By Kilian Wagner, University of Vienna
Spearheaded by the United States, several states including Australia, Canada, Japan and the United Kingdom have imposed restrictions on the Chinese tech-giant Huawei. These measures essentially ban Huawei’s products for the roll-out of the infrastructure for the fifth generation of wireless technology (5G) on national security grounds. The EU has not taken a uniform approach, but several member states have stepped up, with others considering to follow suit. Security risks associated with the 5G network include the potential for cyber threats, espionage or data breaches. The role of 5G for the internet of things, critical infrastructures and the digitalization of the economy exacerbates these concerns.
Huawei has responded by seeking legal remedies against the ban. Primarily, this includes domestic administrative and judicial proceedings to overturn the restrictions. As a secondary means, Huawei has indicated that Investor-State Dispute Settlement (ISDS) may serve as a remedy at the international level to obtain compensation. The potential of such a move has been analyzed in light of policy considerations by several states, including Australia, Canada, the Czech Republic, Germany and New Zealand (see here, here and here). Huawei has become serious about this option by initiating arbitral proceedings against Sweden and by submitting a notice of dispute to the United Kingdom. This blog post will give an overview of the currently pending proceeding between Huawei and Sweden.
The arbitral proceeding and the facts of the case
Following a Notice of Dispute dated 31 December 2020, Huawei filed a Request for Arbitration on 7 January 2022. The legal basis for the arbitration is the China-Sweden Bilateral Investment Treaty (BIT) 1982. While this ‘first-generation’ BIT does not provide for ISDS, an additional Protocol of 2004 does so (see here to access both). The arbitral tribunal was constituted under ICSID Rules on 8 June 2022. Since then, the tribunal has issued 4 procedural orders. These include a rejection of Sweden’s request for bifurcation between a jurisdictional and a merits phase and a document production order addressed to Huawei. As the case is still pending, the post will refrain from a detailed legal analysis but provides a descriptive overview setting out the key legal issues based on the available documents.
The case relates to the roll-out of 5G infrastructure in Sweden, which dates back to a national broadband plan adopted in 2016. The legislative framework for the granting of individual telecommunication licenses is the Electronic Communications Act of 2003 (‘ECA’). The Swedish Post and Telecom Agency is the main authority in this policy area. An amendment to the ECA from the beginning of 2020 requires the Post and Telecom Agency to consider national security risks before and after granting individual licenses. Moreover, it requires the Post and Telecom Agency to involve the Swedish Security Police and the Swedish Armed Forces as Consultation Authorities.[i] The dispute arises out of a decision by the Swedish Post and Telecom Agency issued in October 2020, which authorized four major mobile network operators to participate in the first auction of 5G licensing rights. According to Huaweis’ request for arbitration this decision prohibits mobile network operators from equipping the 5G network with its products and from another Chinese company, ZTE. Moreover, it would require the bidders to decommission these companies’ products from existing infrastructure by the beginning of 2025.[ii] The request for arbitration quotes from that decision that Huawei’s and ZTE’s products in central functions may harm Sweden’s security. Huawei suggests that the Consultation Authorities have influenced this decision. In particular, Huawei claims that the authorities have not identified any security risks associated with its participation in the 5G roll-out and refers to the implementation of a ‘state-of-the-art cybersecurity framework’.[iii] Huawei argues that Sweden’s measures have driven its business out of the 5G market and led to a monopoly by its global competitor Ericsson.[iv] Huawei has unsuccessfully challenged the decision by the Swedish Post and Telecom Agency before administrative courts (see here).
The jurisdiction of the arbitral tribunal
Procedural Order No. 3 on Sweden’s bifurcation request reveals that the jurisdiction of the arbitral tribunal is a contested matter between the parties. According to Article 25 of the ICSID Convention, there has to be a ‘legal dispute arising directly out of an investment’. Arbitral tribunals have frequently applied a ‘double-keyhole test’ to determine whether an economic activity constitutes an investment under a BIT and the ICSID Convention. Huawei raises both issues in its Request for Arbitration. The China-Sweden BIT 1982 contains a non-exhaustive asset-based investment definition. Huawei argues that its investments in Sweden consist of its indirect ownership of the subsidiary Huawei Sweden, long-term property interests, contract rights as well as interests and entitlement to performance having an economic value in Sweden.[v] Accordingly, Huawei claims that it has provided telecommunication infrastructure and developed mobile networks through these investments since 2000. Huawei further contends that its ‘significant, long-term interests in property, shareholdings, concessions, and other contract rights’ are encompassed by Article 25 of the ICSID Convention.[vi]
Pursuant to the information available via Procedural Order No. 3, Sweden objects that Huawei has a protected investment in Sweden[vii] and denies that the alleged investment would include the rights underlying its claims.[viii] Indeed, it might be contested whether Huawei’s claims with respect to the 5G roll-out – from which its products are banned – can actually relate to its existing investment or would rather concern a new investment. Absent any pre-establishment rights in a treaty, states remain free to adopt restrictions and to prohibit certain investments. Thus, only investments made in accordance with the host state’s law are protected. The China-Sweden BIT 1982 follows this approach and does not protect the making of investments. It could be argued that Huawei has no protected investment regarding the 5G network. Nevertheless, in Procedural Order No. 3, the tribunal considered Huawei’s claim not solely related to 5G but also to the previous 4G as well as future technologies.[ix] Arbitral tribunals have regularly taken a holistic approach to consider separate aspects of an economic activity. Taken together, individual assets, rights or claims may form a uniform investment that is protected under a treaty. It appears that Huawei relies on long-term contracts with mobile network operators, which it would be unable to honor due to the ban.[x] The tribunal deemed this issue to be interconnected with the merits of the dispute and rejected Sweden’s bifurcation request. According to Procedural Order No. 4, Huawei relies on the contracts concluded with mobile network operators for matters of jurisdiction, merits and quantum. The procedural order addresses whether and to what extent Huawei should have produced the contracts along with its memorial and the extent of redactions.[xi] In conclusion, the tribunal ordered Huawei to produce certain contracts including their amendments, annexes, appendices and schedules without redactions.[xii]
The merits of Huawei’s claim
The China-Sweden BIT 1982 contains typical substantive investment protection standards such as most-favored nation treatment (MFN), fair and equitable treatment (FET) and rules on expropriation. However, since the BIT does not contain a national treatment provision, Huawei seeks to incorporate the national treatment standard from the Sweden-Hong Kong BIT via the MFN clause. It alleges that Sweden’s measures violate the national treatment standard because the respective decision favors domestic companies for no legitimate reason.[xiii] In addition, Huawei argues that Sweden breached the FET standard, as the decision was arbitrary and discriminatory, disproportionate, not transparent and contrary to its legitimate expectations. Moreover, the decision forms a drastic and unexplained change of Sweden’s position.[xiv] Finally, Huawei also asserts that the measures had the effect of expropriating its investment without compensation.[xv] As many old BITs, the treaty does not include a security exception clause, which would allow to carve-out measures necessary to protect the state’s security interests.
In the context of its national treatment claim, Huawei specifically addresses the putative security motive behind the decision. Accordingly, these national security concerns would be unsubstantiated, without ‘a legitimate or rational basis.’[xvi] Although the treaty does not include a security exception clause, the state’s right to regulate for legitimate public purposes is well accepted in investment treaty arbitration. A different treatment between domestic and foreign investors in like circumstances may be warranted by legitimate policy reasons. Tribunals regularly take account of policy objectives when assessing legitimate expectations or regulatory changes in light of the FET Standard. Moreover, the so-called police powers doctrine allows to consider the rationale of a measure to distinguish an indirect expropriation from non-compensable regulatory activity. National security interests are at the core of state sovereignty. Hence, it is likely that a tribunal would grant a state a fair level of discretion in determining its security interests. This is confirmed by the tribunal’s decision in Global Telecom v Canada, which concerns a national security review under the Investment Canada Act. The tribunal adjusted the threshold for a breach of the FET standard in light of the objective of a national security review. Nevertheless, a decision that merely targets a foreign investor without any legitimate purpose or which seeks to exclude investors from geo-economic competitors may amount to arbitrary treatment and violate a BIT.
It remains to be seen how the present case will unfold. According to the procedural timetable included in Procedural Order No. 1, the hearing will only take place at the end of 2024. However, it is already clear that the proceeding will be decisive for ISDS cases concerning the ban of Huawei by other states.
[i] Huawei v Sweden, ICSID Case No. ARB/22/2, Request for Arbitration, 7 January 2022, paras 40, 41, 49.
[ii] Ibid, paras 6–7, 45–47.
[iii] Ibid, para 28–33, 47.
[iv] Ibid, para 60.
[v] Ibid, para 78.
[vi] Ibid, para 87.
[vii] Huawei v Sweden, ICSID Case No. ARB/22/2, Procedural Order No. 3, 28 April 2023, paras 37 ff.
[viii] Ibid, paras 43 ff.
[ix] Ibid, para 44; See also Huawei v Sweden, ICSID Case No. ARB/22/2, Request for Arbitration, 7 January 2022, para 8.
[x] Huawei v Sweden, ICSID Case No. ARB/22/2, Procedural Order No. 3, 28 April 2023, para 44.
[xi] Huawei v Sweden, ICSID Case No. ARB/22/2, Procedural Order No. 4, paras 36, 38.
[xii] Ibid, para 75.
[xiii] Huawei v Sweden, ICSID Case No. ARB/22/2, Request for Arbitration, 7 January 2022, paras 94–95 and footnote 46.
[xiv] Ibid, paras 35, 96.
[xv] Ibid, para 97.
[xvi] Ibid, para 95.