Social Media Business: Can BITS Protect?

Divyansh Sharma
Guest Editor

Today, internet censorship and social media blockages have become global concerns as states increasingly adopt these measures, purporting to protect public order by curbing hate speech and misinformation. Countries have repeatedly perceived that some degree of regulation of the internet is necessary. Consider the blockage of LinkedIn in Russia following the company’s failure to abide by the data retention law.[1] While free speech defenders argue that the ban was not motivated by public order concerns,[2] this has not stopped Russia from pressuring other platforms, such as Facebook and Twitter, to abide by the much-criticized law.[3] In April 2019, Sri Lanka also blocked access to several websites, including Facebook, fearing communal hate speech in the wake of a terrorist attack.[4] Other states across the globe are following suit, including India[5] and Germany.[6] Given the alarming rise in internet regulation, it is pertinent to understand the potential remedies available to social media companies as foreign investors under the bilateral investment treaty [‘BIT’] framework.

BITs are bilateral instruments that provide reciprocal guarantees for protection of investors of one contracting state in the territory of other contracting state.[7] While the particular standards vary from treaty to treaty, arbitral tribunals have used precedents to guide their understanding of certain common standards, such as protection from expropriation and the guarantee of fair and equitable treatment [‘FET’] of the investor in the host state.[8]

In this article, I conduct a substantive analysis of the possible BIT standards that these website blockages may violate. The first part will address whether such website blockages can amount to expropriation under investment law, and the second part addresses the potential arguments for a FET claim.

Expropriation and Social Media Blockages: The Threshold Question

It is well-established that territorial sovereignty confers the states with an inherent power to regulate upon issues in their jurisdiction under principles of customary international law.[9] Treaty law accepts these police powers; it merely provides for consequences of such measures, never really questioning the right to expropriate.[10] However, most BIT frameworks have imposed certain pre-requisites to a legitimate exercise of police powers.[11] These include public purpose, non-discrimination, and in some instances, due process.[12] Any claim for expropriation must meet at least these criteria. Since an analysis of these three criteria will be invariably factual, the question of whether the contested blockage rises to the threshold of expropriation must be posed at the outset.

Notably, the law on expropriation is not limited to direct or formal takings of physical property, but also includes within its ambit any “covert or incidental interference” with the use or enjoyment of the investment, as observed in Metalclad v. Mexico.[13] To establish an indirect expropriation, tribunals, such as that in Telenor v. Hungary, have understood the key determinative elements of the test to be those of ‘intensity’ and ‘duration’.[14]

To satisfy the first element of the test, the social media companies must demonstrate that the impugned blockage substantially deprived them of their investments. For the impact to be substantial, it is sufficient that the state measure interfered with the “use or reasonably-to-be expected economic benefit” of the investment.[15] Since the entire business model of social media companies is rooted in promotions and click-based advertisements,[16] they generate revenue only when their platforms are functional. Upon blockage, these companies can argue that the restriction amounts to a substantial (if not complete) interference with the economic enjoyment of their investment.

A possible argument could also be made regarding access to consumer markets. In Pope & Talbot v. Canada, the Tribunal held that the foreign investor’s “ability to sell” softwood lumber to the United States market was significant to the business and was thus an asset susceptible to expropriation.[17] The Chemutra v. Canada Tribunal similarly held market share and customer access to be assets susceptible to expropriation.[18] Given that the presence of its userbase is indispensable to the social networking business, it could be argued that a blockage deprives them of their significant investment assets. These “assets” include not only their access to users, but also their rights to the domain name and consequent “interest” in the user data.[19] This interest is usually the result of a company-user agreement and may thus qualify as a contractual right, which would be covered if the expansively drafted investment clauses protect interests such as “claims to money” or “rights in the field of intellectual property, technical processes and know-how”.[20]

The second element of the test for expropriation would deal with the temporality of the blockage. Since every interference cannot amount to expropriation, tribunals have understood the test to be that the effect of a measure should be more than “merely ephemeral”.[21] The host states may use S.D. Myers v. Canada to argue that a blockage of merely a week or ten days merely amounts to a “postponement of benefits” and not a “denial”.[22] However, this argument is easily defeated. In Myers, the company had not started its operations, and thus it made little difference when the procedure was delayed by a few months. In fact, the Tribunal acknowledged that the losses due to the rise in competition over this period might be relevant in the calculation of compensation.[23] Interestingly, the Tribunal also noted that in some contexts and scenarios, even “temporary or partial deprivations” may amount to expropriation.[24] Therefore, since a “lasting” deprivation is no longer required to be permanent, it will suit the case of a social media company to establish that the blockage was active for a reasonable period.[25]

However, blockages for defined periods, such as the week-long one carried out in Sri Lanka, might not fulfill this threshold. Even an indirect interference is deemed expropriatory only when tribunals conclude that it is “tantamount” to a taking, i.e., as if a taking had occurred and the property rights are rendered meaningless.[26] This threshold will require a destruction of “fundamental rights of ownership”,[27] and in some cases, irreversibility[28] or lack of any immediate prospects of resumption of business.[29] Therefore, a continued hostility on the parts of the host states to resume platform functionalities might ripen the claims; but a pre-defined temporary blockage with a public purpose does not seem to meet the threshold of an expropriation claim.

Can a FET clause protect?

As seen, expropriation seems to be a higher threshold, which only the claimants blocked for a considerable amount of time might avail the benefit of. However, the FET standard presents an attractive option where the expropriation threshold cannot be met.

Although states enjoy substantial deference in undertaking regulatory measures, the Phillip Morris Tribunal has clarified that the contested acts must meet certain standards of proportionality and rationality.[30] The state’s actions should be proportionate to the legitimate objective that their actions seek to achieve.[31] In Tecmed v. Mexico, the Tribunal noted that guidance for proportionality standards could be sourced from the European Court of Human Rights (ECHR).[32] To this end, the measure must be both necessary and suitable in the context. It must also be the least restrictive measure to the rights or interests of the stakeholders involved (known as the LRM test[33] in the European context).

The ECHR, in cases such as Yildirim v. Turkey[34] and Cengiz v. Turkey,[35] has affirmed that absolute restrictions on social media websites are grossly disproportionate to the free speech interests of the users. Further, social media companies could also argue that the host state should have attempted a content restriction or a selective blockage before proceeding with a blanket ban, thereby meeting the LRM test. In this context, the example of Indonesia is relevant to understand a proportionate state measure. In May 2019, the State limited access to certain social networks only by reducing the downloading and uploading speeds, thereby limiting the scope of hate speech and false information.[36] However, if a state fails to undertake a proportionate action, a convincing argument could be made for violation of FET, especially if the blockage unreasonably continues post the normalcy of the public order situation.

Another significant move that could be seen over the next few years is the challenge of legal and business framework changes in the host state. Such claims have succeeded in the past where tribunals noted that a stable business framework was essential to a FET guarantee.[37] The domestic regulations could be challenged if they are excessively onerous or unreasonable for social media investors to abide by, thereby restricting the enjoyment of their investments. Such claims could arise from new, regressive laws like the Network Enforcement Directive of Germany, which tend to disproportionality fine the social media company if they fail to immediately remove ‘unlawful’ speech.[38] Similar requirements are increasingly being adopted all over the world, with intermediaries being perceived as directly involved in content dissemination rather than being neutral facilitators.[39] Any algorithmic development or speech filtering legislation that might disproportionately burden such investors would successfully meet the threshold of a FET claim. Further, the general lack of any procedural propriety behind the shutdown or blatant disregard of intermediary’s interests may also qualify as a violation under this standard.

Comment

While it is true that the claims of social media investors would face a significant jurisdictional hurdle depending upon the relevant institutional rules and contents of the particular BIT, this would be but a start. One should note that there also exist sufficient gray areas in investment protection standards on the substantial questions of any such potential claims. In this regard, further interpretative clarity in the BIT standards is urgently required to manage such claims successfully.


Divyansh Sharma is a B.A.L.L.B. student from West Bengal National University of Juridical Sciences, Kolkata. He currently also works with the Columbia Centre on Sustainable Investment as a Student Researcher, where his research focuses on the issue of third-party funding in Investment Arbitration. 


[1]LinkedIn blocked by Russian authorities, British Broadcasting Corporation (Nov. 17, 2016), https://www.bbc.com/news/technology-38014501.

[2] Id.

[3] Marc Bennetts, Facebook and Twitter could be blocked in Russia in data storage row, The Guardian (Apr. 17, 2019), https://www.theguardian.com/world/2019/apr/17/facebook-and-twitter-face-russian-sanctions-in-data-storage-row.

[4] Max Fisher, Sri Lanka blocks Social Media, Fearing More Violence, The New York Times (Apr. 21, 2019), https://www.nytimes.com/2019/04/21/world/asia/sri-lanka-social-media.html.

[5] India considering blocking Facebook, WhatsApp, New York Post (Aug. 7, 2018), https://nypost.com/2018/08/07/india-considering-blocking-facebook-whatsapp/.

[6] Germany: The Act to Improve Enforcement of the Law in Social Networks, Article 19 (Aug. 2017), https://www.article19.org/wp-content/uploads/2017/09/170901-Legal-Analysis-German-NetzDG-Act.pdf [‘Article 19’].

[7] See, for ex., Agreement on the promotion and reciprocal protection of investments between the Kingdom of Spain and the Republic of South Africa, Spain-S.Afr., Sept. 30, 1998, 2098 U.N.T.S. 203; Agreement for the encouragement and reciprocal protection of investments, Hung.-Spain, Nov. 9, 1989, 1722 U.N.T.S. 125 [‘Hungary-Spain BIT’].

[8] See International Thunderbird Gaming Corporation v. The United Mexican States, IIC 136, Separate Opinion of Thomas Wälde, ¶15 (Dec. 1, 2005).; El Paso v. Argentina, ICSID Case No. ARB/03/15, Decision on Jurisdiction, ¶39 (April 27, 2006) [‘El Paso’].

[9] See Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A.v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award, ¶¶290-301 (Jul. 8, 2016) [‘Philip Morris’]; Técnicas Medioambientales Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award, ¶119 (May 29, 2003) [‘Tecmed’].

[10] Christoph Schreuer & Rudolf Dolzer, Principles of International Investment Law 98 (2008).

[11] See Expropriation: UNCTAD Series on Issues in International Investment Agreements II, United Nations Conference on Trade and Development 8 (2012), https://unctad.org/en/Docs/unctaddiaeia2011d7_en.pdf [‘UNCTAD’].

[12] Id.; ADC Affiliate Ltd. & ADMC Management Ltd. v. The Republic of Hungary, ICSID Case No. ARB/03/16, Award, ¶435 (Oct. 2, 2006). See, for ex., Agreement between the Republic of Austria and the Republic of Croatia for the Promotion and Protection of Investments, Austria-Croat., art. IV, ¶1, Feb. 19, 1997, 2098 U.N.T.S. 517 [‘Austria-Croatia BIT].

[13] Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, ¶103 (Aug. 30, 2000).

[14] Telenor Mobile Communications A.S. v. The Republic of Hungary, ICSID Case No. ARB/04/15, Award, ¶70 (Sep. 13, 2006); Christoph Schreuer, The Concept of Expropriation under the ETC and other Investment Protection Treaties, Transnational Dispute Management (Nov. 2005), https://www.transnational-dispute-management.com/article.asp?key=596.

[15] Metalclad, supra note 13, ¶103.

[16] Greg Mcfarlane, How Facebook, Twitter, Social Media Make Money From You (Feb. 7, 2020), https://www.investopedia.com/stock-analysis/032114/how-facebook-twitter-social-media-make-money-you-twtr-lnkd-fb-goog.aspx.

[17] Pope & Talbot v. The Government of Canada, IIC 192, Interim Award, ¶98 (Jun. 26, 2000).

[18] Chemutra Corporation v. Canada, ICGJ 464, Award, ¶258 (Aug. 2, 2010).

[19] Matthew R. Dardenne, Testing the Jurisdictional Limits of the International Investment Regime: The Blocking of Social Media and Internet Censorship, 40 Denv. J. Int’L L. & Pol’y  400 (2011).

[20] See, for ex., Hungary-Spain BIT, supra note 7, art I, ¶1(c),(d); Austria-Croatia BIT, supra note 12, art. I, ¶1(c).

[21] Tippetts, Abbett, McCarthy, Stratton v. TAMS–AFFA Consulting Engineers of Iran, 6 Iran-U.S. Cl. Trib. Rep. 219, 225 (June 22, 1984) [‘Tippetts’]; Phelps Dodge Corp v. Iran, 10 Iran-US CTR 121 (Mar. 19, 1986).

[22] S.D. Myers v. Canada, IIC 252, Partial Award, ¶284 (Nov. 13, 2000).

[23] Id.

[24] Id., ¶283.

[25] See generally Wena Hotels Ltd. v. Egypt, ICSID Case No. ARB/98/4, Award, ¶9 (Dec. 8, 2000).

[26] UNCTAD, supra note 11, 71.

[27] Tippetts, supra note 21, 225.

[28] Tecmed, supra note 9, ¶116.

[29] UNCTAD, supra note 11, 70.

[30] Philip Morris, supra note 9, ¶136.

[31] Tecmed, supra note 9, ¶122.

[32] Id.

[33] Eva Brems & Laurens Lavrysen, ‘Don’t Use a Sledgehammer to Crack a Nut’: Less Restrictive Means in the Case Law of the European Court of Human Rights, 15(1) Hum. Rts. L. Rev. 139, 168 (Mar. 2015).

[34] Ahmet Yildirim v. Turkey, App. No. 3111/10, [2012] ECHR 3003.

[35] Cengiz & Ors. v Turkey, App. Nos. 48226/10 & 14027/11, [2015] ECHR 1052.

[36] Karina M. Tehusijarana & Jessicha Valentina, Jakarta riot: Government temporarily limits access to social media, messaging apps, The Jakarta Post (May 22, 2019), https://www.thejakartapost.com/life/2019/05/22/jakarta-riot-government-temporarily-limits-access-to-social-media-messaging-apps.html.

[37] See, for ex., El Paso, supra note 8; LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, ¶125 (Oct. 3, 2006).

[38] Article 19, supra note 6.

[39] See generally, Frank Pasquale, Platform Neutrality: Enhancing Freedom of Expression in Spheres of Private Power, 17 U. Md. Theoretical Inquiries L. 487 (2016).

The views expressed in this post represent the views of the post’s author only.

2 Comments - Leave a Comment
  • Laravel Framework -

    To satisfy the first element of the test, the social media companies must demonstrate that the impugned blockage substantially deprived them of their investments. For the impact to be substantial, it is sufficient that the state measure interfered with the “use or reasonably-to-be expected economic benefit” of the investment.[15] Since the entire business model of social media companies is rooted in promotions and click-based advertisements,[16] they generate revenue only when their platforms are functional. Upon blockage, these companies can argue that the restriction amounts to a substantial (if not complete) interference with the economic enjoyment of their investment.

  • Troveworks -

    This is a really amazing piece of writing on a topic which not many writers dare to unravel. There are things that you come to know for the first time and perceptions of people uncovered which throws light on the core topic. Keep sharing such posts!

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