China MOOT COURT COMPETITION

ON WTO LAW CASE 2020

Luzena – Expropriation measures on certain internet service from Bucuik (Complainant: Bucuik)

Background

1. Bucuik, Luzena, and Valysia are original Members of the World Trade Organization (WTO). They are also parties to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).

2. Bucuik is a strong advocate of the multilateral trading system and is highly integrated into the global economy. The Bucuik’s economy is dominated by the services sector (including government services), of which share in GDP has risen since the late 1980s; services now account for over 80% of GDP, while the share of manufacturing has fallen below 12% and agriculture’s contribution was less than 1% in 2019.

3. Luzena is one of the largest economies in the world and has historically been party to a few regional trade agreements and bilateral investment agreements. Luzena’s trade and investment policy is largely driven by domestic political and economic considerations and also intended to attain short-term objectives, such as eliminating trade deficit or incentivizing the manufacturing sector, rendering its trade and investment regime less predictable and creating additional costs.

4. International investment agreements are used in the Luzena to foster foreign investment. These agreements include bilateral investment treaties (BITs), and free trade agreements (FTAs) that contain investment provisions. BITs are at the core of promoting a rules-based system for international investment. These treaties may contain provisions on non-discriminatory treatment of investments by the host country, limits on expropriation of investments, and access to impartial binding procedures to settle investment-related disputes between investors and host governments, among other things. Luzena has bilateral investment promotion and protection agreements that are currently in force with 37 countries and regions. The Agreement on the Promotion and Protection of Investments between the Government of the Republic of Luzena and the Government of the Kingdom of Valysia (“the Investment Agreement between Luzena and Valysia”, see Annex II) was concluded and implemented in 2002, but so far no investment dispute has been filed. There is no bilateral investment agreement or free trade agreement between Bucuik and Luzena.

WeMusical in Luzena

5. MyVlog is a company founded in Bucuik since 2011. This company has built a fast-emerging short video social network – in the form of an app – for users to post and share their self-created short videos. The app is named as WeMusical. Videos on WeMusical are limited to 15 seconds. The time limit motivates users both to view and to post videos faster than on other video sharing apps. Viewers can comment and give “likes” to the video clips, share them with their friends on other social media platforms, as well as follow hosts they are interested in. The app of WeMusical has a powerful artificial intelligence-backed recommendation engine that could enable the company to recommend videos to different users based on the features of their profiles and preferences, as well as their previous viewing history. In addition, when registering to use WeMusical, users need to submit information about name, gender, language, country, age, education, ethnicity, religious beliefs, and interests.

6. WeMusical is especially popular with teens and young adults, who enjoy using its tools to combine video, music, and graphics into fun sketches, and creative shorts. The app and its user community are known to value creativity and authenticity over follower counts and likes. As a result, users find it a refreshing atmosphere where they can be themselves. WeMusical videos can also be fun to watch and – because they are so short – be enjoyed during brief breaks.

7. WeMusical has proliferated rapidly and gained much popularity ever since its establishment. It has started to tap the international market since August 2014 and successfully established a strong global presence. As a significant step, MyVlog established a subsidiary company Vglobal to operate WeMusical in Luzena in September 2016. WeMusical is now available in over 150 countries and regions; it has become one of the most popular short video apps globally especially in countries such as Valysia, Russia, Turkey, Costa Rica, Kuwait, Poland, Singapore, and Uruguay. WeMusical has community guidelines that limit what can be posted by users. It excludes anything illegal in where it operates, content that depicts dangerous activity, including self-harm, threats against any person or group, any form of hate speech based on race, ethnicity, religious sexual orientation, and other characteristics, and any nudity or sexual content. Additionally, to advance its global strategy, Vglobal does not allow users to post any videos about sensitive political issues and international conflicts.

8. WeMusical’s ease of posting short videos and huge fans base have attracted large numbers of users – both individual users and brands – to post videos on its platform on a regular basis. The platforms allow viewers to send virtual gifts to hosts which can be exchanged to money, or allow companies to insert advertisements into the videos. According to the survey of mobile app marketing, WeMusical was the fifth most downloaded non-game app in the world in 2018, combining all iOS and Android app downloads. As of July 2019, WeMusical had around 800 million monthly active users (“MAUs”) globally. Meanwhile, in Luzena, it had over 300 million MAUs and 150 million average daily active users as of December 2019.

9. Vglobal is facing fierce market competition resulting from the proliferation of MeMusical. There are quite several of short video platforms in Luzena; the business model of WeMusical can be easily copied and adopted by others. Vglobal may lose users if other platforms offer better functions and more attractive content and elements. Indeed, many internet players have started to tap the short video market recently by launching their apps. For instance, in August 2018, NCF, a Valysian internet company, released its app of short video streaming platform “Top-Shining” in the Luzena’s market. The new platform works similarly to WeMusical and can introduce and recommend activities or products through video streaming while viewers can share the videos with their friends.

10. Behind the successful business story of WeMusical, there is a complex business relationship between Vglobal and MyVlog. Based on their agreement and internal rules, the customer database of Vglobal is located within the territory of Luzena and the data is not allowed to be transmitted back to Bucuik. However, the recommendation engine is developed and updated by MyVlog. Vglobal obtains the authorization of use of the recommendation engine from its parent company in Luzena market. Except for the development of recommendation engine, it is the responsibility of Vglobal for all the business activities in Luzena, such as promote the app with Luzena partners through various means, maintain public relations and customer service, etc. At the same time, a user in Bucuik may only use the app of WeMusical in the territory of Bucuik, and may not be able to register as a user of Luzena to use the app of WeMusical in Luzena. Practically, the Bucuik users are not able to watch or share the videos posted by Luzena users, and vice versa.

11. While Vglobal’s business has achieved great success, the bilateral political and economic relations between Bucuik and the Luzena have deteriorated sharply since 2015 due to intense economic competition. Some Luzena politicians see the government of Bucuik as a threat to Luzena’s national security.

12. The 2017 Luzena National Security Report stated that “after being dismissed as a phenomenon of an earlier century, great power competition returned. Revisionist country, such as Bucuik, begins to reassert its influence through trade and investment regionally and globally.” On 13 February 2018, Luzena Intelligence Director Johnson Bay, in front of a national media, stated that “one of the things we’re trying to do is view Bucuik threat as not just the whole of government threat, but a whole of society threat on their end and I think it’s going to take a whole of society response by us.”

13. On 20 May 2019, the State Department of Luzena issued a report on its strategic approach to Bucuik (the “State Department Report”), it provided that:

To respond to Bucuik’s challenge, the Administration has adopted a competitive approach to Bucuik, guided by the principle of realism and based on a reappraisal of the Luzena’s many strategic advantages and shortfalls, and a tolerance of greater bilateral friction. Our approach is not premised on determining a particular end state for Bucuik. Rather, our goal is to protect Luzena vital national interests. We aim to: (1) protect the Luzena people, homeland, and way of life; (2) promote the prosperity of Luzena; (3) preserve peace through strength; and (4) advance the influence of Luzena.

……

To prevent foreign malign actors from gaining access to Luzena information networks, the Administration will prevent certain companies associated with or answering to the intelligence and security apparatus of foreign adversaries from, for example, readily accessing the private and sensitive information of the Luzena Government, the Luzena proviate sector, and Luzena people.

Prohibition Order

14. On 6 January 2020, Luzena Ministry of Commerce (“MOC”) initiated a proceeding of the National Security Review. In its final report of 6 April, the MOC found that:

MyVlog’s close ties to the Bucuik’s government raise serious concerns about whether information collected by WeMusical on Luzenian users is being shared with the Bucuik’s government. Some instances suggest that MyVlog, Vglobal’s parent company, spreads anti-Luzena propaganda. Further, MyVlog reportedly censors sensitive political content and videos critical of the Bucuik’s government. Moreover, Vglobal pressures Luzena-based employees to censor videos that Bucuik’s government finds objectionable and culturally problematic. Such close ties to the Bucuik’s government raise serious concerns about MyVlog and Vglobal’s data practices, including what information is collected on Luzena people and what to do with it.

15. MOC does not disclose any further information or evidence on whether and how MyVlog or Vglobal share the data with the government of Bucuik. Vglobal defended itself in a company blog post in which it reiterated what it’s repeatedly claimed – that Bucuik’s law doesn’t influence Vglobal, given that its data is stored on servers in the Luzena:

We’re dedicated to entertainment and creativity. We had never been asked by the government of Bucuik to remove content. We store all data of Luzenian users in Luzena, with backup redundancy in Valysia. Our data centers are located entirely outside of Bucuik, and the law of Bucuik does not apply to our data. Further, we have a dedicated technical team focused on adhering to robust cybersecurity policies, and data privacy and security practices.

16. Based on the MOC report, the State Department of Luzena issued an Administrative Order of Prohibition on 1 May 2020 (“Prohibition Order”). It provided that:

The Government of Luzena finds that additional steps must be taken to deal with the national emergency with respect to the information and communications technology and services supply chain. Specifically, the spread in Luzena of mobile applications developed and owned by companies in Bucuik continues to threaten the national security, foreign policy, and economy of the Luzena. At this time, action must be taken to address the threat posed by one mobile application in particular, WeMusical.

WeMusical, a video-sharing mobile application owned by the Bucuik company MyVlog, has reportedly been downloaded over 475 million times in the Luzena and over one billion times globally. WeMusical automatically captures vast swaths of information from its users, including the internet and other network activity information such as location data and browsing and search histories. This data collection threatens to allow the Bucuik government access to Luzenian personal and proprietary information — potentially allowing Bucuik to track the locations of Luzenian nationals, build dossiers of personal information for blackmail, and conduct corporate espionage.

These risks are real. The Government of Luzena has already banned the use of WeMusical on the Government phones. Some Luzena’s companies and organizations have begun banning WeMusical on their devices. Luzena must take aggressive action against the owners of WeMusical to protect our national security.

Accordingly, the Department hereby orders:

Section 1.

(a) The following actions shall be prohibited beginning 45 days after the date of this order, to the extent permitted under applicable law: any transaction by any person, or with respect to any property, subject to the jurisdiction of Luzena, with MyVlog, or its subsidiaries.

(b) The prohibition in subsection (a) of this section applies except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted before the date of this order.

Section 2.

(a) Any transaction by a Luzena person or within the Luzena that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the prohibition set forth in this order is prohibited.

(b) Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.

Section 3.

For the purposes of this order:

(a) the term “person” means an individual or entity;

(b) the term “entity” means a government or instrumentality of such government, partnership, association, trust, joint venture, corporation, group, subgroup, or other organization, including an international organization.

17. Due to the Prohibition Order, MyVlog decided to quit the Luzena’s market and planned to sell Vglobal (including the company’s business operations and database). However, Luzena Secretary of State Ian Astin posted a twitter that he would like the Luzena to be “well compensated” from the transaction and insisted that any sale of the Vglobal should include a cut for the government. He added that the government “should get a very large percentage of that price because we’re making it possible….we want and we think we deserve to have a big percentage of that price coming to Luzena, coming to the Treasury.”

18. Four weeks after publication of the Prohibition Order, MyVlog announced that it was unable to complete the transaction within the 45 days as set by the Prohibition Order and that the sale of Vglobal had eventually failed. Vglobal had to terminate its app of WeMusical in Luzena. MyVlog claimed that its investment in Luzena had been expropriated by the Luzena government with no compensation.

19. To respond MyVlog’s expropriation allegation, Secretary Ian Astin in its twitter stated that “[t]he purpose of Prohibition Order is to protect the national security of our country. It is not an expropriation. There is no investment agreement between Luzena and Bucuik. The allegation made by MyVlog is completely unfounded and with no merit.”

20. Several other Bucuik internet companies are operating in Luzena, mainly providing services such as electronic payments, virtual meetings, and online sales. Although the services they provide are different from MyVlog, after the Prohibition Order was issued, some media reports that the Luzena government is considering imposing a ban on some of them.

Complaint by Bucuik

21. Bucuik expressed serious concerns about Luzena’s Prohibition Order and related measures against MyVlog and Vglobal. Bucuik believes that, because of the MFN obligation under the General Agreement on Trade in Services (hereinafter the “GATS”), the investment protection provided by the Agreement on the Promotion and Protection of Investments between the Government of the Republic of Luzena and the Government of the Kingdom of Valysia should be extended to Bucuik’s investment in Luzena (see Annexes I and II). Investments by investors of Bucuik shall not directly or indirectly be expropriated, nationalized, or subjected to any other measures that the effects of which would be tantamount to expropriation or nationalization in the territory of Luzena except for the public benefit and against compensation based on fair market value.

22. On 15 May 2020, the Government of Bucuik requested a consultation with the Government of the Luzena pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (hereinafter the “DSU”), Article XXIII of the GATS. After two months, the consultations ended without a mutually satisfactory solution. On 16 July 2020, Bucuik requested the establishment of a Panel. The Panel was established at the DSB meeting on 28 August 2020.

23. In its request for the establishment of a Panel, Bucuik argues that Luzena’s Prohibition Order and related measures breached Article II:1 of the GATS, because it accords less favorable treatment to services and service suppliers of Bucuik than that it accords to like service and service suppliers of Valysia relating to:

A. expropriation and compensation as provided by Article 5 of the Investment Agreement between Luzena and Valysia;

B. right to request for investment arbitration before ICSID as provided by Article 8 of the Investment Agreement between Luzena and Valysia.

24. In response to Bucuik’s claims, Luzena does not dispute the likeness of the relevant services or service suppliers, but contests that the Investment Agreement between Luzena and Valysia is not applicable to the WTO dispute, and that Bucuik is not allowed to import obligation of investment protection and procedural right of dispute settlement under investment treaties through most-favoured nation treatment of GATS. At the same time, Luzena invokes Article XIV bis:1(b)(iii) (Security Exceptions) of the GATS to justify its measures.

NOTE: The participants are not required to make any arguments under Article V (Economic Integration) and Article XIV (General Exceptions) of the GATS.

Annexes

I. The Republic of Luzena - Final List of Article II (MFN) Exemptions

II. Agreement on the Promotion and Protection of Investments between the Government of the Republic of Luzena and the Government of the Kingdom of Valysia

Indicative Cases and Materials

Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997

Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, adopted 20 April 2005

Panel Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/R, adopted 20 April 2005, as modified by Appellate Body Report WT/DS285/AB/R

Appellate Body Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, adopted 19 January 2010

Panel Report, China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/R and Corr.1, adopted 19 January 2010, as modified by Appellate Body Report WT/DS363/AB/R

Panel Report, China – Certain Measures Affecting Electronic Payment Services, WT/DS413/R and Add.1, adopted 31 August 2012

Appellate Body Report, Argentina – Measures Relating to Trade in Goods and Services, WT/DS453/AB/R and Add.1, adopted 9 May 2016

Panel Report, Argentina – Measures Relating to Trade in Goods and Services, WT/DS453/R and Add.1, adopted 9 May 2016, as modified by Appellate Body Report WT/DS453/AB/R

Panel Report, European Union and Its Member States – Certain Measures Relating to the Energy Sector, WT/DS476/R, circulated 10 August 2018

Emilio Agustín Maffezini v. The Kingdom of Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000

Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005

RosInvestCo UK Ltd. v. The Russian Federation, SCC Case No. V079/2005, Award on Jurisdiction, 1 October 2007

Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen, ICSID Case No. ARB/14/30, Decision on Jurisdiction, 31 May 2017

Menzies Middle East and Africa S.A. and Aviation Handling Services International Ltd. v. Republic of Senegal, ICSID Case No. ARB/15/21, Award on Jurisdiction, 5 August 2016

Rudolf Adlung and Martin Molinuevo, “Bilateralism In Services Trade: Is There Fire Behind The (BIT-)Smoke?”, Staff Working Paper ERSD-2008-01, World Trade Organization, 16 January 2008

Final Report of the Study Group on the Most-Favoured-Nation clause, adopted by the International Law Commission at its sixty-seventh session, in 2015, and submitted to the General Assembly as a part of the Commission’s report covering the work of that session, Yearbook of the International Law Commission, 2015, vol. II (Part Two)