Standards of Protection: The State’s Sovereign Right to Regulate and its Limits

In today’s globalised inter-connected economy, one that is supported by a safety net of international trade and investment agreements, foreign investment in spectrum, and telecommunications more generally, ought to be anodyne, conducted without controversy. However, spectrum’s privatisation and commoditisation, and its exponentially increasing relevance and value, have drawn sovereign intervention on the part of host-states in the name of the public interest. That intervention is also increasingly rooted in national security concerns, particularly in the context of the allocation of 5G spectrum bands and the broader roll-out of 5G technology. Although host-states’ sovereign right to regulate in the public interest and protect the public policy are generally-recognised principles of international law, the challenge is for such right to be exercised within the boundaries set by those host-states’ obligations under international trade and investment agreements, including the standards of protection set forth therein, even when national security imperatives are at play. Before acting, both host-states and investors ought not only to consider carefully domestic policy and legal considerations, but also the applicable international legal framework – including in particular their respective rights and obligations arising therefrom – to navigate the attendant high-stakes risks of today’s telecommunications sector.

Introduction

According to the European Parliament, ‘radio spectrum is a vital and scarce natural resource’.^[2] Others describe it as ‘among our most valuable natural resources’.^[3] First discovered by Gugliemo Marconi in 1901 as an effective vehicle for human communication, spectrum is a natural phenomenon that consists of electromagnetic radio signals that are capable of traversing space without the need for physical intervention.^[4] Although spectrum is a natural resource that is – by its very nature – ubiquitous (unlike other natural resources such as oil, gas or gold),^[5] it is finite and thus often protected as a ‘public’ good in the legislation of certain states.^[6] As is the case with other natural resources, spectrum and the revenues therefrom can be appropriated by militants and rebels.^[7] Increasingly, its limited availability can give rise to political controversy^[8] and – more pertinently for present purposes – investor–state disputes.^[9]

A particular characteristic of spectrum, and telecommunications in general, is that they raise sensitive defence and national security concerns, including with regards to espionage, hacking, the allocation of spectrum for exclusive military use, control over information and censorship, and the protection of sensitive operations from foreign interference.^[10] These concerns are accentuated in the context of the installation and operation of network equipment operating on the 5G spectrum for use by telecommunications service providers. Given the sheer internet speed of 5G (compared with 4G),^[11] the Council of the European Union stated that ‘5G will form a part of crucial infrastructure for the operation and maintenance of vital and societal and economic functions’ and that ‘5G will increase the potential of mobile network service provision and at the same time enable innovative business models and public services across multiple sectors’.^[12] It is that very enmeshment of 5G networks in all social, economic and public aspects of life that triggers security concerns.^[13]

Last year, the United States’ Federal Communications Commission (FCC) auctioned its C-band spectrum for 5G use, collecting a staggering US$94 billion in gross proceeds, with the C-band expected to generate US$192 billion for the American economy by 2026.^[14] The United Kingdom’s latest 5G auction in 2021 raised noticeably less (£1.3 billion), but the amounts at play remain significant and a testament to the importance of 5G.^[15]

With the transformational socio-economic impact of 5G, the already-alluded to security concerns and significant amounts of investment^[16] at stake, several host-states around the world, particularly in North America and Europe, have taken restrictive measures against foreign telecoms equipment manufacturers as part of their 5G rollout, including most notably Chinese companies such as Huawei and ZTE.^[17] The first to face an investor-state claim as a result of said measures is Sweden,^[18] as discussed in more detail in this chapter.

This chapter will consider two key areas of disputes in the telecommunications sector, which is proving to be a growing area for investor–state arbitrations.^[19] Specifically, the first consists of disputes that either directly or indirectly relate to host-states seeking to exert control over spectrum and the telecommunications sector on public interest grounds, such as market regulation, competition and, at times, resource-nationalism.^[20] The second area (and one that has increasingly been gaining momentum) consists of disputes arising out of restrictive host-state measures on defence and national security grounds. In addressing both areas, this chapter will focus on the boundaries set by host-states’ obligations under international trade and investment agreements, including the standards of protection set forth therein.

Disputes that either directly or indirectly relate to the control over spectrum and the telecommunications sector

There is now a sizeable body of investor–state disputes involving host-state control measures in the telecommunications sector,^[21] namely measures through which host-states seek directly or indirectly to seize control over operators’ assets, operations or allocated spectrum.

Some of these measures have been aimed at gaining ownership or use of assets in the telecommunications sector, including spectrum. One of the most prominent examples concerns the Supreme Court of India’s revocation of over 120 2G licences in 2012, on the basis that the then Minister of Communication and Information Technology and the Department of Telecommunications ‘virtually gifted away the important national asset [i.e., spectrum] at throw away prices’.^[22] The Court was particularly critical of the decision to allocate spectrum in 2008 at prices that were determined in 2001,^[23] and found that the licence allocation process ‘was wholly arbitrary, capricious and contrary to public interest apart from being violative of the doctrine of equality’.^[24] Loop Telecom is one of the many operators that saw their 2G licences revoked. A Mauritian investor in Loop, Khaitan Holdings, brought a claim against India under the India-Mauritius BIT, which remains pending.^[25] India unsuccessfully pursued an injunction to stay the arbitral proceedings before the Delhi High Court.^[26] Although its decision was meant to be strictly procedural in nature, the Delhi High Court noted that the Supreme Court’s 2012 judgment ‘was pronounced . . . in [the] public interest’, that Loop Telecom was afforded the right to be heard and participate in a subsequent auction and has availed itself of judicial remedies under Indian law, thus suggesting that there was no breach of the India–Mauritius BIT.^[27] In no ambiguous terms, the Delhi High Court added that ‘if any investment is expropriated for a public purpose after following due process of law, no compensation would be payable’.^[28]

Many investor–state tribunals have systematically disagreed with the above view, however.^[29] In British Caribbean Bank v. Belize – where the then prime minister of Belize accused the former administration of privatising shares in Belize Telecommunications Limited (BTL) ‘at a rate and in a manner that was counterintuitive and counter nationalistic’ – the tribunal held that ‘a State is entitled to broad latitude to devise its public policy as it sees fit’ but that the obligation to make prompt, just and equitable compensation as enshrined under the United Kingdom–Belize BIT still stands.^[30]

Naturally, not all public policy measures will result in a treaty breach and an ensuing payment of compensation. Tribunals have long recognised that host-states have an inherent (and valid) right to regulate in protection of the public interest when enacting bona fide, non-discriminatory and proportionate regulations in accordance with due process (the Police Powers Doctrine).^[31]

By way of illustration, in Global Telecom Holding (GTH) v. Canada, the tribunal scrutinised a change in Canada’s telecom regulations by way of a ‘2013 Transfer Framework’ policy whereby Industry Canada, Canada’s government agency for trade and the economy, would conduct reviews of licence transfers so as to prevent the concentration of spectrum (i.e., the accumulation of the amount of spectrum held by a single market player) and ensure ‘the efficiency and competitiveness’ of the Canadian telecommunications market.^[32] Indeed, the issue of spectrum concentration – often referred to, somewhat pejoratively, as ‘hoarding’ – has been a live one in several jurisdictions.^[33] GTH sought to challenge that change, which it alleged had the effect of preventing it from selling its subsidiary, Wind Mobile, to an incumbent, as being in breach of the Canada–Egypt BIT’s fair and equitable treatment (FET) standard. The tribunal disagreed. Noting that ‘the rising use of smartphones . . . made it critical for the government to control spectrum concentration’, the tribunal held that, absent specific commitments vis-à-vis the investor, ‘a change in that framework to reflect [] market evolution that is not arbitrary or aimed to harm the investor is not a breach of the FET standard’.^[34] While Canada successfully argued that international law gives host-states a high level of deference with respect to domestic policy choices and the balancing of public interest and individual rights,^[35] the key in GTH is that the investor was not facing a host-state measure that was targeting it specifically; rather, it was impugning the legitimacy of a policy measure of general application, which was found to have been adopted in a manner that was consistent with the BIT.

In a similar vein, America Móvil failed in its US$1.2 billion expropriation claim against Colombia under the Colombia–Mexico Free Trade Agreement.^[36] America Móvil notably sought to impugn the Constitutional Court’s interpretation of Law 1341 of 2009, including its alleged expropriatory effect on its investments in Colombian operator, Comcel. Under this legislation, the state sought to change the then prevailing regime pursuant to which concessionaires would be required, at the term of their concession, to relinquish both assigned spectrum as well as all telecommunications assets (as set out in the Reversion Clause of Comcel’s relevant concessions).^[37] Under the new regime, concessionaires would be required instead to relinquish the assigned spectrum only. In a 2014 judgment, the Constitutional Court held that Law 1341 of 2009 was constitutional; however, the Reversion Clauses of concessions predating that Law must be respected, meaning that, at the term of its concessions, Comcel had to relinquish both its assigned spectrum and telecommunications assets.^[38] While the Court acknowledged that the state may modify the terms of concessions to serve the public interest, it held that there was no such interest in allowing the retroactive application of Law 1341 of 2009 so as to amend the Reversion Clauses of prior concessions, including Comcel’s.^[39] The tribunal’s majority found that, on matters of interpretation of municipal law such as this one, it is bound by the judgments of municipal courts unless these are (1) the product of a procedural or substantive denial of justice, or (2) clearly incompatible with international law, resulting in ‘a direct violation of an international rule’.^[40] On that basis, the majority concluded that, as a matter of Colombian law, Comcel did not have a right to the non-Reversion of its assets, thus dismissing America Móvil’s claim for expropriation.^[41]

It is worth noting that Spain’s Telefonica has brought a similar claim against Colombia under the Spain-Colombia BIT (which, unlike the Colombia-Mexico Free Trade Agreement, contains an FET clause), alleging breaches of FET and indirect expropriation.^[42] It remains to be seen whether the tribunal in the Telefonica case will reach the same findings as the America Móvil tribunal, including on the public interest questions at play.

Disputes that were brought as a result of restrictive host-state measures on defence and national security grounds

As is the case with public interest considerations, host states can and do intervene in the telecommunications sector on defence and national security grounds, ostensibly for the purposes of maintaining public policy.^[43] Indeed, the investor-state disputes arena has seen numerous investors impugning restrictive measures by host states that were founded on defence and national security concerns.^[44]

In CC/Devas v. India and Deutsche Telekom v. India, commenced under the Mauritius–India BIT and Germany–India BIT, respectively, India sought to revoke an agreement with the investors that would have seen them use satellite-generated S-band spectrum, allocating it instead to the Indian military.^[45] A day prior to the revocation, India’s then prime minister announced that the government ‘should take a sovereign policy decision regarding the utilization of [S-band] spectrum having regard to the country’s strategic requirements’.^[46]

Interpreting slightly different ‘essential security interests’ clauses in the two BITs,^[47] the tribunals arrived at different conclusions on the interplay between national security and international standards for the protection of investments.

In Devas, the tribunal agreed with India that national security matters ‘absolve the Respondent from following the principles of international due process’, which include ‘the obligation of the host-state to notify the investor of the proposed expropriatory measure and give it the opportunity to be heard and/or mitigate the impact of the threatened measures’.^[48] The Devas tribunal carved out the effect of India’s expropriatory measure that is covered by the BIT’s security exception, thus only compensating the investor partially.

In contrast, in Deutsche Telekom, the tribunal held that if the Devas agreement were ‘irreconcilable with military and societal needs, quod non, the Indian authorities should have engaged with [the investor] to seek a solution, which they failed to do’.^[49] Finding that India breached the BIT’s FET standard, the tribunal disagreed with ‘India’s position that the very nature of the subject matter pertaining to national security prevented it from sharing information with the investor’ and that, without disclosing sensitive or classified information, India could have ‘simply [] advised Devas/DT in general terms that the military needed some of the spectrum, thus allowing the investor to be aware of the situation and act accordingly’.^[50]

The tribunal in the GTH v. Canada case described above applied a similar approach to the tribunal in Deutsche Telekom in reaffirming that international standards for the protection of investments do in fact apply to questions of national security. In that case, Industry Canada subjected GTH to a review and approval process under the Investment Canada Act, so as to decide whether GTH’s proposed transaction to gain voting control in its subsidiary Wind Mobile (1) is ‘likely to be of net benefit to Canada’ and (2) ‘could be injurious to national security’.^[51] Although the GTH award is heavily redacted on the facts, press reports have suggested that Industry Canada’s review process was driven by a combination of GTH’s ultimate ownership by VimpelCom (now VEON), a Russian-controlled entity, and the use by Wind Mobile of Huawei network equipment.^[52] On the merits of Industry Canada’s review, while the GTH tribunal recognised that full transparency in the context of a national security investigation may be difficult to achieve, the tribunal nonetheless held that the due process standard remains applicable. It stated that such standard:

should be deemed satisfied where the subject of the investigation is afforded a fair opportunity to make its case in relation to readily identifiable issues, and that opportunity is afforded reasonably ahead of an administrative decision being made based on objectively verifiable factors and after an appropriate time period which is not unnecessarily rushed.^[53]

Ultimately, the tribunal concluded that Canada had provided GTH ‘with an adequate opportunity to make its case in relation to the regulatory and the national security reviews’ and that GTH ‘engaged fully in that exchange’, finding therefore that there had been no violation of the FET standard under the Canada–Egypt BIT.^[54]

Since GTH, the most recent case raising national security issues concerns a claim brought by Huawei against Sweden under the China–Sweden BIT before ICSID – one that host-states and operators worldwide will undoubtedly monitor carefully as it concerns alleged security concerns in the context of the roll-out of 5G. Specifically, Huawei complains of arbitrariness on the part of the Swedish telecoms regulator, the Swedish Post and Telecom Agency (PTS), which decided that applicants for Sweden’s 5G spectrum auctions should not use network equipment from Huawei and ZTE (another Chinese manufacturer), and that any such equipment and services already in use for existing 3G and 4G networks must be phased out before January 2025.^[55] The PTS decision expressly states that the motive for excluding Huawei is that ‘[t]he use of Huawei and ZTE products in central functions may harm Sweden’s security’.^[56] There can be no doubt, therefore, that the PTS specifically targeted Huawei with a restrictive measure (as opposed to adopting a measure of general application aimed at protecting the security of its 5G network more broadly). It remains to be seen whether this factor will weigh in the tribunal’s analysis of Sweden’s potential liability under the China–Sweden BIT, including on arbitrariness and discrimination.

Conclusion

Host-states will intervene in the name of the public interest if they consider that valuable national resources, including of course spectrum, are being ‘gifted away . . . at throw away prices’ – to quote India’s Supreme Court.^[57] Investor–state tribunals unequivocally recognise state police powers and their right to regulate in the public interest and protect public policy. Therefore, it is not about whether that right can be exercised – it is about how. The taking of investors’ property – no matter how laudable the underlying motive is – will nonetheless result in their being compensated under international law. Defence and national security imperatives – irrespective of how acute they are – do not alter this principle. That said, absent specific commitments on the part of host states, investors may face hurdles in impugning non-discriminatory and proportionate regulations of general application that were adopted in good faith, in accordance with due process.

In short, before acting, both host-states and investors ought not only to consider carefully domestic policy and legal considerations, but also the applicable international legal framework – including in particular their respective rights and obligations arising therefrom – to navigate the attendant, high-stakes risks of today’s telecommunications sector.

Notes