Taking control: Navigating Russia’s brand seizures
Russia has assumed ownership of the Russian subsidiaries of Danone and Carlsberg, which can be analysed from two perspectives: investment law and IP law.
Because IP rights are an investment, current acts must be scrutinised through the lens of the fair and equitable treatment requirement as well as the expropriation criteria.
Expropriation factors
The international IP regimes and international investment regime's goals are in sync. While the term ‘expropriation’ is most commonly used to refer to the taking of property rights by the state, it can also refer to interference with property rights caused by the state's direct acts or omissions.
One of the key issues in investment law is where to draw the line between expropriation and when there is an element of illegality involved, such as a breach of the bilateral investment treaty.
Under customary principles of international law relating to the treatment of foreigners and their property (including IP), host states are not prohibited from expropriating the investments of foreign investors.
However, unlawful expropriation is prohibited, i.e, when it does not meet the legal requirements of being in the public interest or for a public purpose, following due process, without discrimination and with compensation.
Failure to meet any of these requirements turns an expropriation into an unlawful expropriation. Expropriation can take different forms, although there are two main types: direct and indirect expropriation. It is clear that direct expropriation is strictly prohibited. What we are now witnessing in Russia can be discussed from the perspective of indirect expropriation in the host country.
Danone and Carlesberg may argue that the laws enacted in Russia in April this year alter pre-existing IP norms and standards in the host country, rendering them illegitimate under international law and subject to compensation.
Seizing foreign assets
Arbitrary tribunals in investment disputes apply at least three different standards under international investment law, which can be broadly categorised as the ‘sole effects’ test (or theory), the police power test and the proportionality test. First, the sole effects test focuses on the objectives of the host state in taking “temporary control of foreign assets”.
The key question is whether there has been a significant loss of economic value, benefit or enjoyment of the investment. The degree of interference with the investment must be significant, which depends on the facts.
Second, under the police power test, government actions that appear to be legitimate exercises of governmental power (such as the enactment of a law pursuing a legitimate public welfare objective) may have a significant impact on foreign interests without constituting an expropriation.
A legitimate measure adopted by a state for public welfare (the police power exception) can be expropriatory if it constitutes a permanent and substantial deprivation of foreign investment. So the determining factor to establish indirect expropriation is substantial deprivation. There is a third test, the proportionality test, which involves balancing the public purpose of the regulatory measure against the impact of the policy on foreign investment.
Good faith argument
The host state can defend itself against (potential) investment law claims by arguing that the exercise of regulatory powers by the state in a given situation does not constitute indirect expropriation because such action is taken in good faith to protect the public interest, is non-discriminatory and proportionate.
The Danone and Carlsberg cases both require further investigation to assess them from a legal perspective. In the coming weeks, Russia may be interested in preventing foreign investors from leaving its market.
Consequently, the protection of IP rights in Russia remains a pressing concern for foreign companies that hold IP rights in Russia or other neighbouring countries, such as trademarks or patents.
