Tiktok Divestiture Bill Becomes Law - What's Next and Implications

On 24 April 2024, President Biden signed the “21st Century Peace Through Strength Act” passed by the U.S. Congress, which included in its provisions the “Protecting Americans from Foreign Adversary Controlled Applications Act” (the “Act”).

Particulars of the Act

The Act not only applies to Tiktok, but any other “foreign adversary controlled application” as determined by the President, which is controlled by an entity in a “foreign adverse country”. Under the Act, the parent company of Tiktok, Bytedance, is required to divest Tiktok within 270 days, with one 90 day extension by the President if the President determines the divestiture has made substantial progress. 

The Act may not be limited to Tiktok. The term “foreign adversary country” means the PRC, along with Russia, Iran, and North Korea. The term “foreign adversary controlled application” specifically mentions Tiktok, but would also potentially apply to any social media content sharing and distribution application with more than 1 million active users, which is “controlled by a foreign adversary”, and determined by the President to represent “a significant threat to U.S. national security” (effectively a discretionary standard). The term “controlled by a foreign adversary” means a non-U.S. entity incorporated in or with a principal place of business in, a “foreign adverse country”, or any 20% non-U.S. owner of such entity. There is a specific exclusion for apps “whose primary purpose is to allow users to post product reviews, business reviews, or travel information and services”.

Applied in practice, the Act could potentially also apply to Telegram (to the extent it still has a Russian nexus) if its user base expands in the U.S., or it could be used as a foundation by other Western countries to impose similar restrictions on Telegram. It could also apply to e-commerce offerings with significant operations in the U.S., such as SHEIN^[1] and Temu, to the extent they are deemed to enable the sharing of content by users in real time, though here in the context of e-commerce. 

PRC Reaction

A key component in any divestiture of Tiktok in the U.S. is the ownership of the content recommendation algorithms that power Tiktok. On 21 December 2023, the PRC updated its export controls regime to specifically include personalized algorithms based on large data sets^[2], which would allow the PRC to block the transmission of Tiktok’s algorithms from the PRC to any potential U.S. acquirer. This could significantly diminish the economic value of Tiktok to potential suitors if the algorithms are not allowed to be transferred, though any potential acquirer would still presumably have access to the Tiktok trademarks and application infrastructure apart from the content recommendation algorithms. 

What’s Next

Bytedance has the legal right to challenge the validity and constitutionality of the Act, and on 7 May 2024 Bytedance and Tiktok did so in the Washington D.C. appeals court, primarily on the grounds of the first amendment right to freedom of speech. U.S. courts have overturned prior attempts to ban Tiktok, first by President Trump, and recently by the State of Montana. Any court challenges involving the Act may centre on whether the Act is in fact a ban, either directly or indirectly through its effect.

Proponents of the Act may argue that the divestiture requirement means Tiktok will not be banned, only that its owner will change. They could also cite the Communications Act of 1934, which imposed a 20% non-U.S. ownership limitation on U.S. broadcast carriers. Interestingly, 20% ownership is also used in the Act to determine the thresholds for “controlled by a foreign adversary”, meaning the drafters of the Act may have had the Communications Act of 1934 in mind when preparing the Act, in anticipation of using it as a defense in a court challenge. 

Bytedance may argue that any PRC prohibitions on the transfer of content recommendation algorithms would effectively nullify the ability of Tiktok’s users to exercise their free speech rights, thereby having the effect of a ban. If U.S. courts determine that the Act is a ban, the U.S. government would have to overcome high legal hurdles such as “compelling state interest” under “strict scrutiny” to justify that national security concerns outweigh the first amendment right to freedom of speech.

Implications

The Act is part of a wider set of restrictions imposed by the U.S. on PRC interests in recent years. The end game may be a convergence between U.S. and PRC standards, which ironically will lead to reciprocity on both sides.

In the realm of Internet communications, on 10 April 2024, the PRC’s Ministry of Industry and Information Technology (MIIT) issued the “Notice on Launching the Work for the Pilot Program for the Expansion of Value-Added Telecommunications Services to the Outside World”. These rules substantially increase certainty for non-PRC investors, who had been dealing with legal uncertainty for 25 years in the PRC’s promising and valuable Internet ecosystem. While the MIIT rules expressly allowed non-PRC investment in platform e-commerce, data centres, and most software services, it expressly disallowed online publishing, online news, online videos, or platforms enabling such activities. Furthermore, it did not cover all Internet activities, meaning search services and social media are still restricted to foreign investment under existing laws.

Accordingly, both the U.S. and the PRC seem to agree that an application such as Tiktok made by a company from one jurisdiction should not be allowed to operate in the other jurisdiction!

For more information on how we can help you navigate US-China tensions, please contact Charles Wu at Charles.Wu@clydeco.com