A judge for the US District Court for the District of Columbia granted an injunction Friday preventing the Department of Defense (DOD) from enforcing restrictions against Chinese smartphone maker Xiaomi.
Earlier this year, the DOD designated Xiaomi a “Communist Chinese Military Company” (CCMC) pursuant to Section 1237 of the Defense Authorization Act for the Fiscal Year of 1998 and an executive order issued by former president Donald Trump. The act and order prohibit US citizens from doing business with any company designated as a CCMC. Trump’s order declared that “civilian Chinese companies” that support the military and intelligence activities of the People’s Republic of China pose a security threat to the US. By volume, Xiaomi is the third-largest manufacturer of smartphones in the world. Xiaomi’s CEO Lei Jun has received recognition from China’s Ministry of Industry and Information Technology, which has purported ties to the Chinese military.
The lawsuit challenging Xiaomi’s CCMC designation was brought by Xiaomi and shareholders Bin Lin, Peng Lin and Stephen Sean English. The plaintiffs allege that the DOD violated the Administrative Procedure Act (APA) when issuing the designation and that the designation would cause irreparable harm. The court determined that the plaintiffs stood a good chance of succeeding on the merits of both allegations.
The court found the DOD’s rationale for assigning the designation inadequate. According to the court, the DOD failed to connect the facts to their conclusion. Further, the court found that while Xiaomi may have some ties to the Chinese military, said ties do not rise to the level required by Section 1237.
In addition, the court found that the designation would cause irreparable harm to the plaintiffs. According to the court, the designation would cause substantial harm to Xiaomi’s reputation. Further, it would cause severe monetary losses and economic harm. As evidence, the court cited the drop in Xiaomi’s stock price and subsequent lost market capitalization. It has also begun to lose contracts. When terminating contracts, business partners reportedly cited the CCMC designation as the reason.
Though the injunction prevents the DOD from enforcing the designation, it does not remove it. As such, the injunction may have little actual impact on Xiaomi’s economic situation. It is also possible that DOD may choose to withdraw the designation and resubmit it with a more thorough rationale. The DOD could also resubmit the designation to Congress with a more thorough rationale if it loses the lawsuit.