Analysing WTO-Arbitration under Article 25 of the DSU Agreement and proposing recommendations to incentivize it as a Dispute Resolution Mechanism (PART-II)

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III. US – COPYRIGHT ACT CASE AND WTO JURISPRUDENCE ON ARTICLE 25

Facts and Procedural History

The only time that Article 25 was used by the WTO member States was in the US – Copyright Act case.^[1] This dispute between the EC and the USA originated when the latter amended its copyright law in a way that nullified and impaired certain benefits promised to the EC under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).^[2] The EC had complained that Section 110(5) of the US Copyright Act failed to protect the exclusive copyrights of its right holders of music, thus causing a loss of royalties.^[3] After the consultations failed between the parties, the DSB established a panel in accordance with Article 6 of the DSU. Australia, Brazil, Canada, Japan and Switzerland reserved their rights to participate in the panel proceedings as third parties.^[4].

Ultimately, the panel found inter alia that sub-section (B) of Section 110(5) of the US Copyright Act was inconsistent with Article 13 of the TRIPs.^[5] The DSB adopted the panel’s report. The USA subsequently requested for 15 months as a reasonable time-period to implement the recommendations of the DSB; however, the arbitrator appointed under Article 21.3(c) of the DSU determined 12 months to be the reasonable period.^[6] The said period of 12 months was scheduled to expire on 27 July 2001.^[7]

The USA could not implement the DSB’s recommendations within the determined reasonable time-period. In its meeting of 24 July 2001, the DSB agreed to the United States’ proposal to extend the time till 31 December 2001 or the end of the current session of the USA Congress, whichever was earlier, and this extension was agreed by the EC.^[8]

On 23 July 2001, the EC and the USA jointly notified the DSB of their mutual agreement to resort to Article 25 arbitration and the stated object thereof was to determine the level of nullification or impairment of the benefits to the EC as a result of Section 110(B) of the US Copyright Act.^[9] The particular issue was very factual, i.e. whether it was reasonable for the EC to calculate its losses for all potentially realisable income.^[10] The working procedures and timetable were developed by the arbitrators on the basis of the agreed procedures and timetable for Article 25 arbitration annexed to the parties’ communication to the chairman of the DSB.^[11] The award was issued on 12 October 2001 and it was held that the level of EC’s benefits being impaired or nullified was to the tune of EUR 1,219,900 per year.

Legal Principles, Jurisprudence and Scholarly opinion

There are certain legal principles emerging from the US – Copyright Act case which stand as the only available source of jurisprudence for arbitrations under Article 25 of the DSU. The arbitrators observed that no decision is required from the DSB for a matter to be referred to arbitration under Article 25 and that in the absence of a multilateral control over recourse to that provision, it is incumbent on the arbitrators themselves to ensure that it is applied in accordance with the rules and principles governing the WTO system.^[12] It was further observed that arbitration is likely to contribute to the prompt settlement of a dispute between members and that it may facilitate the resolution of a divergence in the context of a negotiation of compensations, thus paving the way to implementation without suspension of concessions or other obligations.^[13]

The arbitrator also suggested that compensation is always to be preferred over countermeasures of any sort, since it enhances trade instead of restricting or diverting it, and the possibility for the parties to seek arbitration in relation to the negotiation of compensation operates to increase the effectiveness of that option.^[14]

Declaring jurisdiction over the matter, the arbitrators further considered the fact that the rights of other members under the DSU were not affected by the decision of the EC and the USA to seek arbitration under Article 25.^[15] Recourse to arbitration under this provision should be consistent with the “object and purpose of the DSU”,^[16] not “circumvent” the provisions of Article 22.6 of the DSU^[17] and take place “in accordance with the rules and procedures governing the WTO system.”^[18]

In scholarly opinion, the way arbitration mechanism facilitated the negotiations between the parties was “an interesting and constructive precedent”^[19] and can be described as “the most diplomatic procedure amongst the WTO adjudicative bodies”^[20]. Article 25 of the DSU does not address the issue of how the arbitrators’ mandate shall be determined and which is why the arbitrators in the US – Copyright Act case accepted their limited mandate.^[21]

Article 25 is also silent on the issue of punitive compensation and on the question of whether compensation should be paid retroactively (i.e. from the time that the offending party began to violate the WTO Agreement) or prospectively (i.e. from the time that the injured party filed its complaint).^[22] The arbitrator arguably exercises greater independence and discretion as the award does not require any formal adoption or approval by the DSB and only needs to be notified to the DSB.^[23]

IV. INCENTIVIZING ARTICLE 25 ARBITRATION: PROPOSALS TO RESOLVE THE PREVAILING CRISIS CONCERNING THE APPOINTMENT OF APPELLATE BODY

The oft-cited reasons for the under-utilization of Article 25 arbitration amongst the member States appears to be that: (a) it is fit only for matters that are “distinct or narrow bilateral issues”,^[24] (b) it lacks an appeal mechanism against awards,^[25] and (c) overall, there is a pronounced tendency towards the use of litigation to settle disputes.^[26] However, the recent turn of events at the WTO headquarters in Geneva may prove to be the biggest incentive for the member States to reconsider their thoughts about Article 25 arbitration mechanism and utilize it to its full potential.

The Appellate Body crisis at the WTO arose due to the USA’s decision to not support further appointment of members of the Appellate Body. Therefore, it is not difficult to appreciate that Article 25 arbitration offers a two-pronged solution to the WTO members to maintain a status quo in terms of a functional dispute resolution mechanism within the framework of the DSU until the crisis is resolved through political consensus.

Primarily, the subject-matter scope of Article 25 is broad enough to allow the parties to submit any dispute to arbitration by mutual agreement, as long as they can specifically determine the issues to be settled. Given that the parties enjoy the autonomy to decide the procedure to be followed, the mandate of the arbitral tribunal so constituted can be specified depending on the nature of dispute. Considering that expeditious disposal of any dispute is the primary goal, and the fact that participation by third parties to a dispute has been the norm in the WTO system, it is likely that third-parties to an arbitration would be permitted to make submissions in case their rights are likely to be affected. At least, the award in the US Copyright Act case suggests that the arbitral tribunal would be considerate of the rights and interest of third-parties (which in that case were at least considered but held as not affected).

The incentive for the disputing parties – in addition to fast-tracked adjudication – is greater control over the choice of arbitrators, procedure to be followed and, last but not the least, finality of the award. The recourse to Appellate Body will be avoided and thus, result in avoiding the crisis at hand. The enforcement of awards (as under Article 21 and 22 of the DSU) will also remain unaffected.

Alternatively, Article 25 can be used instead of the regular appellate process, considering that Article 17 of the DSU and the Working Procedures for the Appellate Body (Appendix 3 to the DSU) could serve as the legal framework for an appeal-arbitration.^[27] The parties can agree to “appeal-arbitration” by setting the terms of appellate process in their arbitration agreement such as (a) the mode of initiation of appeal, (b) selecting the arbitrators from an agreed roster of individuals comprising current and previous Appellate Body members, (c) adopting the same procedural steps and timetable as provided in the Working Procedures, and (d) defining third-party participation through Rule 24 of the Working Procedures, inter alia. ^[28] The incentive in following this approach is that the end-result, i.e. the arbitral award – or the appellate arbitral award – would be just as much as final and binding on the parties as an Appellate Body Report. The parties can, thus, for all practical purposes, continue to avail the remedies under the existing judicial mechanism under the DSU while simultaneously taking advantage of the specialized arbitration mechanism.

V. CONCLUSION

The founding fathers of the WTO retained Article 25 as it is for a purpose, which seemingly, was to create an incentive for the members to resolve their disputes in the future in a speedy, efficient, effective and WTO-consistent manner. Perhaps, the time has come for the WTO member States to realize it, be more open-minded and make the most of Article 25 arbitration as an alternative method of dispute settlement especially under the prevailing Appellate Body crisis.

 

(This post has been authored by Subhiksh Vasudev and Rodrigo Castillo de la Cerda. Subhiksh and Rodrigo are 2018 MIDS LLM graduates.)

References

1. United States – Section 110(5) of the US Copyright Act, Report of the Panel, WT/DS160/R, 15 June 2000 (“US – Copyright Act (Panel Report)”); United States – Section 110(5) of the US Copyright Act – Recourse to the Arbitration under Article 25 of the DSU, Award of the Arbitrators, WT/DS160/ARB25/1, 9 November 2001 (“US – Copyright Act (Art.25 Award)”). ↑

2. GENE M. GROSSMAN & PETROS C. MAVROIDIS, ‘United States – Section 110(5) of the US Copyright Act, Recourse to Arbitration under Article 25 of the DSU: Would’ve or should’ve? Impaired benefits due to copyright infringement’, (2003) 2:2 World Trade Review 233-249 at p. 234. ↑

3. DAVID JACYK, ‘The Integration of Article 25 Arbitration in WTO Dispute Settlement: The Past, Present and Future’, (2008) 15 Australian International Law Journal 235 at p. 254. ↑

4. US – Copyright Act (Panel Report) at para. 1.4 (p. 1). ↑

5. US – Copyright Act (Panel Report) at para. 7.1(b) (p. 69). ↑

6. See the summary of the US–Copyright Act case (available at: <https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds160_e.htm> and accessed on 21 May 2020). ↑

7. United States – Section 110(5) of the US Copyright Act, Award of the Arbitrator, Arbitration under Article 21.3(c) of the DSU, WT/DS160/12, 15 January 2001 (“US – Copyright Act (Art.21.3(c) Award)”) at para. 47 (p. 11). ↑

8. See the summary of the US–Copyright Act case (available at: <https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds160_e.htm> and accessed on 21 May 2020). ↑

9. US – Copyright Act (Art.25 Award) at para. 1.1 (p. 1). ↑

10. DAVID JACYK, ‘The Integration of Article 25 Arbitration in WTO Dispute Settlement: The Past, Present and Future’, (2008) 15 Australian International Law Journal 235 at p. 254. ↑

11. US – Copyright Act (Art.25 Award) at para. 1.5 (p. 2). ↑

12. US – Copyright Act (Art.25 Award) at para. 2.1 (p. 6). ↑

13. US – Copyright Act (Art.25 Award) at para. 2.5 (pp. 6-7). ↑

14. US – Copyright Act (Art.25 Award) at para. 2.6 (p. 8). ↑

15. US – Copyright Act (Art.25 Award) at para. 2.7 (p. 8). ↑

16. US – Copyright Act (Art.25 Award) at para. 2.5 (p. 7). ↑

17. US – Copyright Act (Art.25 Award) at footnote 22. ↑

18. US – Copyright Act (Art.25 Award) at para. 2.1 (p. 6). ↑

19. DAVID JACYK, ‘The Integration of Article 25 Arbitration in WTO Dispute Settlement: The Past, Present and Future’, (2008) 15 Australian International Law Journal 235 at p. 254. ↑

20. PIERRE MONNIER, ‘Working Procedures Before Panels, the Appellate Body and Other Adjudicating Bodies of the WTO’, (2002) 1 Law and Practice of International Courts and Tribunals 481at p. 512. ↑

21. GENE M. GROSSMAN & PETROS C. MAVROIDIS, ‘United States – Section 110(5) of the US Copyright Act, Recourse to Arbitration under Article 25 of the DSU: Would’ve or should’ve? Impaired benefits due to copyright infringement’, (2003) 2:2 World Trade Review 233-249 at p. 236; US – Copyright Act (Art.25 Award) at para. 2.4 (p. 7). ↑

22. GENE M. GROSSMAN & PETROS C. MAVROIDIS, ‘United States – Section 110(5) of the US Copyright Act, Recourse to Arbitration under Article 25 of the DSU: Would’ve or should’ve? Impaired benefits due to copyright infringement’, (2003) 2:2 World Trade Review 233-249 at p. 237. ↑

23. DAVID JACYK, ‘The Integration of Article 25 Arbitration in WTO Dispute Settlement: The Past, Present and Future’, (2008) 15 Australian International Law Journal 235 at p. 254. ↑

24. VALERIE HUGHES, ‘Arbitration Within the WTO’, in: Federico Ortino & Ernst-Ulrich Petersmann (eds.), The WTO Dispute Settlement System 1995-2003, (Kluwer Law International, 2004) at p. 85. ↑

25. VALERIE HUGHES, ‘Arbitration Within the WTO’, in: Federico Ortino & Ernst-Ulrich Petersmann (eds.), The WTO Dispute Settlement System 1995-2003, (Kluwer Law International, 2004) at p. 85. ↑

26. BASHAR MALKAWI, ‘Arbitration and the World Trade Organization — The Forgotten Provisions of Article 25 of the Dispute Settlement Understanding’, (2007) 24 Journal of International Arbitration, Issue 2, pp. 173–188 at p. 187. ↑

27. SCOTT ANDERSEN, TODD FRIEDBACHER, CHRISTIAN LAU, NICOLAS LOCKHART, JAN YVES REMY and IAIN SANDFORD, ‘Using Arbitration under Article 25 of the DSU to ensure the availability of appeals’, CTEI Working Paper CTEI-2017-17 (Centre for Trade and Economic Integration) at pp. 4-9 (paras. 14-17) (available at: <http://repository.graduateinstitute.ch/record/295745/files/CTEI-2017-17-.pdf> and accessed on 21 May 2020). ↑

28. SCOTT ANDERSEN, TODD FRIEDBACHER, CHRISTIAN LAU, NICOLAS LOCKHART, JAN YVES REMY and IAIN SANDFORD, ‘Using Arbitration under Article 25 of the DSU to ensure the availability of appeals’, CTEI Working Paper CTEI-2017-17 (Centre for Trade and Economic Integration) at pp. 4-9 (paras. 14-17) (available at: <http://repository.graduateinstitute.ch/record/295745/files/CTEI-2017-17-.pdf> and accessed on 21 May 2020). ↑

Cite as: Subhiksh Vasudev and Rodrigo Castillo, ‘Analysing WTO-Arbitration under Article 25 of the DSU Agreement and proposing recommendations to incentivize it as a Dispute Resolution Mechanism (PART-II)’ (The Contemporary Law Forum, 23 May 2020) <https://tclf.in/2020/05/23/analysing-wto-arbitration-under-article-25-of-the-dsu-agreement-and-proposing-recommendations-to-incentivize-it-as-a-dispute-resolution-mechanism-(part-ii)> date of access.