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What just happened? Xiaomi has been granted a reprieve against DoD restrictions that stop U.S. companies investing in the firm. The tech giant will avoid restrictions that come from its addition to a Communist Chinese Military Companies (CCMC) list, at least for now, after it launched a lawsuit against the U.S. treasury and defense departments in the district court of Columbia last month.
Xiaomi was designated a CCMC in January, one of the final acts by Donald Trump's outgoing administration. A 1999 law requires the Defense Department to compile a catalog of companies owned or controlled by the People's Liberation Army. The Pentagon has added 35 companies so far, including Huawei and the Semiconductor Manufacturing International Corporation (SMIC).
Its addition to the list meant Xiaomi was subject to an investment ban that prohibits U.S. companies purchasing its securities or derivatives of those securities. It also forces American investors to divest their holdings on November 11, 2021.
In February, Xiaomi sued the U.S. government over the designation, claiming it is "unconstitutional because it deprives Xiaomi of its liberty and property rights without due process of law," thereby violating the Fifth Amendment.
Xiaomi was the world's third-largest smartphone vendor in Q4 2020
District Judge Rudolph Contreras issued an initial injunction over the weekend, granting a temporary ban to the restrictions. He said the U.S. case against Xiaomi was "deeply flawed," and it would likely succeed in its lawsuit to remove its designation as a Chinese military-linked company, writes the Financial Times.
Judge Contreras said Xiaomi would likely suffer "irreparable harm" in the absence of the relief, citing its share price falling almost 10% since the CCMC designation, banks suspending shares, and the company losing global contracts. He added that the DoD's memorandum that led to Xiaomi being added to the list was made on "shaky ground."
"[The memorandum] does not explicitly identify the agency's source of authority that governs the CCMC designation process, and when the memo does invoke the relevant statutory language, the excerpted language is quoted incorrectly. These errors do not inspire confidence in the fastidiousness of the agency's decision-making process," he said.
Xiaomi ended up on the list because it was allegedly a national security threat. Contreras said he was "somewhat skeptical that weighty national security interests are actually implicated here."
"Taken together, the Court concludes that Defendants have not made the case that the national security interests at stake here are compelling," he wrote.
Xiaomi said it was pleased with the outcome and will continue to its case against the DoD to have the CCMC designation removed.
"We believe that the inclusion of Xiaomi in the list of Chinese military-related enterprises is an arbitrary and arbitrary decision, and the judge also agreed with it. We will continue to ask the court to finally rule that the decree is invalid for Xiaomi," it said.