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Do BITs and bytes bite? Investment treaty arbitration for technology disputes

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Tech Newsflash

Cross-border disputes involving technology companies are increasing with the proliferation of new government regulations in the areas of data protection, cybersecurity, online content, foreign investment controls, taxation, competition and consumer protection. These changes in the regulatory landscape are forcing technology companies to adapt and, in some cases, are driving them out of important markets.

When considering legal options, technology companies increasingly are looking to international legal forums to bring claims against States, particularly where the prospects of obtaining redress in domestic courts are slim. Investment treaty arbitration—a tool used for decades in the telecommunications, infrastructure, and energy sectors—is an important option to consider.

 

Investment treaty arbitration

Investment treaty arbitration is a binding international dispute resolution mechanism that arises from the consent provided by two or more States in a treaty. Each contracting State undertakes to afford investments made by investors of the other contracting States certain substantive protections, and each State gives these investors standing to bring direct claims against it in arbitration for alleged treaty violations. More than 2,500 such treaties are in force globally, most of which are bilateral investment treaties (BITs) although there also are an increasing number of free trade agreements (FTAs) and multilateral treaties with investment protections. While their provisions differ, these treaties often oblige host States to provide qualifying investors and investments in their territory with "fair and equitable treatment," "national" and "most-favored-nation" treatment, protection against uncompensated expropriation, "full protection and security," and a right to transfer funds and returns outside the host State. These standards protect against arbitrary and discriminatory measures and measures that constitute a taking of an investment. 

Investment treaty arbitration may offer foreign investors significant advantages over other international dispute resolution mechanisms. Unlike most other categories of private claimants in international law (e.g., those bringing claims under international human rights instruments), investment treaty claimants generally are not required to exhaust domestic remedies in the courts of the host State before bringing a claim in arbitration. Once an arbitration is underway, both claimant investors and respondent States have the opportunity to appoint an arbitrator and to agree on the third arbitrator, who together will form a three-member tribunal. Arbitrators may be selected having regard to relevant expertise and nationality, among other factors. After an arbitral award is rendered, award creditors may seek the cross-border recognition and enforcement of the award, usually with greater ease and predictability than would be the case with a domestic court judgment.

 

Investor-State arbitration of technology disputes

While technology companies, until recently, have not been frequent users of investor-State arbitration, the trend is changing:

  • In April 2019, the Polish unit of music streaming company TIDAL threatened an investment treaty claim against Norway, alleging that a criminal investigation conducted by the Norwegian authorities against TIDAL's local subsidiary breached Norway's obligations under its BIT with Poland.1
  •  In December 2019, Uber served a Notice of Dispute on Colombia under the Colombia-U.S. Trade Promotion Agreement (TPA) after the Colombian competition authority (SIC) banned Uber's ride-hailing services in the country, forcing Uber to suspend these services.2  Uber eventually re-entered the market with a new car rental service model in February 2020, and in June 2020, the Superior Tribunal of Bogotá overturned the SIC's order.3
  • In December 2019, Neustar and .CO Internet filed a request for arbitration under the same Colombia-U.S. TPA, alleging that Colombia (acting in particular through its Ministry of Information Technologies and Communications) had violated the treaty in connection with its management of the .CO Internet domain concession.4
  • In January 2022, Huawei brought a claim against Sweden under the China-Sweden BIT after the Swedish telecom regulator PTS excluded Huawei and another Chinese telecom company, ZTE, from the rollout of its 5G network, invoking purported national security concerns.5 Huawei has also threatened an investment treaty claim against the Czech Republic.6

As more technology companies seek redress in arbitration for a broad range of grievances under investment treaties, arbitral tribunals may be called on to apply common treaty provisions to new and emerging technologies. These may include determining, e.g., whether digital and delocalized or de-centralized assets qualify as protected investments "in the territory of the host State" under applicable treaties, the circumstances in which State measures may effect an expropriation in the digital economy, and which methodologies may apply to quantify damages in the technology sector. 

 

Structuring technology investments to benefit from treaty protections

As more States increase regulatory attention on the technology sector, an increasing number of technology companies will find reliance on treaty protections to be an important option to consider among the range of remedies available to them. Under most investment treaties, shares in a locally incorporated company, including indirect and minority shares, are a covered investment. Where an investment is structured through one or more subsidiaries in different States, the ultimate shareholder(s) and each company in the chain accordingly may benefit from investment treaty protections if there is an applicable treaty. Investments therefore may be planned strategically to benefit from investment treaty protection even where an investment treaty is lacking at the level of the parent company, by structuring the investment through a subsidiary in a third-State jurisdiction that has concluded a treaty with the host State.

To ensure that recourse to investment treaty arbitration is available when a dispute arises, technology companies need to act proactively to put investment structures in place before the dispute arises. Arbitral tribunals repeatedly have dismissed claims where restructuring was done in an attempt to gain access to investment treaty protections after the host State had already begun taking adverse action against the investment. Strategic planning as to the structure of the investment therefore must be done in advance, before problems with the host State begin to occur.

 

1 Caroline Simson, Streaming Service Tidal Threatens Norway with Arbitration, LAW360 (Aug. 21, 2019), available at https://www.law360.com/articles/1191257/streaming-service-tidal-threatens-norway-with-arbitration. 
2 Lisa Bohmer & Luke Eric Peterson, Uber Threatens Colombia With Treaty-Based Arbitration After Ban on Use of Its Ride-Sharing App, IA REPORTER (Jan. 9, 2020), available at https://www.iareporter.com/articles/uber-threatens-colombia-with-treaty-based-arbitration-after-ban-on-use-of-its-ride-sharing-app/.
3 Colombia court overturns restrictions on Uber, REUTERS (June 19, 2020), available at https://www.reuters.com/article/uber-colombia-idLTAL1N2DW2IS
4  Neustar, Inc. v. Republic of Colombia, ICSID Case No. ARB/20/7, Request for Arbitration (Dec. 23, 2019), available at http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C8333/DS16719_En.pdf. 
5 Cosmo Sanderson, Huawei brings ICSID claim against Sweden over 5G ban, GLOBAL ARBITRATION REVIEW (Jan. 24, 2022), available at https://globalarbitrationreview.com/article/huawei-brings-icsid-claim-against-sweden-over-5g-ban.
6 Cosmo Sanderson, Huawei threatens claim against Czech Republic, GLOBAL ARBITRATION REVIEW (Feb. 8, 2019), available at https://globalarbitrationreview.com/article/huawei-threatens-claim-against-czech-republic

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© 2022 White & Case LLP

 

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