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Commerce Department Announces Stay of TikTok Shutdown Order -- 3rd Update

11/12/2020 | 06:21pm EST

By John D. McKinnon and Georgia Wells

WASHINGTON -- The Commerce Department said Thursday it wouldn't enforce its order that would have effectively forced the Chinese-owned TikTok video-sharing app to shut down, in the latest sign of trouble for the Trump administration's efforts to turn it into a U.S. company.

The department's action delayed implementation of an order, set to take effect Thursday, that would have barred U.S. companies such as Apple Inc. from offering TikTok in its app store, and companies such as Amazon.com Inc. and Alphabet Inc. from offering web-hosting service for TikTok -- moves that would effectively make it inoperable in the U.S.

The U.S. crackdown on Chinese social-media apps has been led by President Trump, and it is unclear how President-elect Joe Biden will address the situation. Many members of Congress in both parties, however, have sounded alarms about potential Chinese data-gathering and surveillance in the U.S.

The outcome has important implications for U.S.-Chinese relations, as well as the future shape of the global internet, as other countries wrestle with how to incorporate Chinese technology companies.

In announcing its decision, the Commerce Department cited a preliminary injunction against the shutdown last month by U.S. District Judge Wendy Beetlestone in Philadelphia in a suit brought by three TikTok stars, comedian Douglas Marland, fashion guru Cosette Rinab and musician Alex Chambers.

Judge Beetlestone said the government action "presents a threat to the 'robust exchange of informational materials'" and therefore likely exceeds the government's authority under the International Emergency Economic Powers Act, the law the Trump administration has relied on to take action against TikTok.

The U.S. government appealed that order late Thursday. The U.S. has argued that it is trying to prevent data on American TikTok users from being shared with China's authoritarian government, which TikTok says it would never do. The government also contends that its efforts are aimed at protecting U.S. users' data, and not at closing off informational exchanges.

As the battle plays out in court, the Commerce Department statement on Thursday said the shutdown order wouldn't go into effect "pending further legal developments."

The concession comes as the administration's clampdown has been undermined by a series of legal challenges from the social-media app and its allies. Those challenges initially attacked the government's authority to order a shutdown in the event that the company wasn't divested by Thursday.

This week, TikTok and its Chinese parent company, ByteDance Ltd., also asked a federal appeals court in Washington, D.C., to overturn an order by the Committee on Foreign Investment in the U.S. that ByteDance divest the company.

In a statement Thursday, a TikTok spokeswoman said the company was "focused on continuing to engage CFIUS" in an effort to address the security concerns, "even as we disagree with them."

The Treasury Department, which oversees Cfius, issued a statement a day earlier saying that it "remains focused on reaching a resolution of the national security risks" from TikTok.

As the legal underpinnings of the Trump administration's effort appear to be weakening, there were signs that the parties also were still far apart on the terms of the deal. Still, people familiar with ByteDance's thinking said the company was hopeful about reaching an agreement that would allow TikTok to remain in the U.S.

Mr. Trump issued an order in August stating that TikTok would be banned in the U.S., but later told reporters that he might approve a divestiture to a U.S. company.

Under a preliminary proposal that Mr. Trump approved in concept in September, Oracle Corp. and Walmart Inc. would take a combined 20% in TikTok Global, a new U.S.-based company that would run the global service. But among the major sticking points in the continuing negotiations was the size of the stake that ByteDance would get to keep in TikTok, according to people familiar with the matter.

People familiar with ByteDance have said the company is working to take measures to safeguard the data of its American users, but noted that they don't believe the U.S. government has authority to dictate the corporate structure of a Chinese company.

In its recent filing in the appeals court case, TikTok said that ByteDance recently submitted a fourth version of its proposal for addressing U.S. security concerns.

The proposal called for creating "a new entity, wholly owned by Oracle, Walmart and existing U.S. investors in ByteDance, that would be responsible for handling TikTok's U.S. user data and content moderation." That U.S. entity could be created in addition to a TikTok Global unit, according to people familiar with the matter.

ByteDance is still working to reach an agreement with the U.S. government, the people said.

Chinese authorities will also need to sign off on the deal, which must comply with recent restrictions it placed on exports of data-processing technologies such as content-recommendation algorithms -- a move widely seen as aimed at TikTok.

Write to John D. McKinnon at john.mckinnon@wsj.com and Georgia Wells at Georgia.Wells@wsj.com

(END) Dow Jones Newswires

11-12-20 1820ET

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