Protecting Tech Companies’ Investments from Unfair National Regulation through international investment treaties

Guest blog: Rachel Thorn, Partner at Cooley, New York office; Marc Suskin, Partner at Cooley, New York office; James Maton, Partner at Cooley London Office; and Juan Nascimbene Associate at Cooley, London office

On a daily basis, technology companies face regulation and regulatory action from foreign governments that challenge their business models.  All indications suggest that the amount of foreign regulation will only increase in the years to come.  Such regulation can be arbitrary or discriminate in favor of local interests. These measures could include:

  • Forced data localization requirements;
  • Intrusive cybersecurity requirements;
  • Forced compensation transfer schemes to domestic industries;
  • Disproportionate digital taxes;
  • Censorship and blockages of digital platforms and content;
  • Forced transfer of proprietary information, including source code;
  • Failure to protect intellectual property; or
  • Outright nationalization of companies.

Rights under international investment law can protect against arbitrary, discriminatory and other unfair regulation or treatment by foreign governments, and provide a direct right of action against foreign governments for resulting harm.  Companies in extractive industries and infrastructure projects have relied on these rights for many years in disputes with governments.

 

1) What is international investment law and how does it protect tech investors?

International investment law sits above and is independent of national legal systems.  It protects foreign investors and their investments from unfair interference by a host government through regulation or other governmental measures that are arbitrary, unfair, discriminate in favor of local players or take the investment without full compensation

Bilateral or multilateral investment treaties signed between a Host State (the country where the investment is made) and a Home State (the country of the investor’s nationality) protect foreign investors and their investments by granting investors the right to bring a claim against Host States before international independent arbitration tribunals. This means that investors may have a direct right of action against foreign governments, in a neutral forum, heard by independent arbitrators appointed by the disputing parties.

The resulting awards are enforceable as local court judgments under existing international treaties and conventions. 

However, the legal remedies that protect foreign investors under international investment law may not be available without advance planning.  Access depends on whether the foreign investor is from a Home State that benefits from the protection of an investment treaty with the Host State of the investment. 

 

2) What are the protections found in international investment agreements?

Foreign states currently have entered over 3,500 international investment treaties (including investment protection chapters in trade agreements) granting foreign investors legal rights under international law directly enforceable against countries. The treaties require countries to observe enforceable standards of conduct with respect to foreign investors and investments, notably:

  • Fair and equitable treatment (i.e., avoiding arbitrary regulation, procedurally unjust measures, and observing state undertakings that induced the investment)
  • National treatment (i.e., treating foreign investors on an equal footing with local investors engaged in the same business)
  • Full protection and security (i.e., protecting investors and their employees and equipment against physical attacks and harassment by State or other local persons, and potentially against radical change to local laws or cybersecurity attacks)
  • No direct or indirect expropriation without full compensation (i.e., paying the investor fair market value where the State takes property, and compensation where State regulation unfairly destroys the value of the investment)
  • No requirement to transfer technology as a condition of investment (i.e., protection against “performance requirements” that condition investment authorization on transferring a key technology to local companies)

Typically, the term “investment” is defined broadly under these investment treaties and extends to intangible rights and IP, locally incorporated enterprises, commitments of capital to the host state, claims to money, and other assets.  Many of these investments represent the kind of assets that tech companies already possess in foreign investments around the world.

 

3) How to take advantage of Investment Protections?

Not all foreign investments enjoy coverage under the international investment law regime. Investment treaty protection depends on whether an investment treaty exists between the Home State and the Host State.  Where current investments do not enjoy protection, or where protection is not optimal, restructuring operations through a jurisdiction with adequate investment protections is often possible, and is often done in tandem with tax planning. 

While the optimal time to ensure adequate treaty coverage is when a company makes its initial foreign investment, existing operations can often be re-structured to obtain protection, provided that such re-structuring takes place before a dispute arises. Many successful claims have been brought through re-structured investments.  That being said, re-structuring must be completed before the facts that give rise to a dispute have transpired, otherwise a claim may be barred.

 

4) Conclusion

In the past years, technology companies, perhaps more than any other industry, have faced increasing regulatory friction with foreign governments because of the innovative and disruptive technologies that they provide. Sometimes these regulations are arbitrary and unfair and aimed at extracting concessions.  In these cases, international investment law and arbitration can be a useful shield and sword to protect tech companies.

 

Jana Psarska

Jana Psarska

Policy Manager | International Trade, techUK

Jana is techUK’s Programme Manager for International Trade.

 

She supports techUK members in navigating international markets, including market access and regulatory challenges, and assists the tech sector in taking full advantage of UK’s trade deals. Her responsibilities also include driving the UK digital trade policy agenda. Jana is committed to promoting UK digital trade by engaging businesses, UK government and international partners.

 

Jana has several years of experience in trade promotion, public policy, and providing strategic advice on international expansion strategy to companies across a variety of sectors. Prior to techUK, she worked for the Department for International Trade, helping UK SMEs expand abroad.

 

She holds a MA in International Political Economy from King’s College London.

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