Espíritu Santo Holdings, LP and L1bre Holding, LLC v United Mexican States - ICSID Case No. ARB/20/13 - Memorial on the Merits - 17 September 2021
Country
Year
2021
Summary
Source: icsid.worldbank.org
CLAIMANT'S MEMORIAL
17 September 2021
Claimant Espíritu Santo Holdings, LP ("Claimant" or "ES Holdings") serves this Memorial on the United Mexican States ("Mexico" or "Respondent") pursuant to Article 1120 of the North American Free Trade Agreement ("NAFTA" or the "Treaty"), Rule 31 of the Arbitration Rules of the International Centre for Settlement of Investment Disputes ("ICSID Rules") and the Tribunal's Procedural Order No. 1 dated 29 March 2021 and amended procedural calendar, and submits the following requests to the Tribunal:
Requests:
(i) A declaration that Mexico breached Articles 1102, 1105, and 1110 of the Treaty;
(ii) An order directing Mexico to compensate Claimant for its losses resulting from Mexico's breaches of the Treaty and international law in an award of damages not less than USD $2.802 billion; such compensation to be paid without delay, be effectively realizable and be freely transferrable, and bear post-award interest at a compound rate sufficient to fully compensate ES Holdings for the loss of the use of this capital as from the date of Mexico's breaches of the Treaty;
(iii) A declaration that the award of damages and interest be made net of all Mexico's taxes, and that Mexico may not deduct taxes in respect of the payment of the award of damages and interest;
(iv) An order that Mexico reimburse Claimant for all costs, expenses, expert fees, and reasonable attorneys' fees incurred or paid by Claimant in connection with this arbitral proceeding, plus interest; and
(v) An order granting any further relief as the Tribunal considers appropriate.
Claimant also reserves its right to alter, amend, and/or supplement its claims as necessary and in accordance with the applicable rules during the course of this arbitral proceeding.
TABLE OF CONTENTS
I. INTRODUCTION AND EXECUTIVE SUMMARY
II. THE PARTIES
III. FACTUAL BACKGROUND
IV. THE CONDITIONS FOR JURISDICTION UNDER THE TREATY HAVE BEEN MET
V. MEXICO BREACHED ITS OBLIGATIONS UNDER NAFTA AND UNDER INTERNATIONAL LAW
VI. MEXICO IS REQUIRED TO COMPENSATE CLAIMANT TO WIPE OUT ALL CONSEQUENCES OF ITS UNLAWFUL CONDUCT
VII. REQUEST FOR RELIEF
INTRODUCTION AND EXECUTIVE SUMMARY
1. In July 2016, Mexico City granted Servicios Digitales Lusad S. de R.L. de C.V.
("Lusad")--Claimant's wholly owned subsidiary--a concession to install a digital taximeter system across all of Mexico City's taxis (the "Concession"). Lusad and its affiliates devoted significant resources to developing the technology prior to applying for the Concession and, once it had been granted, Lusad spent the next 27 months toiling over and refining the software, hardware, and all commercial aspects of the system and the business.1
2. Lusad was ready to launch full-scale operations under the mandatory installation period in 2018, having received all required regulatory approvals. All that remained to enable Lusad to enter the revenue-generating phase was for Mexico City to open the reservation platform, for which it was responsible, so as to allow the taxis to schedule an appointment to have Lusad's taximeter system installed.2
3. Mexico City never opened the reservation platform and, before long, Claimant's investment succumbed to the whims of a new, incoming administration. In July 2018, Mexico City elected a new Mayor, Claudia Sheinbaum, who had campaigned heavily against Lusad in connection with her opposition to private investment. A few months later, the administration took steps that gave effect to the Mayor-elect's opposition against Lusad, spelling doom for Claimant's investment. On 28 October 2018, the government informed Lusad that its Concession would be indefinitely suspended because of the "political change" that had taken place. At the same time, the government also assured Lusad that the company was not to blame for the suspension, as it had complied with all of its obligations. The motivation for the suspension soon became clear: the government launched its own copy-cat digital taximeter system the following year. The suspension was a purely political decision and deprived Claimant of the entire value of its investment in breach of numerous provisions of NAFTA.3
4. Mexico City has the world's largest taxi fleet. In 2016, the City's more than 138,000 registered taxis made in excess of two million trips and transported more than five million passengers every day.4 The taxi fleet is regulated by Mexico City's Secretariat of Mobility (Secretaría de Movilidad, commonly referred to as "Semovi").
5. Although the taxi fleet provided a vital means of transportation within Mexico City, it was run down and in dire need of improvement. The City's taxis were equipped with technologically obsolete and inefficient metering equipment. Many of the taxis' fare-calculation systems were inaccurate and lacked geolocation features; drivers could easily tamper with meters; and rides could not be hailed from smartphone applications or paid for with credit cards. Mexico City's taxi fleet was also unsafe, with public reports of violence against passengers and drivers commonplace. The taxi fleet also faced stiff competition from new entrant ride-sharing companies such as Uber and Cabify.5
6. Claimant's predecessor company saw an opportunity and began developing a plan to modernize Mexico City's taxis. They would update the taximeters for Mexico City's entire fleet with new technology that would not only contain geolocation, improved fare-calculation, and safety features, but would also improve the rider experience by allowing users to hail a taxi and pay the fare via a smartphone application and placing a paired passenger tablet in the backseat. This taximeter system was branded as the "L1bre System." They brought the idea to Semovi, which immediately took interest in the plan and requested a formal proposal.6
7. Semovi awarded the Concession to Lusad through a public process. After thoroughly evaluating the state of the taxi fleet, Mexico City concluded there was indeed a need for improvements to the taxi fleet and that it required private sector investment in order to fulfill that need. It therefore issued a "Declaration of Necessity for the Substitution, Installation, and Maintenance of Taximeters." In the Declaration of Necessity, Semovi recognized that the fare meters in Mexico City's taxis were "technologically obsolete," and expressed the need "to advance toward a public passenger transport system that includes different modes of physical, operational, and technological transport," including a "fare system that guarantees a service that is reliable, efficient, comfortable, safe, results in low emissions, and is of the highest quality, access, and coverage."7
8. Semovi also declared through the Declaration of Necessity that, to meet Mexico City's needs, it "required the substitution of the taximeters currently being used with ones that offer the public greater certainty, security and range in functionality, including geolocalization, and permits remote hailing" of a taxi. The Declaration specified that the new taximeter system needed to include: (i) a digital device capable of accurately charging fares authorized by Mexico City; (ii) a software program, registered before the competent authority, that allows the device to function as a taximeter; (iii) a geolocalization feature; (iv) a panic alert system connected to local security authorities; (v) authorizations from the government allowing the taximeter to be used as a proper measuring device; (vi) compliance with calibration and laboratory tests required by law; and (vii) uninterrupted access 365 days a year.8
9. Lusad, along with seven other companies, submitted proposals in an attempt to fulfill Mexico City's Declaration of Necessity. Lusad fulfilled all of Mexico City's requirements and was granted the Concession.9
10. The Concession conferred valuable rights to Lusad. Lusad was granted exclusive rights to install its taximeter system in all 138,000 of Mexico City's taxis and to launch its smartphone application from which passengers could hail taxis. The Concession had an initial term of 10 years. However, Lusad was entitled to request two 10-year extensions of the Concession, for a total Concession term of 30 years.10
11. Importantly, the Concession, as subsequently amended, provided Lusad with a guaranteed stream of revenue: Lusad was entitled to a fee for every single trip conducted by a taxi that had installed the L1bre System, which--once the mandatory installation had been completed--would be every single one of Mexico City's 138,000 taxis. Lusad also had no risk of non-payment of the fee because the fee would be automatically be charged through a proprietary e-wallet installed in the digital taximeter software. Beyond that, the Concession entitled Lusad to other revenue streams, including lucrative rights to sell advertisements on the passenger tablet.11
12. Lusad did everything required under the Concession and spent the following two years designing and refining all aspects of the L1bre System, signing vendor contracts, purchasing hardware, establishing operational readiness, and commercializing all aspects of its business.
Lusad completed all aspects of software development. Lusad's software development team had developed a smartphone ride-hailing application, digital taximeter software that included GPS integration, software for passengers that allowed them to follow rides and receive customized advertising during their ride, a digital "panic button" integrated with Mexico City's security and surveillance service, an e-wallet for passengers to pay drivers and for drivers to pay Lusad, and cloud-based back-end computing to integrate all of these systems together.
Lusad selected a vendor for the tablets and accessories to be installed in each taxi, developed hardware specifications for those devices, and had signed a contract with Ingram Micro to provide them. Crucially, it stockpiled in Mexico City an inventory of more than 85,000 of these kits (each comprising two tablets and all accessories needed for installation) ready to be installed, with arrangements to acquire the remainder as installations began.
After proving the concept worked, finalizing its hardware and software designs, and securing its vendor contracts, Lusad obtained government certifications and tested the L1bre System in trial periods in over 1,100 taxis. Mexico City confirmed that the test periods in the taxis had been successful.
Lusad set up installation centers around Mexico City to perform the physical installation of the system in all of the 138,000 taxis. It hired personnel for these centers, developed manuals for the installation process, and conducted timed trials to ensure the mass installation would be completed as quickly as possible.12
13. In April 2018, Semovi issued a crucial notice to bring Lusad into the revenue- producing phase of its operations: a formal notice in the official gazette of Mexico City requiring all taxi drivers to bring their taxis in to one of Lusad's installation centers by no later than March 2019 so that Lusad could install the L1bre System in their vehicles. The government openly celebrated these steps and the upcoming implementation of the L1bre System as a major step forward to improve the safety and efficiency of Mexico City's taxi system. After years of investments, the L1bre System was ready for commercial launch.13
14. Claimant's investment and the guaranteed revenue streams under the Concession created substantial value, and that became well-recognized in the market. Claimant's investment began to attract interest from leading private equity investors. Indeed, later that year, and mere weeks before a fateful October 2018 suspension notice from Semovi, Claimant's investment banker, Goldman Sachs, valued the business under the Concession at USD $2.43 billion.14
15. In order to finally launch the L1bre System, one additional step was needed from Semovi: under the Concession, Semovi was required to open the online reservation platform to enable taxi drivers to schedule the installation of the L1bre System. Regrettably, Mexico City never took that final step for political reasons, and thus prevented the installation of the L1bre System.15
16. This political tension began to mount in the lead-up to the July 2018 mayoral elections in Mexico City. Then-candidate Sheinbaum had begun speaking out against private investment, including with respect to Lusad's Concession. To maintain some order during the election season, in May 2018, Semovi temporarily suspended the installation of the L1bre System.
That suspension was designed to be temporary and, in issuing its suspension notice, Semovi reassured Lusad that "this suspension is not attributable to [Lusad] since to the day this writ is issued, the concessionaire has fully complied with its rights and obligations [under the Concession]."16
17. In July 2018, Sheinbaum won Mexico City's mayoral elections, and her new administration was scheduled to take office in December 2018. An ardent opponent of Lusad, Sheinbaum had spoken out against the company with baseless and misleading criticisms on many occasions. Her threats soon translated into action against Lusad.17
18. On 28 October 2018, Semovi delivered a letter to Lusad announcing the indefinite suspension of the Concession. The letter made it explicit that the suspension was brought about because of a "political change" within Mexico City and, with that change, Semovi yielded to the Mayor-elect's political will. Semovi acknowledged once again, however, that Lusad had at all times complied with all of its obligations under the Concession. The new administration, however, did not care about Lusad's compliance. It simply did not wish for Lusad to benefit from its rights under the Concession and so it brought a de facto end to the Concession. All the while, Mexico City has never proffered a single legitimate reason for the suspension. The only reason on record is that it was to give effect to a "political change."18
19. Without any way for Lusad to earn the revenues guaranteed to it under the Concession, Claimant's investment was destroyed in its entirety. Claimant had no way to monetize its investment and, although Mexico City decided not to formally terminate the Concession, it instead left Claimant and the Concession in a perpetual state of limbo. Claimant subsequently asked for a meeting with the government. After all, more than USD $80 million had been sunk into Lusad and the L1bre System at the government's constant encouragement, and Claimant hoped to reverse its misfortunes. However, in January 2019, Claimant was informed that the Government had no intention of ever permitting Lusad to operate the business that it had developed pursuant to the Concession.19
20. Soon, the government's motives became clear. The Sheinbaum administration had its own plans for the City's taxi system. The government began to develop, test, and then implement a replacement service and smartphone application, called "Mi Taxi." In doing so, Mexico City appropriated Claimant's ideas, intellectual property, and plans, and proceeded with its own State-owned, inferior version of the L1bre System.20
21. In destroying Claimant's investment, Mexico has violated, manifestly, several provisions of NAFTA Chapter 11. Mexico has unlawfully expropriated Claimant's investment in violation of Article 1110. Mexico has treated Claimant and its investment unfairly and inequitably in breach of Article 1105. Mexico has also failed to accord Claimant and its investment the standard of national treatment promised under Article 1102.21
22. This is a straightforward case on the merits. Mexico's repeated violations of its Treaty obligations are easily demonstrated. In short, the Mexico City government approved, endorsed, and celebrated Claimant's investment and Lusad's innovative L1bre System every step of the way. The government entered into a legally binding Concession with Lusad. Every required license, permit, and authorization was granted. Then, due to a change of political leadership, the government breached its obligations under the Concession. Specifically, the government was required to ensure that all government-licensed taxis would have the L1bre System installed, and the Concession guaranteed Lusad revenue linked to each taxi ride using the L1bre System. Instead of allowing Claimant to launch, the government refused to even allow taxi drivers to install the L1bre System, much less to facilitate or require the L1bre System's installation.22
23. In taking these unlawful actions, the government has destroyed the value of Claimant's investment. The government has done so without due process, explanation, or even the slightest allegation of any wrongdoing by Claimant or Lusad. The only reason that the government has provided to Lusad for these destructive actions--and indeed the only reason for these actions--was a political one. Mexico City has not paid a penny of compensation to Lusad or Claimant for its blatant violation of the Treaty. To make matters worse--and to make the violations of the Treaty even more obvious--the Mexico City government quickly replaced the L1bre System with its own government-owned service, Mi Taxi. Mi Taxi amounts to a usurpation of Claimant's private foreign investment--a "cherry on top" of the government's complete destruction of the L1bre System.23
24. Claimant is entitled to compensation commensurate to the fair market value of its investment. Claimant has instructed one of the world's foremost experts on the computation of damages, Howard Rosen of Secretariat Advisors. Rosen has used for his valuation the most reliable evidence as a starting point: the reasonable expectations of the business before the government's unlawful measures. Rosen has independently evaluated, verified and, where appropriate, adjusted the inputs in the valuation to derive his own, independent valuation of the fair market value of Claimant's investment. Rosen's thorough analysis shows that Claimant's investment, but-for Mexico's unlawful conduct, was worth USD $1.8 billion, rising to USD $ 2.8 billion after considering the full compensation, including gross-up for taxes and pre-award interest, due to Claimant.24
25. The remaining portions of this Claim Memorial are structured as follows: Section II describes the parties to the dispute. Section III details the factual background. Section IV outlines the basis for Claimant's jurisdiction to bring this dispute and these claims. Section V describes Mexico's several breaches of the Treaty. Section VI demonstrates the damages caused by Mexico's breaches of the Treaty and the resulting compensation that should be paid to Claimant to make it whole. Section VII states the requested relief.
...
VII. REQUEST FOR RELIEF
Claimant submits the following requests of the Tribunal:
Requests:
(i) A declaration that Mexico breached Articles 1102, 1105, and 1110 of the Treaty;
(ii) An order directing Mexico to compensate Claimant for its losses resulting from Mexico's breaches of the Treaty and international law in an award of damages not less than USD $2.802 billion; such compensation to be paid without delay, be effectively realizable and be freely transferrable, and bear post-award interest at a compound rate sufficient to fully compensate ES Holdings for the loss of the use of this capital as from the date of Mexico's breaches of the Treaty;
(iii) A declaration that the award of damages and interest be made net of all Mexico's taxes, and that Mexico may not deduct taxes in respect of the payment of the award of damages and interest;
(iv) An order that Respondents reimburse Claimant for all costs, expenses, expert fees, and reasonable attorneys' fees incurred or paid by Claimant in connection with this arbitral proceeding, plus interest; and
(v) An order granting any further relief as the Tribunal considers appropriate.
Claimant also reserves its right to alter, amend, and/or supplement its claims as necessary and in accordance with the applicable rules during the course of this arbitral proceeding.
...
Footnotes omitted