China’s Claim concerning App Ban Under International Investment and Trade Law – Part I

[Angeline Priety and Rohin Goyal are fourth-year law students at Gujarat National Law University]

On September 2, 2020, India’s Ministry of Electronics and Information Technology released a press note banning 118 mobile applications of Chinese origin. This blocking order, the third such order in a span of two months, was prompted by concerns with respect to the sovereignty of India, particularly its data sovereignty. The apps were purportedly misused “to steal and transmit users’ data to servers located outside India” creating a potential threat to national security and citizens’ privacy. This apprehension flowed from Article 7 and Article 14 of China’s National Intelligence Law, effective since 2017, which require Chinese companies to support the Chinese government in state intelligence work. However, such apprehensions of national security crises have intensified due to allegations of data mining and profiling by Chinese companies, as well as the border dispute at Galwan Valley in early 2020. The app bans, blocking nearly 230 apps of Chinese origin, appear to be a result of this dispute.

Most of the applications listed in the blocking orders have since been taken down from the Google and Apple stores. As of 2019, 44 of the 100 most downloaded apps in India were made by Chinese companies and the current blockade would undoubtedly impact the bilateral investment relationship between India and China. China’s Ministry of Commerce has condemned the ban as harmful to the legitimate rights of Chinese investors and in violation of relevant WTO rules.

In this two-part post we explore the possibility of China bringing a valid claim against India under international trade and investment law. In Part I, we explain and identify the provisions of the bilateral investment treaty between India and China (“Indo-China BIT”) under which Chinese investors may establish a claim against the app ban. In Part II, we analyse the defence that India may invoke against such a claim. Finally, we examine whether China may initiate and sustain a claim against India with the Dispute Settlement Body of the World Trade Organization (“WTO”).

Can Chinese Investors bring a sustainable claim under the Indo China BIT?

Although the Indo-China BIT was terminated by India in 2018, the BIT continues to operate by virtue of the sunset provision in Article 16. This provision ensures that protection in respect of investments made and acquired before the date of termination shall persist for fifteen years from the date of termination. Many Chinese apps such as Tik Tok and Camscanner were made before 2018 and hence can avail protection from the BIT. With regards to the Galwan Valley conflict, BITs generally continue to operate during periods of armed conflict, except where they contain explicit provisions to the contrary. Hence the sunset provision would operate despite the Galwan Valley conflict.

For a valid claim to lie before a tribunal, Chinese investors must first prove that the impugned apps constitute ‘investment’ as defined in the BIT. The definition of ‘investment’ under the Indo-China BIT includes intellectual property rights and right to money from contracts having a financial value.Apps easily satisfy these qualifiers since domain names, proprietary software code, and user interface would constitute intellectual property. Similarly, the primary source of revenue for apps is advertising contracts, which are indisputably financial in nature.

An investment thereafter enjoys a range of substantive protections like ‘Most-Favoured-Nation’; ‘Full Protection and Security’; ‘Fair and Equitable Treatment’ (“FET”); and protection against expropriation without compensation. The blocking order directly threatens two of these protections- firstly, protection against indirect expropriation; and secondly, fair and equitable treatment.

Indirect Expropriation of Chinese Applications

Indirect expropriation occurs when the investor’s holding of the legal title becomes merely nominal since they are substantially deprived of the use, enjoyment, or disposal of the investment. Tribunals such as that in Telenor v. Hungary have outlined two determinative factors to establish expropriation: (a) intensity of economic deprivation; and (b) duration of economic deprivation.

For the first element, the apps must establish that the ban substantially deprived investors of their investments. This could translate into a significant reduction in expected returns or frustration of the investor’s rights, both of which are clear effects of the impugned ban. The app ban renders investors’ rights useless for the simple reason that intellectual property is essential for any app related to economic activity. Blockage of domain names by internet service providers, known as geo-blocking, prevents customer access in India and stunts any previously held market share; both of which are assets susceptible to expropriation. Secondly, the revenue model of most apps is embedded in promotions and click-based advertisements which yield returns only when the platforms are functional. The ban has also deprived these apps of their significant user base in India. The app ban substantially deprives investors of significant investment assets and the possibility of obtaining profits seems distant.

The second element deals with the duration of the app ban. Though the norm requires a degree of permanence, temporary measures can constitute an ‘expropriation’ or ‘taking’ when there is no immediate prospect of resuming the deprived business. On these grounds, the Iran-United States Claims Tribunals found, in a number of cases, that the appointment of temporary managers by Iran resembled a ‘taking’ since there was no realistic prospect that investors would resume their business activity in the backdrop of the Islamic revolution.

Similarly the blocking order touted as an interim measure is a reaction to tense relations between India and China. The continued hostility between the countries fuelled by impact of India’s revised FDI Policy and the temporary suspension of entry of Indian nationals into China due to COVID-19 indicate that the ban might not be repealed in the near future.

Thus, considering the ban fulfils both the key elements, it is a measure of indirect expropriation. However, the question of its legality remains to be addressed.

Possible Justification for the App Ban

Measures resembling indirect expropriation could be justified if they are found to be good faith regulatory measures. There is a very thin line between the two charted by customary international law as well as the specific treaty between the parties. A good faith regulatory measure, as per customary international law is one that is implemented with a public purpose; in a non-discriminatory manner; and in compliance with the law. Article. 5 of the Indo- China BIT adds a fourth requirement of fair and equitable compensation.

Public Purpose and Discriminatory Application

The blanket ban clearly has a public purpose component. However, the notification is ambiguous in defining the culpability of each app. The apps, over 200 in number, function in different fields and their data collection differs in terms of type, extent, and safety practices. Even if viewed in the backdrop of China’s National Intelligence Law, imposition of a blanket ban on these apps would be a discriminatory move.

Compliance with Domestic Law

With respect to the next requirement, the app ban seems to have been imposed under section 69 of the Information Technology Act, 2000 read with rule 9 of the Information Technology (Procedure and Safeguards for Blocking for Access of Information by Public) Rules, 2009. As per rule 9(2), the Department of Information Technology is empowered to issue an interim measure to block public access to any information through a computer resource, if they consider it necessary and justifiable in a case of emergency nature. Sections 69 and 69A of the Information Technology Act, 2000 allow the Central government to intercept, decrypt, or block apps or services through an order published in the interest of national security. Any restriction must contain reasons in writing and cannot be arbitrary. It is unclear whether this implies that only the reasoned order must be made public and not the extent of reasoning required to comply with section 69A.

The impugned blocking order simply states that the apps were required to be banned for national security purposes but did not elaborate on the technicalities of the threat posed. If this is required to be disclosed, then the order would violate both international customary law as well as principles of Indian administrative law. However, as rule 16 of the 2009 rules requires strict confidentiality to be maintained, there is hardly any information available in the public domain. Hence, a comment on compliance would be unfounded.

Regardless, the three conditions are conjunctive in nature and since the ban appears to be discriminatory, the ban can be distinguished from a valid regulatory measure and investors may pursue a claim against India for indirect expropriation and abusive taking.

Violation of the FET Requirement

Article 3 of the Indo-China BIT guarantees that investors would be accorded fair and equitable treatment. The central aspect of FET is whether legitimate expectations of investors are protected. An evaluation of this would not only consider the bilateral relations between the countries but also assess how appropriate the measures are in light of proportionality. The Tribunal in Tecmed v. Mexico indicated that standards of proportionality could be imported from the decisions of the European Court of Human Rights. A look at decisions of the Court signals that measures must be necessary as per the objective as well as be least restrictive to the rights of investors.

A data breach threat is undoubtedly a legitimate objective but an absolute ban on the operation of these apps is a disproportionate response as it is not the least restrictive measure. Other measures such as restricting content or enforcing data protection practices could have helped India address its concerns. Further, the blocked apps are not homogenous and collect different amounts and types of data. A complete ban without restrictions customised to the threat that each app poses would be a disproportionate measure.

Hence the Chinese investors could bring a claim against India on these two grounds seeking restitution or compensation for the losses suffered.

While these claims might seem strong, recent tensions between the two nations resulting in armed conflict have given India the right to invoke essential measures in the interest of national security. In Part II, we shall analyse the possible defence that India may invoke to clear itself of liability as well as the possibility of China’s claims before the WTO.

(continued here)

– Angeline Priety & Rohin Goyal

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