Two recent actions involving the FCC reflect the escalating difficulties U.S. businesses, especially in consumer-facing industries, are confronting when attempting to transact business with Chinese entities (whether based in China or owned or controlled by Chinese nationals or the government). This alert updates our May 2020 guidance regarding FCC efforts involving China in another area (issuing orders to show cause against four companies indirectly owned and controlled by the Chinese government).
Team Telecom’s Submarine Cable Recommendation
First, on Wednesday, June 17, 2020, Team Telecom submitted its recommendation to the FCC to deny, in part, a pending application to operate a submarine fiber cable that would connect the United States and Hong Kong. The proposed fiber cable system, the Pacific Light Cable Network (PLCN), would connect Los Angeles and Hong Kong, with intermediate stops in Taiwan and the Philippines. If adopted by the FCC, this recommendation will, at best, significantly increase the cost of doing business via the internet with businesses in Hong Kong and other parts of Asia.
Team Telecom, a collection of executive branch agencies that conduct national security reviews of such proposals, recommends that the FCC deny the application to the extent it seeks a direct connection between the United States and Hong Kong. Team Telecom further recommends that the other portions of the network, those connecting the U.S. and Taiwan and the Philippines, be conditioned on mitigation measures prohibiting any People’s Republic of China (PRC)-based ownership of, control of, or influence over the permitted connections.
In making its recommendation, Team Telecom raises national security concerns, noting that a significant investor in the PLCN, and the proposed owner of the fiber segments that would terminate in Hong Kong, is Pacific Light Data Co. Ltd. (Pacific Light). Pacific Light is a Hong Kong company and subsidiary of the fourth-largest provider of telecommunications services in the PRC. This ownership, according to Team Telecom, poses a risk to the security and privacy of U.S. data and communications traffic over the proposed fiber network. Team Telecom further notes concerns over the PRC’s erosion of Hong Kong’s autonomy and the potential for the proposed fiber connection to further strengthen the status of Hong Kong as a hub for international communications critical infrastructure. Recall that, in May 2020, Secretary of State Pompeo informed Congress that "[n]o reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China.”
Even earlier in April, the FCC granted Special Temporary Authority (STA) for GU Holdings (a Google-controlled entity) to begin commercial operation of the portion of the PLCN fiber network connecting the U.S. and Taiwan. However, the STA was expressly conditioned on a commitment by GU Holdings and Google not to connect or operate any fiber lines or supporting equipment terminating in Hong Kong. The U.S. Department of Justice (DOJ) petitioned for these conditions, raising concerns similar to those raised by Team Telecom in its recent recommendation.
It is likely that the FCC will give a significant amount of deference to Team Telecom’s recommendation. Absent a further extension of GU Holding’s STA, the FCC should render its decision on the fiber application on or before the STA’s expiration on October 5, 2020.
FCC Dismissal of Section 325(c) Application
Second, on June 22, 2020, the FCC dismissed a Section 325(c) Application to deliver Mandarin Chinese programming from a California-located studio to a Mexican station, XEWW-AM in Rosarito, Mexico, for rebroadcast back into the United States.
In its order, the FCC stated that the application was dismissed because the parties failed to include a key participant – Phoenix Radio – in the application. Phoenix Radio produces the Mandarin programming subject to the application in its California studio and is partially owned by two entities with Chinese government ownership. The FCC order further requires the studio to cease such operations within 48 hours.
The dismissal of the Section 325(c) Application is quite extraordinary. Typically, the FCC does not claim jurisdiction over production facilities. The order provides that the studio may submit a revised application with Phoenix Radio included as an applicant. However, it is unclear whether the FCC would approve any such revised application, which would necessarily require a determination on whether granting the application would serve the public interest.
Escalating Difficulties With China
Taken together, the two actions—the Team Telecom recommendation and the Section 325(c) order—reflect the escalating difficulties U.S. businesses, especially in consumer-facing industries, confronting when attempting to transact business with Chinese entities (whether companies are based in, or owned or controlled by, Chinese nationals or the government). The Phoenix Radio case may have adverse economic impacts on any entity engaged in the marketing of consumer products to Asian Americans. The Google Submarine Cable “recommendation” poses broader complications for those doing business with (or otherwise involved with) those in Hong Kong or Mainland China. The Submarine Cable provides a direct internet connection between the U.S. and Hong and is designed to address the very heavy traffic demands on that route. If the Team Telecom recommendation is adopted by the FCC, the concern is that it would effectively preclude direct internet connection on any cable between the U.S. and Hong Kong absent China surrendering its sovereignty to permit foreign-controlled entities to have unrestricted termination rights in Hong Kong; this seems highly unlikely. It may be possible to terminate traffic on the Submarine Cable in other locations—including the Philippines—and then transfer the traffic to entities with termination rights in Hong Kong. But even if this is possible, doing so is likely to be quite costly and to be viewed by commercial entities as an inefficient use of resources.
Clearly, the U.S. Congress and executive branch will have more to say on how data will be allowed to flow between the U.S. and China. With all of the other pressure points between the two countries, doing business with China, particularly business with any expectation of privacy, will continue to be complicated and require careful legal, as well as business, planning.