On May 6, 2021, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) published public guidance related to software firm, Luokung Technology Corp., which was previously designated as a Communist Chinese military company (“CCMC”), pursuant to Executive Order (“EO”) 13959. OFAC explained that the prohibitions in EO 13959 do not currently apply with respect to Luokung, as a result of a federal lawsuit.

As discussed in our previous post, EO 13959, dated November 12, 2020, targets “Communist Chinese Military Companies” by prohibiting “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any [CCMC] . . . by any United States person.” Similarly, we discussed OFAC’s issuance of additional guidance related to EO 13959 on December 29, 2020 and January 15, 2021.

On January 14, 2021, the US Department of Defense (“DoD”) designated “Luokong Technology Corp.” as a CCMC, apparently misspelling Luokung’s company name. On March 9, the DoD delisted the misspelled company name from its list of CCMCs and re-listed Luokung as a CCMC, using the correct spelling. OFAC also published Frequently Asked Question (“FAQ”) 881, which clarified that, as a result of the de-listing and re-listing of Luokung on March 9, 2021, the EO 13959 prohibitions would go into effect on May 8, 2021, with full divestment required by March 9, 2022.

On March 4, 2021, Luokung and two of its shareholders filed a complaint in the US District Court for the District of Columbia contesting its designation as a CCMC and the application of restrictions to it pursuant to EO 13959. Luokung also filed a motion to enjoin the DoD from enforcing its designation as a CCMC. On May 5, the Court granted Luokung’s motion and issued an order preliminarily enjoining the enforcement of the EO 13959 prohibitions against Luokung.

The Court determined that Luokung had shown that it would likely succeed on the merits of its challenge to its CCMC designation, which was largely based on the DoD’s interpretation of the phrase “affiliated with,” as used in §1237 of the National Defense Authorization Act for Fiscal Year 1999. Section 1237 defines a CCMC as any person who “is owned or controlled by, or affiliated with, the People’s Liberation Army or a ministry of the government of the People’s Republic of China or that is owned or controlled by an entity affiliated with the defense industrial base of the People’s Republic of China.” The Court explained that, “[h]aving considered each of Defendants’ arguments in favor of adopting their broader statutory definition for the term ‘affiliated with’ . . . the Court concludes that none are compelling,” and “[g]iven the Court’s conclusion with regard to the statutory interpretation question, it should come as no surprise that it now finds that Luokung’s CCMC designation violated the [Administrative Procedure Act] on a number of different grounds.” As a result, OFAC issued FAQ 893, which explains that “the prohibitions in EO 13959 do not apply with respect to Luokung pending further order of the Court.”

Luokung is not the first company to successfully appeal its designation as a CCMC. For example, we previously discussed the successful appeal of Chinese smartphone manufacturer, Xiaomi Corporation, of its designation as a CCMC. US District Court Judge Rudolph Contreras issued the decisions in both lawsuits.

We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.

Jonathan Cross
Jonathan Cross
Counsel, New York
+1 917 542 7824
Christopher Boyd
Christopher Boyd
Associate, New York
+1 917 542 7821
Brittany Crosby-Banyai
Brittany Crosby-Banyai
Associate, New York
+1 917 542 7837
Alex Hokenson
Alex Hokenson
Associate, New York
+1 917 542 7836
Christopher Milazzo
Christopher Milazzo
Associate, New York
+1 917 542 7807