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What is the proper scope for a “national security” review? Throughout CFIUS’s history, commentators and practitioners have debated the shifting and unclear limits of what the term means, between those who argued for a narrow conception tied largely to defense production, and a broader conception that further considers “economic security.” The recently proposed Protecting Against Foreign Adversary Investments Act of 2024 (PAFAIA) sides firmly with the latter. In the first post of this two-part series, we discussed PAFAIA and its effects on CFIUS’s real estate jurisdiction. Here, we examine how PAFAIA would formally charge CFIUS with reviewing economic effects, reversing how CFIUS analysis has traditionally been understood. We also comment on PAFAIA’s foray into the interplay between CFIUS and burgeoning state-level foreign investment laws and PAFAIA’s prospects in Congress.
Considering economic factors in national security reflects a tension between opposing concerns. On the one hand, major shifts in a country’s economic position inevitably have ramifications for its national security. On the other hand, exactly how these effects will manifest is often nebulous, with broader interpretations of national security coming at the cost of higher regulatory burdens, including trade barriers. Because national security arguments are hard to challenge and often not publicly disclosed, expansive interpretations of national security potentially create exceptions that swallow the usual rule of free trade and open markets.
The provisions of the Defense Production Act of 1950 governing CFIUS have never explicitly defined “national security.” However, when the Exon-Florio Amendment formalized CFIUS, the Reagan administration had threatened to block the legislation if its review included economic considerations. Instead, CFIUS has been guided by a non-exhaustive list of factors established by statute, executive order, and practice (see our recent U.S. M&A Newsletter for a description of how these factors have changed over time). PAFAIA would mark a shift towards more expansive notions of national security by formally directing CFIUS to evaluate how transactions affect “the economic security of the United States.” This change would mark the first formal inclusion of economic analysis into CFIUS review and a rejection of the original scope of foreign investment reviews under Exon-Florio.
Setting aside the wisdom of such an approach, we question whether CFIUS has the appropriate expertise to evaluate economic effects. The members of CFIUS (including both standing members and agencies that participate on an ad hoc basis) are focused on traditional definitions of national security in the context of the U.S. government’s open investment policy. The Department of Labor is expressly excluded by the CFIUS regulations from participation in CFIUS policy decisions. To date, CFIUS’s reviews have not focused on the economic dimension of transactions, instead evaluating threats, vulnerabilities, and consequences associated with foreign control and influence. Even when facing consolidation in the defense industry, where market dynamics have direct national security implications, the Department of Defense has previously directed its concerns to U.S. antitrust authorities. This allocation of review authority reflects the antitrust agencies’ economic expertise, as well as CFIUS’s jurisdictional limits when evaluating transactions with domestic acquirers. Given the volume of data evaluated and CFIUS’s statutory timing requirements (see our recent post on CFIUS’ proposed new rules tightening processes and enforcement mechanisms in this respect), we wonder how CFIUS would be able to process this expanded mandate.
Engaging with increased state interest in evaluating foreign acquisitions, PAFAIA also directs the Office of the Director of National Intelligence (ODNI) to develop and publish best practices for state and local officials to evaluate transactions with foreign entities of concern. We have two concerns with this initiative.
First, we wonder why this responsibility falls to ODNI. The U.S. Intelligence Community (IC) is charged with informing government policy—not developing or advancing it. Yet the proposed legislation would place ODNI in a central position to influence any foreign investment analysis done by state governments, suggesting that Congress may place a new and potentially uncomfortable mandate upon the IC.
Second, it is unclear whether states are permitted a role in foreign investment analysis at all. Active litigation surrounds Florida’s restrictions on foreign real estate investment, which passed in May of last year and targets buyers domiciled in “foreign countries of concern,” including China. Affected homebuyers have challenged the legality of these restrictions. After losing in district court, they obtained an injunction pending appeal from the Eleventh Circuit, which noted that the law is likely pre-empted by FIRRMA, the most recent amendment to CFIUS’s statute.
At oral arguments on April 19, 2024, the homebuyers argued that the law interferes with the President’s discretion to block transactions, taking foreign policy considerations into account, and did not follow federal standards because CFIUS does not have a list akin to Florida’s list of “foreign countries of concern.” Florida responded that CFIUS’s limited resources indicates its determinations are too imprecise to preclude parallel state legislation. The law is also being challenged on Equal Protection grounds: homebuyers assert the law impermissibly singled out persons domiciled in specific countries. Florida conceded at oral argument that the law would not survive strict scrutiny but disputed that strict scrutiny applied.
We recently learned of a different local government approach. Beavercreek, Ohio, a town adjacent to Wright-Patterson Air Force Base, has incorporated CFIUS into its local zoning regulations. Specifically, a land use request in Beavercreek by a “foreign person” (defined using CFIUS’s language) must either be reviewed by CFIUS first or if not reviewed by CFIUS (e.g., because CFIUS lacks jurisdiction), must be referred to Wright-Patterson’s base commander for input. The town can consider the CFIUS outcome or base commander’s inputs before approving or denying the land use request. This approach may be more effective at avoiding the issues raised by the Florida law, but may also be of limited value as it relies on CFIUS’s jurisdictional reach, which is generally based on proximity to identified U.S. government facilities, training areas, and missile ranges.
Most years, similar CFIUS bills come and go with little fanfare, and this bill may be just another. And yet, legislative dynamics indicate a higher likelihood of passage than in the past. After years of failed proposals to formally add the U.S. Department of Agriculture (USDA) to CFIUS, the Consolidated Appropriations Act of 2024 codified the Department’s case-by-case attendance with little debate, though even then, “case-by-case” participation is limited, just as it was before, by the relevance of a transaction to USDA equities. Legislation seeking to ban or force divestment of TikTok, incorporated in a “must-pass” foreign aid bill, cleared Congress with bipartisan support and was signed by President Biden. This legislative record suggests that PAFAIA may have better prospects than past proposals, especially considering election year pressures that may make both parties wary of appearing “weak on China.”
Even if Congress fails to enact PAFAIA, the bill reflects a continuing sentiment in Congress that CFIUS should do more, particularly with respect to China. With outbound investment and data security regimes also on the horizon in the United States, PAFAIA may be yet another portent of regulatory scrutiny to come.