,that Tencent threatens legal proceedings if the
US doesn't overturn decision to label it as aChinese military company.
Now I was interested in what it meant tothreaten a legal proceeding of this type.
(24:22):
I suspected it was just the standard end of astatement, and I was proved right.
When we look at the statement here, Tencentresponded to this by saying, hey.
The company noted that the US Department ofDefense has scheduled to publish the notice of
availability of designation of Chinese militarycompanies on 7 January 2025.
Pursuant to the notice that the the deputysecretary of defense has included the company
(24:43):
in this list, as the company is neither aChinese military company nor a military civil
fusion contributor to the Chinese defenseindustrial base, it believes that its inclusion
in the CMC list is a mistake.
Unlike other lists maintained by the USgovernment for sanctions or export control
measures, inclusion in this list relates onlyto US defense procurement, which does not
affect the business or the group.
So this is essentially a statement toinvestors.
(25:06):
Right?
Our share price is going down.
This is a bad thing that were included on thislist, but you should know this is not what
Bloomberg reported.
This is not the Trump prohibition list.
This is only about defense departmentprocurement.
The CMC list is distinct from non SDN Chinesemilitary industrial complex list maintained by
the US Office of Foreign Assets Control, adifferent list that the US government uses.
(25:26):
And inclusion in the CMC list will not prohibitany persons other than the Department of
Defense from business dealings with thecompany, including transacting in the
securities of the company.
So don't feel like you are going to losewhatever value your equity position in 10¢
might have due to our inclusion on this list.
Obviously, there is some confusion.
There was confusion in the reporting.
There's probably confusion at the shareholderlevel, and so we feel the need to make this
(25:48):
statement.
The company intends to initiate areconsideration process to correct this
mistake.
But from a legal perspective, that same entitythat made this initial designation is in charge
of the reconsideration process, so probablywe're not holding out a lot of hope for that
process to bear fruit.
During the process, it, Tencent, will engage indiscussions with the US Department of Defense
to resolve any misunderstanding.
(26:09):
And if necessary, will undertake legalproceedings to remove the company from the CMC
list.
The company will make further announcements asand when appropriate.
So this, if necessary, will undertake legalproceedings to remove the company from the CMC
list is shown by these journalists asthreatening legal proceedings if the US doesn't
overturn decision.
But from a legal perspective, from a lawyer'sperspective, this is what you put at the end of
(26:31):
a demand document or a letter to the opposingcounsel that says, look.
We're gonna ask you to do this the right way.
We're gonna use your process if necessary.
But just because we're using your process, justbecause we are exceeding to this particular set
of demands, it doesn't mean that we're givingup our legal rights in the future.
So Tencent here to my ear is effectivelysaying, hey.
(26:51):
We'll go through your reconsideration process.
But if that doesn't work, we will undertakelegal proceedings to remove the company from
the list if necessary.
So this isn't really threatening legalproceedings if they don't remove them as much
as it's saying, we'll use your process, andthat doesn't mean that we're giving up the
right to sue you in the future.
And, also, hey.
Some folks have had some success suing you.
(27:12):
Now this is the DJI drone company complaintthat The Verge published and linked to in that
initial article that we looked at at the topthis video, but I wanted to highlight for you
what a lawsuit, what legal proceedings mightlook like on this particular account.
And the basic nature of this is in the contextof this particular instance, DJI says the
Department of Defense didn't talk to us aboutincluding us on the list, didn't respond to our
(27:35):
answers or the reconsideration process thatsays why we shouldn't be on this list and is
acting arbitrarily and capriciously under theirauthority given to them by Congress.
And that's important for US law underadministrative law.
These agencies, these executive branch parties,the Department of Defense in this case, are not
allowed to just take their authority thatCongress gives them and use it willy nilly.
(27:57):
They're not allowed to act arbitrarily orcapriciously in legal parlance.
And so this lawsuit alleges that that's what'shappening here.
The The statute invoked by defendants does notauthorize their action because we don't fall
under any of the definitions provided.
Defendants have authority under section 1260 hto identify each entity the secretary
determines based on the most recent informationavailable is operating directly or indirectly
(28:20):
in the United States or any of its territoriesand positions that is a Chinese military
company, but that they shall make additions ordeletions to that list on an ongoing basis
based on the latest information available.
Section 1260 h permits the secretary of defenseto designate the companies if one of either two
conditions is met.
First, the secretary may designate a company ifit is directly, indirectly, or beneficially
owned, controlled, or acting on behalf of thePeople's Liberation Army or any other
(28:43):
organization subordinate to the CentralMilitary Commission, but we are not owned,
controlled, or acting on behalf of the People'sLiberation Army.
2nd, the secretary may designate a company as aCMC if it is a military civil fusion
contributor.
We saw that description in the law fair articlewe read earlier, but we do not fit in any
categories listed by the statute.
Therefore, we do not qualify as a CMC.
(29:03):
And in failing to remove us from the list,defendants failed to abide congress's mandatory
command that they shall make deletions on anongoing basis based on the latest information
available.
Defendant's designation is therefore arbitrary,capricious, and abuse of discretion or
otherwise not in accordance with law and is inexcess of statutory jurisdiction authority or
limitations under the Administrative ProceduresAct.
(29:24):
And they say there's other violations here.
They failed to articulate a a satisfactoryexplanation for designating us as a CMC, which
this list process itself doesn't really givethese companies enough information in my view
to feel like they're getting due process underUnited States law.
And you can feel one way or the other aboutthat to the extent that these companies are
(29:44):
interacting with or helping the Chinesemilitary.
But we do have rules in the United States aboutthese agencies acting arbitrarily and
capriciously.
I think that's part of this story.
Whereas DJI says in their lawsuit, reasondecision making requires that an agency
articulate a satisfactory explanation for itsaction with a rational connection between the
facts found and the choice made.
(30:06):
Defendant's conclusory analysis does notprovide a rational connection between the facts
found and decision to designate us as a CMC.
This includes, but is not related to,defendant's failure to make the legal
conclusion necessary under 12 60 h, under thosetwo categories that we just talked about.
An agency's factual findings must be supportedby substantial evidence.
Here, the evidence that defendants report torely upon is either false, contravened by the
(30:29):
public record, or DJI's delisting petition, orinsufficient to support defendant's factual
finding that we are a CMC.
So this is what Tencent might look likefighting this particular designation.
Again, from my perspective, editorializing alittle bit here, this is the kind of thing that
the US government is doing realistically on anarbitrary basis on its own to the extent that
(30:53):
the Department of Defense is just providingthat list and not otherwise providing any
information about any of the entries on thatlist, that they're immediately blacklisted,
described as such by Bloomberg, that theirshare price immediately goes down based on this
sole authority to designate by the secretary ofdefense.
But a reasonable mind can look at this and saythat's necessary for the national security, and
I think that you can have a good reason debateon that topic.
(31:16):
Please do in the comments or otherwise shouldyou see fit.
But this is what that lawsuit would look like,and I am trying to make these videos 30 minutes
or less.
I don't know that I'm gonna make it this time,but I do wanna leave you with that information
and let you know that if you enjoy and findthese conversations informational, educational,
and helpful, please do consider supporting thechannel at PlayYour or Patreon.
I'll have links in the description or throughmemberships to the channel, super chats, and
(31:38):
the like on live streams.
Otherwise, you can find me on PlayYour,formerly Utreon, at a website like this one to
to watch your videos there, otherwise, supportthe channel.
And questions or comments are welcomed, to thecomments to this video.
I do try to respond to as many as I cansubstantively, when I get the chance to after
these videos.
Otherwise, just telling folks about thischannel, telling your friends every little bit
(32:00):
helps.
So thank you so much.
I hope this was informative to you, and I willcatch you on the next episode of Virtual
Legality.
Virtual Legality is a YouTube video series withaudio podcast versions presented as commentary
and for education and entertainment purposesonly.
It does not constitute legal advice and doesnot create an attorney client relationship.
(32:24):
If you have legal questions about the topicsdiscussed, please consult your own legal
counsel.
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