Arbitration in Expertise Disputes – International Arbitration Evaluation
Technology is fundamentally shifting the way in which individuals, businesses and governments interact across sectors. The landscape is ripe for tech disputes, particularly in three key areas: post-M&A, long-term commercial collaborations and international investment protection. Arbitration is – rightfully – a prime forum for resolving such disputes. Tech arbitrations are, however, complex and raise a number of difficult practical and strategic issues, which we explore in this article.
- Trends in tech disputes in Europe
- The suitability of arbitration for tech disputes
- Implications of the record-breaking tech M&A deal market
- Implications of the rise in commercial tech collaborations
- Increasing use of investor-state arbitration in response to government regulation of tech
Referenced in this article
- L1bero Partners LP and Mr Fabio M. Covarrubias Piffer v United Mexican States
- Espíritu Santo Holdings, LP and L1bre Holding, LLC v United Mexican States
- Huawei Technologies Co Ltd v the Kingdom of Sweden
- Neustar Inc and .Co Internet SAS v The Republic of Colombia
- Uber Technologies Inc and Uber Colombia SAS v Colombia
Why does ‘tech disputes’ warrant its own chapter in the 2023 European Arbitration Review? The answer lies in a combination of three basic truths about society, disputes and arbitration, respectively.
First, technology (spanning AI, advanced robotics, data analytics to the internet of things (IoT)) is fundamentally shifting the way that individuals, businesses and governments interact with one another. At the corporate level, tech M&A deal value and volume continue to dominate in 2022, including in the EMEA region. Tech-driven joint ventures (JVs) and other collaborative agreements have also become a prominent feature of corporate strategy across a number of sectors. At the governmental level, tech is raising novel questions about policymaking and challenging the boundaries between commercial activities and government regulations. This is true especially in the European Union, which even more than any other major jurisdiction, is currently adopting and proposing significant new regulations in the tech space, altering the legal landscape for intermediary services such as platforms and marketplaces, the use of artificial intelligence and the commercialisation of data. The European Union’s regulatory ambitions have and will result in an increasingly regulated environment, heightened compliance requirements and greater legal risks for tech companies operating in the European Union.
Second, wherever there is rapid change increasing complexity and significant uncertainties, there will be disputes. Thus, it is of no surprise that across all stakeholder levels, tech disputes are becoming more prevalent. In recent years, commercial tech disputes across the globe and, in particular, in Europe, have made headlines, ranging from the telecommunications and IT sectors to the med-tech space, with many more such arbitrations staying out of the public eye. Moreover, the proportion of tech disputes at ICSID appears to have doubled in 2022 compared to three years ago.
Third, and relatedly, arbitration is in principle well suited to resolve tech disputes. Arbitration promises to offer not only heightened confidentiality prized by tech companies, but also broad international enforceability, neutral and expert decision-making and increased efficiency.
The interface between technology and arbitration can be analysed in great depth from many different angles – far more than could be adequately addressed in a brief survey review such as this one. We therefore do not aim for completeness or exhaustiveness, and refrain entirely from addressing fascinating topics such as the use of technology in arbitration, blockchain ADR and the question of which IP rights may be non-arbitrable in some jurisdictions. Instead, we focus on the key trends, issues and challenges for the tech industry moving forward and consider the use of international arbitration as a preferred means of dispute resolution in three key areas: first, tech M&A disputes; second, disputes arising in the context of commercial collaborations, with distinguishable features from tech M&A disputes; and third, investor–state disputes centred around technology as the protected investment.
Part I: tech M&A arbitrations
The rise of tech M&A disputes
The tech industry encompasses a wide range of sub-industries, ranging from the earlier electronics and IT sectors to newer-age companies that rely heavily on intangible assets such as software, algorithms, AI-powered systems and data.
Historically, tech disputes usually arose out of cornerstone agreements like research and development, licence or distribution and sales agreements (ie, agreements about the creation, protection or sale of technology). It was (and is) common to see disputes over missed milestones, quality of service, payment obligations, breach of licences or exit terms.
More recently, however, tech-related M&A deals and related disputes have significantly increased. The year 2021 was record-breaking in M&A and, although there was some decline in the M&A market in the first half of 2022, tech remains a growth driver and continues to be a relatively hot and seller-friendly market. The EMEA region has experienced a particularly high level of deal activity in the tech sector in 2021 and the first half of 2022. Moreover, we see that in contrast to earlier times in Europe, raising post-M&A arbitration claims is becoming the norm rather than the exception and is no longer perceived to be a last-resort measure. In some cases, these arbitrations may even be seen as an acceptable mechanism to achieve a post-closing price adjustment.
Combine this with the unprecedented level of commercial and legal changes in the tech industry and we can expect more disputes arising throughout the cycle of tech-related M&A transactions, ranging from early-stage investments post-closing to initial public offerings.
Suitability of arbitration
This expected rise of M&A disputes raises the question of whether parties can rely on arbitration as a proper means to resolve such disputes. In our experience, this is generally the case, as arbitration offers important advantages at various stages:
- Pre-dispute: many tech M&A disputes involve cross-border elements, which is unsurprising given that technology itself knows no physical boundaries. Tech businesses and their investment structures are also typically international in nature. This renders international arbitration – being generally perceived as neutral and well shielded from domestic influence favouring a particular party – particularly well suited to resolving tech M&A disputes. This is confirmed by technology, media and telecom stakeholders, who consider arbitration to be ‘preferred’ given its widespread enforceability and neutrality.
- At the start of an arbitration: commercial parties have the option to select arbitrators and experts with sophisticated and specialised knowledge. In tech, this is particularly useful in ensuring that adjudicators are equipped to address intricate factual issues in accordance with industry norms and practices. Furthermore, the parties have broad discretion to design the arbitration process as they see fit, including tailoring confidentiality protections. These benefits are not to be understated especially given that tech M&A disputes may now bring into question more technical or factually complex issues than earlier contractual type claims, which tended to have only an ancillary relationship to technology.
- Throughout the arbitration: commercial parties can continue to tailor the proceedings in accordance with their joint needs, including, for example, opting to keep the dispute confidential to shield key technology assets from the public eye. Parties may also agree on specific and more innovative evidentiary tools and processes tailored to the underlying technological questions at hand (eg, automated reviews of software code and reverse engineering).
- At the end of an arbitration: commercial parties can also expect to receive an award that can be recognised and enforced in other jurisdictions, especially where a tech company’s foreign counterparts may have assets. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards has 160 signatories, comprising over 80 per cent of the world. The norm is, therefore, that arbitral awards will be recognised and enforced in other jurisdictions.
Meanwhile, parties should also bear in mind some tech-specific caveats to the suitability of arbitration, especially:
- Arbitrability: in general, the fact that a dispute relates to tech will not affect the arbitrability of that dispute. However, in some situations, the dispute might be non-arbitrable if it relates to IP or a subject matter that is governed by the exclusive jurisdiction of specific tribunals or courts.
- Provisional measures: although provisional measures are becoming more established in arbitration, national courts still tend to provide faster enforceable decisions in situations where it is important for the parties to preserve their rights. This will be particularly relevant if the dispute arises out of tortious elements (like in IP infringement scenarios).
Overview of relevant issues
In our experience, the following issues stand at the heart of many tech M&A arbitrations.
First, there are difficulties associated with the valuation of the (complex) business models in tech, particularly given the competitive and fast-changing nature of the market and today’s seller-driven hot market. High valuations – but often with significant contingent payment components – are common fodder for disappointment by one side or the other. Moreover, the value of tech companies depends heavily on the assumptions that they can establish and maintain a profitable business model and their competitive edge over time. If, however, a new competitor with superior technology abruptly enters the market or another significant adverse external event occurs, this can completely negate earlier planning assumptions in an M&A deal. The valuation forming the basis for the purchase price may then prove to be significantly incorrect if it fails to take into account such risks. This increases the risk of disputes under several heads, in particular for breaches of warranties, fraudulent misrepresentations, culpa in contrahendo (fault in conclusion of a contract) and in relation to earn-out provisions.
Second, buyers may also face unique challenges conducting due diligence on tech businesses. More than other sectors, tech businesses often rely on ‘intangible assets’ such as patents, trademarks, copyrights or trade secrets. Assessing intangible assets is no easy task, even under the best of circumstances, let alone under the tight deal time frames frequently observed in the recent sellers market. In contrast to a physical asset such as a machine that can be inspected, the assessment (and valuation) of the validity of IP rights and their ownership is much more challenging – and in some cases, simply not fully possible (eg, with respect to trade secrets). Furthermore, tech is also a people business. From a deal perspective, in particular, the risk of departing key employees and onboarding key employees and the related risk of misappropriation of trade secrets needs to be considered in the transaction documents and might lead to disputes over breach of (IP) warranties or the valuation disputes described above.
Third, there can often be a significant disparity in sophistication and bargaining power between the parties. This applies most prominently in transactions where an established player is buying a start-up. But this can also be true even for transactions between two mature commercial entities, given sellers’ recent penchants for instituting tightly managed auction processes with limited room for buyers’ diligence or contractual protection. As mentioned before, this can lead to disappointed expectations and increase the likelihood for disputes and claims for misrepresentation.
Key takeaways for parties
A broad range of potential issues may trigger a tech-related M&A dispute, and it is usually not possible for either party to succeed in insulating itself against all material risks. Parties are, therefore, well advised to anticipate from the beginning of a transaction that they could end up in a dispute down the road and act accordingly at every stage. In our experience, in particular the following key takeaways should be considered:
- Make an informed decision: insist on taking the time required for due diligence checks and ensure proper documentation during the negotiation phase to document the reasons for changes to particularly sensitive clauses (eg, warranty qualifiers).
- Know the contracts before signing: keep in mind that deal documents frequently provide for various time limitations. With respect to raising claims, the contract may impose a relatively strict time frame in combination with tight formal notice requirements or require for pre-arbitration negotiations or other settlement efforts. When dealing with specific types of disputes (eg, earn-out clauses) some are specified to be resolved via expert determination and not litigation or arbitration. In sum, commercial parties need to make sure that they clearly understand the applicable contractual framework for their claims.
- Manage the contracts post-signing: both parties should ensure a smooth handover from the deal team to the operations team. Buyers need to ensure compliance with any post-closing diligence obligations. Sellers also need to remain on the alert after signing for issues in relation to representations and warranties, given that there is usually a significant time gap between signing and closing where representations and warranties are often repeated. Sellers need to ensure that they disclose and mitigate any relevant issues in this period in accordance with the agreed deal framework – or risk being hit with a post M&A claim.
- Secure your evidence: parties also need to make sure that they document the relevant factual condition (ie, a buyer seeking to rely on breach of warranty claims usually needs to plead and prove that the relevant breach was present at the time of signing or closing). In the fast-paced tech space, buyers are often eager to integrate the acquired company within the buyer’s business as soon as possible. To preserve the relevant facts, buyers can consider conducting independent evidence proceedings prior to moving forward with the business integration and raising a claim.
- Avoid ‘midnight’ clauses: parties need to make a conscious choice with respect to the dispute resolution and governing law clauses. This requires time and effort from commercial parties to assess their roles and the substance of the contract. In this regard, the seat of an arbitration should also be considered. This is not a formality but an essential feature for the whole arbitration proceedings.
Part II: commercial collaborations
The rise of tech commercial collaborations
Aside from increased tech-driven M&A activity, we also observe a noticeable uptake of commercial collaborations between companies in the tech sector.
Pressure to develop innovative solutions and reduce go-to-market times have incentivised businesses to look more frequently for partners with complementary and specialised capabilities to drive forward specific projects. An illustrative example is the automotive industry, which is in the midst of a fundamental digital transformation: most OEMs and their suppliers now work together with software providers, battery producers and start-ups to develop solutions for self-driving and electric vehicles, charging or mobility-as-a-service solutions. Similarly, in various parts of the world, urban city planners and construction companies are partnering up with tech outfits to create ‘smart cities’ that work more efficiently and intelligently. In the IoT space, the global market looks bullish, with companies across different sectors transforming their businesses towards more connected, data- and software-driven digital operating models.
Such commercial collaborations are different from M&A transactions in a fundamental way: they are typically entered into for a longer term, with the parties establishing a symbiotic relationship and sharing the common goal of having the collaboration succeed. In comparison, commercial parties in an M&A context are usually engaging in a one-off transaction and typically have (at least partially) opposed interests. Despite this conceptual difference, arbitration offers the same benefits of specialised knowledge and expertise, as well as heightened confidentiality protections adapted for the commercial tech environment. However, commercial collaborations also raise a number of unique challenges and novel issues.
Disputes of a different nature
The potential for disputes occurring in a commercial collaboration is enormous. While the issues that can give rise to conflicts are manifold, in our experience, they most commonly arise in relation to the following general topics:
- Differences in governance and management: collaborations are difficult as they require commercial parties with different corporate cultures, goals and mindsets to work together. Most collaboration contracts contain sophisticated project management, governance and tiered dispute resolution mechanisms, aimed at ensuring smooth cooperation and avoiding an unnecessary escalation of day-to-day operational disputes. But even then, these regimes are often (too) complex, and project teams actually dealing with the contract governance often might not be able to work in full compliance with the governance rules as established in the underlying agreement. This can trigger disputes about a party’s compliance with the governance and dispute resolution mechanisms (on issues of deadlines, escalation rules, formal requirements, etc). For instance, a recent ICC arbitration addressed the breach of a right to ‘equal representation’ under the consortium and the tribunal ordered the management board to be reconstituted, with each partner naming half of the members.
- Different approaches to risk: in many cases, the parties have different risk appetites, as may be reflected in their commercial strategies and policies. For example, while US businesses may (broadly speaking) often apply less scrutiny in regard to data protection and similar regulatory aspects, EU-based companies may take a significantly more risk-averse approach. In collaborations, regulatory compliance of either party may also affect the other partner and have a spill-over effect on the project. In addition, the regulatory landscape, especially in the EMEA area, is constantly changing at an ever-increasing speed. This cannot always be resolved up-front contractually, and disputes about each party’s compliance with their respective obligations in this respect are in practice often unavoidable.
- IP, know-how, and data: digital assets, such as IP, know-how and data play a crucial role in tech collaborations. The contracts need to consider rules on the allocation of rights, warranties and a regime for the commercial exploitation of the results of the collaboration (joint ownership, cross-licences, use-case based restrictions, access to source code, etc). These rules are, by their nature, complex, especially if several jurisdictions are involved. Contractual rules also need to consider the time after the collaboration has ended, and the need to comply with applicable competition laws. In particular, in respect of data as an asset, the legal uncertainty is considerable – with no clear ownership or use rights available under applicable laws and potentially significant access and sharing obligations on the horizon under the proposed Data Act. What the partners can and cannot do with the IP, know-how and data generated out of a collaboration is commercially crucial – and disputes often revolve around these distinctions.
- Unclear contractual language: collaboration contracts are often the result of lengthy negotiations and, owing to little standardisation, are complicated to understand, ambiguous and open to different interpretations. As the contours of the project are often not entirely clear in the beginning and the parties are keen to retain a certain flexibility, collaboration agreements are often (necessarily) incomplete, and may contain vague obligations and ‘agree to agree’ provisions, including on key commercial aspects. Unsurprisingly, this is a minefield for disputes.
- Resources and consideration: commercial collaborations feature many different variations with regard to how the parties contribute to the project and compensate each other for such contributions. For example, in some cases, one party will contribute assets in-kind such as human resources, manufacturing tools or other infrastructure, while the other party provides monetary contributions (typically payable conditional upon the achievement of milestones). In other cases, parties also contribute pre-existing IP assets, such as software, know-how, patents or valuable data. In such scenarios, different problems can also arise (eg, regarding valuation, representations and warranties, scope of use and implications of early terminations for such contributions).
- Subsequent change after the establishment of collaboration: in long-term collaborations, the parties are in a symbiotic relationship, and their mutual dependency determines the success of the partnership. In particular, in the case of fast-paced technology, collaborations should expect changes ranging from a variety of sources including new technology, market demand, competitor activity, the regulatory framework, force majeure events (including a pandemic or war, and supply chain issues). In these circumstances, the nature of the collaboration comes under stress and will either have to adapt or fail. Although contracts typically contain comprehensive change management rules, these are also complex and have commercial complications leading inevitably to disputes.
Against this backdrop, it may – at first blush – be surprising that, statistically speaking, arbitrations arising in connection with commercial collaborations have thus been relatively rare. In our view, the explanation is twofold. First, unlike in an M&A scenario, collaboration-type disputes typically arise when the collaboration is still in full pursuit – with mutual dependencies still in place. Arbitration is, thus, perceived as a means of last resort, an action one would pursue only when the termination of the partnership is unavoidable. Most parties will file a claim only when all other options (eg, discussions in steering committees, mediation, expert determination and negotiations between C-level management) have not been fruitful – and collaboration agreements are often designed accordingly. Second, as noted above, the age of commercial collaborations is just beginning, and the time horizon for these collaborations is long. Thus, we believe it reasonable to expect that the recent trend towards more and bigger tech collaborations will result in a range of disputes – including some very complex and significant ones – going to arbitration in the years to come.
Key takeaways for parties
In light of the nature of issues highlighted above, we have compiled some key issues to consider for businesses entering into a commercial collaboration:
- Realistic drafting: agreements should be designed so that operational teams can reflect them in practice. This is true especially for governance and tiered dispute resolution mechanisms. Boilerplate or overly complex regimes mean a higher risk of non-compliance.
- Contract governance: once agreed, contract governance clauses must be respected. If the formal requirements of the agreed dispute resolution procedure are not complied with, rights to assert claims may become forfeited. This is a real issue in practice, as the implementation of such projects is typically being handled by project teams, without direct legal support from the lawyers who have negotiated and drafted the agreements. Documentation is also key, and project teams are well advised to take minutes of all meetings and adequately document the decision-making in steering committees, notices being sent to the other party, and actions being taken.
- Tiered dispute resolution mechanism: in the context of commercial collaborations, parties may adopt tiered dispute clauses, which require prior steps such as negotiations, mediation or expert determination to be exhausted before arbitration is available as a last resort. Non-compliance with these prior steps may prevent an arbitral tribunal from having jurisdiction over the dispute.
- Arbitration strategy: to be successful in a dispute arising out of a commercial collaboration, a deep understanding of the project at hand is key. The interpretation of the relevant agreements usually requires careful forensic investigation; in many cases, preceding memoranda of understanding, term sheets or other preliminary documents were put in place and may impact how the final agreement must be construed. The teams involved in the negotiation and drafting of the agreement should be consulted where possible.
- Fate of the collaboration: arbitration does not always have to result in the termination of the underlying agreement. In contrast to one-off transactions, the parties in dispute are likely to remain dependent on each other, and the collaboration will need to be continued for some time (or, at least, be phased-out in accordance with the relevant exit provisions). This will likely have strategic implications (and often raise the pressure to come to an amicable solution). On the flip side, arbitration may provoke a termination for cause by the other party – it should be considered whether such scenario is acceptable from an operational perspective and how to deal with it.
Part III: tech investment protection
The rise of tech investor–state arbitration
One of the defining questions of our time is how to regulate tech in a way that both fosters technological innovation and ensures that such innovation fairly benefits society as a whole. Tech today is thus at the core of government policymaking, bringing into question regulations spanning free speech, citizens’ privacy, defence, economic security to public health and safety.
Governments are moving to regulate tech, and foreign tech investors, in a variety of ways. European countries are banning Huawei from participating in 5G networks over national security allegations. The US is advocating for tech companies to ban TikTok over privacy and security concerns. In light of its war on Ukraine, Russia has also banned some social media companies to combat ‘fake news’ and ‘foreign interferences’. Indonesia and Pakistan are imposing licensing and data sharing requirements. Following a Colombian court’s finding on competition law violations, Uber is exiting the market altogether.
Faced with increasing government activism, companies are starting to turn to the investor–state dispute settlement (ISDS) regime. Investment agreements provide for a range of protections, in essence against arbitrary and unlawful interferences by the host state. When an investor is of the view that the host state has violated these protections, it can bring a direct claim against the host state before an international arbitral tribunal. Such is the ISDS’s advantage in allowing the investor to seek recourse against the host state outside of its national courts.
In the same examples cited above, Huawei has filed ICSID claims against Sweden over the 5G ban, and Uber is also looking to bring claims against Colombia over the ban of its ride-sharing app. Other examples of recently initiated cases in the tech space include PCCW’s claims against Saudi Arabia under the China–Saudi Arabia Bilateral Investment Treaty (BIT) over the cancellation of its telecoms operating licence, Digicel’s claim against Papua New Guinea over additional taxes on telecom firms, L1bero Partners’ claims against Mexico under the North American FTA (NAFTA) and the Italy–Mexico BIT over regulations affecting the use of its ride-sharing app, and Neustar’s ICSID case against Colombia in taking over its management of an internet domain. Not only have we arrived at the new era of ISDS-tech disputes, but these examples also show that there are effectively no limits to the factual scenarios in which these claims may arise.
Given the increasingly complex regulatory environment, ISDSs will play an important (and likely controversial) role in determining the boundaries between investment protection and the host states’ right to regulate. As with the numerous examples mentioned, arbitral tribunals will be asked to grapple with difficult questions raised by the cross-cutting use of tech today and its intersections with core policy issues such as security, privacy and even free speech. However, as we observe below, while ISDS provides a general framework for tech companies to safeguard their foreign investments in the host state, the exact contours of these protections in relation to tech companies and their assets are, in some important respects, still to be determined.
Tech as a protected investment
Most investment treaties provide for a wide definition of ‘investment’ that is broad enough to encompass various forms of tech and tech-related resources. Certain treaties expressly protect IP rights in various forms, including those that do not typically provide that an ‘investment’ may be of ‘every kind’. Under this broad definition, physical tangible assets, such as hardware, and intangible assets, such as operating licences and IP rights, constitute protected tech investments.
However, in some areas, investment treaties continue to fall behind tech developments. Data, the ‘new oil’ of the digital economy, is one such prominent example of a gap in treaties provisions. Most treaties were concluded in the 1990s, pre-dating the advent of such new technologies, and have not been updated to explicitly address the question of whether ‘data’ can be an investment. The issue is whether data can be treated as an IP right or an intangible asset, and therefore qualify as a protected investment. This again raises difficult issues associated with the nature of data and whether it is capable of giving rise to rights. The position is far from settled, with some countries, including the United Kingdom, now considering legislative reforms to specify the qualifying criteria for data as an asset, notably requiring the quality of a rivalrous good. In contrast, European regulations such as the Regulation on the free flow of non-personal data and the proposed Data Act adopt the opposite presumption of the ‘free movement of data’ and data as a non-rivalrous good. Clarifications on the status of data are important and long overdue in Europe, particularly in light of the increasing number of related EU regulations. In other words, watch this space.
Key substantive protections in flux
Against this backdrop, it is important for tech companies to be aware of the substantive protections offered for their investments, notably: (1) against wrongful expropriation; (2) fair and equitable treatment; and (3) full protection and security. However, the scope and limits of these protections are in flux with new types of tech assets, changing jurisprudence and state practices in investment agreements. There are, thus, many interesting questions, which to date remain unanswered.
Protection against wrongful expropriation
It is well-established that host states may only lawfully expropriate the property of foreign investors if done in a non-discriminatory manner, for a public purpose, in line with due process and with just compensation. In the tech context, the classic expropriation could be a direct taking of a physical asset such as a tech company’s hardware or its brick-and-mortar operations by a host state. Additionally, other intangible assets, such as licences and IP rights, may also be expropriated.
However, some difficulties arise when we apply the test for indirect expropriation to current challenges faced by tech companies. In today’s regulatory environment, social media companies appear to be particularly affected, with bans over their operations and software applications and compulsory data sharing requirements. Turning to each of these factual scenarios:
- Ban over operations: tech companies that face a cancellation of their licence to operate in the host state may try to rely on the analogous situation in CME, where the state’s alternation of the broadcasting licence in the telecoms sector was found to be an indirect expropriation.
- Ban over software applications: a more complicated situation would be whether an effective ban on software application could also potentially qualify as an indirect expropriation of the IP rights. It is unclear if this line of argument would be raised in the dispute between Uber and Colombia, but it would be an important area for clarifications.
- Regulations such as mandatory data sharing: the unresolved question of the status of data as an investment would also affect whether such measures could, in certain circumstances, be found to constitute an expropriation.
Fair and equitable treatment
The fair and equitable treatment (FET) standard protects an investor’s legitimate expectations of the regulatory environment and prevents unlawful government interference. This is a particularly effective tool as it speaks to the tech companies’ legitimate expectation that the regulatory environment will not change significantly to undermine the value of their investments over time. Out of the six active ISDS disputes in the tech industry, at least four have alleged a breach of the FET standard and in a variety of factual scenarios, including alleged irregularities in the public tender processes, the termination of an existing concession, a failure to comply with agreed obligations to facilitate the operation of the investment and government actions requiring telecommunication companies to cease support to the tech company. These permutations speak to the versatility of the FET standard, which may be useful for tech companies when challenging a variety of regulations that impact their investments.
However, given the fast-changing nature of tech, it is questionable when and if investors may have a legitimate expectation to a stable regulatory environment. In new-age tech industries such as software, data and blockchain where much is still in flux, states would likely argue that there can be no legitimate expectations of any regulatory stability and that governments cannot be constrained from legislating to protect key national interests. Moreover, more states are seeking to restrict the protections afforded by the FET standard, including through newer investment agreements in an effort to take back regulatory control, such as with India’s removal of the FET clause in its 2016 Model BIT, and clarifications under the NAFTA and ASEAN-Australia-New Zealand FTA, linking the content of the FET clause to the customary international law standard.
Full protection and security
Full protection and security (FPS) serves as a diligence obligation on host states to protect foreign investments from harm against acts of the host state and its entities, as well as those of third parties. While FPS is traditionally understood in terms of physical protection and security, this has been extended on occasion to include non-physical protection, particularly when the treaty defines an ‘investment’ to include intangible assets or fails to exclude non-physical protections.
In recent times, tech companies face an increasing threat of cyberattacks that emanates from private hackers, as well as state-sponsored (or at least tolerated) outfits. Against this backdrop, the FPS standard may become increasingly relevant in determining the extent of the host state’s obligations to protect the assets of tech companies against cyberattacks in the host state. While there is no award thus far that has considered the extent of a host state’s FPS obligation over intangible tech assets, it has been suggested that cyberattacks are no different from civil unrests in which an obligation to accord FPS has generally been upheld. Holding that a host state is obliged to provide FPS to a tech asset could expose the state to an obligation to provide a stable and secure internet infrastructure as against cyberattacks and to provide effective legal redress when these occur.
Nonetheless, it is important to emphasise that there are two opposing schools of thoughts on the appropriate protections granted under the FPS standard. The law is far from settled on whether FPS can be accorded to intangible tech assets, and the extent of those due diligence obligations imposed on host state to prevent harm.
The ultimate goal is for the investor to receive compensation for the losses suffered as a result of the host state’s breaches of its substantive obligations. Tribunals can order a range of remedies, with compensation (damages) being the most frequently awarded. However, the unique features of some tech investments may complicate a tribunal’s consideration of remedies.
First, there are uncertainties with the valuation of tech investments in which the economic value has yet to crystallise. Taking the example of big data, discrete data points may not make sense unless accumulated with other data and read together as part of an overall model. In a scenario where an investor is seeking to challenge mandatory data transfers to the host states as an expropriation, it may not be able to readily assign an economic value to such assets in its claim.
Second, there are tech companies that are in their infancy but exhibit future high growth potential. Although tech claimants would only need to prove the quantum of their damages with ‘some’ and not absolute certainty, the unique nature of some businesses may render it difficult to show that their lost profits or future damages were not too speculative, uncertain or remote to be awarded by the tribunal.
Third, the different ways in which a host state may breach its obligations to protect the foreign tech investment may also give rise to complications when analysing issues of causation and the investor’s contributory negligence. For example, the failure to provide FPS in a foreign cyberattack would raise issues surrounding whether vulnerabilities in the investor’s own servers served as a contributing cause.
Key takeaways for parties
We are now likely at the start of a new wave of ISDS claims in relation to government regulations and activities in the tech space. There are a number of uncertainties that should be considered by tech companies considering initiating arbitration, including:
- Tech companies should be aware that the intangible nature of some tech assets may pose difficulties in relation to the interpretation of older investment treaties, notably in relation to the question of data and whether it can be regarded as an investment.
- The contours of the substantive investment protection standards are far from settled in relation to expropriation, FET and FPS protections. In particular, we hope to see clarifications on the issues of: (1) indirect expropriation of IP rights and data given the regulatory developments in the form of software bans and data-sharing requirements by governments across the globe today; (2) the scope of a tech company’s legitimate expectations to a stable regulatory environment given its unique position; and (3) the extent of a host state’s obligation to protect tech assets against cyberattacks from private as well as state actors.
- Lastly, and similar to the position in tech commercial arbitrations, there continues to be uncertainty in how arbitral tribunals in the investor–state sphere will approach remedies, in particular on the specific issues of valuation, causation and contributory negligence.
In the above, we have only begun to scratch the surface as to the possibilities for, and implications of, tech disputes. Whether we are considering the commercial sphere (tech M&A and collaborations) or investor–state sphere, the common theme remains that arbitration can and will likely play a bigger role in helping parties to resolve such disputes.
We have, where relevant, highlighted some overall uncertainties and areas to watch. Moving forward, it is important for tech companies to continue to keep track of these developments that fundamentally affect the protections of their commercial assets.
* The authors further thank our interns Param Bhalero and Nataliia Kichuk for their research assistance rendered in preparing this article.
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