A Hong Kong textile company has gone to U.S. court to challenge its inclusion on the "Entity List" maintained by the U.S. Department of Commerce. While its request for a preliminary injunction was recently rejected by a U.S. judge, the company's complaint will continue as it protests the absence of evidence that it uses forced labor, and argues that the Trump administration acted illegally by including it on the list. If this company wins its lawsuit, it may inspire other companies to bring similar cases, although these cases tend to be very fact-intensive and a company’s specific practices will be an important factor in whether to bring a case.
As described in its complaint in the U.S. District Court for the District of Columbia against the U.S. Commerce Department and a number of department officials, Esquel is "an independent, family-owned business headquartered in Hong Kong," with "over 35,000 employees across its international operations," mostly located in China, Sri Lanka, and Vietnam (and, at the time of the Entity List designation, Mauritius). The plaintiffs are Changji Esquel Textile Co. Ltd. (“CJE”), Esquel Enterprises Limited, and Esquel Apparel Inc., which are all part of the Esquel group of companies.
The complaint emphasizes that "Esquel is not, and has never been, subject to ownership, control, or direction by the Chinese government in any of its operations, either in mainland China or across the world," and, in fact, "is run by U.S.-educated executive leadership with close ties to the U.S. academic and trade communities."
In terms of its labor practices, the complaint says that "Esquel has been a global leader in sustainable manufacturing and socially responsible business operations since its founding," and that it operates pursuant to the Esquel Workplace Code of Conduct, "which mandates that all Esquel facilities safeguard employee rights under national and international labor laws; requires that all Esquel facilities pay 'at least' the local minimum wage or the 'prevailing industry wage, whichever is higher'; prohibits all forms of forced labor, child labor, harassment, abuse, and discrimination; and requires Esquel facilities to 'comply with the legally mandated regular work hours or 48 hours per week, whichever is less.'"
Of crucial importance for this case, Esquel established a presence in Xinjiang in 1995 "to launch spinning mills close to the supply of high-quality Xinjiang cotton." Since then, the complaint states, "Esquel has offered equal opportunity employment to members of Uyghur and other ethnic minority groups on a non-discriminatory basis." CJE, the entity that the Defendants named to the Entity List, was established in 2009 and operates one of Esquel’s spinning mills in Xinjiang. As of May 31, 2021, "CJE employed 370 employees, of whom 27 are Uyghurs and 44 are other ethnic minorities, including Hui people and Kazakhs."
The complaint states that "[i]ndependent, third-party audits have repeatedly confirmed the absence of forced labor in CJE’s facility and Esquel’s facilities more broadly." In 2019, "three sets of independent third-party audits were conducted, each on a subset of Esquel’s facilities in Xinjiang, and each concluded that there was no forced labor in any of the facilities … [and] [f]our additional audits that took place in 2020 and 2021 came to the same conclusion."
CJE's inclusion on the Entity List
The complaint alleges that during the Trump administration, the Department of Commerce added CJE to the Entity List "without any basis in fact and fail[ed] to respond to CJE’s good-faith efforts to access the evidence underlying its designation." On July 22, 2020, the complaint argues, "without notice or warning, Defendants placed CJE on the Entity List with a single phrase of explanation: CJE, along with other companies, was allegedly 'engaging in activities contrary to the foreign policy interests of the United States through the practice of forced labor involving members of Muslim minority groups in the XUAR [Xinjiang Uyghur Autonomous Region].'" According to the Commerce Department at the time, "the conduct of" CJE and the other identified companies "raises sufficient concern that prior review of exports, reexports or transfers (in-country) of all items subject to the EAR involving these entities, and the possible imposition of license conditions or license denials of shipments to these entities, will enhance BIS’s ability to prevent items subject to the EAR from being used in activities contrary to the foreign policy interests of the United States." The complaint argues that "[t]his reed-thin justification for adding CJE to the Entity List was unaccompanied by a whit of support," as "[d]efendants provided no evidence or reason to believe that CJE actually had engaged in the practice of forced labor in Xinjiang."
The complaint suggests that a possible source for the Trump administration's decision to place CJE on the list was a Wall Street Journal article and an Australian organization that cited the article, but argues that "[w]hatever the basis, Defendants made no attempt to solicit a factual response from Esquel or to give it an opportunity to rebut the accusations before placing CJE on the Entity List." It states that "Esquel further sought to engage with the U.S. government to ascertain the bases for Entity List designation and to clear up Defendants’ misapprehension regarding Esquel’s labor practices," and "made clear that CJE would gladly submit to further independent audits and unannounced site visits by U.S. government officials, including confidential interviews with ethnic minority employees." However, it "has received no meaningful response to its queries regarding the basis for its designation on the Entity List or any other substantive response from the U.S. government."
The impact of CJE's inclusion was "severe irreparable harm on Plaintiffs," as it had "the immediate legal effect of imposing a license requirement for all exports, reexports, and transfers (in-country) to CJE of items subject to the EAR." This meant that "CJE is no longer able to receive any U.S. items (whether sensitive or not) subject to the EAR—from physical equipment and spare parts used in CJE’s spinning mill, to over-the-counter consumer laptops and computers from Hewlett-Packard and other U.S. companies—unless the U.S. exporter procures a license from BIS." It also led to "reputational damage," losses caused by disruption to supply chains, and difficulty in "securing financing."
Plaintiff's legal claims
The plaintiffs filed their complaint in U.S. District Court in July 2021, making three claims.
First, they alleged that "Defendants acted ultra vires and in excess of their statutory and regulatory authority under the 2019 NDAA and associated regulations in issuing the July 2020 Notice that added CJE to the Entity List." In particular, Section 1752(2)(A) of the relevant statute explains that "[t]he national security and foreign policy of the United States require" controlling the release of items for use in five specific areas: "(i) the proliferation of weapons of mass destruction or of conventional weapons; (ii) the acquisition of destabilizing numbers or types of conventional weapons; (iii) acts of terrorism; (iv) military programs that could pose a threat to the security of the United States or its allies; or (v) activities undertaken specifically to cause significant interference with or disruption of critical infrastructure." However, Defendants "did not find, and have not alleged, that CJE or any other Plaintiff engaged in any of the activities specified in Section 1752(2)(A)." Moreover, BIS regulations require that entities be added to the Entity List only after the agency has found “specific and articulable facts” regarding the entities’ activities, and here Defendants neither possessed nor offered any "specific and articulable facts" demonstrating that CJE was engaged in the practice of forced labor in Xinjiang.
Second, Defendants violated the Administrative Procedures Act "by acting in excess of statutory and regulatory authority and otherwise contrary to law by placing CJE on the Entity List for supposed human-rights-related violations." In this regard, "Defendants never found that CJE ... engaged in any of the activities specified in Section 1752(2)(A)," and "the sole basis Defendants gave for placing CJE on the Entity List—alleged human-rights abuses—is entirely without record basis."
And third, Defendants violated the Due Process Clause of the 5th Amendment, as "Plaintiffs were entitled to constitutionally mandated due process prior to any deprivation of their constitutionally protected interests," which includes, "at a minimum, the right to notice of the basis for Defendants’ decisions and an opportunity to be heard, including an opportunity to rebut whatever evidence on which the government relied." However, plaintiffs "were not afforded constitutionally sufficient process: they were not provided with the evidentiary basis for CJE’s designation on the Entity List, and they were not given an opportunity to rebut the determination reflected in the July 2020 Notice."
Preliminary injunction request rejected
The plaintiffs filed for a preliminary injunction against CJE's inclusion the Entity List, but that request was rejected earlier this week by the U.S. District Court judge. As a result, the case will continue, but CJE will remain on the list in the meantime. The South China Morning Post reports that Esquel intends to appeal the decision rejecting the preliminary injunction. The report also states that "[s]eparately, Esquel has also been working with a US inter-agency body called the End-User Review Committee to remove the subsidiary from the entity list," and that "[t]he committee voted in August to remove Changji Esquel under certain conditions and the company has since been working to satisfy these conditions."
UPDATE November 7, 2021
In an opinion issued on November 4, 2021, the court further explained its decision to deny the preliminary injunction. The core of its reasoning was that: 1) “the Court concludes that the plaintiffs have not shown a likelihood of success on the merits on their claim that the defendants exceeded their statutory authority in listing Changji on the Entity List pursuant to the ECRA”; and 2) “the Court agrees with the defendants’ position that the plaintiffs cannot demonstrate that the defendants acted contrary to their own regulations.” Because the plaintiff “has not shown a likelihood of success on the merits,” the Court said it need not consider whether the plaintiffs have met the other factors under the preliminary injunction standard.