Last month, U.S. President Barack Obama cited national security concerns in blocking Chinese company Ralls Corp. from buying four wind farms in northern Oregon. Obama’s Republican challenger, Mitt Romney, says that if elected, he would label China as a currency manipulator on his first day in office. Last week a U.S. congressional committee labeled two major Chinese companies national security threats and urged the Committee on Foreign Investment in the United States (CFIUS) to block any attempt by them to acquire U.S. companies.

As U.S. politicians from both major political parties increasingly take a get-tough attitude toward China, American law firms trying to do business there are feeling caught in the middle.
“If you take one view and not the other, there could be serious ramifications for lawyers,” says Michael Preston, a Hong Kong partner with Cleary Gottlieb Steen & Hamilton. “Nobody wants to be on the wrong side of U.S. or Chinese authorities.”
Lawyers have already been pulled into the debate though. On October 8, the U.S. House Intelligence Committee released a report labeling two Shenzhen-based telecommunications companies— Huawei Technologies Co. Ltd. and ZTE Corp.—as threats to American national security because of their possible ties to the Chinese military. The two companies both make networking equipment that the committee claims could be used for surveillance purposes.
Huawei is now the world’s second-largest provider of telecommunications equipment, and it does 70 percent of its business outside China. The company had $1.3 billion in sales in the United States last year. ZTE has a smaller presence in America, primarily through sales of devices like smartphones. Its sales in the U.S. were $30 million last year. Both companies issued statements last week denying the thrust of the committee’s report.
But the investigation’s impact was first felt by firms a month before, when committee member Sue Myrick of North Carolina and congressional colleague Frank Wolf of Virginia issued a letter blasting DLA Piper for unspecified work it has done for ZTE.
“By publicly representing and advising the ZTE Corporation your firm is indicating it values the retainer of one contract over the legitimate cyber security and supply chain concerns of the United States government,” the two Republican politicians wrote in the September 13 letter addressed to DLA Piper Washington, D.C., managing partner Frank Conner and international trade partner Richard Newcomb.
In April, Wolf wrote two similar letters to Sidley Austin chairman Carter Phillips urging that firm to drop Huawei as a lobbying client, citing the company’s sales to Iran and, earlier, Saddam Hussein’s Iraq and Afghanistan under the Taliban.
“How can an American firm like Sidley Austin represent a company that has provided our enemies with equipment?” wrote Wolf in an April 30 letter to Phillips. “How does Sidley Austin reconcile working for a company that is empowering the world’s worst governments to monitor and repress their own people? Certainly this must give you pause.”
Both DLA Piper and Sidley Austin declined to comment but lawyers involved in China practice leaped to their defense.
“I am definitely with DLA Piper and Sidley Austin on this,” says Thomas Shoesmith, the Palo Alto–based China practice leader for Pillsbury Winthrop Shaw Pittman. “A law firm has to decide whether or not a company is worth spending time with. Once that decision is made, lawyers need to have the courage to stand by its independent professional decision.”
Weiheng Chen, head of the China practice for Wilson Sonsini Goodrich & Rosati, agrees. “Even for criminals, they need to get a good lawyer,” he notes. “A lawyer’s professionalism should not be tainted by their patriotism.”
Independent Beijing-based intellectual property lawyer and law professor Stan Abrams went further in an expletive-laden post on his China Hearsay blog. “Frank Wolf, and his fellow House member whom I’ve never heard of before, is trying to smear a law firm with the sins of its clients, some of which have yet to be substantiated,” he wrote, adding that the incident made him “want to vomit.”
Lawyers are split though on whether the recent political turbulence is going to have a chilling effect on Chinese investment in the U.S.
Huawei has dropped U.S. deals before because of political opposition. Chen, whose firm represented one of the companies Huawei tried to buy, says the telecom sector has always been deemed particularly sensitive from a national security viewpoint. Moreover, the industry is under pressure economically at the moment, and U.S. companies like Qualcomm Inc. and Cisco Systems Inc. don’t want new Chinese competitors right now.
“I foresee some formidable obstacles in that sector,” says Chen. “But in sectors that are less sensitive we continue to see deals all the time, and I don’t think that deal flow will stop.”
He is watching China National Offshore Oil Corp.’s $15 billion bid to acquire Calgary-based oil exploration company Nexen Inc., which will be the largest overseas deal ever by a Chinese company if it can get past national security reviews in Canada and the U.S.
“With what is happening with Huawei, and if the CNOOC–Nexen deal also fails, I expect a certain pause, and Chinese companies will be more cautious and prudent about their major acquisitions in the future,” says Chen.
Preston says some Chinese companies have put deals on hold until after the U.S. elections, but he’s not foreseeing a long pause. He attributes a lot of the amped-up China rhetoric to the campaigning and expects that things will return to normal after the elections. “It’s a result of the political football,” he says. “Both candidates are trying to score points.”
But Shoesmith strongly disagrees. “What is happening has nothing to do with the elections, not in the slightest,” he says, “and I absolutely don’t think it will die down after the elections.”
Shoesmith says China’s rising status in the world puts its fundamentally different economy and political system into more direct conflict with those of the United States. He doesn’t see that trajectory changing. “China has not just stood up over the past few years,” he says. “It has been striding around the world, and issues are bound to come up when you deal with an entrenched and established economy like the U.S.”
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