Zoom-Five9 deal falls under national security scrutiny

The federal government has started investigating Zoom's planned acquisition of Five9 for its national security impact, a move that could give companies pause when deciding whether to do business with Zoom.

The Department of Justice has asked the Federal Communications Commission to refer the deal to an interagency committee known as Team Telecom to investigate whether Zoom's ties to China could jeopardize U.S. national security or law enforcement interests. The Wall Street Journal first reported on the request this month.

The increased scrutiny might scare off current or prospective Zoom customers, as the company has previously caught flak for its connections with the Chinese government. Though Zoom is a U.S.-based company, it has product development operations in China.

Zoom announced its intention to buy Five9 for $14.7 billion earlier this summer. Industry observers said the purchase would allow Zoom to be the single vendor for its customers' UC and contact center needs. However, FCC approval is needed before a telecommunications provider like Five9 can change hands.

A Zoom spokesman said the regulatory approval process is proceeding as expected, and it still believes the deal will close in the first half of 2022. Five9 refused to comment on the matter.

Colin Taylor

Colin Taylor, CEO of contact center consulting firm The Taylor Reach Group, said the FCC investigation could raise red flags for the company's current or potential customers. He said Zoom would have to address the issue when dealing with tech buyers considering products.

"While [Zoom has] likely worked to build firewalls and [increase] security protocols, negative news always seems to have a longer shelf life than good news," he said.

Lawyer Richard Sofield, a partner at Vinson & Elkins and former chairman of Team Telecom, said the committee would consider the threats, vulnerabilities and consequences of a Zoom-Five9 deal when deciding whether to impose conditions on the acquisition or stop it altogether.

"The threat is a function of the acquiring entity and its capability or intent to harm U.S. national security," Sofield said.

Team Telecom's investigations are broader than the typical review of this kind of deal, Sofield said. Instead of focusing on just changes that arise from the acquisition, the group can consider the current business practices of Zoom and Five9.

"There's no FCC regulation regarding how a video conferencing company handles its client's sensitive personal data … but that's absolutely what Team Telecom's interested in here," he said.

The FCC expects companies to vet the vendors with whom they do business, Sofield said. Banks are responsible for knowing whether their customers violate anti-money-laundering rules, so, similarly, tech companies must understand how their partners operate.

"From Team Telecom's perspective, every business should be attuned to potential national security and data security issues regarding [their] relationships," Sofield said.

Besides the FCC probe, Zoom also faces investigations by the Securities and Exchange Commission and the U.S. Attorney's offices in New York and California regarding security and privacy issues.

The acquisition investigation is not the first time Zoom's relationship with China has led to controversy. In April 2020, the University of Toronto's Citizen Lab reported that some Zoom calls were routed through servers in China, even when no meeting participants were in the country. Zoom said it fixed the routing problem, which stemmed from increased usage in the early days of the pandemic.

Later in 2020, the Justice Department charged a China-based Zoom executive with sharing the personal information of Chinese dissidents to the government and disrupting video meetings held in memory of the Tiananmen Square massacre. Zoom fired the executive when the charges came to light.

Mike Gleason is a reporter covering unified communications and collaboration tools. He previously covered communities in the MetroWest region of Massachusetts for the Milford Daily News, Walpole Times, Sharon Advocate and Medfield Press. He has also worked for newspapers in central Massachusetts and southwestern Vermont and served as a local editor for Patch. He can be found on Twitter at @MGleason_TT.