Another TV Dispute Plagues The Czech Government.

A brewing debate over control of the Czech Republic's top television channel turned into an arbitration hearing in London, in a case testing the Czech government's readiness to afford equal treatment for foreign and domestic investors. The binding mediation is being heard behind closed doors under the guidelines of the U.S.-Czech Co-Investment Treaty, which was signed in 1991. This follows the other recent dispute between the Czech government and the journalists of the country's public television, CT, over the politicians' control of the network.

Central European Media Enterprises (CME), of which Ronald Lauder, of the Estee Lauder cosmetics company, has a 23 percent stake is claiming $500 million in damages from the government, stating that its broadcasting watchdog failed to protect Lauder's investment in TV Nova, the most profitable station in Central Europe.

Arbitration proceedings took place at London's International Court of Arbitration and the jury included a chairman from Switzerland and one judge from the U.S. and one from the Czech Republic.

In 1994, when Lauder launched TV Nova, the former Soviet bloc's first commercial TV station, with a locally-owned license, it was headed by Vladimir Zelezny, a former screenwriter and a well-known local figure from the Prague Spring. Since foreign companies were not allowed to own television licenses in the Czech Republic and the country wanted foreign investments and expertise, the Czech Media Council came up with the answer: The actual license would be held by a Czech body (CET21) in which Zelezny would be a leading player. A separate operating company, Ceska Nezavisla Televizni Spolecnost (CNTS) owned by CME, would be responsible for TV Nova's broadcasting and profits.

According to CME president Fred Klinkhammer, the agreement explained CET21's contribution of "exclusive use of the license" to CNTS, the American group's operating company in the Czech Republic. This awarded CET21 a 12 percent stake in CNTS. The Czech Savings Bank held 28 percent of the broadcasting company and CME had 60 percent.

The CME president commented, "a written commitment from both parties that neither company would operate the television station or broadcast without the other." TV Nova quickly took a 70 percent audience-share with its U.S.-style diet of soaps and game shows. Meanwhile, as director-general with his own TV show Ask The Director, Zelezny became very influential and very rich. He also began to chafe under CME's control. In April 1999, CME sacked Zelezny for allegedly stripping the firm of its licenses in preparation for starring up his own firm. Zelezny, who claimed that his firing was an underhanded tactic designed to force him to sell Nova's license, swiftly found new local partners and continued broadcasting from separate studios, leaving CME without a license.

According to CME spokesman Gerry Buckland, CME, which in the Czech Republic invested about $140 million, lost $2.5 million in monthly profits. Reportedly, this led the NASDAQ-quoted European broadcaster SBS Broadcasting to call off a $615 million takeover. CME's U.S.-listed shares lost almost all their value and the company teetered on the verge of bankruptcy. CME looked for help to the Czech authorities for help, but the parliament-appointed watchdog protected Zelezny and the government refused to intervene regarding it as a business dispute.

CME was also unsuccessful in suing Zelezny for breach of contract in the Czech courts and the police failed to pursue criminal complaints against him. CME claims that Zelezny is so powerful the politicians fear to touch him before next year's elections.

It was elevated to international arbitration, with CME suing Zelezny for breach of contract, and Lauder and CME suing the government under bilateral investment treaties, the first time the Czech Republic had ever faced this. Last month, CME failed to win $470 million in damages from Zelezny in an international chamber of commerce arbitration. This uncovered Zelezny's violation of a non-compete agreement. He was ordered to pay $27.1 million to CME. Klinkhammer said, "We own the buildings and equipment, but not the license, and this was a business valued at half a billion dollars. The question is whether the Czech Republic's a safe place to invest."

If Lauder wins, it will encourage several other foreign investors who are contemplating similar actions. There is the case of Investicni a Postovni Banka (IPB) and Nomura Securities of Japan, which has already started proceedings under a bi-lateral investment treaty, claiming $800 million for the government's forced takeover of its local affiliate bank last June. This is after a run on deposits and its subsequent sale to a rival sans payment. The case is expected to be heard in the middle of next year. Similarly, both cases include allegations that Czech politicians, judges, police and regulators are swayed by powerful local business interests to make arbitrary decisions against foreign investors. Vladimir Balas, a Czech expert on international law, said that Lauder did nor have many chances for success. "This is a dispute which should have been resolved on the private-law level; the government did not prevent Lauder from repatriating his profits, nor did it prevent him from doing business," said Balas. If L auder claims victory, the Czechs will have to comply with his demands. The verdict of the arbitration can be enforced by means of various sanctions, Balas said, adding that the Czech Republic's reputation will suffer.

The first round of the arbitration proceedings ended in November 1999, when a Stockholm court imposed several restrictive court injunctions on Zelezny. He declined to obey the verdict, claiming that some decisions of the court ran counter to Czech laws and that he was not able to comply with the rest of the verdict.

The March 2000 second round took place in an Amsterdam court. The verdict was announced in February 2001. Based on the latter verdict, Zelezny must pay $27.1 million to CME, for which he will obtain 100 percent of Nova Consulting, and will once again acquire 5.8 percent of CNTS.

Further arbitration proceedings will take place late this month in Stockholm, where the parties of the dispute will be the Czech Republic and CME. CME is suing the Czech Republic for $1 billion for insufficient protection of investment.