A11Y Ltd v. Czech Republic, ICSID Case No. UNCT/15/1
An ICSID tribunal decided in favour of Czechia in a case initiated by A11Y Ltd. (A11Y), a company providing assistive technology (AT) solutions for visually impaired persons. The proceedings were bifurcated, and the final award was rendered on June 29, 2018.
Background and claims
A11Y, a British company, after the registration of its Czech branch office, took over the AT solutions activities of BRAILCOM o.p.s. (BRAILCOM), a Czech company that offered blind and visually impaired individuals unique AT solutions.
Czechia, in January 2012, brought into effect the Act on Providing Allowances to Persons with Health Impairment (Act). The act provides for the granting of subsidies to persons with health impairments, including the blind. Subsidies were limited in absolute amounts (to CZK 800,000 per applicant for five years) and in the amount for a single grant (to CZK 350,000 per grant). The beneficiary was required to pay 10 per cent of the aid for which an allowance was sought. Section 9(10) specified that an allowance would be granted for an aid: (a) in its basic version, (b) which satisfies the individual needs of the applicant and (c) which is the least economically demanding option for doing so.
On May 21, 2013, the Czech Labour Office, which was responsible for administering the act, received a letter from Transparency International (TI Letter) alleging that BRAILCOM had been contacting persons eligible for aid under the act. According to the letter, BRAILCOM had been suggesting that those persons conclude an agreement with a power of attorney to organize their application for a special-aid allowance with the Labour Office. Under the agreement, as a gift, the company would pay to the applicant the value of their 10 per cent statutory contribution.
After the receipt of this letter, the Ministry of Labour (Ministry) issued a statement further defining the criteria set out by the act to ensure that the requirements of the act could effectively be assessed in each application and to allow the Labour Offices to take a uniform approach toward all applications (July Statement). Particularly, it stipulated that, when the aids applied for consisted of several individual functionally independent components, the applicant was obligated to submit a list of the components and their respective prices. Further, additional services, like training, or accessory products, like protective covers or laptop bags, could not be considered part of the basic version of an aid and were therefore not covered under the act.
A11Y initiated arbitration against Czechia in 2014 under the United Kingdom–Czechia BIT. It argued that, following the July Statement, four measures allegedly taken by Czechia destroyed A11Y’s investment in the country and led to its insolvency: (a) Czech representatives repeatedly told many customers of A11Y that they should seek their AT aids from A11Y’s competitors; (b) Czechia denounced A11Y on prime-time national television for “overpricing”; (c) Czechia turned over A11Y’s confidential and pricing information to its competitors; and (d) Czechia rigged the independent assessments of its AT solutions. Accordingly, A11Y claimed compensation in the amount of CZK 564,719,000 for breach of the BIT provision on indirect and creeping expropriation.
Jurisdiction: Know-how and goodwill qualify as investments under the BIT
Although the proceedings had been bifurcated to deal with jurisdictional objections in the first stage, the tribunal had reserved for the merits stage its decision on whether A11Y had made a qualified investment in Czechia at the time of incorporation.
The tribunal referred to the plain language of Article 1(a) of the BIT, which defines “investment” as “every kind of asset belonging to an investor.” The tribunal noted that the BIT did not require any qualification of the investment, for instance, that the assets be transferred for consideration, that there be a flow of funds from the United Kingdom into Czechia or that there be an underlying transaction. Further, it noted that the proceedings were initiated under UNCITRAL Arbitration Rules, which had no equivalent to ICSID Convention Article 25.
Consequently, the tribunal chose not to read any limitations into the BIT when none existed. It held that A11Y’s assets in Czechia, which consisted of its know-how and goodwill, were a qualified investment.
Indirect and creeping expropriation analysis
A11Y argued that, first, the Czechia’s four measures had the effect of expropriating its investment; second, that the actions were discriminatory; and third, that they were not for a public purpose. Czechia, in turn, argued that A11Y’s insolvency was not due to the four measures but rather to its own business model.
The tribunal found that the July Statement was a good-faith regulatory measure as it applied to all people with a health impairment and not just those who were visually impaired. The language of the July Statement, the tribunal reasoned, applied uniformly to all companies providing aids across different groups of people with health impairments and did not target A11Y. Although the July Statement was issued after receipt of the TI Letter, the tribunal concluded that it did not target or discriminate against A11Y.
The tribunal concluded from the witness examination that A11Y’s economic model was “economically unsustainable from a long-term perspective” (para. 221) in the regulatory environment created by the July Statement. It noted that, in the implementation of the July Statement, some Labour Office employees acted improperly, by pressuring customers to abandon A11Y and purchase aids from its competitors and by sharing A11Y’s business proprietary information with A11Y’s competitors. It also accepted that the TV report harmed A11Y and caused it to lose more customers and orders.
Although the tribunal attempted to separate the effect of A11Y’s loss of customers and orders as a result of those improper actions of Labour Office employees from the effect of A11Y’s significant price reductions and the non-coverage of extras such as training as a result of the implementation of the July Statement, it was unable to do so.
Decision and costs
Consequently, the tribunal held that the evidence before it was inadequate to conclude that Czechia’s conduct and the resulting loss of customers and orders would have caused the demise of A11Y’s business independently of the effect of the July Statement. Therefore, A11Y had not met its burden of proof that Czechia, by its actions, unlawfully indirectly expropriated A11Y’s investment. The tribunal directed A11Y to bear all arbitration costs and ordered each party to bear its respective legal costs.
Notes: The tribunal was composed of L. Yves Fortier (President, jointly appointed by the co-arbitrators, Canadian national), Stanimir A. Alexandrov (claimants’ appointee, Bulgarian national) and Anna Joubin-Bret (respondent’s appointee, French national). The award is available at https://www.italaw.com/cases/5183
Trishna Menon is an Associate at Clarus Law Associates, New Delhi, India.