Digital Trade: Adding Digital Trade Rules to Investment Law

Last October, Mona Paulsen noted on Twitter that Canada and Ukraine had added a source code rule to the Investment Chapter of their modernised FTA (CUFTA):

This is in addition to the FTA’s Digital Trade Chapter, which also includes a source code article (Article 8.12) on familiar terms.

It turns out this new language stems from Canada’s 2021 Model Foreign Investment Promotion and Protection Agreement (Canada’s Model BIT),¹ which in addition to adding source code to the performance requirements article also adds a limb on cross-border data flows (which Canada notes here in its summary of changes to its Model BIT). I think the CUFTA upgrade is the first time this part of the Model BIT has been used in practice (or indeed the first I’ve seen of an explicit digital trade rule in an Investment Chapter/BIT).

This move to import digital trade rules into Investment Chapters and BITs is an interesting one - and there may be a few more posts here in the future on some of the implications of doing this. There are just two thoughts that I wanted to flag for now - first, on the potential for the application of investor-state dispute settlement to digital trade rules; and second, on the potential exposure under existing FTAs and BITs to disputes for restrictive measures on digital trade .

First, I was trying to work out exactly what the benefit it is in the CUFTA to including this source code rule in the Investment Chapter given it already exists in the Digital Trade Chapter. The change in placement has a few scope implications and different exceptions apply,² and it’s not quite clear what the value is.

It would be quite ‘forward-leaning’ and contrary to the more cautious approach to digital trade rules that is taking hold in the US (if not others) if investor-state dispute settlement applied to the digital trade rules. Just a few weeks ago, Simon Lester was suggesting governments might wish to disapply dispute settlement to some digital trade rules for a while, given the ‘newness’ of the rules and rapidly developing nature of the industry (and this also tracks with, for example, approaches to digital trade in RCEP and AANZFTA). I can’t imagine many governments would want to see the first interpretations of these rules (and in particular what can be quite detailed and overlapping exceptions) to be by investment tribunals, given some past rogue judgments.

Second, the placement of the source code in the performance requirement obligation highlights that perhaps claims contesting source code disclosure requirements are already able to be brought under existing similar performance requirements provisions in other agreements. For example, the CPTPP performance requirement provision prohibits requiring an investor to “transfer a particular technology, a production process or other proprietary knowledge to a person in its territory” (Article 9.10(1)(f)).

Could an investor use this to found a claim against a measure forcing source code disclosure? It would seem at least arguable, and the CPTPP provision doesn’t have the exception extracted above (see paragraph 3) which is part of the Digital Trade Chapter’s usual source code provision. This could potentially mean governments already have greater exposure to disputes for source code measures under existing investment chapters and agreements than they may have realised (although the investment obligation is still subject to scheduled non-conforming measures in many FTAs, which may provide the relevant policy space needed).

I haven’t been able to find much written on digital trade disputes under investment provisions (although see this 2022 article which focuses on FET). But it wouldn’t surprise me if this was an area of growing interest.

1. Which Canada interestingly abbreviates to FIPA - with just one P not two.

2. I plan to come back to these in a future post, so please subscribe if you’d like to receive that in the coming weeks.