Technology companies are increasingly the target of antitrust actions and regulatory interference by nations seeking to protect domestic businesses or collect substantial fines. Investment treaties can provide tech companies with a way to fight back in an impartial forum against aggressive tactics. Elliot Friedman and Thomas Walsh of the global law firm Freshfields explain the nature and scope of investment treaties. In a brief conversation with host Joel Cohen, Elliot and Thomas explore litigation trends and strategies for tech companies to deploy treaty protections against sovereign adversaries.
Elliot Friedman is a partner at Freshfields in the international arbitration practice.
Thomas Walsh is Special Counsel at Freshfields in the international arbitration practice group.
Protecting against mistreatment by foreign governments: TikTok and the world of investment treaties (Freshfields Insights, Sep. 23, 2020)
Interview with International Arbitration Lawyers — Elliot Friedman and Thomas Walsh
Joel Cohen (Host): Hello, and welcome to TalksOnLaw. I’m Joel Cohen. Today as we look at tech firms under fire, we're joined by two experts in international dispute resolution, Elliot Friedman and Tom walsh of the global law firm Freshfields. Elliott, Tom, welcome to TalksOnLaw.
Thomas Walsh (Walsh): Thanks, Joel. We appreciate you having us.
Elliot Friedman (Friedman): Thanks, Joel. It's a real pleasure to be here.
Big Tech Litigation as a Proxy War
Host: Elliot, Tom, I sort of mentioned it in the introduction. Have tech companies become sort of a new proxy battleground?
Friedman: So, Joel, it's looking increasingly that way. You know what we're here to talk about today is how they can fight back a little bit. And historically, these kinds of protections were used mainly after a foreign government sent the army in to just dispossess you of your investment. The investors sued that foreign country, got compensation, end of story. Some of those naked grabs for assets and for investments are still happening, of course, but we are seeing tech companies being subjected to interference with their investments when they're making investments abroad and also in the U.S. Countries are using the regulation of tech companies as political leverage. They're applying foreign investment rules, or antitrust policies, or other regulatory mechanisms for sometimes political, less legal, but sometimes political ends.
Host: And maybe you could explain quickly what exactly is an investment treaty. Tom, maybe you could take this one.
Walsh: Thanks, Joel. Broadly, an investment treaty is a reasonably new solution to an old problem. And the old problem is the one that Elliot just described of states mistreating foreign investors. In the bad old days, if you were mistreated, you had kind of two options:
(1) You'd have to go into the local courts of the state that was mistreating you, which is not terribly palatable for reasons you can imagine. Often the home state would win that case;
(2) The other alternative you had was to talk to your own home government, and ask them to espouse your claim against the other government that just mistreated you.
Treaty claims create a new solution to that old problem. Investment treaties are either bilateral treaties (so a treaty between two countries), or they're multilateral treaties (so a treaty between three or more countries). And there are over 3000 of them in the world. The United States is partied to over forty alone. And generally, what these treaties provide is that if you are a citizen of one of the countries that is a party to the treaty and you make a foreign investment in another one of the countries that's a party to the treaty, your foreign investment will be protected pursuant to that treaty.
A Protection Traditionally Used by Energy and Natural Resources Firms
Host: Elliot, this type of protection is perhaps more commonly associated with natural gas exploitation or oil exploitation or mining in developing world countries. Is this an attempt to bring this type of protection into the tech space?
Friedman: Yeah, Joel, the premise of your question is exactly right. Historically, the industries that used these treaties most frequently were in the energy space. They tended to be the ones who invested enormous amounts of capital in frontier economies and had their investments subjected to unfair treatment. But what we are seeing now is foreign governments mistreating not just the huge infrastructure and the huge mining and the huge oil projects in their territories, but mistreating the tech investors in their territories, as well.
Rights of Companies under Investment Treaties
Host: Let's talk about some of the rights and the protections that can be offered by these treaties. Maybe we could do a quick, at best, of what are you seeing in terms of treaties to date? What types of protections can companies look for?
Friedman: it's a pretty easy question to answer because most treaties contain very similar if not identical protections. Most commonly, they will be a protection against expropriation, which is a standard takings-type protection. There is a right to be treated for your investment to be treated fairly and equitably. That has been interpreted in the main to protect an investor's legitimate expectation. These treaties also protect you against discrimination, and that's discrimination in favor of a local competitor or in favor of a competitor from another country. These treaties also often give you the right to transfer funds back to your home state, so revenues that you generate in the foreign country must be able to be repatriated freely from that foreign country to your home country. And as Tom mentioned a moment ago, one of the key rights in these treaties, and this is what really makes them revolutionary, is that they give private individuals foreign investors the right to bring an arbitration claim against a foreign sovereign.
Host: Nations are generally protected from lawsuits by individuals. That's called sovereign immunity. Here, these countries are giving up significant aspects of their sovereign immunity.
Friedman: That's right. By signing these treaties, the sovereigns waive their immunity to claims like this and accept that they might be sued by private individuals and private investors within a framework that will often see the action brought, for example at the world bank's exit facilities or the permanent court of arbitration.
Tech Companies & Investment Treaties – Examples
Host: There's been a number of prominent examples of large tech companies coming under fire overseas. I don't know what example you might want to give, whether it's Tik Tok here in the U.S. or Facebook or Google overseas. Maybe you could give an example of how a treaty like this may have led to a different outcome.
Walsh: Joel, another good question. And I think, as an example, I'll use Uber's recent case against Colombia. The facts of that were, in a nutshell, that the government of Colombia took regulatory steps that pretty much only affected Uber, and the motivation seemed to be to protect local cab companies, particularly in Bogota. Without an investment treaty, what would Uber have done? They perhaps would have had to go through local courts, and so they would potentially have been without option in terms of how to get redress for these regulatory actions. And instead, they were able to bring an investment treaty claim. That's not to say they didn't try to negotiate with the government, I imagine they did. Investment treaty arbitration shouldn't be thought of as purely an opportunity to receive an award. It's an opportunity to negotiate with the government that you would perhaps not otherwise have. And in Uber's case, they were able to take advantage of that opportunity, and I believe they were able to resolve their case in a favorable manner. So, I believe the settlement is confidential.
Host: When we're talking about investment treaties, these are state investment treaties, so it wouldn't be, you know, Facebook negotiating with the E.U. directly. It would be the United States negotiating with the E.U. or the United States negotiating with Nigeria.
Friedman: That's exactly right, Joel. These are instruments agreed to and signed by governments, usually bilaterally, so one government signs it with another government, and sometimes multilaterally. NAFTA is a good example of a U.S., Canada, Mexico [agreement]. So while signed by sovereigns, they benefit the individual investors from the countries who sign those treaties.
Walsh: It's an interesting point, Joel, about access. Effectively, the beauty of investment treaties is that any investor can benefit from them. It's not just the biggest investors. For example, if you were to negotiate with a state, and you were Exxon Mobil, that's fine, you may not need an investment treaty because you're a big enough company. You can negotiate. But if you're a smaller company or if you're a reasonably new tech company, you can take advantage of a treaty in the same way that the biggest companies can take advantage of the treaty.
Who qualifies under investment treaties?
Host: Elliot, what about the aggrieved parties? How do you qualify? How do you obtain protections under one of these treaties?
Friedman: You have to do something, but it doesn't have to be much. So, these treaties — there are many thousands of these treaties, so they're covering virtually every country in the world — you just have to make sure that your investment is flowing through a country with a treaty with the country in which you're investing. Say you're a U.S. entity investing in Country X, if there's a treaty between the U.S. and Country X, you're automatically covered. But say you're a U.S. investor, and there isn't a treaty with Country X, but say the Netherlands has a treaty with Country X. So, if you structure your investment (you, the U.S. investor) through the Netherlands into Country X, you qualify in most of these treaties for protection under the Dutch - Country X investment treaty.
Host: When you say structuring where, in that example, it may be that you make a subsidiary in the Netherlands and use that to invest in this third country?
Friedman: Oftentimes, that's all it takes, yes. So, at the outset of any major investment, what we are advising our clients to do is check the landscape of treaty protections. If you are not automatically protected by a treaty in place, structure your investments through a country that has one of these treaties in place, and you will therefore qualify for protection. If something goes wrong, you can invoke those rights.
The Future and Trends
Host: Well, before we let you go, maybe you can take a glimpse into what's happening now and what it looks to suggest for the future. Why don't you leave us with some trends in this space.
Walsh: Happy to. There are two trends that I think I'd like to highlight for you. One would be what are the states or which states do you need to be concerned about? And the short answer is all of them. Traditionally, investor state arbitration has been against states that go and take people's property [like] Venezuela or take drastic changes that really affect almost the whole economy like Argentina. What's changing now and is particularly relevant to the tech industry is that any state is a potential target of investor state arbitration. And why is that? Because the tech industry is doing things that no one has ever done before. And when that happens, governments don't know how to regulate the industry, and so they take missteps, some of them intentional, some of them not. And the tech industry should ideally be protected. So, how do you do that? It goes back to Elliott's response earlier about structuring investments and ensuring that you know your investments — whether they be in the United States, Western Europe, South America, Asia, Africa, you name it — are structured through an investment treaty to get those protections.
Host: All right, so that was the first trend. What’s the second one to leave us with?
Walsh: The second trend I want to touch on, Joel, is really specific to the tech industry. And it comes down to the question of whether or not cloud-based businesses are given investment treaty protections. And the short answer is: we think so. There's this theory that they float in the ether, but the reality is when you look more closely at these businesses, they are much more tethered to the jurisdictions in which they're serving. You know, the companies that are providing you with that content and advertisements in a country, let's take Argentina, they might be based abroad, and they in theory might be located in the cloud. But the reality is they're drawing content from entities in Argentina. They're drawing content from advertisers in Argentina that want to sell you things, and they're using Argentine infrastructure in the form of telecommunications infrastructure. And each of those is a touch point in the host country that strongly suggests that they are making an investment in that country, and as a result should be protected under an investment treaty.
Host: Tom Walsh, Elliot Friedman. Thank you for taking the time and joining us today by Zoom.
Friedman: Our pleasure. Thank you, Joel.
Walsh: Thank you, Joel.
Host: And thank you for watching TalksOnLaw.