Expert interpretation | Sorting out the TikTok spin off bill: How much room for future litigation to break through

On the 24th local time, US President Biden officially signed a $95 billion package and authorized a spin off bill for TikTok. This provision will require TikTok’s parent company, ByteDance, to sell the application within 270 days, otherwise it will face the crisis of “off the shelf” in the United States, and the sale period may be extended for another 90 days.

In response, TikTok issued a statement stating, “This unconstitutional law is a TikTok injunction, and we will challenge it in court.”

Gu Dengchen, a special researcher at the Digital China Research Institute of the University of Chinese Academy of Social Sciences, stated in an interview with First Financial News that a high vote does not necessarily mean a consensus.

Meanwhile, the bill requires “qualified divestment”. He explained, “The legality of legal authorization and the repeatability of regulatory tools are the main defense space in the later stage, and what is the ‘qualified divestment’ understood and accepted by US regulatory authorities may be a major focus.”.

On March 14th, after the U.S. House of Representatives voted to pass the above-mentioned bill, Chinese Foreign Ministry spokesperson Wang Wenbin stated that the bill passed by the U.S. House of Representatives has put the United States on the opposite side of the principle of fair competition and international economic and trade rules. If the so-called “national security” reason can be used to arbitrarily suppress excellent enterprises of other countries, then there is no fairness and justice. When you see someone else’s good things, you have to find ways to take them for yourself, which is completely a thief’s logic.

('(Image source: First Financial)',)(‘(Image source: First Financial)’,)

Next two key points

First Financial:

Gu Dengchen:

Generally speaking, legislation should be universal, addressing a common issue rather than targeting a specific enterprise. After the initial version of the House of Representatives was passed in March, the Senate was initially hesitant, with doubts not only about the issue of time limits, but also reflected in the “narrowness” of legislative language. Some lawmakers had different views on “personalized legislation”, and Senate Commerce Committee Chairman Maria Cantwell had previously suggested that the United States needed a comprehensive federal privacy legislation.

The final revision was only a relaxation of the time limit, without making further adjustments to the legislative language, which was to some extent disrupted by other factors such as the US Congress’s imperative aid to Ukraine and Israel. Similar “pass through legislation” is a routine operation of the US Congress, but the controversial Division H can also be coerced into passing the level. Although the vote is highly consistent, it does not necessarily reduce subsequent uncertainty.

First Financial:

Gu Dengchen:

One is the legality of legal authorization.

The second is the “repeatability” of regulatory tools.

Taking TikTok as an example, according to public information, CFIUS review is still ongoing, and the ICTS rules of the Ministry of Commerce were finally implemented last year. It can be said that many departments in the United States have taken a lot of measures to alleviate TikTok anxiety. However, this time Division H directly requests “divestment”, ignoring the efforts made by the enterprise in response to CFIUS review and potential compliance with ICTS in the early stage. In the absence of a conclusion in the relevant review, it skips the “risk mitigation” item and directly enters the “divestment” item. The leading party of Division H is the Ministry of Justice, which has relatively limited practical experience. As of now, the Ministry of Justice has not issued clear evidence, and the subsequent actual implementation may still require the entry of the Ministry of Finance and the Ministry of Commerce. The repetition, necessity, and legality of this “stacked bed” may be challenged in the future.

The definition of “qualified divestment” may become a key controversial point

First Financial:

Gu Dengchen:

Generally speaking, CFIUS will consider the equity situation of investors in the invested enterprise, especially the operational impact of equity, and then propose divestment requirements from a capital perspective. But for companies that have deeply rooted themselves in the United States and continue to operate, the meaning of “divestment” is not only at the equity level.

The “qualified divestiture” defined by the bill refers to achieving the effect of “applications that were originally controlled by foreign competitors are no longer under their control”, without being controlled, including “effectively preventing the establishment or maintenance of any operational relationships between the application and its original affiliated foreign competitor controlled entities, including any operational cooperation or agreements related to content recommendation algorithms or data sharing.”. This actually poses higher compliance requirements than at the level of capital control.

From the public hearing, it can be seen that TikTok has not yet promised to fully localize its data and algorithms, but in the smallest and necessary scenarios, “operation and maintenance” are all completed under third-party supervision, and the so-called risks are only theoretical rather than actual. The bill requires that any operational relationship with entities outside the relevant jurisdiction cannot be sustained. If it is viewed as a fallback clause, it means that even if it is divested at the capital level, it may not constitute a “qualified divestment”. The divestment at the operational level cannot be achieved overnight, and in addition to costs, it also involves policy coordination in different jurisdictions. If we see higher requirements for localization of algorithms and data in legislation beyond this bottom line clause, it may provide a clear direction for “qualified divestment”.

In other words, whether the actions taken by enterprises (including pre compliance actions) should be defined as part of qualified divestment, and how the boundaries of “qualified” should be gradually and clearly delineated during the divestment process can be discussed with relevant parties. However, the so-called capital control rights below 20% are neither a sufficient nor a necessary condition for qualified divestment. The so-called “prohibition unless sold” and “forced buying and selling” are not the basic logic of this legislation.

First Financial: Can TikTok extend its operation time in the United States as much as possible through an appeal?

Gu Dengchen:

It is difficult to make a judgment on the effectiveness of resorting to justice solely from a technical perspective, but it should be considered in conjunction with the larger situation. As mentioned earlier, although this legislation takes action quickly and has a unanimous vote, compared to the controversies of the past five years, the speed and consistency of this stage cannot reflect the consensus of legislators, and it has extremely complex temporal and spatial accompanying factors. In the future, compared to unconstitutional challenges and the impossibility of completely cutting off at the operational level, with the continuous changes in major country relations, especially the deepening willingness and ability of China to open up to the outside world, will the US Congress and executive departments, especially the finance and commerce departments with considerable experience in the early stage, be more willing to adopt a more pragmatic attitude on the so-called “qualified divestment” issue.

First Financial:

Gu Dengchen:

Of course, this does not mean that others can rest assured. In fact, the US’s data security concerns about Chinese companies are gradually moving towards the direction of “background checks” and “sanction based regulation”. The Biden administration’s Executive Order 14117 in the early stage largely reflects this trend and deserves high attention.