WASHINGTON (Reuters) - A federal appeals court on Tuesday delivered a surprising rebuke to U.S. President Barack Obama, saying he deprived a small Chinese-owned company of its right to due process when he squashed its bid to build wind farms near a U.S. naval site.
The U.S. Court of Appeals for the District of Columbia Circuit reversed a lower court ruling and ordered that Ralls Corp be given any unclassified evidence used by Mr Obama to reject the bid. If it stands, the ruling could allow foreign companies to formally challenge decisions by the U.S. committee that reviews deals for any national security concerns.
"It's a potentially transformative decision," said Donald Vieira, a former national security lawyer for the U.S. Justice Department who now works in private practice.
"Before this opinion, the committee didn't have to tell you why it's recommending that the president block the deal, but this decision says otherwise," said Mr Vieira of the law firm Wilson Sonsini Goodrich & Rosati.
On the recommendation of the Committee on Foreign Investment in the United States, an interagency group headed by the Treasury secretary, Mr Obama issued an order in 2012 instructing Ralls to sell off four planned wind farms because of national security risks. It was the first time since 1990 that a U.S. president formally blocked a business deal or required a sale on these grounds.
Ralls, which was installing wind turbines close to an Oregon site used to test unmanned drones, immediately sued. The company argued that Mr Obama's order violated the due process clause of the Fifth Amendment to the U.S. Constitution, and that Ralls had not been given the opportunity to review and respond to evidence against it.
Experts believed the lawsuit had little chance of success because the president has broad powers to protect national security. But in a 47-page ruling, a panel of one Obama and two Republican-appointed judges concluded the President's order deprived the company of property without due process.
"Due process requires, at the least, that an affected party be informed of the official action, be given access to the unclassified evidence on which the official actor relied and be afforded an opportunity to rebut that evidence," the panel wrote.
"Ralls was not given any of these procedural protections at any point," it added.
The lower court that dismissed Ralls' claims valued the wind farm assets at US$6 million. A lawyer for Ralls, Mr Tim Tingkang Xia, said the company was "heartened that the court today upheld Ralls' arguments in every respect. We look forward to further vindicating Ralls' right to be treated fairly and equally under the law",
Former solicitor general Paul Clement argued the case on behalf of Ralls.
A Justice Department spokeswoman said the agency was reviewing the ruling.