DC Court Upholds Hesai's Designation as 'Chinese Military Company'

Hesai immediately appealed the case to the U.S. Court of Appeals for the D.C. Circuit.

The judge began by looking to define the phrase "military-civil fusion contributor," since the law, Section 1260H, includes seven sections detailing how an entity can earn this designation. The Pentagon said Hesai qualifies as a military-civil fusion contributor under four of them, one of which includes companies that are "residing in or affiliated with a military-civil fusion enterprise zone." The court sustained Hesai's designation under that criterion.

Friedman first sought to define "military-civil fusion enterprise zone." DOD applied the dictionary definitions of each word in the term, defining the term as "a section of territory established by the Chinese government for the purpose of advancing its policy of military-civil fusion through economic activity.” Friedman said the Pentagon's interpretation "reflects the plain meaning of the term."

DOD said Hesai met this definition based on two development centers the company has built or plans to build in, which qualify as military-civil fusion enterprise zones: Chonqing Economic Development Zone and Jiading Industrial Zone. The court then said there's "substantial evidence" supporting the conclusion that these two zones qualify as military-civil fusion enterprise zones, including evidence from Chinese regional organizations and government entities stating that both zones are meant to "promote economic activity and military cooperation."

Hesai argued this definition leads to the "absurd result that potentially thousands of international consumer-facing companies such as Amazon Web Services, Volvo, Qualcomm, Autoliv, and Continental qualify as ‘military-civil fusion contributors’" just by building in these zones. Friedman said this claim is "foreclosed by the plain statutory language of Section 1260H(d)(2)(E)," which says that merely residing in one of these zones is enough to be deemed a "military-civil fusion contributor."

The court said it's persuaded by the claim that the Pentagon must at some point find that a particular entity has a "meaningful connection to the Chinese military before the DoD can list the entity as a 'Chinese military company,'" though the plain terms of the statute don't appear to contain such a requirement.

Freidman next sought to parse through the government's arguments regarding the phrase "to the Chinese Defense Industrial Base" found in the statute. At the outset, the judge rejected DOD's claim that this phrase doesn't have any meaning by itself given the statute's definition of the term "Chinese military company." The Pentagon argued that the statute imposes an "identity" requirement, meaning the law is only concerned with the "identity" of the entity, and a "conduct requirement," meaning the entity "must be engaged in certain conduct," such as providing services.

The court said this claim must be rejected, since it "omits half of the statutory text" and the Pentagon provides no authority for it. In fact, DOD's read of the statute would require the court to find that the phrase "to the Chinese defense industrial base" is meaningless, the judge held.

Friedman then set out to define the phrase "to the Chinese defense industrial base" adopting the definition of "defense industrial base" proffered by Hesai. This definition defines the term as "the Department of Defense, Government, and private sector worldwide industrial complex with capabilities to perform research and development, design, produce, and maintain military weapon systems, subsystems, components, or parts to meet military requirements." The judge clarified that this definition doesn't mean an entity has to actually supply the Chinese defense industrial base to find itself on the Section 1260H list.

And while the Pentagon argued that any entity that produces a "dual-use" product contributes to the Chinese defense industrial base, Friedman rejected this interpretation as overly broad. As a result, Friedman held that an entity contributes to the Chinese defense industrial base "if it produces a product or technology that has substantial military application, even if the entity’s particular product is not directly supplied or used by the Chinese military and even if it also has commercial uses."

The court then looked at the potential military application of lidar, the product made by Hesai. DOD said lidar has two specific military applications: aiding in the development of self-driving vehicles, which have "substantial military use," and collecting and passing information to unknown sources. The Pentagon relied on three pieces of evidence to back this claim, only one of which the court found to be of use: an online article that explores the military applications of lidar, particularly as they relate to self-driving cars, and the gains Hesai has made in the lidar market.

The article also suggests a link between Hesai and "China Electronics Technology Group Corporation," which is a company that was founded to supply advanced electronics to the Chinese military. Friedman found this evidence, among other pieces of evidence, sufficient to justify DOD's finding that Hesai contributes "to the Chinese defense industrial base."

While Hesai argued that the Pentagon failed to include the article in the record until three weeks after Hesai filed for summary judgment in its lawsuit, the court said it properly considered the article. DOD said in a sworn statement it directly considered the article but only failed to include it in the administrative record due to an "administrative error." While this explanation alone may not be enough to justify the court's consideration of the article, there's "good reason" to think DOD actually considered the article, including the fact that the "article merely affirms the DOD’s core contention" that lidar has substantial military applications, the court said.

Friedman also addressed Hesai's claim that it was entitled to pre-deprivation notice and comment. The judge largely sidestepped this claim, finding that Hesai failed to show it was prejudiced due to the alleged procedural violation. Hesai hasn't shown that, on remand, it could "mount a credible challenge" to the Pentagon's evidence, the court said.