The expropriation of Kellogg’s in Venezuela and the international investment arbitration

Source: Tal Cual

Venezuela currently ranks second globally in facing investment claims (59). With only one exception, all these cases are tied to expropriation policies implemented since 2002, resulting in multi-billion-dollar awards against Venezuela and its main entity, Petróleos de Venezuela, S.A. (PDVSA).

One of the most recent cases against Venezuela was brought before ICSID by Kellogg Latin America Holding Company (One) Limited. The claim is rooted in a common practice: the “temporary” intervention of a corporation whose assets, however, are indirectly expropriated by the Government.

The Expropriation of Kellogg’s

On May 15, 2018, Kellogg’s announced the closure of its operations in Venezuela due to production constraints amid the escalating economic crisis. President Nicolás Maduro deemed the closure unconstitutional, ordering the corporation’s transfer to the workers.

The President’s threat was realized on May 18, 2018. On that day, the Social Working Process Ministry issued Resolution No. 356, ordering the temporary intervention of Alimentos Kellogg’s S.A. and appointing a special administration board. The resolution deemed the closure unlawful under the Labor Law.

In practical terms, the temporary intervention allowed the Venezuelan Government to administer Kellogg’s assets, including appointing the General Manager (Resolution No. 388, dated June 4, 2018).

By these resolutions, the government proceeded to utilize the seized assets for the production of goods under Kellogg’s trademark. In essence, although the shares of Alimentos Kellogg’s S.A. were not transferred to the Government, the Kellogg group permanently lost control of the operation.

It wasn’t a temporary intervention but a permanent occupation, enabling the Government of Venezuela to operate Kellogg’s assets, including its trademarks. Therefore, according to Venezuelan Administrative Law, these assets were effectively expropriated.

In Venezuela, the institution of expropriation applies not only when the Executive issues a formal Expropriation Decree but also when the Government engages in material actions that practically empty property rights of content, assuming the exercise of those rights (Art. 8, Expropriation Act). This is known as factual expropriation (expropiación de hecho).

Kellogg’s assets in Venezuela were expropriated, not formally (as there has been no Expropriation Decree), but in a factual manner. Hence, the expropriation was unlawful under Venezuelan Law because it violated the guarantees recognized in the Expropriation Act. Consequently, according to Venezuelan Law, Kellogg has the right to comprehensive reparation, including compensation for the trademarks expropriation.

The Expropriation of Kellogg’s under International Investment Law

In addition to liability under Venezuelan Law, the Government of Venezuela is also responsible for expropriation according to International Investment Law. In this context, the investor’s protection standards concerning expropriation apply not just to direct actions that convey property rights but also to all measures whose indirect consequence involves the transfer of those rights.

Kellogg filed an arbitration claim based on the BIT Venezuela-United Kingdom, in which Article 5 establishes the expropriation standard, granting the right to prompt, adequate, and effective compensation. The BIT also covers non-expropriatory standards, such as fair and equitable treatment (Article 2).

Arbitration tribunals have ordered Venezuela to pay damages caused by expropriation actions conducted through “temporary occupation” measures. In some cases, after the intervention was executed, the Executive issued an Expropriation Decree, even though the expropriation procedure never concluded.

What distinguishes the Kellogg case from these other precedents is that the expropriation measures adopted by the Government of Venezuela included the commercialization of products under Kellogg’s trademarks. Therefore, in addition to compensation for the expropriation of tangible assets, Venezuela is also liable for the expropriation of intangible assets.