Investment Arbitration Reporter

By Luke Eric Peterson

In a ruling that remained unpublished as of press time, the state of Ukraine has been held liable by a tribunal of international arbitrators for breaching the US-Ukraine bilateral investment treaty.

In a decision released to the parties on January 21, 2010, arbitrators ruled that Ukraine denied fair and equitable treatment to US citizen Joseph Charles Lemire on four separate occasions over a course of several years.

Long string of failed license tenders lay at crux of claim

Mr. Lemire turned to arbitration in 2006, alleging that Ukrainian broadcasting authorities had unfairly rejected a long string of applications for new frequencies (which would have permitted an expansion of Mr. Lemire’s Radio Gala station, as well as the launch of other stations).

In their January 21, 2010 ruling, arbitrators determined that Mr. Lemire’s efforts to expand the reach of his radio company were thwarted by licensing authorities, whilst other seemingly politically-connected stations fared far better. Indeed, of dozens upon dozens of broadcasting frequency applications made from 2001 to 2007, Mr. Lemire was awarded only a single license for a tiny town of 5,000 persons which could not be serviced due to infrastructure limitations.

Ultimately, arbitrators identified four instances where Mr. Lemire’s treatment at the hands of authorities engaged Ukraine’s liability for breach of treaty protections owed to US investors.

Indeed, in one licensing tender in October of 2005, arbitrators ruled that Mr. Lemire’s fate appeared to have been sealed thanks to behind-the-scenes pressure exerted by the President of Ukraine in favour of a political ally. Arbitrators pointedly observed that such interference breached Ukraine’s broadcasting laws, and triggered a further breached of the US-Ukraine BIT.

Further, the tribunal went on to find that regulatory authorities acted in an arbitrary and discriminatory manner in declining - without proffering any reasons - to award Radio Gala another license for a nationwide talk radio service, and then rapidly re-tendering the license and awarding it to a bidder with political ties to the government.

With respect to a third tender in February of 2008, arbitrators held that broadcasting authorities meted out discriminatory treatment to Mr. Lemire’s company, applying certain requirements in a restrictive fashion in his case, while giving his competitor a free pass.

Finally, arbitrators also ruled that Ukraine was liable for a treaty breach thanks to the fact that the broadcasting National Council was not properly constituted for a period in 1999 to 2000, yet a separate government body awarded licenses via a non-transparent process that ran counter to Ukraine’s broadcasting laws. In treaty terms, such conduct was deemed both arbitrary, and unfair and inequitable.

Ukraine prevailed on some claims

Not all of Mr. Lemire’s allegations for treaty-breach were upheld, nor did he succeed in making out alleged breaches of a 2000 Settlement Agreement, which ended an earlier BIT arbitration between Mr. Lemire and Ukraine.

In particular, Mr. Lemire was unsuccessful in challenging a 2006 Ukraine law which mandated that radio stations must play at least 50% Ukrainian-produced music. Arbitrators held that this type of law was commonly used by other countries in order to promote local culture and languages and that the law, which applied to all broadcasters in Ukraine, could not be a breach of the fair and equitable treatment standard, nor did it fall afoul of a provision in the US-Ukraine BIT prohibiting the use of so-called performance requirements.

(One unnamed arbitrator disagreed with aspects of the majority’s analysis of this dimension of the case, but does not appear to have signed a separate opinion elaborating on these divergences).

Arbitrators also rejected several other claims rooted in additional licensing decisions. In one instance, the tribunal ruled that an alleged treaty breach premised solely on the lack of reasons provided by broadcasting regulators for declining to award certain licenses – without any aggravating factors such as favoritism having been shown to a competitor – did not amount to a breach by Ukraine of its BIT obligations.

Similarly, in yet another license application, arbitrators held that the claimant may have disadvantaged himself relative to other competitors by voicing criticism of a key tender requirement. Arbitrators noted that the comments by Mr. Lemire might have been construed as a “challenge” to the regulators’ perfectly-defensible determination that the radio channel under consideration should have 100% Ukraine-language content, thus inclining the licensing authorities to favour the application of a competing broadcaster which expressed no quarrel with this language requirement.

Damages ruling postponed

Despite holding Ukraine to have breached the US-Ukraine BIT, arbitrators refrained from ordering damages in their January 21, 2010 decision, citing the stark economic changes which have come about in Ukraine (and globally) since the damages reports were tabled in the arbitration proceeding in the summer of 2008. Instead, arbitrators signaled that they would postpone a damages award until they could consult further with the parties.

This move may hearten Ukraine as the lack of any dollar-figure attached to the liability ruling might serve to tamp down media interest in the case while the country holds national election run-offs.

More generally, other states embroiled in investor-state claims might be expected to ask arbitral tribunals to revisit economic damages evidence presented prior to the recent global economic downturn.

Moral damages remain a possibility

In their recent decision, Arbitrators signaled that they would postpone a ruling on Mr. Lemire’s separate request for so-called moral damages, as a result of alleged systematic harassment and stress suffered at the hands of the Ukrainian authorities.

In principle, arbitrators signaled their support for the position taken in a 2008 ICSID award, where a tribunal ruled that it could award compensation for moral damages in exceptional circumstances. Moreover, the signaled that Mr. Lemire had suffered “grave” and one-sided treatment from regulators, as evidenced not just by licensing decisions but also repeated inspections of his radio premises (typically without any advance notice).

However, arbitrators reserved judgment as to whether this conduct by Ukraine constituted “exceptional circumstances” which would justify the award of moral damages.

A fuller analysis of the arbitral award, and its broader implications for contemporary debates about media freedom and foreign investment protection, will be forthcoming once the award is made available publicly. (Indeed, the arbitrators acknowledge in their award the special nature of government regulation of the media, and the range of legitimate public policy considerations which may motivate media regulation, including: to ensure transparency, political and linguistic pluralism, protection of children and minorities and other factors.)

Arbitrators in the case are Prof. Juan Fernandez-Armesto, Mr. Jan Paulsson, and Dr. Juergen Voss.

Mr. Lemire is represented in the arbitration by the Paris firm of Derains & Gharavi, whilst Ukraine is represented by White & Case and Magisters.

UPDATE: In March of 2011, we reported on the tribunal's final damages award. Click here to read that article.

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
 
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com