U.S. Files Antitrust Lawsuit Challenging Visa’s Acquisition of Plaid

The Department of Justice filed an antitrust lawsuit that seeks to block Visa Inc.’s $5.3 billion deal to acquire Plaid Inc. Visa agreed to buy the financial technology company in a deal designed to increase Visa’s access to the booming financial technology sector. The Justice Department argued that the acquisition would allow Visa to unlawfully maintain a monopoly in online debit services, which in turn would lead to “higher prices, less innovation and higher entry barriers for online debit services.”

Plaid is a privately held software startup that powers financial technology apps like Venmo, Acorns and Betterment by linking the financial data from people’s bank accounts to the apps.  Plaid’s technology allows “access into consumers’ various financial accounts, with consumer permission, to aggregate spending data, look up balances, and verify other personal financial information.” Accordingly, Plaid has access to financial data from over 11,000 U.S. banks. This access, the government argues, better positions Plaid to overcome entry barriers others face in attempting to provide online debit services.

The lawsuit suggests that Visa is a “monopolist in online debit transactions,” responsible for some 70% of the market for online debit services. Mastercard, Visa’s next closest rival at around one-third of the size, has not constrained Visa’s monopoly power. This leaves merchants with little choice but to accept Visa debit payments, despite complaints about the cost of Visa’s service.

Visa earns a small fee from every transaction run on its network, varying depending on the card, but debit transactions tend to be cheaper to run on Visa’s network than credit card transactions. Those transactions ultimately bring in billions of dollars in revenue for Visa every quarter.

A new service in development by Plaid would bypass traditional debit card networks, and would be a substitute for Visa’s online debit services. According to the lawsuit, this presented a competitive threat to Visa, and the proposed acquisition therefore “would eliminate a nascent competitive threat” to Visa’s monopoly.

As evidence, the Justice Department cited the CEO of Visa’s own description of the deal as an “insurance policy” to neutralize a “threat to our important US debit business.” Further, the Department cited the $5.3 billion sale price, “an unprecedented revenue multiple of over 50x” as evidence of the deal being strategic instead of financial.

Visa, on the other hand, said it “strongly disagrees” with the lawsuit, arguing that it “reflects a lack of understanding of Plaid’s business and the highly competitive payments landscape in which Visa operates.” Further, Visa argued that Plaid is not a payment network like Visa, but a payment infrastructure company. Visa said the Department of Justice’s arguments were “legally flawed,” and it “intends to defend the transaction vigorously.”

The case represents the increased scrutiny the Department of Justice plans on taking in antitrust matters in the financial sector. Specifically, the department is focused on protecting future competition, even in cases where two companies aren’t currently rivals.

Google’s Alleged Campaign Against EU Lawmakers

The EU, through the European Commission (EC), plans to revise its legal framework for digital services by way of a new legislative package: the Digital Services Act (DSA). The announced goal of the DSA is to modernize its regulation of digital services, which has remained unchanged since its adoption in 2000. The underlying purpose is to protect strategic EU industries.

According to the Executive Vice President of the EC, Margrethe Vestager, the DSA aims to “create a more trustworthy digital world,” by holding digital services to a higher standard of transparency. The new regulations would “level the playing field” for smaller businesses, allowing entrants to the market the opportunity to grow; the DSA would prevent large online platforms from acting as gatekeepers by placing constraints on the business models of tech giants. A draft of the legislative package is expected to be available by the beginning of December.

The push for heightened regulation in the digital market has not been well-received by the major online platforms. According to Google, the proposed laws under the DSA will “curb the power of big tech.” In response to the initiative, Google allegedly plans to push back on the proposal by targeting European politicians. Google’s strategy was revealed in an internal presentation that was leaked to the French publication Le Point, and picked up by the Financial Times. The document cited an objective to “reset the political narrative” around the proposed legislation. In essence, Google hopes to weaken support for the proposal.

Though Google neither confirmed nor denied the existence of the leaked document, Google’s management has made it clear that they have concerns surrounding the proposed legislation. Amazon and Facebook have drafted complaints to the practices proposed under the DSA as well; Microsoft and Apple are also likely to be among the affected group.

Google’s leaked presentation uncovers a common response of big tech players to unfavorable regulatory proposals in the market: manipulation of public discourse and influencing lawmakers. In addition, the presentation cited strategic offensive tactics, such as highlighting the potential negative impacts of the DSA, and seeking out “allies” in its efforts to campaign against the proposal in Brussels.

Europe is not the only entity advancing new regulations of Big Tech players. The U.K. and Australia have recently recommended similar regulatory efforts. The U.S. is now seeking to catch up to its overseas counterparts: lawmakers released a proposed “massive overhaul” of U.S. legislation surrounding antitrust enforcement in the digital marketplace. There are many steps before these proposals could become law, but they are likely triggering a similar response to the one uncovered by Google’s leaked presentation.

M&A Activity Amidst the Shifting Business Climate

The global pandemic that so dramatically forced the world economies to shut down, has led to a surprising number of mergers during the last quarter of 2020. This sudden influx of M&A has amounted to more than $1 trillion in transactions in sectors that might benefit from the coronavirus crisis, such as the technology sector. A high-ranking Citigroup executive, Alison Harding-Jones, urged CEOs and boards that “the way out of this crisis is through M&A” and strategic repositioning in a post-COVID era. Goldman Sachs’ head of M&A, Stephan Feldgoise, postulated that corporations are eager to explore this uncharted territory by expanding and diversifying their businesses. The accretive benefits of M&A, however, have often been argued to be circumstantial, while the legal pitfalls could be significant.

The v-shaped increase in M&A activity indicates that managers believe in the benefits of a potential acquisition. However, a study showed that a merger with no apparent synergies, driven mainly by the expansion and diversification cited by Feldgoise, would lead in consumer surplus and loss of revenue for the corporation. As such, a hedging position through M&A on horizontal or unrelated vertical products would not have a desirable effect, unless the goal is to also achieve synergistic value. On the contrary, the managers’ accretive expectation could be justified not only in absolute measures of efficiency or synergies, but also in the effective tax rate, which has been found to decrease on average by 6.7% for the acquirer. This could potentially be a strong liquidity injection for the corporation during tumultuous times. Another view suggests that rational managers might knowingly proceed in an unprofitable merger. Managers could be seeking an event-driven stock price support. As such, the M&A activity indicates that managers employ this move strategically for a variety of reasons and not just accretion or expansion and diversification.

Despite the strategic benefits that M&A pose, lawyers warn that there are legal implications that could render those benefits void. A critical step to correctly identifying a target company without encountering legal pitfalls is an in-depth due diligence process. Especially during a post-COVID era, vetting a target company to assess the transferability of liabilities should take a primary role in the acquirers’ priorities as it could substantially affect the purchase premium. Furthermore, during this time it would be salient to assess the third-party contractual consent requirements as they could act as a deterrent of a potential acquisition. This is also the case for substantial third-party business agreements, where Force Majeure clauses, during the pandemic, could lead to their dissolution and to a substantial loss of revenue for the acquirer. Moreover, in the current fast-changing environment target indemnification provisions and subsequent indemnity caps need to be very tightly drafted, as the indemnitee/acquirer is more likely to utilize these provisions. However, nowadays, the implementation of insurance schemes has substantially mitigated the risk of post-closing M&A indemnity risk.

Another, legal implication that managers need to consider is the stock to cash ratio as a means of acquisition. Acquiring companies through cash is a more straightforward process. Stock acquisitions, on the other hand, provide a portion of control to the target stakeholders, forming new board and stakeholder relationships, which need to be safeguarded for the success of the deal. Another major factor that managers should consider is the tax deferment incentives that stocks offer to target stockholders, as their tax obligations can be deferred unlike cash receivables. During a post-COVID era, acquirers seek to hoard cash as an insurance against uncertainty, leading them to seek stock offering deals. As Mr. Beck, the head of M&A of UBS said, it also means that “there is also a lower premium as target stakeholders will participate in the combined entity.” However, due to the uncertain environment, many factors need to be carefully provisioned such as whether the shares will be of fixed amount or fixed value, leading negotiating parties to follow a stricter approach clawing to their positions.

Are SPACs the New IPO?

Faraday Future, the electric vehicle startup hyped as a rival to Tesla, has been eyeing a public listing through a deal with a special purpose acquisition company (SPACs). The startup’s CEO says that the company is working on a deal that will be announced: “hopefully quite soon.” Faraday’s action falls into the pool of 166 SPAC IPOs up to October 29, 2020. In fact, 2020 has been a record year for the formation of SPACs given that initial public offerings (IPOs) of SPACs have raised nearly $59.4 billion in gross proceeds, which is far higher than $13.6 billion in gross proceeds raised by SPACs in 2019 or the $10.8 billion in 2018.

SPACs originated from the development and emergence of “blank check companies” in the 1980s. Like blank check companies, SPACs are vehicles with no operating history, assets, revenue, or operations that are formed to raise capital in a public offering, will be used to acquire an existing company.

After a SPAC is established, its business model is simple: use the SPAC as a shell company to raise money from investors in an IPO, and then target and merge with a company seeking to go public. Unlike a reverse triangular merger, in which an acquiring company creates a subsidiary, merges its subsidiary into a target company, and then becomes the parent company of the target, here, the company itself is targeted by the SPAC vehicle, which will absorb it and take it public.

SPAC deals are appealing for companies that want to go public with less regulatory hurdles than a traditional flotation. For example, with a SPAC a company can announce the merger after the price and the size of the deal have been settled. In contrast, a company seeking to conduct a conventional IPO must file a detailed registration statement, respond to SEC inquiries concerning, and conform all communications to a complicated set of speech regulations (i.e., the “gun jumping rules”) before it can begin the process of pricing the IPO. Given these regulatory differences, SPAC deals are much faster and more certain than the traditional option. The Covid-19 pandemic and the resulting national shutdown have also complicated the issuers’ ability in an IPO to meet with investors for purposes of pricing a conventional IPO. SPACs offer a potential alternative.

The question now is whether a SPAC will become a mainstream option for companies that seek a public listing. While the rapid growth in these vehicles in recent years points in that direction, the potential disadvantages outweigh this conclusion.

First, the top advantage of SPACs for a company seeking to go public is its speed and certainty. However, a merger between a SPAC and a target company could fail if the SPAC’s shareholders vote against the merger. In the past, around 10% of mergers by SPACs have failed for this reason. For instance, in April 2020, TGI Fridays, a highly-recognized American brand, terminated its merger with Allegro Merger, a SPAC. According to the deal’s form 8-K file with the SEC, the reason was “extraordinary market conditions and the failure to meet necessary closing condit ions” during the COVID-19 pandemic. Another example of a SPAC that failed after the merger related to Akazoo S.A. Akazoo S.A. was the product of a September 2019 merger between a SPAC called Modern Media Acquisition Corp. (MMAC) and Akazoo. Ltd., an AI music streaming company. The merger was completed prior to the September 17, 2019 deadline for MMAC, otherwise it would have had to return all of the funds from its trust account and wind up the SPAC. However, after the merger, news came out that Akazoo Ltd. was a massive accounting fraud, making their proclaimed 5.5 million subscribers a moot point. On June 1, 2020, Nasdaq Stock Market announced that it would delist the ordinary shares and warrants of Akazoo S.A. As such, the sponsors suffered significant losses and filed a lawsuit on misrepresentation. Rencently, on September 30, 2020, the Securities and Exchange Commission (“SEC”) also filed a lawsuit against Akazoo S.A. and its original management team (not including MMAC and its directors and officers), alleging that it “grossly misrepresented the nature and success of its music streaming business.” To sum up, the uncertainty of a successful merger may come from either a SPAC or a target. Nevertheless, when the parties cannot benefit from the certainty of a successful listing, both of them will leave the market.

Second, the target company’s founders are more vulnerable to losing control of the company during a SPAC transaction than in a conventional IPO. In an IPO, the new shareholders of the company are typically individual investors and long-term institutional investors. Thus, the incumbent management typically retains a degree of autonomy. However, in a SPAC transaction, the SPAC sponsor typically expects to obtain representation on the surviving company’s board of directors, allowing the sponsor to participate in the company’s decision-making process. Therefore, a founder who intends to preserve his decision-making power may be unwilling to go public through a SPAC.

Third, a SPAC transaction causes more dilution for the company than an IPO. As we discussed above, the SPAC investors invest at greater risk than in a traditional offering. Thus, in addition to a formal discount, most SPACs compensate sponsors by giving them 20% of the entire share capital of a SPAC upon its IPO, which translates into an often-substantial ownership claim in the target following the SPAC merger. Additionally, during a SPAC’s initial public offering, investors in a SPAC are given warrants in addition to common shares, which can convert into shares of the target’s common stock following the merger, further diluting the existing shareholders of the target company.

In conclusion, SPACs are more likely a flash in the pan. This new option for companies has a long way to go before it replaces the traditional IPO, and with growth in the space, regulation will likely follow.

The Google v. Oracle Battle

A decade-long legal battle between Google and Oracle reached the U.S. Supreme Court in October, 2020. This case attracts unusual interest because it could significantly impact innovation in the software industry. Two major issues in the case include whether Oracle can claim a copyright on Java APIs (Application Programming Interfaces) and whether Google’s use of the APIs constituted “fair use,” a defense for a copyright infringement claim.

When Google developed the Android operating system for mobile phones, it decided to make the platform interoperable with Java, a popular programming language in the developer community. In order to do so, Google reimplemented several Java APIs, which are interfaces that grant access to particular functions in a program. With the APIs, developers who write applications for Android can utilize the existing functions of the underlying platform and avoid having to start from scratch.

Oracle, who bought the company that owned the Java platform, sued Google for copying the Java APIs in 2010. In May 2012, Judge William Alsup of the Northern District of California ruled that APIs are not copyrightable. Distinct from patent law, the Copyright Act protects expressions but does not protect any “idea, procedure, process, system, or method of operation.” If the expressions, in this case the API codes, are too closely related to their functions so that developers have to write them in only one way to perform a particular task, they are inseparable from the task and do not quality for protection.

On one hand, re-implementing or copying APIs has been a widespread practice in the industry. Providing copyright protection to the APIs could forbid a vast number of applications that currently use the codes from operating. On the other hand, some people argue that providing copyright protection to the APIs would encourage innovation by rewarding the developers who write the codes.

In 2014, the U.S. Court of Appeals for the Federal Circuit reversed the district court’s decision. The Federal Circuit held that APIs are copyrightable and left open the possibility that Google might have a fair use defense. Google filed a petition asking the U.S. Supreme Court to review the Federal Circuit’s decision, but the Supreme Court denied certiorari. The case then went back to the district court for a trial on the fair use defense. In 2016, a jury found fair use and delivered a verdict in favor of Google. In 2018, the Federal Circuit set aside the jury’s verdict as a matter of law. In 2019, Google filed another petition asking the U.S. Supreme Court to review both decisions by the Federal Circuit. The Supreme Court granted the petition, and oral arguments were heard via telephone on October 7, 2020.

During the oral arguments, the Supreme Court justices seemed to be skeptical about Google’s argument that the codes are not subject to copyright protection but showed more sympathy with the fair use defense. Justice Roberts mentioned that “the only reason it was necessary” for Google to use the API code was that it had been “very successful” and “it seems a bit much to penalize (Oracle) for that.” Justice Neil Gorsuch pointed out that both Apple and Microsoft had created mobile operating systems without copying the Java interfaces and questioned Google’s belief that it had no choice.

According to a software developer who worked on the Java interface, if Google loses the copyright argument but wins on the fair use defense, it would be a “weak win” for the rest of the software industry because fair use turns on the merits of a particular case. The defense does not necessarily apply to other API users, but the implications of the holding on the copyright claim could be devastating. The Supreme Court has not issued its opinion yet, but this case will surely impact the software industry in the future.

The Steady Transition to a United States-China Supply Chain Split

The four-year trade war between the United States and China has resulted in many companies bifurcating their manufacturing and product design pipelines into one for China and another for the rest of the world. This bifurcation has been done not only to avoid costly tariffs and trade restrictions, but also out of fear of heightened security risks of doing business with China. And while these supply chain transformations may outwardly seem like a byproduct of President Trump’s nationalism, they are actually the product of a decade of increasing divergence over civil liberties and growing economic competition between the United States and China, and would likely continue in some form under a potential Biden administration.

In 2017 and 2018, the Trump administration announced a series of new tariffs on Chinese manufacturing that dramatically increased costs and barriers for trade between the two countries. The policies were designed with the aim of decreasing Western dependence on Chinese imports and increasing domestic manufacturing. These series of executive actions eventually drove Taiwanese manufacturers like Foxconn and Wistron, which manufacture consumer electronics for major US companies like Apple, to bifurcate their supply chains. They spun off parts of their businesses to manufacture products solely for the growing and lucrative Chinese market, while rapidly moving their global-oriented manufacturing plants to new sites in Southeast Asia, India, and Latin America.

However, these changes have not just been limited to supply chains. In recent years, the United States has begun to clamp down on software and telecommunications equipment of Chinese origin running on American networks. Federal officials including members of Congress have cited fears that building networks using equipment made by Chinese manufacturers like Huawei or ZTE would give Beijing an unacceptable backdoor into US internet services and pose a heightened national security risk. A key example of this was the 2019 ban on Huawei’s 5G equipment and consumer electronics in the United States. This move eventually resulted in Google severing key mobile services like Maps and Gmail from Huawei’s Android devices. The United Kingdom replicated the United States months later by opting to stop use of Huawei equipment in its nationwide 5G network.

However, while the Trump administration may have accelerated this transition, a divide between US and Chinese product and manufacturing lines was always in the cards. The United States and China have long been at odds over digital rights and trade hegemony. In the 2000s, strict Chinese censorship laws prevented Google and Facebook from entering the Chinese market and paved the way for China-specific search engines and social networks like Baidu and WeChat to run in a self-contained bubble. And China was noticeably absent from the ultimately failed negotiations on the Trans-Pacific Partnership trade agreement, whose goal from the perspective of the Obama administration was to re-center supply chains and trade rules in East Asia around the United States and its allies. Given this history of difference over civil liberties and the continued economic competition between China and the United States, it is very unlikely that a President Joe Biden would change this ongoing supply chain bifurcation.

The long overdue split between global and Chinese product chains, driven by a continued US-China impasse over digital rights and trade dominance, could continue to decrease interdependence between the two countries. Should it succeed, this bifurcation will echo for decades to come in the global economy.

The Inevitability of Cryptocurrency ETFs

Over the last twenty years one of the most notable trends in the asset management industry has been the rise of electronically traded funds (ETFs). An ETF is a fund that passively tracks a basket of securities, typically stocks or bonds. Since the first ETF tracking the S&P 500 was created in 1993, ETFs have steadily become the preferred investment instrument for millions of people and institutions seeking exposure to broad market indices. According to the research firm ETFGI, US-based ETFs have over $4 trillion in assets under management, with $326.3 billion flowing into US-listed ETFs in 2019. Within the last decade, the number of ETFs that track stock market indices has more than doubled, from 901 funds in 2010 to over 2,100 today.

Simultaneously, another less mainstream and risky trend has shaken up retail investing: the rise of digital currencies. Bitcoin, a blockchain-based peer-to-peer cryptocurrency pseudonymously invented in 2008, remains the most popular and widely held digital currency. Often referred to as “digital gold” due to its limited supply and ability to function as a hedge against inflation (like gold ETFs), Bitcoin now has a market capitalization of nearly $200 billion. According to a survey by Blockchain Capital, 30 % of those in the 18-to-34 age range would rather own $1,000 worth of Bitcoin than $1,000 of stocks or bonds. As interest has grown, established financial institutions have taken notice. Just last week, PayPal announced that it would allow US users to buy, hold, and sell cryptocurrencies. In the company’s press release PayPal CEO Dan Schulman said that the shift to digital currencies “is inevitable.”

These two trends – ETFs and cryptocurrencies – are now set to collide. At a conference held by the Chamber of Digital Commerce on October 2nd, Securities and Exchange Commission (SEC) Chairman Jay Clayton stated that the SEC is actively developing a regulatory framework that will permit ETFs that track crypto assets. The SEC is collaborating with the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC) on an approach to oversee cryptocurrencies, which continue to exist in a regulatory grey area. Clayton’s comments came as a response to specific interest in the prospect of cryptocurrency ETFs. A recent study by Bitwise Asset Management found that 76% of surveyed financial advisors reported that they had received a question from a client about crypto in the past twelve months. In addition, a top concern of financial advisors in the survey was that cryptocurrencies lack “easily accessible investment vehicles like ETFs or mutual funds.”

While Clayton’s statement indicates that a cryptocurrency ETF could be on the horizon, proponents shouldn’t get their hopes up just yet. Historically, the SEC has been skeptical of cryptocurrencies and reluctant to grant regulatory approval to experimental ETFs. In 2018 the SEC rejected the Winklevoss Bitcoin Trust, a bitcoin ETF launched by Cameron and Tyler Winklevoss (the twins made famous for their early involvement with Facebook and subsequent depiction in The Social Network film). The SEC cited issues related to fraud and investor protection. Last March, the SEC similarly rejected Wilshire Phoenix’s proposal for a bitcoin-based ETF.

The appeal of a digital currency ETF – for both ETF issuers and retail investors – is that it would allow new investors to gain exposure to a diversified basket of cryptocurrencies. Further, crypto ETFs could offer outsized returns that are uncorrelated with the stock market. According to a recent paper by Sandip Mukherji of Howard University, over the last 60 months Bitcoin has provided higher returns (with higher volatility) than ETFs containing bonds, stocks, commodities, and other alternative assets.

Though still years away, an SEC-approved ETF tracking digital assets would accelerate capital flowing into ETFs as well as the adoption of digital currencies. As regulators better understand the cryptocurrency ecosystem and interest from investors continues to climb, a crypto ETF could happen sooner rather than later.

Despite recent struggles Ikea bets big and pursues “total market approach”

As vast swathes of the economy continue to suffer the effects of the global pandemic, at least one corner of the retail market is winning: home improvement. Consumers, stuck at home more than ever before, are spending big on home offices, storage solutions, and décor. Both Lowes and Home Depot reported strong sales growth over the spring and summer, while Wayfair’s stock gained 1,356% in just five months.

Not all companies have profited equally, though. As was the case for many brick and mortar stores, global lockdowns hit Ikea hard. Over springtime, 75% of its stores were forced to close for periods of up to 12 weeks, resulting in the furloughing of thousands of staff. Eager to buy, consumers turned to Ikea’s online store. But the notoriously clunky and unreliable website couldn’t keep up with demand, and there were soon horror stories of unfulfilled orders and poor customer service. The Swedish retailer recently reported that in the 12 months to August its sales dropped 4% .

It’s not all bad news for Ikea, though. Despite a parade of difficulties with its online store, sales through the website grew substantially. In September, a noticeably relieved Jesper Brodin, CEO of INGKA Holdings – the primary Ikea franchisee – revealed online sales were up 60% during the pandemic and now make up 18% of the company’s total business. Without these gains, Ikea’s losses would undoubtedly have amounted to much more than 4%. Moreover, since stores began reopening over the summer, demand from in-person consumers has been consistently strong. Outdoor furniture and office furniture are powering recovery. Demand for desks – especially Ikea’s popular customizable desks – has outstripped supply. In August, parking lots were filled with customers desperately trying to secure desks, lamps, and shelves before their children started distance learning.

Buoyed by these positive signs, Ikea is putting its struggles in the rearview mirror and turning an eye to our post-pandemic future. The company intends to pursue a “total market approach” – a strategic marketing and business approach that recognizes and prioritizes a diverse customer base without necessarily segmenting the market. In September, the company announced that it will open 50 new stores worldwide, bringing the total to 445. In a dramatic departure from its traditional retail strategy, some of these new Ikeas will be small, city-center stores, rather than big-box suburban builds. According to Brodin, Ikea sees these new, smaller stores as important touchpoints, a way to “become more accessible to people where they are.” In a move that suggests Ikea is finally willing to take online shopping more seriously, it has expanded into three new e-commerce markets, including China. This month Ikea also announced that it will proceed with its Buy Back scheme. The program is part of Ikea’s efforts to be carbon neutral by 2030, and is also designed to take advantage of a strong furniture resale market powered by millennials who are increasingly eschewing brand new furniture. The program will launch in 27 countries, including the UK and Ireland (but not the U.S.) this November. It gives customers the opportunity to sell their used Ikea furniture back to the store in return for a voucher of up to 50% of the original purchase price. In turn, Ikea will open its first second-hand store, selling only used Ikea furniture, in Eskilstuna, Sweden, this Fall.

Riding this wave of pandemic-related growth, Ikea is betting big that it can predict life post-Covid. Is “nesting” really here to stay? Will young people return from the suburbs to the big cities? Can the company finally embrace our digital future? And how interested is China in buying Ikea’s products? The company’s future as a global, multi-platform retailer will depend on the answers.

U.S. Appeals Preliminary Injunction Stalling WeChat Ban

The Department of Justice filed an appeal with the Ninth Circuit challenging a preliminary injunction won by WeChat users, which stalls President Trump’s executive order effectively banning WeChat from U.S. app stores. Magistrate Judge Laura Beeler of the U.S. District Court for the Northern District of California temporarily blocked the executive order days before it was to take effect.

WeChat, a subsidiary of Chinese tech giant Tencent Holdings Ltd., is a messaging service with sprawling features. The app allows users to video chat, transfer money, make in-store payments, share photos, and access third-party services, such as ride-hailing and food delivery. WeChat is one of the few tech bridges between the U.S. and China, and it allows the Chinese diaspora to communicate with friends and family in China. Like other Chinese internet services, however, WeChat is subject to censorship and can serve as a vehicle for propaganda.

The executive order banning WeChat stems from a 2019 national emergency declared by President Trump with respect to the “information and communications technology and services supply chain.”  The President announced that foreign adversaries were creating and exploiting vulnerabilities in communications technology, constituting an unusual and extraordinary threat to national security.  President Trump’s August 2020 executive order targeting WeChat stated that the app’s data collection and censorship pose such a threat. The President cited his authority under the International Economic Emergency Powers Act (IEEPA) and the National Emergencies Act to implement the ban.

Judge Beeler granted the preliminary injunction halting WeChat’s ban because the plaintiffs raised significant First Amendment claims. The opinion reasoned that banning “an entire medium of public expression” could amount to restraint of free speech and is not “narrowly tailored to address the government’s significant interest in national security.”

TikTok, the Chinese-owned video-sharing app, won a preliminary injunction challenging its own ban from U.S. app stores on different grounds. TikTok successfully argued that the President likely exceeded his authority under the IEEPA in banning the app, which does not grant the authority to restrict “exchanges of information materials.”

While WeChat’s challenge to the executive order continues, WeChat will likely remain essential to many Chinese speakers in the U.S. In an interview with the New York Times, one WeChat user stated that if the app were banned, she would use a virtual private network (VPN) to access WeChat from the U.S. Chinese emigres are often familiar with VPNs, as they are commonly used to access websites like Google, Instagram, and Wikipedia from China.

The One Year Standoff Between the NBA and China Over Tweet May Finally Be Over

Nearly one year later, the backlash from a tweet by the former Houston Rockets (“Rockets”) General Manager, Daryl Morey, seems to have finally subsided. In October 2019, one tweet caught Chinese and National Basketball Association (“NBA”) executives completely off-guard. At the time, Hong Kong’s pro-democracy protests were fueling anarchy and revolts, causing the government, backed by Beijing, to use emergency power measures for the first time in approximately fifty years. In an effort to support the protests, Morey tweeted “Fight for Freedom. Stand With Hong Kong.” Those seven words resulted in a massive economic downfall for the NBA and damaged the long-standing relationship between the league and China.


The NBA’s expansion efforts into China date back to 1979 when the Washington Bullets became the first team to play a game in China. Shortly after that, the NBA capitalized on the untapped market by airing games on China’s state-run CCTV, opening an office in Hong Kong, and playing over 20 NBA Preseason games in China. The NBA furthered its devotion to the Chinese fan-base in 2008 by creating NBA China, which is now estimated to be worth $5 billion. As a result, basketball continues to remain the most popular sport in China.


On October 4, 2019, the seemingly positive relationship between China and the NBA came to a screeching halt because of the words of one man. Immediately following Morey’s tweet (which he quickly deleted) the Rockets’ coverage on CCTV and Tencent Holding’s (“Tencent”) streaming platform ceased. Shops and online stores removed their merchandise and the existence of arguably the most popular team in China disappeared in a matter of days. The consequences of Morey’s actions continued on October 8, 2019 when CCTV suspended all NBA broadcasts. Additionally, tech giant Tencent—which had reached a $1.5 billion deal with the NBA in 2019—halted coverage of all NBA games. However, it quickly resumed live broadcasts by mid-October. Tencent’s decision to resume delivering limited coverage to approximately 500 million Chinese NBA fans may have mitigated some financial losses. But CCTV’s censorship of a large portion of the NBA’s viewership continued to pose major economic downfalls, though the extent was not initially clear.


The standoff between China’s CCTV and the NBA continued until Game 5 of the NBA Finals on October 9, 2020, between the Miami Heat and the Los Angeles Lakers. For the first time in a year, the state-run television channel finally resumed its NBA coverage and the tension between the NBA and China seems to have eased. The final damage caused by the rift has yet to be determined. However, NBA Commissioner Adam Silver estimated that the loss would be in the hundreds of millions, even as much as $400 million—not a small figure compared to the league’s annual global revenue estimated at around $10 billion


With the emergence of COVID-19, the league faced even greater financial uncertainty. Before the NBA implemented the ‘bubble’ in Orlando, NBA Commissioner Silver advised players that roughly 40% of the NBA’s revenues come from arena sponsorships and ticket sales. The NBA’s restart on July 30 increased approximately 80% more prime-time viewership than before the lockdowns interrupted the season. Even though these numbers in the ‘bubble’ experience satisfied the league’s television contracts and provided revenue-sharing payouts to each team, the pandemic still crippled many teams financially. According to a confidential ESPN report, 14 of 30 NBA teams lost money this past season before the television payouts, and nine of those teams suffered losses even with the profit sharing. Amidst the unpredictability caused by COVID-19, the revenue loss that resulted from Morey’s tweet becomes even more prevalent. However, CCTV’s recent decision to resume coverage of the league certainly provides the NBA with an assurance that they may be able to salvage their relationship with China after all.