Since 2021, the Secretary of Defense has been placing government contractors identified as Chinese military companies (CMCs) on the Section 1260H List (section 1260H of the National Defense Authorization Act for FY 2021, codified at 10 U.S.C. § 113, note).  At first, the 1260H List did just that: identify CMCs. But over the past five years, Congress has transformed the consequences of inclusion on the 1260H List from a “stigma” surrounding listed companies to firm prohibitions barring federal agencies from doing business with listed entities.  The first insight in this series discusses the statutory scheme and implications of the 1260H List.  These new concrete legal consequences have raised disputes in the District of D.C. and the D.C. Circuit, and we are now seeing the emerging jurisprudence on 1260H List designations.

Three recent decisions, all issued within an 11-day span in August, 2026, are defining the procedural and evidentiary limits on the Department of War’s (DoW) Section 1260H designations.  These decisions, which involved WuXi AppTec Co., Ltd. (WXAT); Shenzhen DJI Technology Co., Ltd./ Shenzhen Dajiang Baiwang Technology Co., Ltd. (DJI); and Hesai Group/Hesai Technology Co., Ltd., and its subsidiaries (Hesai), show that the judiciary will closely scrutinize both the process the DoW uses to designate an entity as a CMC and the evidence supporting that designation.  Although the DoW retains broad discretion to make decisions to support national security, affected companies are entitled to meaningful notice and an opportunity to be heard; material errors of fact or inexplicable conclusions can invalidate a CMC designation, and the courts will not make assumptions or otherwise supply reasoning in support of a designation that the agency failed to provide.

WuXi AppTec: Accurate Fact-Finding Is Essential

In WuXi AppTec Co. v. U.S. Department of Defense, No. 1:26-cv-02069, 2026 WL 2279624 (D.D.C. Aug. 7, 2026), the district court granted WXAT a preliminary injunction, barring the DoW from enforcing WXAT’s designation as a CMC under Section 1260H.  The court found that WXAT was likely to succeed on its Administrative Procedure Act (APA) challenge to its CMC designation because the DoW’s rationale for listing the company was directly contradicted by the evidence in the administrative record. WXAT, a Chinese life-sciences company founded in 2000, operates using a contract research, development, and manufacturing organization model, providing research, development, and manufacturing services (which span everything from early research through clinical trials) to more than 4,000 pharmaceutical and life-sciences customers, including over 1,200 in the United States.  WXAT is reportedly involved in producing roughly one-quarter of the medicines used in the United States.  The DoW first added WXAT to the 1260H List on June 8, 2026, when the Pentagon released an expanded 188-company list that superseded the prior 1260H List, which had not included WXAT.

In explaining the finding that WXAT is a CMC, the DoW asserted that:

  • WXAT is indirectly owned by the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) (a ministerial-level organization of the Chinese State Council that supervises and manages state-owned assets of enterprises under the Central Government’s supervision, effectively serving as China’s state-asset regulator exercising investor control over state-owned enterprises) because another SASAC-controlled CMC, the Chinese state-owned Aviation Industry Corporation of China (AVIC), owns a 5.32% equity stake in WXAT through the AVIC Military-Civilian Integration Selected Fund (the AVIC Fund).
  • WXAT is indirectly affiliated with the State Administration for Science, Technology and Industry for National Defense (SASTIND) (the Chinese civilian government agency that oversees science and technology for China’s defense industry), based on an October 2022 compilation of approvals issued by the Chinese Government’s Ministry of Science and Technology (MOST) for clinical drug trials involving human genetic materials (the MOST Compilation), which the DoW concluded WXAT had conducted in partnership with SASTIND-supervised universities.
  • WXAT is also indirectly affiliated with the People’s Liberation Army (PLA), based on a single line-item in the MOST Compilation documenting MOST approval for a drug trial at a PLA General Hospital clinical research site.

The court concluded that each of these justifications rested on a misreading or factual error, leading to the conclusion that WXAT’s APA challenge is likely to succeed on the merits.

First, the court pointed out that the source material the DoW relied upon in finding that WXAT is indirectly owned by SASAC/AVIC reflected that WXAT stock made up 5.32% of the AVIC Fund’s total portfolio, which translated to roughly a 0.001% (~$200,000) open-market equity stake in WXAT.  In other words, the AVIC Fund does not hold a 5.32% stake in WXAT; rather, WXAT stock makes up 5.32% of the AVIC Fund, which is a miniscule (0.001%) ownership stake in WXAT.

Second, the court held that the October 2022 MOST Compilation, the very document upon which the DoW relied upon to support its determination that WXAT was indirectly affiliated with SASTIND, directly contradicted the DoW’s decision.  For each listed clinical trial, the MOST Compilation used separate columns to distinguish between three distinct roles: (1) Applicant (the commercial drug sponsor seeking regulatory approval); (2) Medical/Academic Institution (the hospital or university clinical trial site conducting the study); and (3) Third-Party Laboratory (the contracted vendor performing routine analytical testing).  In every MOST Compilation entry the DoW cited to find affiliation with the SASTIND, WXAT (or one of its subsidiaries) only appeared in the “Third-Party Laboratory” column.  The court read the MOST Compilation differently, holding that the actual applicants which had sought and received MOST drug trial approval were largely global pharmaceutical companies headquartered in the United States and Europe.  This directly contradicted the DoW’s assertion that WXAT had received approval from MOST for these drug trials.  Furthermore, the Administrative Record demonstrated that, for each clinical trial, WXAT’s contractual relationship was exclusively with the commercial pharmaceutical sponsor (the applicant), and not with MOST, SASTIND, or some other CMC or Chinese state-controlled entity.  On top of that, WXAT’s role in these trials was limited to performing routine central laboratory analytical services (such as blood and tissue sample processing) at its own facilities, with no collaboration, joint research projects, or direct interaction with the SASTIND-supervised university hospitals serving as clinical trial sites.

Third, the court held the DoW finding that WXAT is affiliated with the PLA rested “on the same error as the [SASTIND affiliation], just in miniature.”  Mirroring its error on the SASTIND affiliation, the court held the DoW’s assertion that WXAT had received MOST approval to conduct research with the PLA General Hospital misread the MOST Compilation, which reflects that MOST had given Novo Nordisk (a Danish multinational pharmaceutical company) approval to conduct the drug trial in question, and only listed a WXAT subsidiary in the column reserved for third-party laboratories.  The fact that WXAT had served as a contracted analytical lab for a European pharmaceutical company’s commercial drug trial, in which one of the clinical hospital sites happened to be operated by the PLA, did not support the DoW’s claim that WXAT had either sought approval from MOST or partnered with the PLA in conducting the drug trial.

By mistaking portfolio weight for corporate ownership and control; confusing contracting to serve as an outsourced lab for routine testing capabilities with partnerships with SASTIND-supervised universities; and conflating WXAT’s role as a third-party commercial laboratory with that of applicants seeking Chinese Government approval for clinical testing and partnership, the DoW’s analysis and designation rested on basic factual errors, supporting the court’s finding that WXAT’s challenge to its inclusion on the 1260H List is likely to prevail on the merits.  The court also found that due process outweighed national security concerns and set the precedent for Hesai (discussed below).

DJI: Deference Has Limits, and the Agency Must State Its Own Rationale

In SZ DJI Technology Co. v. U.S. Department of Defense, No. 25-5367, 2026 WL 2357473 (D.C. Cir. Aug. 14, 2026), the D.C. Circuit affirmed in part, reversed in part, and remanded the September 2025 district court decision on Chinese drone manufacturer DJI’s challenge to its inclusion on the 1260H List, which had granted summary judgement to the DoW.  The D.C. Circuit was not convinced by three of the four bases DJI asserted on appeal, finding substantial evidence supported the DoW’s determination that DJI is a CMC and that the DoW did not act arbitrarily by failing to explain why other alleged companies with military-adjacent products were not added to the 1260H List.  The D.C. Circuit also rejected DJI’s claims that its designation as a CMC without advance notice violated procedural due process, ruling that DJI had no protected liberty or property interest triggering due process.  This conclusion rested on the fact that DJI is the global market leader with roughly 90% of the consumer drone market, which prevented DJI from showing that the CMC designation broadly precluded it from its business under the “stigma-plus” broad-preclusion theory.

The D.C. Circuit, however, sustained DJI’s argument that the district court had erroneously relied exclusively on the unclassified record to uphold the DoW’s conclusion that DJI contributed to the Chinese defense industrial base, leading the court to reverse and remand the case back to the district court.  In its decision the court assumed that, as applicable under the circumstances, Section 1260H imposes a distinct requirement that a company directly “contribute” to the Chinese defense industrial base.  The DoW, however, had redacted from the unclassified record the entire explanation for its finding that DJI was a direct contributor to the Chinese defense industrial base.  The district court had not considered the classified record in its decision and instead relied on arguments in the DoW’s briefing materials and other sections of the unclassified record in finding that DJI directly contributed to the Chinese defense industrial base.  The D.C. Circuit found that, as a result, the district court violated the Chenery principle (established in Sec. & Exch. Comm’n v. Chenery Corp., 332 U.S. 194 (1947)): that a reviewing court can only judge an administrative agency’s decision on the specific grounds and reasons invoked by the agency itself at the time of its action and not on later post hoc rationalization.  The D.C. Circuit declined to examine the classified record itself (as an Appellate Court is “a court of review, not of first view”), the D.C. Circuit remanded the case so that the district court could examine the classified record and determine whether the DoW’s contemporaneous reasoning supported the designation.

Hesai: Advance Notice and a Meaningful Opportunity to Respond

Four days after releasing the DJI opinion, the D.C. Circuit again tackled a 1260H challenge in Hesai Technology Co. v. U.S. Department of Defense, 186 F.4th 873 (D.C. Cir. Aug. 18, 2026).  In Hesai the D.C. Circuit considered a district court decision that the Pentagon’s failure to give the company advance notice of the bases for the company’s redesignation as a CMC or a chance to respond before the redesignation became final violated the company’s procedural due process under the Fifth Amendment.

Hesai develops and sells light detection and ranging (LiDAR) sensors, principally used in advanced driver-assistance systems and autonomous-vehicle fleets.  The DoW first designated Hesai as a CMC in the 1260H List on January 31, 2024; Hesai sued in May 2024, arguing that it was denied procedural due process for lack of pre-deprivation notice and hearing.  While summary judgment was pending before the district court, the Department rescinded Hesai’s initial CMC designation and then immediately redesignated Hesai, adding new bases and evidence.  Naturally, Hesai amended its complaint to challenge the redesignation, arguing in part that the DoW had not given it notice of the materials the Department intended to rely on or a chance to respond before the redesignation became final.  The district court upheld Hesai’s redesignation as a CMC and entered summary judgment for the DoW, finding that any notice or procedural due process error was harmless because Hesai had a meaningful opportunity to respond and showed no prejudice.

On appeal and reviewing de novo, the D.C. Circuit reversed and remanded on due-process grounds.  It held that the CMC designation’s reputational stigma, combined with its automatic exclusion from federal contracting and financial assistance, entitled the company to due process under the Fifth Amendment.  The D.C. Circuit held Hesai’s CMC designation implicated a constitutionally protected interest under the “stigma-plus” doctrine: public labeling as a CMC inflicts reputational harm and the statutory scheme automatically makes listed companies ineligible for certain government contracts, grants, and loans, and that change in legal status supplies the “plus.”  The court distinguished Hesai from its holding in DJI (which the court had issued four days before the Hesai decision) on the grounds that DJI’s stigma-plus claim exclusively rested on the broad preclusion from a chosen trade theory, whereas Hesai relied on the deprivation-of-a-legal-right theory.  Since Hesai had identified a constitutionally protected interest, the D.C. Circuit held that the DoW, after having reached a tentative determination, was required to provide notice, disclose the unclassified material on which it relied in identifying Hesai as a CMC, and permit a meaningful written response.  General national-security concerns did not excuse advance notice absent a particularized risk.  The court remanded without vacating the designation, allowing the DoW to cure the procedural defect.

The key takeaway in Hesai is that due process requires an agency, upon reaching a tentative determination, to notify the entity, disclose any unclassified materials upon which it intends to rely, and provide a meaningful opportunity to respond, in writing, before the designation becomes final.  This decision directly acknowledges that being branded a CMC and included on the 1260H List inflicts serious reputational damage.

Together, these decisions indicate that the courts, or at least the D.C. Circuit, will engage in an exacting review of Section 1260H designations. The DoW must provide alleged CMCs with a fair process where required, including providing notice before listing a company publicly on the 1260H List, accurately characterizing the record, and defending its action on the rationale upon which the designation was actually based, not on rationalization after the fact.  While national security is an important consideration that deserves substantial deference, it does not always outweigh due process and must coexist within the framework established by the Constitution.

Practical Takeaways for Government Contractors

These three decisions – WuXi AppTec, DJI, and Hesai – which were issued within an 11-day window (August 7, 14, and 18), should give industry a measure of assurance that courts will not rubber stamp placement on the 1260H List.  These three decisions, along with those that will inevitably follow, are forming a roadmap for how to challenge CMC designation and what is required from the DoW before listing an entity on the 1260H List.  Contractors concerned that they may be so much as considered for designation as a CMC should begin taking steps to demonstrate that they do not meet the criteria for listing under Section 1260H.  While engaging counsel that understands Section 1260H and the DoW is a vital first step, other things contractors should consider include:

  • Build the record early. Preserve evidence concerning ownership, affiliations, government support, facilities, and relevant technology uses.
  • Seek specific notice. If a company is placed on the 1260H list, Hesai illustrates the importance of requesting the unclassified record and demanding a meaningful opportunity to respond before a final CMC designation.
  • Test every factual premise. WuXi AppTec shows that source-reading errors can support immediate APA relief, especially where commercial harm is rapid and irreversible. Don’t accept the DoW’s evidence and reasoning at face value; carefully review the entire record, with knowledgeable experts if needed, to ascertain flaws in the Government’s reasoning and conclusions.
  • Focus on the DoW’s stated rationale for the CMC designation. DJI confirms that neither the Government nor a reviewing court may rescue a decision through post hoc rationalization.
  • Document harm promptly. Evidence of lost customers and disrupted programs can be critical to obtaining preliminary relief.

Companies facing designation should prepare at once for the administrative response, possible emergency relief, and close review of the agency record.