Australia and WTO Dispute Settlement

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Monthly Bulletin: November 2001

RESOLVING EXPORT ACCESS PROBLEMS THROUGH THE WTO SYSTEM

  • Are you an exporter or intending to export?
  • Do you export to one or more of the 142 markets that belong to the World Trade Organization?
  • Are you experiencing access problems in one or more of those markets?
  • Is the access problem caused by a regulation or directive of the importing government (at central, regional or local government level?)

If you have answered "yes" to those questions, the WTO Trade Law Branch of the Department of Foreign Affairs and Trade stands ready to assist in developing options for resolution of your access problems.  Exporters can contact WTO legal specialists in the Department on the following numbers:

RECENT DEVELOPMENTS

Launch of Doha Round of Trade Negotiations Agreement was reached on 14 November at the Fourth Ministerial Conference of the WTO in Doha on a new three-year Doha round of multilateral trade negotiations (to be concluded by January 2005).  Of relevance to dispute settlement, this included agreement to negotiations on improvements and clarifications of the Dispute Settlement Understanding with a deadline of May 2003.  The Ministerial Conference also saw the accession of China and Chinese Taipei to the WTO.  Further information can be found on the WTO web-site at: www.wto.org

Article 25 Arbitration on Level of Nullification or Impairment of Benefits

The award of the Arbitrators in United States: Section 110(5) Copyright Act (Homestyle exemption) (WT/DS160) was released on 9 November.  This is the first time that parties to a dispute have made recourse to arbitration under Article 25 of the Dispute Settlement Understanding to establish the level of compensation.  A paper examining the legal and policy management issues arising from this use of Article 25 arbitration, as well as the conceptual approaches and methodologies used by the Arbitrators, is attached to this Bulletin.

Australian Official to Serve on Panel

Mr Michael Mulgrew of the Australian Customs Service has been selected to serve as a panellist in United States Countervailing Measures Concerning Certain Products from the European Communities.  This panel was established by the DSB at its 10 September 2001 meeting, at the request of the European Communities (EC).

A list of Australian nationals who have served or are serving as WTO panellists (prior to Mr Mulgrew's appointment) and of Australian experts who have advised WTO Panels was attached to the October Bulletin, and an updated list can be found on DFAT's web-site at www.dfat.gov.au/trade/negotiations/wto_disputes.html

Retiring Appellate Body Members to Complete Current Appeals

The WTO Appellate Body has authorised retiring Members Claus-Dieter Ehlermann (EC), Mr Florentino Feliciano (the Philippines) and Mr Julio Lacarte-Muro (Uruguay) to continue as AB Members beyond the 10 December 2001 expiry of their terms of office so that they may complete the Appeal cases they are currently hearing.  Mr James Bacchus (US), Mr Georges Michel Abi-Saab (Egypt), Mr A V Ganesan (India), and Mr Yasuhei Taniguchi (Japan) are the four continuing Members of the seven member body, who will be joined shortly by new Members the Hon John Lockhart, AO, QC (Australia), Mr Luiz Olavo Baptista (Brazil) and Mr Giorgio Sacerdoti (EC).

A copy of Mr Vaile's media release congratulating Mr Lockhart on his appointment to the Appellate Body was included with the September Bulletin.

Waivers of WTO Obligations

The WTO Agreement and its covered agreements include provisions that enable Members to decide to waive a Member's WTO obligation.  This provides that Member with immunity from a challenge in the DSB to what would otherwise be a WTO-inconsistent action.  Recent examples include the waivers granted to the EC in Doha for its proposed banana import regime (see below) and the extension requests granted by the Council for Trade in Goods under the TRIMS Agreement that allow several developing countries further time to phase out their WTO-inconsistent TRIMS.

Australia as a Complainant (2)

United States: Safeguard measure on imports of fresh, chilled and frozen lamb meat (WT/DS177 and WT/DS178)

The US has implemented the DSB recommendations on lamb meat by removing its WTO-inconsistent safeguard measure on lamb meat with effect as of midnight 14 November.  All lamb imports arriving in the US after this time will be subject instead to the MFN rate of duty.  The US informed the DSB Meeting on 21 November that it had completed all necessary legal steps to remove the safeguard measure, a move that was welcomed by Australia and New Zealand.

United States: Continuing Dumping and Subsidy Offset Act of 2000 (Byrd Amendment) (WT/DS217 and WT/DS234)

The Panel examining the complaint of eleven Members (including Australia) against the US Continued Dumping and Subsidy Offset Act of 2000(the Byrd Amendment) has issued its timetable and working procedures.  The Panel is expected to release its final report on 10 July 2002.  The Byrd Amendment requires US customs authorities to distribute anti-dumping and countervailing duties assessed on imports to US domestic parties that supported the original petition for anti-dumping or countervailing duties to be imposed.  The co-complainants are arguing that the Act is, in several respects, not in conformity with US obligations under GATT 1994, the Anti-Dumping Agreement and the Agreement on Subsidies and Countervailing Measures.

Disputes involving Australia as a Third Party (8)

Chile: Price band system and safeguard measures relating to certain agricultural products (WT/DS207)

The Panel has advised that it will not be possible to complete its work as scheduled in February 2002, and that it expects to release its final report in March.

EC:  Measures affecting meat and meat products (Hormones) (WT/DS26)

No new developments. The EC is still facing WTO-authorised retaliation by the US and Canada because of its failure to implement within a reasonable period of time.

United States: Import prohibition of certain shrimp and shrimp products (the shrimp/turtle" case) (WT/DS58)

The Article 21.5 Panel and Appellate Body Reports were adopted at the 21 November DSB meeting.  In its Report, the Appellate Body rejected Malaysia's challenge against the Article 21.5 panel report and upheld the Panel's core finding that the US measure was justified under the GATT exception provision (Article XX(g)) so long as certain stated conditions, in particular the ongoing serious good faith efforts to reach a multilateral agreement, remain satisfied.  Australia's intervention on this item at the 21 November DSB meeting is set out below.

Canada: Measures affecting the importation of milk and the exportation of dairy products (WT/DS103 and WT/DS113)

Canada appealed the Article 21.5 Panel finding in favour of the US and New Zealand that the revised Canadian measures are export subsidies under the Agriculture Agreement.  In its recently released report, the Appellate Body reversed certain findings by the Panel which resulted in it also reversing the Panel's decision that the measures are export subsidies.  However, the Appellate Body was unable to complete the analysis of the claims made by NZ and the US due to an insufficient factual basis.  As such, the Appellate Body's findings do not amount to a finding that the measures are WTO-consistent.  NZ and the US retain the right to request an implementation panel on these aspects.

United States: Section 110(5) Copyright Act (Homestyle exemption) (WT/DS160)

The award of the Arbitrators was released on 9 November.  The Arbitrators awarded an amount of US$1.1 million per year.  The Arbitrators rejected the EC's argument that the level of nullification and impairment corresponded to the licensing revenue potentially foregone by EC right holders as a result of the US measure.  Instead, they calculated the royalty which EC right holders could reasonably have expected to realise in the absence of the US measure, based on the royalties that EC right holders were receiving prior to the introduction of the measure.  Australia has registered its expectation that any compensation will be non-discriminatory.

United States: Definitive safeguard measures on imports of circular welded carbon quality line pipe from Korea (WT/DS202)

The US has appealed the Panel's finding that the US line pipe measure was imposed inconsistently with certain provisions of GATT 1994 and the Safeguards Agreement.  An oral hearing has been scheduled for 15 December and the Appellate Body's report is due by 15 February 2002.

United States: Tax Treatment for Foreign Sales Corporations (WT/DS108)

The US has appealed the finding by the Article 21.5 compliance panel that its revised FSC scheme is inconsistent with US WTO obligations (including that the scheme is a prohibited export subsidy).  The EC has also appealed certain issues of law and legal interpretation made by the panel.  An oral hearing was held on 26-27 November.  The Appellate Body's report is due by 14 January 2002.

Canada: Export credits and loans guarantees for regional aircraft (WT/DS222)

No new developments. The Panel informed the DSB in August that it would not be possible to complete its work with the 3 months deadline from its composition.  The panel expects to complete its work shortly.

Disputes in which Australia has a policy or economic interest (4)

Japan:  Measures affecting agricultural products (Varietal testing) (WT/DS76)

No new developments.  Japan outlined its agreement with the US on a mutually satisfactory solution at the 25 September DSB meeting. Australia has registered its expectation that the outcome will be applied in a non-discriminatory manner to the products of all WTO members.

EC:  Regime for the Importation, Sale and Distribution of Bananas (WT/DS27)

At the Doha Ministerial Conference, the EC was granted the two waivers it requires for its proposed new banana import regime, implementing its bilateral settlements with the United States and Ecuador in this dispute.  The waivers, from Article I and Article XIII of GATT 1994, will allow the EC to give tariff preferences to certain African, Caribbean and Pacific countries, and additionally to continue to reserve an import quota allocation exclusively for banana exports from these countries.

United States: Section 129(c)(1) of the Uruguay Round Agreements Act (WT/DS221)

No new developments.  Canada is challenging the legality of a specific aspect of the US statute controlling the US implementation of DSB rulings.  A panel with standard terms of reference was established at the 23 August 2001 DSB meeting, and was constituted on 30 October.  Third party rights were reserved by the EC, India, Japan and Chile. 

United States Section 211 Omnibus Appropriations Act (WT/DS176)

No new developments.  The EC has appealed certain issues of law and legal interpretations in the panel report, including the finding that WTO intellectual property rules do not cover trade names (company or business names that are not registered as trademarks).  The Panel had ruled that a U.S. law known as Section 211, which prevents U.S. recognition of trademarks and other intellectual property used in connection with confiscated property, was partially inconsistent with the WTO TRIPS Agreement.  Other of the EC's claims relating to the inconsistency of Section 211 with Article 42 of the TRIPS Agreement were rejected by the Panel.

Meetings of the Dispute Settlement Body: November 2001

 The DSB, consisting of all the Members of the WTO, met on 5 November and 21 November 2001. The next regular DSB meeting will be held on 18 December 2001, and special DSB meetings have been scheduled for 5 December and 10 December.  Australia uses DSB meetings to monitor progress and to register its views on disputes of interest. The agendas of the November DSB meetings were as follows (any Australian interventions are indicated):

DSB Meeting 5 November 2001

EC Regime for the Importation, Sale and Distribution of Bananas (WT/DS27)                - status report by the EC

The EC presented a further status report on progress in the implementation of the DSB's recommendations on its banana import regime.

2. Panel Request

US Preliminary Determinations with respect to Certain Softwood Lumber from Canada (WT/DS236) request for the establishment of a Panel by Canada

Panel was not established as the United States opposed the request.  Panel request deferred.

3.  Report of the Panel

Argentina Definitive Anti-Dumping Measures on Imports of Ceramic Floor Tiles from Italy (WT/DS189)

The Panel Report was adopted.

4.  Report of the Appellate Body and Report of the Panel

US Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan (WT/DS192)

The Appellate Body and Panel Reports were adopted.

Prior to adoption of the Reports, both parties commented critically on aspects of the legal reasoning in the Reports, particularly as regards the issue of attribution of injury.

Special DSB Meeting 21 November 2001

1. Implementation of the Recommendations of the DSB

US Transitional Safeguard Measure on Combed Cotton Yarn from Pakistan (WT/DS192)

The US informed the DSB that it had implemented the DSB's recommendations in this case.

2. Report of the Appellate Body and Report of the Panel

US Import Prohibition of Certain Shrimp and Shrimp Products (WT/DS58): Recourse to Article 21.5 of the DSU by Malaysia

The Appellate Body and Panel Reports were adopted.

Australia said that our participation in this dispute as a third party reflected both systemic and substantive trade interests.

We said that we appreciated the positive US response to the issue of certification of shrimp exports from two Australian shrimp fisheries.  We also welcomed the efforts of the United States and other countries, including Malaysia, to address sea turtle conservation.

This dispute, in Australia's view, had highlighted that genuine, multilateral co-operative efforts are preferable when transboundary or global environment problems are at issue.

While unilateral measures are not ruled out in all instances, as demonstrated by the outcome of this dispute, Australia expressed some concerns about the legal reasoning that has led to the conclusion that the United States measure in this instance is justified by the chapeau of GATT Article XX.  These concerns were described in our submission to the Appellate Body.

In particular, we stated that Australia believes that the Panel incorrectly relied on whether or not the United States engaged in ongoing serious good faith efforts to reach a multilateral agreement as a determining factor for the measure's consistency with the chapeau of GATT Article XX.

We said that the key issue, in our mind, should have been whether the measure itself, following the conclusion of the reasonable period of time, was justified by the chapeau.  This would have required an examination of the steps taken by the United States to obviate or eliminate the unjustifiably discriminatory nature of the trade restriction - including in the design, extent and implementation of the measure.

The progress of the Indian Ocean initiative on sea turtle conservation has demonstrated the existence of a viable, non-discriminatory alternative to the unilateral import restriction. The initiative provides for a wide and comprehensive range of actions to address turtle conservation, including the provision of technical expertise and genuine capacity building in country.

If the United States believes that, in addition to these actions, trade restrictive measures are needed to promote sea turtle conservation, it can pursue these proposals through the Indian Ocean initiative - rather than through a unilaterally determined import restriction.  This would reaffirm the importance of multilateral solutions to transboundary environmental problems.

3. Report of the Appellate Body and Report of the Panel

Mexico Anti-Dumping Investigation of High Fructose Corn Syrup (HFCS) from the US (WT/DS132): Recourse to Article 21.5 of the DSU by the US

The Appellate Body and Panel Reports were adopted.

4.  Other Business

US: Safeguard Measure on Imports of Fresh, Chilled and Frozen Lamb Meat (WT/DS177 and WT/DS178)

 The US made a statement announcing that it had completed, on 14 November, all of the necessary legal steps to implement its 31 August decision to end the safeguard measures, and that, by this action, it had implemented the DSB recommendations and rulings in this case.

Australia welcomed the withdrawal of the WTO-inconsistent safeguard measures on lamb.

We noted that this withdrawal took place almost two and a half years after the measure was imposed and six months after the DSB adopted the Panel and Appellate Body Reports in the dispute.

Australia urged the United States to apply its safeguards legislation in the future in a way that was consistent with its WTO obligations, as clarified through this and other disputes.

 

US: Section 110(5) Copyright Act (Homestyle exemption) (WT/DS160)

The EC made a statement criticising the approach taken by the arbitrators in making an assessment of the level of nullification and impairment suffered by the EC as a result of US violation of its TRIPS obligations.

WTO:  EC/US HOMESTYLE COPYRIGHT DISPUTE ARBITRATION ON THE LEVEL OF NULLIFICATION AND IMPAIRMENT[3]

SUMMARY

This paper addresses the legal and policy management issues arising from the decision of the European Community and the United States to engage in arbitration procedures of Article 25 of the WTO Dispute Settlement Understanding (DSU).  The paper addresses the following issues: 

  • The policy and legal implications of recourse to Article 25 procedures as an alternative to other WTO arbitration and litigation processes, including the rights of third parties
  • Conceptual approaches to defining nullification and impairment
  • Methodologies for assessing nullification and impairment

The paper draws the following conclusions:

Article 25 arbitration as an alternative to litigated dispute settlement

  • Article 25 arbitration procedures may be a useful and more expeditious option to standard dispute processes, or in circumstances where there are no specific procedures to assist the parties in resolving an issue
  • However, there are constraints on recourse to Article 25 procedures and potentially adverse policy implications:
  • Recourse to Article 25 procedures requires mutual agreement and mutual agreement is also necessary for working procedures and selection of the arbitrator
  • The arbitration award is binding on the parties and would therefore preclude an appeal
  • Third parties do not have automatic rights to intervene, but may be affected by the jurisprudence of the arbitration award

Conceptual approaches to defining nullification and impairment

  • The arbitrators rejected the concept of  hypothetical potential opportunity in favour of reasonable expectations, taking into account commercial considerations

Methodologies for assessing nullification and impairment

  • There is some flexibility in determining a methodology, but much would depend on the quality of the factual data supplied by the parties and the willingness of commercial operators to supply data.  An Article 25 arbitrator will not impose a methodology on the parties, but will select the most credible of options proposed by the parties that would reduce guesstimates and that would be based on standard burden of proof in arbitration.

THE EC-US HOMESTYLE COPYRIGHT DISPUTE

1.  On 26 January 1999, the EC requested consultations with the US under Article 4 of the WTO DSU and Article 64.1 of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights(TRIPS).  The consultations involved Section 110(5) of the US Copyright Actas amended by the Fairness in Music Licensing Act of 27 October 1998. [4]

2.  The dispute concerned limitations on the exclusive rights provided to owners of copyright in Section 106 of the Copyright Act in respect of certain performances and displays.  The principal issue related to the extended exemption from licensing in regard to the transmission of non-dramatic musical works in small eating drinking and retail establishments by audio or audiovisual apparatus commonly sold for private use (homestyle transmission).  The EC alleged that the exemptions were incompatible with Article 9.1 of the TRIPS Agreement, together with Articles 11(1)(ii) and 11bis of the Berne Convention. 

3.  The consultations failed to resolve the dispute.  The EC subsequently requested the establishment of a panel in accordance with Article 6 of the DSU and Article 64.1 of TRIPS.  A panel was established on 26 May 1999.  Australia, Brazil, Canada, Japan and Switzerland joined as third parties.

4.  The Panel submitted its report to the parties on 5 May 2000[5].  WTO Members adopted the report on 27 July 2000, giving legal effect to the Panel findings.  The report (which was not appealed) made the following finding of inconsistency: 

Subparagraph (B) of Section 110(5) of the US Copyright Act does not meet the requirements of Article 13 of the TRIPS Agreement and is thus inconsistent with Articles 11bis(1) (iii) and 11(1)(ii) of the Berne Convention as incorporated into the TRIPS Agreement by Article 9.1 of that Agreement.

5.  As the EC and the US were unable to agree on a reasonable period of time for bringing the measure into WTO consistency, an Arbitrator was appointed under the terms of Article 21.3(c) of the DSU.  The Arbitrator awarded a 12-month period from date of adoption of the panel report, expiring on 27 July 2001[6].  The Arbitrator's award is binding on the parties.  In accordance with Article 22 of the DSU, failure to implement within the arbitrated period gives rise to a right to seek compensation or to request WTO-authorized suspension of concessions (retaliation rights). 

6.  In a highly irregular procedure developed between the EC and the US, the US lodged a request on 18 July 2001 for DSB approval to extend the arbitrated time period.  The US requested extension of the time period to 31 December 2001 or the date on which the current session of Congress adjourned whichever was the earlier.  The US requested that the DSB approve its request at the DSB meeting of 24 July 2001[7].  The DSB did not disapprove of the US request.[8]

7.  On 3 August 2001, the EC and the US requested arbitration, in accordance with Article 25 of the DSU, to determine the level of nullification or impairment of benefits to the EC as a result of the operation of Section 110(5)(B) of the Copyright Act.  The request (which does not require approval by the DSB) included agreed procedures and a timetable for completion of the process by 25 September 2001.  In accordance with their Article 25 rights, the parties determined that third parties would be excluded from the procedures.[9] 

8.  On 9 November 2001, the Arbitrators issued their report.  The Arbitrators determined that the level of EC benefits being nullified or impaired is US$1.1 million a year[10].  Should the US fail to implement by the extended time period, that figure would be used as the basis for compensation negotiations, in accordance with Article 22.1 of the DSU, or as the level of a request for DSB authorization to retaliate in accordance with the provisions of Article 22.2 of the DSU.  The assessed level could presumably be used as an offset in regard to US retaliation currently applied against EC exports arising from other WTO disputes.   

Article 25 of the DSU

9.  This is the first dispute involving recourse to the procedures of Article 25 of the Dispute Settlement Understanding (DSU).

10.  Article 25 provides:

1.  Expeditious arbitration within the WTO as an alternative means of dispute settlement can facilitate the solution of certain disputes that concern issues that are clearly defined by the parties

2.  Except as otherwise provided in the Understanding, resort to arbitration shall be subject to mutual agreement of the parties, which shall agree on the procedures to be followed.  Agreements to resort to arbitration shall be notified to all Members sufficiently in advance of the actual commencement of the arbitration process.

3.  Other Members may become party to an arbitration proceeding only upon agreement of the parties which have agreed to have recourse to arbitration.  The parties to the proceedings shall agree to abide by the arbitration award.  Arbitration awards shall be notified to the DSB [Dispute Settlement Body] and the Council or Committee of any relevant agreement where any Member may raise any point relating thereto.

4.  Articles 21 and 22 of this Understanding[11] shall apply mutatis mutandis to arbitration awards.

11.  Article 25 allows for an alternative route to all other dispute settlement processes embodied in the DSU, such as the three-tier process of consultations (Article 4), panel (article 6) appellate review (Article 17) as well as the arbitration procedures for determining a reasonable period of time (Article 21.3(c) and the level of retaliation (Article 22.6).    The Article 25 option sits halfway between the formal litigated processes and those of the Chair's Good Offices (Article 5), in that the Arbitrators issue a report of a juridical nature that binds the parties to a dispute. 

12.  In addition, Article 25 serves to fill a procedural vacuum.  Parties may agree to invoke Article 25 in circumstances where the DSU does not expressly provide for a particular issue to be arbitrated or litigated.  For instance, the DSU does not specifically provide for arbitration on the level of compensation that might be agreed between the parties (Article 22.1).  Moreover, the DSU does not specifically provide for arbitration on retaliation levels until the expiry of a reasonable period of time, following a request for DSB authorization to apply retaliation (Article 22.6).[12]

13.  Article 25 may also offer a more expeditious means of arriving at an outcome. Article 25 allows parties to develop their own working procedures and timetables, subject only to the reasonableness of the timetable for the arbitrators to issue a report. 

14.  Article 25 reports are made publicly available.  WTO Members are free to raise any issues connected to the report at meetings of the DSB.

 THE ARTICLE 25 ARBITRATION REPORT

Mandate of the Arbitrators

15.  The arbitrators essentially assumed a mandate comparable to that of an arbitrator assessing the level of retaliation in accordance with Article 22.6-7 of the DSU, as modified by the terms of reference agreed between the parties.  The arbitrators noted that there was nothing in Article 22.2 of the DSU that would prevent arbitration that might assist the parties to arrive at mutually acceptable compensation as an alternative to retaliation.

Conceptual Issues

16.  The Arbitrators addressed two conceptual issues before proceeding to examine the level of benefits nullified or impaired.

A.  Nature and Level of Benefits Nullified or Impaired 

17.  The Arbitrators addressed opposing EC and US contentions:

  • the EC claimed that the nature and benefits in this instance should be examined as a special case, in that the benefits involved exclusive rights, compared to other cases involving expectations as to the legal framework and factual conditions in which economic activities could be pursued.  
  • the US considered that the level should be measured by reference to the licensing royalties lost by EC right holders, but lost benefits should not involve those that might be hypothetically collectible.   Those benefits could be quantified by determining the benefits that EC right holders were receiving prior to the enactment of Section 110(5)(B) in 1998. 

Nature of the benefits

16.  The Arbitrators took the position that benefits should be considered on the basis that, while the United States is under an obligation to provide right holders with exclusive rights, the exercise and exploitation of those rights was a matter for the EC, not the US. Consistent with past arbitration proceedings, the WTO benefits in question accrued to the EC, not the EC right holders, but the nullification or impairment involved benefits foregone by EC right holders arising from the US amendment. 

Level of the benefits

17.  The Arbitrators considered this issue from the perspective of the royalty income which EC right holders could expect to receive if the US were to comply with its WTO obligations.  The principal issues involved the following:

  • the EC argument that the level should be considered as the economic value of rights corresponding to income potentially realisable by EC right holders.
  • whether the level of royalty income which EC right holders could expect to receive should include the royalty income of which they would be deprived by all unauthorized use of their works (the piracy argument)
  • whether account should be given to the fact that 100% licensing would not be countenanced on economic grounds

16.  The Arbitrators considered that the benefits should be those that the EC could reasonably expect to accrue to it, that is, the licensing revenue from the number of users that would be licensed.    Applying the reasonable expectation test, the Arbitrators queried whether the EC should expect that all users of the works would be licensed and would pay licensing fees.  The nullification and impairment derived from the US measures that actually prevented licensing of such premises.  It was pertinent that the relevant WTO obligation did not extend to a duty to enforce exclusive rights on behalf of right holders.  In that context, the US argued that the number of licences sought by agents of the right holder is a function of the expected cost and revenue per licence.  Licensing levels of 100% would involve significant costs that might deliver a lower return than a much lower level of licensing.  

B.  Royalties Collected versus Royalties Distributed

17.  The arbitrators applied a reasonable expectation test in considering whether the benefits should be assessed on the basis of the royalty income actually collected on behalf of the right holders or the amount distributed to right holders. 

18.  The arbitrators considered that authorization by right holders to agents to license works does not translate to a reasonable expectation that they would receive any benefits directly from the licensed users, but rather from their arrangements with their agents. 

19.  The arbitrators rejected the US argument that the level of benefits should be measured as foregone earnings in the EC `s current account transactions with the US, partly on the grounds that such a basis would not take into account payments made to EC royalty holders in non-EC countries.

20.  The arbitrators determined that the basis should be one of the amounts that might be reasonably distributed.

Calculation methodology

21.  The choice of methodology was not determined by the arbitrators as such, but rather turned on the legal question of the burden of proof.  The parties had instructed the arbitrators to follow the allocation of the burden of proof applied by arbitrators under the DSU Article 22.6 procedures (level of retaliation).  In the current case, the burden of proof would therefore rest on the US to make a prima facie demonstration that the EC-proposed methodology and calculations were inconsistent with the requirements of Article 22 of the DSU.

22.  The EC had proposed a bottom-up approach, involving the number of establishments that may qualify for the exemption.  On that basis, the EC calculated the level as US$25.5 million. 

23.  The US had proposed a top-down approach, involving the three-year average (1996-98) of the total royalties paid to EC right holders, subject to deductions.  On that basis, the US calculated the level at between US$446,000 to $US733, 000.

28.  The arbitrators accepted that the US had established a prima facie case that the EC-proposed methodology and estimates were not appropriate and that the EC had failed to rebut that presumption.   The arbitrators therefore adopted a top-down approach, justifying that approach on the following grounds:

  • the number of establishments actually licensed at the time of the entry into force of the 1998 amendment provided a starting point of historical, verified facts, adjustable in light of the date of referral to the arbitrators
  • it limited the number of assumptions required as compared to a counterfactual approach (as used in other disputes where there had been an absence of historical trade)
  • there was insufficient data or cooperation by the private sector to give adequate precision to calculations under a bottom-up approach

Elements in the calculations:

29.  At the request of the EC, the Arbitrators excluded the following elements:

  • indirect or potential harm (the potential detrimental effects for the exploitation of other rights)
  • activities of one of the three collective management organizations acting as agents for EC licence holders , on grounds of insignificance
  • music broadcast through the Internet

29.  The arbitrators used the following elements in its calculations (some based on estimates because of inadequate data)

  • amount of royalties received by EC right holders prior to the entry into force of the 1998 Amendment, for use of broadcast music from the types of establishment newly exempted by the 1998 legislation
  • representative period of 3 year average prior to the 1998 amendment (following standard GATT practice)
  • share of royalties from eating, drinking and retail establishments (around 50%)
  • amount of revenue collected attributable to playing radio and television music (approximately US$1.5 million a year)
  • exempt establishments that fell within the statutory size or equipment definition (58.5%)
  • annual growth assumptions starting from 1997, based on growth in the US economy.

CONCLUSIONS

Legal and Policy Management, including the rights of third parties

29.  In the current dispute, recourse to the Article 25 process has filled a procedural vacuum which could facilitate mutual resolution of a dispute as an alternative to litigation and retaliation, consistent with the objectives of the WTO dispute settlement system. Recourse to Article 25 process will also serve to reduce the time frames for outcomes, whether negotiated or imposed by WTO-authorization.  If the US has not implemented by the expiry of the implementation period, the negotiation of compensation could be relatively swift (Article 22.2 of the DSU provides a small window of 20 days for the negotiation of compensation from the date of expiry of the implementation period).  Alternatively, the EC could move to obtain DSB authorization to retaliate, without need for recourse to arbitration on the level of retaliation, thus saving 60 days  (Article 22.6 of the DSU provides for a 60 day period for arbitration).

30.  The parties now have a benchmark for proceeding to negotiate an outcome, thus limiting the harassment leverage of a successful complainant in threatening retaliation or in inflating an amount for negotiating compensation as an alternative to retaliation.  The relatively small level of nullification determined in this instance might not be a strong inducement for the US to bring its measure into WTO conformity, but on the other hand, the United States has a major systemic export interest in securing observance by others of TRIPS obligations.

31.  Recourse to Article 25 procedures as an alternative to the standard litigation procedures could substantially reduce time frames for outcomes and could therefore be helpful to exporters subject to shorter term trade remedy measures (such as anti-dumping, countervailing and 3 year safeguards arrangements).  However, recourse to Article 25 would need the agreement of the other party.  From a systemic perspective, a complainant party would also need to factor in a loss of appeal rights (arbitration is binding on the parties).

32.  In terms of the rights of third parties:

  • Although the parties can exclude third parties from the arbitration process (Article 25.3 of the DSU), such exclusion has no practical effect in relation to alternative arbitration on the level of retaliation or reasonable period of time (third parties have no such rights under Article 21.3(b) or Article 22.6). 
  • However, if Article 25 were to be used as an alternative to the standard consultations, panel, Appellate and implementation panel procedures (Articles 4.3, 6,10,17.4 and 21.5), third parties could be totally excluded from intervention in legal processes and would not have automatic right of access to the submissions of the parties.  
  • The arbitrators recognised the indirect rights of third parties in relation to compensation, noting the erga omnes character of compensation[13].  A respondent party is under no obligation to negotiate compensation with a third party, but should it negotiate a form of compensation that serves to discriminate against other WTO members, those members could seek to exercise their WTO rights of non-discrimination.
  • If Australia wished to clearly establish its own WTO legal rights as a direct party Australia could seek Article 25 arbitration subject to US agreement - in regard to its own WTO rights and level of benefits nullified or impaired. This would be a much faster route than the standard process of consultations/panel etc.  Recourse to any such process would involve considerable collection of credible commercial data from the private sector.

Conceptual approaches to nullification and impairment

29.  The arbitrators rejected an approach of calculating benefits on the basis of potential, as compared to reasonable expectations of benefits that might be realisable from a commercial perspective.

Methodologies for assessing levels of nullification and impairment

30.  Consistent with the practice followed by other WTO arbitrators, the arbitrators would not impose their own methodology.  The methodology adopted would depend on the strength of the claims and arguments of the two parties and the strength of empirical data, from official and commercial sources.  Business-in-confidence procedures can be utilised, but either party is heavily reliant on the cooperation of the private sector to advance its claims and arguments. 

29 November 2001


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[2] This publication is intended to provide a general update and the information within it should not be relied on as complete or definitive.

[3] United States Section 110(5) of the US Copyright Act:  Recourse to Arbitration under Article 25 of the DSU Award of the Arbitrators WT/DS160/ARB25/1. It cannot be assumed that the views expressed in this paper represent the views of the Department of Foreign affairs or of the Australian government.

[4] WT/DS160/1

[5] WT/DS160/R

[6] WT/DS160/12

[7] WT/DS160/14

[8] WT/DSB/M/107, p.13

[9] WT/DS160/15

[10] WT/DS160/ARB25/1

[11] Article 21 procedures include provision for arbitration on a reasonable period of time for implementation and for implementation panels.  Article 22 provisions include arbitration on the level of retaliation.

[12] A complainant party must request authorization to retaliate at a specified level.  If that level is disputed, the other party may seek arbitration. The DSB would then grant authorization to retaliate the arbitrated level. 

[13] Para 2.5 of WT/DS160/ARB25/1


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The Monthly Bulletin is an overview of Australian involvement in WTO Dispute Settlement from the WTO Trade Law Branch of the Department of Foreign Affairs and Trade . It updates Australian involvement in specific WTO disputes and, more generally, in disputes in which Australia has a policy or economic interest. Also included are the agendas of meetings of the WTO Dispute Settlement Body (DSB), with specific reference to any Australian interventions.

For more information and copies of previous issues, visit Australia and WTO dispute settlement.

For more general information relating to the Doha Round of Trade negotiations, see the WTO Doha Round Bulletin.