asper review of international business and trade...

ASPER REVIEW OF

INTERNATIONAL BUSINESS AND

TRADE LAW

VOLUME VII 2007

ISSN: 1496-9572

© 2007 Asper Review of International Business and Trade Law

Printed in Canada

ACKNOWLEDGEMENTS

his edition of the ASPER REVIEW OF INTERNATIONAL BUSINESS AND TRADE LAW has been published with the support of:

THE ASPER CHAIR OF INTERNATIONAL BUSINESS AND TRADE LAW was established in 1999 at the Faculty of Law of the University of Manitoba. Its mandate includes teaching, research, and publication.

THE CANADIAN CREDIT MANAGEMENT FOUNDATION was founded in 1996 and pledges its support to strengthening the international business and trade law programs at the Faculty of Law of the University of Manitoba.

THE UNIVERSITY OF MANITOBA LEGAL RESEARCH INSTITUTE promotes research and scholarship in diverse areas.

PITBLADO BARRISTERS AND SOLICITORS is a law firm based in Winnipeg, Manitoba, whose broad range of services include international tax and international commercial transactions.

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ASPER REVIEW OF


TRADE LAW

VOLUME VII 2007

ISSN: 1496-9572

EDITORIAL BOARD: BRYAN SCHWARTZ LL.B. (Queen’s), LL.M. (Yale), J.S.D. (Yale) Asper Professor of International Business and Trade Law Faculty of Law, University of Manitoba MICHELLE GALLANT B.A. (PEI), LL.B. (UNB), LL.M. (UBC), Ph.D. (London) Associate Dean of Research & Graduate Studies, Professor of International Law Faculty of Law, University of Manitoba SHANE GROSS LL.B. (UM) 2004 Associate, Miller Thomson LLP JOHN POZIOS B.A. (Hon) (Western), LL.B. (UM), MBA (UT) Director, The Marcel A. Desautels Centre for Private Enterprise and the Law Faculty of Law, University of Manitoba PERRY CHEUNG LL.B. (UM) 2008 Desautels Credit Management Fellow ALEXANDRA DUECK B.Comm. (Hon) (UM), LL.B. (UM) 2008 Desautels Credit Management Fellow

Submissions may be sent via email to [email protected]; or mailed to Asper Chair, Faculty of Law, University of Manitoba, Robson Hall – 224 Dysart Road, Winnipeg, Manitoba, R3T 2N2. The Review particularly welcomes submissions that are academically sound and accessible to a general audience. Topics should address trade issues that are of global interest or in which Canada has a material involvement.

ASPER REVIEW OF


TRADE LAW

INDEX – Volume VII 2007

INTRODUCTORY ESSAY East vs. West: Evaluating Manitoba Hydro’s Options for a Hydro-Transmission Line from an International Law Perspective

by Bryan Schwartz and Perry Cheung……………………..…………1 ARTICLES United States Anti-Dumping Policy and the Negotiation of a Free Trade Area of the Americas: The Impact of Protectionist Measures on Regional Trade Integration by Patrick J. Glen ……………..………………………………………….47 WTO Case Study: United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services by Tom Newnham ……….………………………………………………..77 Sanitary and Phytosanitary Measures at the WTO: Balancing Biological Risk and Commercial Interest

by Peter Ward …………...……………………………………………….101 The Political Economy of Sovereignty Revisited: A Re-examination of the Public Choice Model in Light of China’s Accession to the World Trade Organization by Miron Mushkat and Roda Mushkat………….………………....115 How to See a Jar of Peanut Butter: Evaluating Empirical Studies of Patents and Patent Law by Katie Lula ………………………………….................................151 Sloping in the Right Direction: A First Look at the UCP 600 and the New Standards as Applied to Voest-Alpine by Lisa Pietrzak …………………………………………………..........179

SEC Rule 144A and the Global Market by Bo James Howell …………………………………………………....199 A Call for Action: The Need for Canadian Spam Legislation by Perry Cheung …………………………………………………………227 Let Go of My Dot-CA: Using the CDRP in the Fight Against Cybersquatting by Melissa Beaumont ……………………………………………….....257 Essay: China’s Future Lawyers: Some Differences in Education and Outlook by Patricia R. McCubbin, et. al…………………………….…………293 ABOUT THE CONTRIBUTORS…………………………………………………………307

INTRODUCTORY ESSAY

East vs. West: Evaluating Manitoba Hydro’s Options for a Power Transmission Line

from an International Law Perspective

Bryan Schwartz* and Perry Cheung** INTRODUCTION

ANITOBA HYDRO IS A CROWN CORPORATION that provides power to sectors of Canada and the mid-western United States.1 One of their plans for future development projects involves the

Conawapa Generating Station, a hydro-electric project based in Northern Manitoba.2 The Conawapa Generating Station is expected to have great potential in terms of electricity generation, but its remote location on the Lower Nelson River in Northern Manitoba presents difficulties regarding the transportation of the power generated. As a result, the project has created controversy regarding a number of issues.

Generated power will need to be transported by way of hydro-electric transmission lines. The debate revolves around deciding which route these lines should take. Currently, an existing hydro-electric transmission line runs through Western Manitoba, going West of Lake Winnipeg. The question faced by Manitoba Hydro is whether the new power line should take the same route, going West of Lake Winnipeg, or whether it should go through Eastern Manitoba, to the East of Lake Winnipeg.

Financially speaking, the East option presents a clear winner. This option offers a significantly shorter route than the Western Manitoba alternative,3 which would result in substantial cost savings. * LL.B. (Queen’s); LL.M. (Yale); J.S.D. (Yale); Asper Professor of International Business and Trade Law, University of Manitoba ** LL.B. (UM, 2008) 1 Manitoba Hydro, “About Us”, online: Manitoba Hydro <http://www.hydro.mb.ca/corporate/about_us.shtml>. 2 Manitoba Hydro, “Projects: Conawapa Generating Station”, online: Manitoba Hydro <http://www.hydro.mb.ca/projects/conawapa.shtml>. Since this paper was initially written, Manitoba Hydro has stated that it will take the Western route; however, many parties are still discussing the pros and cons of this decision. See Hugh McFadyen, “Doer’s west-side sellout: NDP bows to pressure on power-line route” Winnipeg Free Press (2 October 2007) A11. 3 According to Manitoba Hydro President Bob Brennan, the West option is approximately 50 percent longer, spanning a distance of 1,200 km versus the 800 km route to the East. See Helen Fallding, “Readers would pay to save wilderness” Winnipeg Free Press Online Edition (11 October 2005), online: Winnipeg Free Press Online Edition <www.poplarriverfirstnation.ca/docs/ReadersSave11Oct05.doc>.

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2 ASPER REVIEW [Vol. VII The West option is expected to cost an additional $250 million for the routing of transmission lines, and an extra $300 million in power that will be lost during transportation.4 In addition, from a risk management perspective, the West route presents difficulties, as the new route to the West would be in close proximity with existing transmission lines, meaning that damage from natural disasters could potentially result in massive power shortages.5 Pro-development aboriginal communities in the East region also support this initiative, as it has the potential to bring development to an area of the country that is highly undeveloped and considered the poorest region in Canada.6

On the other hand, the proposed East option raises environmental concerns, as it would need to run through an area of Boreal Forest that, to this day, has remained largely undisturbed. This option also raises issues of aboriginal land rights, as—depending on the route chosen—it could require the use of territories in which First Nations in the area have constitutionally-protected interests under historic treaties, including rights to generally occupy and use reserve land, or to continue harvesting in traditional territories outside of reserves.

The first issue that invites examination from the perspective of international law is the extent to which the State of Minnesota—which is expected to be a major purchaser—has the right to base its import decisions on how Manitoba resolves the environmental debate. This issue is of great importance to Manitoba Hydro, as most of the power generated from the Conawapa Generating Station is expected to be exported.7 The State of Minnesota, currently one of Manitoba Hydro’s biggest energy purchasers,8 recently passed a new Bill that aims to hold Manitoba Hydro accountable for the impact of their projects on local communities and environments. The Minnesota 2007 Environment & Energy Omnibus Bill (SF 2096)9 was passed in May 200710 and requires that, starting in

4 Ibid. 5 Elijah Harper & Bryan Schwartz, “East side the right side: It is immoral to block Hydro line and perpetuate poverty” Winnipeg Free Press (14 May 2007) A15. See also Minnesota Power, “Energy Supply Diversity”, online: Minnesota Power <http://www.mnpower.com/about_mp/supply_diversity.html> (recognizing the importance of diverse energy supplies for risk management purposes). 6 See Harper & Schwartz, ibid. See also Chief George Kemp, “East side is the right side” Winnipeg Free Press (28 July 2007) Editorial Leaders. 7 Manitoba Hydro, supra note 2. 8 See Manitoba Hydro, News Release, “Manitoba Hydro Signs Agreement for Sale of 500 MW to Xcel Energy” (8 September 2002), online: Manitoba Hydro <http://www.hydro.mb.ca/news/releases/news_02_08_09.shtml>. 9 U.S., S.F. 2096, Minnesota 2007 Environment & Energy Omnibus Bill, 2007-2008, Reg. Sess., Min., 2007 (enacted).

2007] East vs. West: Evaluating Manitoba Hydro’s Options 3 January 2008, the Legislative Electric Energy Task Force (“LEETF”) in Minnesota request certain information from Manitoba Hydro on an annual basis. Generally speaking, the LEETF is mandated “to study future electric energy sources and costs and to make recommendations for legislation for an environmentally and economically sustainable and advantageous electric energy supply.”11 The information that will be requested in the future from Manitoba Hydro pursuant to Bill SF2096 includes:

(1) median household income and number of residents employed full time and part time; (2) the number of outstanding claims filed against Manitoba Hydro by individuals and communities and the number of claims settled by Manitoba Hydro; and (3) the amount of shoreline damaged by flooding and erosion and the amount of shoreline restored and cleaned.12 This new legislation could force Manitoba Hydro to take a more

active role in cleaning up its messes, both environmental and legal, for fear of losing its American customer base.13 In the wake of present day environmental activism, energy companies want to ensure that they have environmentally friendly policies.14 Association with an ‘environmentally unfriendly’ labeled Manitoba Hydro would go against these policies. Accordingly, if Manitoba Hydro is unable to provide the LEETF with positive reports, its competitiveness as an energy supplier may be compromised.

From a legal perspective, Bill SF2096 raises some issues regarding international law. This paper analyzes the free trade commitments of the United States and considers the question of what the State of Minnesota is able to do with the information that they seek

10 Minnesota spends nearly $800 million on Hydro-electric power from Manitoba annually. See Staff, “Bill Requiring Manitoba Hydro to Report on Impacts to First Nations Passes in Minnesota” Winnipeg Free Press (10 May 2007), online: Honor the Earth <http://www.honorearth.org/whatsnew/manitobahydro.htm>. 11 M.S.A. § 216C.051 (2006). Amended by 2007 Minn. Sess. Law Serv. Ch. 57 (S.F. 2096) (WEST). 12 Minnesota 2007 Environment & Energy Omnibus Bill, supra note 9, § 166.6. 13 Staff, supra note 10. 14 See Xcel Energy, “Xcel Energy Environmental Policy” (29 March 2005), online: Xcel Energy <http://www.xcelenergy.com/XLWEB/CDA/0,3080,1-1-1_11824_11843-4801-5_538_969-0,00.html>. See also Alliant Energy, “Environmental Policy & Compliance”, online: Alliant Energy <http://www.alliantenergy.com/docs/groups/public/documents/pub/p014402.hcsp>.

4 ASPER REVIEW [Vol. VII from Manitoba Hydro. In other words, this paper asks: while Bill SF2096 may require that the LEETF simply request information, can unflattering reports regarding impacts on the Canadian environment and Canadian aboriginal communities in Northern Manitoba or the failure of Manitoba Hydro to provide such reports be used to justify new Minnesota import regulations or selection procedures for the purchasing of energy? Is the fact that the LEETF is required to ask for such information itself in violation of international free trade principles? This paper will discuss the legality of Bill SF2096 with regards to GATT/WTO jurisprudence and the international free trade obligations of national treatment, most-favoured nation treatment, and government procurement obligations.

The second issue that invites examination from an international law perspective is the pursuit of a World Heritage Site designation by Parks Canada for the Canadian Boreal Forest Network. Referred to by some as the “northern lung of the planet” based on its ability to consume carbon and produce oxygen, this forest alone stores 186 million tonnes of carbon, equivalent to 27 years of the world’s carbon dioxide emissions from burning oil and gas for cars and heat.15 An area of this Boreal forest that occupies land in Eastern Manitoba and Northwestern Ontario was considered for a United Nations Educational, Scientific, and Cultural Organization (“UNESCO”) designation as a World Heritage Site in 2007.16 This paper explores how the East option might affect the bid for the Canadian Boreal Forest Network to attain a World Heritage Site designation, as it would require routing through this region of the Boreal Forest Network. Also, this paper considers whether or not a successful World Heritage Site designation would preclude the possibility of subsequently running transmission lines through Eastern Manitoba, as the World Heritage Centre (“WHC”) requires that protection measures be taken by host countries with regards to their World Heritage Sites. This paper will consider the selection criteria for World Heritage Sites, the guidelines for management of existing sites, and the overarching principles of sustainable development which drive the UN, and accordingly, UNESCO and the WHC.

Having considered whether or not the Minnesota legislation and the World Heritage Site requirements need to be taken into consideration by Manitoba Hydro, this paper concludes by commenting on which option—East or West—Manitoba Hydro would be best positioned to justify to Minnesota or the World Heritage Centre.

15 Alexandra Paul, “Save trees, help world, Canada told” Winnipeg Free Press (15 May 2007) A7. 16 Poplar River First Nation, “World Heritage Site”, online: Poplar River First Nation <http://www.poplarriverfirstnation.ca/poplar_river_world.htm>.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 5 MINNESOTA BILL SF2096

INNESOTA DIRECTLY BORDERS MANITOBA and currently places significant reliance on Manitoba for its energy.17 With its Bill SF 2096, however, Minnesota has expressed some concern over the

treatment of communities in Northern Manitoba arising from power generation projects. Particularly, in the early 1970s, flooding arising from hydro-electric power generating projects created significant damage to the environment and as a result, local aboriginal groups suffered as well.18 Land was lost due to flooding exceeding projected figures. This led to a number of problems including mercury contamination, reduced availability of food, and an alleged loss of taste in food. This loss of habitat and disruption to local aboriginal groups’ ways of life are said to have caused a perceived loss of control within these communities, resulting in many social problems, such as alcoholism, drug abuse, and suicide.19 Destruction of traditional subsistence hunting, fishing, and trapping sites have also contributed to mass poverty, high unemployment, ill-health, and epidemic rates of suicide.20 For the communities affected by the floods, it took until 1977 for any compensation arrangements to be made.21 Now, four of five First Nations have reached settlement, but the process is still continuing with the Pimicikamak Cree Nation.22

Starting in January 2008, under its new legislation, Minnesota’s LEETF will be required to request information from Manitoba Hydro pertaining to the environmental impact and effects on local communities

17 Mike Mosedale, “Minnesota by the numbers: The nation’s biggest importer of electricity” The Blotter (30 December 2005), online: <http://blogs.citypages.com/blotter/2005/12/minnesota_by_th_7.asp>. 18 Martin Loney, “Social Problems, Community Trauma and Hydro Project Impacts” at 239 [unpublished, archived at Brandon University Library]. See also Peter Kulchyski, The town that lost its name: the impact of hydroelectric development on Grand Rapids, Manitoba (Ottawa: Canadian Centre for Policy Alternatives, 2006). 19 Loney, ibid. at 246. 20 United Nations Commission on Human Rights, Oral intervention by the International Indian Treaty Council, Agenda Item 7: The Right to Development, 57th Sess., (2001), online: International Indian Treaty Council <http://www.treatycouncil.org/new_page_5246.htm>. 21 Indian and Northern Affairs Canada, “Backgrounder: Manitoba Northern Flood Agreement Implementation—Cross Lake First Nation” (23 April 2004), online: Indian and Northern Affairs Canada <http://www.ainc-inac.gc.ca/pr/info/baccros_e.html>. 22 “Band Occupies Manitoba Power Station” CBC News (16 April 2007), online: cbc.ca <http://www.cbc.ca/canada/manitoba/story/2007/04/16/jenpeg-protest.html>.

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6 ASPER REVIEW [Vol. VII arising from Manitoba Hydro’s hydro-electric projects.23 As this legislation targets Manitoba Hydro specifically, and does not include any other energy suppliers, Canadian Federal Trade officials and Manitoba Premier Gary Doer protested to legislators in the days leading up to passage of the law, alleging that the new law would violate NAFTA24 provisions, but to no avail.25

It appears that the new Minnesota laws attempt to prevent a repeat incident of the flooding problems of the 1970s. By having the LEETF seek out information basically dealing with environmental impacts and the treatment of aboriginal peoples in the communities affected by the hydro-electric projects, Minnesota State aims to hold Manitoba Hydro accountable. Accordingly, Manitoba Hydro might want to consider whether the East or West option would allow them to offer a better report to the LEETF. At first sight, it seems that the West option would cause less disruption to the environment because it would mirror an existing route, leaving the pristine Canadian Boreal Forest Network alone. However, in considering which option best affects the local aboriginal communities, a more polarized debate exists.

Northern Manitoba represents the poorest region of Canada, where suicide, poverty, and rates of disease are all high.26 Incidents of diseases thought to be absent in Canada, such as tuberculosis, can be found in some communities in Northern Manitoba.27 Additionally, these communities lack basic infrastructure—there are no roads and basic sewer systems are rare.28 Not surprisingly, there are also few jobs available. The construction of a transmission line through the Eastside of Northern Manitoba can bring much needed development in terms of roads, education, and employment. This project has the potential to help aboriginal groups in the region attain economic sustainability and diversification, resulting in fewer young people leaving their communities for the big cities in search of jobs, which could ultimately help aboriginal groups in these communities preserve their way of life. Studies on regional development in the 1970s involving the Northern Cree in Quebec have in fact shown that economic diversification can be beneficial in many ways.29 Diversification has resulted in an increase in monetary

23 M.S.A., supra note 11. 24 NAFTA, infra note 35. 25 Staff, supra note 10. 26 Harper & Schwartz, supra note 5. See also Kemp, supra note 6. 27 See Dr. Gary Podolsky, “Tuberculosis in Manitoba”, online: Skylark Medical Clinic <http://skylarkmedicalclinic.com/TubercuosisinManitoba.htm>. See also Michael Clark & Dr. Peter Riben, Tuberculosis in First Nations Communities (Health Canada, 1999) at 8 & 25. See also Harper & Schwartz, supra note 5. 28 Harper & Schwartz, ibid. 29 Richard F. Salsbury, A Homeland For The Cree: Regional Development in James Bay, 1971-1981 (McGill-Queen’s University Press, November 1986) at 7.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 7 wealth, allowing for the purchase of equipment to be used for traditional activities such as hunting. Diversification also has the potential to allow individuals to reinforce their cultural values with activities other than traditional activities such as hunting. For example, opportunities in education and tourism may arise. Moreover, economic diversification reduces the economic vulnerability that a community faces based on natural fluctuations in the availability of game that is available to hunt.30 As the UN has recognized the right to development as an inalienable human right31 and the Manitoba Hydro transmission lines may be the last opportunity for development that this region of Canada receives for a long time, the East option should be given due consideration.

On the other hand, there are those who oppose development, as they believe it could taint the aboriginal way of life. Academics note that while development has the potential to bring jobs and therefore a more stable means of economic resources to a community, the temporary form of development that construction projects bring can create an inappropriate reliance on government investment and result in a future dependency on government transfers.32 Meanwhile, the employment policies of Manitoba Hydro have been criticized for training and hiring local workers only for low-level employment, while failing to offer any locals training for management positions.33 Some academics also suggest that statistics may reflect an inaccurate picture of the wealth of communities in Northern Manitoba. Statistical data on hunters, for example, would consider them to be unemployed.34 Accordingly, it is suggested that the development that some First Nations leaders seek is not justifiable by poverty statistics and that it is in fact unnecessary. With First Nations communities relying heavily on their environment to sustain their way of life, a transmission line, because of its environmental disruption, could arguably reduce the standard of living for those who hunt for a living and thus, further exacerbate the alleged poverty problem.

30 Ibid. 31 Declaration on the Right to Development, GA Res. 41/128, UN GAOR, 1986, Supp. No. 53, U.N. Doc. A/RES/41/128, art. 1. 32 Steve Hoffman, “Engineering Poverty: Colonialism and Hydroelectric Development in Northern Manitoba” (Presented to the Old Relationships or New Partnerships: Hydro Development on Aboriginal lands in Quebec and Manitoba Conference at the University of Winnipeg, 23 February 2004) [unpublished]. 33 Peter Kulchyski, “Nisichawayasihk Cree Nation and the Wuskwatim Project” (May 2004) at 7 (Presented to the Old Relationships or New Partnerships? Hydro Development on Aboriginal Lands in Quebec and Manitoba Conference at the University of Winnipeg, 23 February 2004) [unpublished]. 34 Ibid.

8 ASPER REVIEW [Vol. VII Are The Minnesota Laws Consistent With International Free Trade Obligations?

It seems clear that there is a legitimate debate as to which option would best serve the Northern communities of Manitoba. This debate is not the focus of this paper. Rather, this article will consider the international free trade obligations of the United States, and what Minnesota State, according to these obligations, may do with the information gathered by its LEETF. Specifically, this paper considers the possibility of implementing further regulations and using the information gathered to make energy purchase decisions. In addition, this paper considers whether the legislative requirement that the LEETF ask Manitoba Hydro for information itself is a violation of free trade obligations. Is it a violation simply to ask for information? The Legislative Electric Energy Task Force (“LEETF”), as noted above, is an investigatory body that has the power only to make recommendations for legislation. Therefore, any report received by the LEETF, or a refusal by Manitoba Hydro to provide a report, would be followed by no immediate consequences. The worst that could happen would be legislative recommendations for a reaction by the State of Minnesota. This is a key point in considering potential violations of free trade obligations, which generally stipulate equal treatment of similar products. These obligations will be discussed in further detail below. At this point, however, it can be said that the mere asking for information is unlikely to violate any free trade obligations, as Manitoba Hydro is not legally required to do anything differently.

States, through their investigatory bodies, should be free to request information as they please and this should be consistent with free trade obligations, so long as a refusal to provide information has no immediate or inevitable consequence. Thus, unless the information being requested has no likely use other than to provide a starting point for breaching international free trade obligations, Bill SF2096 provisions requiring the LEETF to request information from Manitoba Hydro are probably legal under international law. As the LEETF is responsible for studying energy sources and making recommendations for legislation that provides environmental and economic sustainability, studying imported hydro-electric energy and the consequences of its production falls within their mandate. Therefore, recommendations for activities such as state investment into domestic energy production or lobbying the Federal Government to get involved in international environmental or aboriginal rights treaties would be perfectly legal, and accordingly, it can be said that there are conceivable legal legislative responses that could

2007] East vs. West: Evaluating Manitoba Hydro’s Options 9 follow reports made to the LEETF. Thus, it is most likely the case that provisions in Bill SF2096 requiring the LEETF to request information from Manitoba Hydro do not themselves breach any international free trade obligations. What can Minnesota do with the information provided in the report, or in response to a refusal to provide a report?

Is the State of Minnesota able to implement import quotas, tariffs, or outright bans based on unflattering figures provided in Manitoba Hydro’s report, or the refusal to provide such a report? Would Minnesota be justified in simply refusing to do business with Manitoba Hydro in the future? The answers to these questions lie in the interpretation of international free trade obligations. The North American Free Trade Agreement (“NAFTA”)35 and several treaties stemming from the World Trade Organization (“WTO”) regulate the elimination of barriers to trade, and from these treaties arise three key obligations that will be discussed: a) national treatment, b) most-favoured nation treatment, and c) government procurement obligations. National Treatment and MFN Treatment

National treatment provisions can be found in the General Agreement on Tariffs and Trade (“GATT”),36 the General Agreement on Trade in Services (“GATS”),37 and NAFTA.38 National treatment obliges signatory nations to give import products the same treatment as domestic products. With a general principle of non-protectionism established by Article III:1 of GATT and similar principles prevalent in other treaties, national treatment obligations prevent signatory states from implementing any laws or regulations regarding products that would provide domestic producers with an unfair advantage.39

35 North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can T.S. 1994 No. 2, 32 I.L.M. 289 (entered into force 1 January 1994) [NAFTA]. 36 General Agreement on Tariffs and Trade, 30 October 1947, 58 U.N.T.S. 187, Can T.S. 1947 No. 27 (entered into force 1 January 1948), art. III [GATT]. 37 General Agreement on Trade in Services, art. XVII, Annex IB to the Agreement Establishing the World Trade Organization, online: World Trade Organization <http://www.wto.org/English/docs_e/legal_e/26-gats.pdf>. 38 NAFTA, supra note 35, c. 3. 39 Michael J. Trebilcock & Robert Howse, The Regulation of International Trade: Political Economy and Legal Order, 3d ed. (New York: Routledge, 2005) at 83-85 & 100.

10 ASPER REVIEW [Vol. VII By legislatively bringing to the table the future impacts on Canadian communities and the Canadian environment, as well as the existing state of affairs in Canada, it seems that the Minnesota legislature may be preparing to erect an illegal barrier to trade. While Bill SF2096 requires the LEETF, an investigatory body, to simply request information from Manitoba Hydro, if this information gathering results in new regulations affecting Manitoba Hydro’s ability to export or their competitiveness as an energy supplier, these regulations could violate national treatment obligations, as such regulations would seemingly discriminate against imported energy. According to national treatment obligations, like-products, whether they be domestic or imported, should be given equal treatment. Disputes over the definition of like-products usually involve products that are argued to be commercially substitutable for one another. In the case of energy, the end-product of Manitoba Hydro’s energy is identical to energy produced elsewhere and energy produced by other means. WTO jurisprudence has found that in determining like-products, it is the end product that is relevant.40 Accordingly, it is clear that Manitoba Hydro’s energy exports would be entitled to treatment equal to that of other energy products produced domestically, and any discriminatory regulations would thus be inconsistent with national treatment obligations. Most-favoured nation treatment, also provided for in GATT,41 essentially provides for the equal treatment of all signatory nations with regards to imports, exports, and related regulations.42 MFN provisions prohibit regulations that provide unfair advantages to certain nations but not others. The rationale for the MFN principle is that it improves international relations by avoiding tensions that result from discriminatory policies. It aims to prevent governments from employing “ad hoc principles based on political considerations.”43

An example of an MFN dispute is where the European Community, in 1996, passed legislation providing special treatment for soluble coffee originating from Andean and Central American Common Market countries that had anti-drug production and anti-drug trafficking programs in place. Brazil launched a complaint to the WTO in December 1998, suggesting that these provisions were inconsistent with MFN treatment obligations under GATT.44 However, like many WTO disputes,

40 See US Tuna/Dolphin I and US Tuna/Dolphin II, infra notes 45 & 46. 41 GATT, supra note 36, art. I. 42 Trebilcock & Howse, supra note 39 at 49. 43 Ibid. at 51. 44 WTO, European Communities—Measures Affecting Differential and Favourable Treatment of Coffee: Request for Consultations by Brazil, WTO Doc. WT/DS154/1, online: WTO <http://www.wto.org/English/tratop_e/dispu_e/cases_e/ds154_e.htm >.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 11 this dispute fell off the radar, as a panel was never assembled to resolve the dispute nor was any settlement reported.

While the MFN principle is generally thought of as preventing signatory nations from extending positive special treatment, it also prohibits unfair negative discrimination. By implementing discriminatory provisions based on the welfare of certain Canadian communities, tension with Canada would certainly arise. For this reason, MFN obligations would prevent such discriminatory action. As an extension of the national treatment argument then, it can be argued that legislation restricting energy imports from Manitoba Hydro based on LEETF recommendations will be inconsistent with MFN obligations under GATT, as such legislation would unfairly restrict imports coming from one particular country—Canada. In the US-Tuna/Dolphin I45 and US–Tuna/Dolphin II46 cases, panels held that import bans of tuna caught using purse-seine nets47 were contrary to GATT Article III, which prohibits discrimination between ‘like products.’ The debate in this case revolved around defining ‘like products,’ specifically, whether or not differences in processes could amount to a difference in product for the purposes of GATT provisions. The panel in US-Tuna/Dolphin I found that processes could not be taken into account in determining the ‘likeness’ of products and accordingly, the United States import ban was inconsistent with GATT principles. However, this panel decision was not actually adopted, as the United States and the complainant Mexico settled the dispute bilaterally.48

Maintaining this distinction between process and product, it is clear that energy available for export by Manitoba Hydro is a ‘like product’ in comparison to energy produced elsewhere, as in the end, energy is energy. Accordingly, import restrictions based on processing effects adverse to communities near processing sites would be inconsistent with GATT principles of MFN treatment.

However, it is important to note that with government procurement obligations, which will be discussed below, this product-process distinction may not be the same. Provisions in the Government

45 GATT Panel Report, United States—Restrictions on Imports of Tuna, DS21/R, DS21/R, 3 September 1991, unadopted, BISD 39S/155 [US-Tuna/Dolphin I]. 46 GATT Panel Report, United States—Restrictions on Imports of Tuna, DS29/R, 16 June 1994, unadopted [US-Tuna/Dolphin II]. 47 Purse seine fishing is an aggressive method of fishing which aims to capture “large, dense shoals of mobile fish.” In the Eastern Tropical Pacific, this method often includes ‘dolphin-fishing,’ which surrounds dolphins in order to catch the tuna swimming below them. See FishOnline, “Fishing Methods: Purse seining”, online: Fish Online <http://www.fishonline.org/caught_at_sea/methods/#purse_seining>. 48 World Trade Organization, “Mexico etc versus US: ‘tuna-dolphin’”, online: WTO <http://www.wto.org/English/tratop_e/envir_e/edis04_e.htm>.

12 ASPER REVIEW [Vol. VII Procurement Agreement49 dealing with technical specifications address the “characteristics of the products or services […] or the processes and methods for their production.”50 If products, services, and production processes are grouped together, and thus, given no distinct treatment in the basic words of the agreement, it can be argued that in determining ‘like products,’ differences in production processes can indeed distinguish products, just as differences in the products or services themselves could. In the context of the Minnesota Energy debate, this would mean that Minnesota energy distributors would be justified in selecting an energy supplier other than Manitoba Hydro because they had an issue with the effects of production, even if Manitoba Hydro rates were the lowest. The US-Tuna/Dolphin I dispute also discussed Article I:1 of GATT, which sets out that the MFN obligation should be unconditional. Prior to this decision, a debate arose regarding the extent of this obligation. Suppose that free trade for a given product was offered as a concession, would this mean that no conditions could be imposed that might impede this trade?51 In US-Tuna/Dolphin I, a challenge was also made to conditions in the Dolphin Protection Consumer Information Act,52 which regulated the use of ‘Dolphin Safe’ labels.53 Dolphin Safe labels were used as evidence showing that tuna products were not harvested by techniques involving encircling dolphins with purse-seine nets. The GATT dispute panel examined conditions imposed on tuna suppliers and found that the conditions imposed in this case were perfectly legal, as they did not result in discrimination. The labeling regulations applied to all countries in the geographical region where purse-seine fishing was conducted; nothing discriminated against goods based on their Mexican origin. Following this decision, it can be said that labeling or product information conditions may be imposed on products so long as they do not amount to discrimination based on the country of origin.54

Minnesota regulations implementing a certification of environmentally safe energy could thus meet MFN obligations according

49 Agreement on Government Procurement, 15 April 1994, Marrakesh Agreement Establishing the WTO (entered into force 1 January 1996), art. VI [GPA]. 50 See Agreement on Government Procurement, art. VI (1) - (2), Annex 4(b) to the Agreement Establishing the World Trade Organization, online: WTO <http://www.wto.org/english/docs_e/legal_e/gpr-94.pdf>. See also Christopher McCrudden, “International Economic Law and the Pursuit of Human Rights: A Framework for Discussion of the Legality of ‘Selective Purchasing’ Laws under the WTO Government Procurement Agreement” (1999) 2 J. Int’l Econ. L. 3 at 36. 51 Trebilcock & Howse, supra note 39 at 59. 52 16 U.S.C. §1385 (1990). 53 Trebilcock & Howse, supra note 39 at 60. 54 Ibid.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 13 to the US-Tuna/Dolphin I decision. Such a regulation in the name of consumer choice, according to US-Tuna/Dolphin I, would not violate MFN treatment obligations, given that the same system applied to energy from all sources. The problem is that in the case of consumers purchasing tuna, the ‘Dolphin Safe’ certification is likely to impact consumer behaviour whereas in the case of energy, consumers have fewer options and would generally make their decisions based solely on price. Governments, quasi-government entities, and a select group of large corporations distribute power to end consumers. Consumers enter into long-term energy contracts and are unable to easily change their service provider based on opposition to environmental impacts arising from energy generation. Thus, it is unlikely that information attained pursuant to Bill SF2096 will be used to create mere labeling regulations. One option, however, is to include LEETF-gathered information in State reports on energy sources that could be provided to energy distributors in the name of education. This could be an attractive option which would be legal from an international law perspective, given that reports included information from all energy sources, both foreign and domestic, as there would then be no discrimination. Exceptions to National Treatment and MFN Treatment—GATT Article XX Article XX of GATT sets out exceptions to national treatment and MFN obligations. Having exceptions is not surprising considering the moral obligations of nations, for example, to combat universally chastised practices such as slavery,55 even if it involves disrupting trade. These exceptions excuse nations from breaching GATT obligations, such as national treatment obligations or MFN treatment obligations. This means that if an exception were to fit, Minnesota would be justified in implementing energy import regulations based on impacts on the Canadian environment or impacts on Canadian communities. While numerous exceptions are set out, the items relevant to Minnesota’s Bill SF2096 are for matters: (b) necessary to protect human, animal or plant life or health,56 and (g) relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.57 When a country claims an exception under Article XX, it must firstly show that one of the sub-paragraphs under the Article applies, and secondly, that the measure is in compliance with the lead paragraph

55 One of the GATT exceptions deals with products of prison labour, which would apply to products of slavery. See GATT, supra note 36, art. XX(e). 56 Ibid., art. XX(b). 57 Ibid., art. XX(g).

14 ASPER REVIEW [Vol. VII of the Article. This latter requirement is often referred to as “meeting the chapeau.” Generally speaking, in order to demonstrate that an Article XX exception applies, a sufficient nexus must be shown between the measures imposed and the goal of the measure, e.g. protection of human life, conservation of exhaustible natural resources, etc. That being said, the law must be primarily aimed at the goal or in other words, the ends must exhibit a close relationship to the means.58 What has become an area of contention in WTO disputes, however, has been defining the scope of these exceptions. Because of the different wording of Article XX exceptions (“necessity,” “in relation to,” “in pursuance of,” “essential to,” etc.), different tests have been applied in determining the applicability of the various exceptions.

In order to demonstrate compliance with the lead paragraph of Article XX (i.e. in order to meet the chapeau) a country is required to show that in its application, the restricting measure does not arbitrarily discriminate, unjustifiably discriminate, or constitute a disguised barrier to trade. While no clear test has been set out to make these determinations, the US Shrimp-Turtle case59 sets out examples of what would not meet the chapeau.60 In the context of the debate at hand, the key question deals with the first hurdle—determining whether or not an Article XX exception applies. Do GATT Article XX subsections (b) and (g) apply only to domestic health and natural resource concerns (i.e. within the United States only), to extra-territorial or global concerns (i.e. concerning the United States and other sovereign states), and can they go so far as to apply strictly to local concerns (i.e. issues located solely in another sovereign state)? In other words, what proximity of interest is required for the United States to fit under an Article XX exception?61 While it was not worded as such, this issue was raised in the US-Tuna/Dolphin cases and the Shrimp-Turtle case. In US-Tuna/Dolphin I, the panel held that Article XX exceptions did not apply. The panel discussed the exception set out in subparagraph (b) and found that it applied only to allow trade restricting measures to protect domestic concerns of human, animal, or plant life or health. However, in obiter, the panel considered the possibility of allowing measures to protect

58 Andrew Green, “The WTO, Science, and the Environment: Moving Towards Consistency” (2007) 10 J. Int’l Econ. L. 285 at 297. 59 WTO, Panel Report on United States—Import Prohibition of Certain Shrimp and Shrimp Products, (6 April 1998) WTO Doc. WT/DS58/R, online: WTO <http://www.wto.org/English/tratop_e/dispu_e/cases_e/ds58_e.htm>. 60 See ibid. 61 See generally Bradly J. Condon, “GATT Article XX and Proximity of Interest: Determining the Subject Matter of Paragraphs B and G” (2004) 9 UCLA J. Int. L. & Foreign Aff. 137.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 15 extra-territorial concerns as well, suggesting this might be acceptable given that all other avenues of protection (i.e. negotiation of treaties) had been exhausted. Indications from the negotiating history of Article XX (b) suggest that it was intended to cover only domestic concerns, however, as references to sanitary regulations were frequently being made, and the sanitary and phytosanitary exception now found in GATT62 apply only to domestic concerns.63 In a subsequent complaint involving the same issue, the panel in US-Tuna/Dolphin II found that nothing in subparagraphs (b) and (g) excluded measures aimed at extra-territorial protection of the subparagraph (b) and (g) elements. However, the United States failed to meet the chapeau, so the result was the same as the previous complaint, in that U.S. measures were still found inconsistent with GATT obligations. Also limiting the extra-territorial application of Article XX (b) is the decision from the EC—Tariff Preferences dispute. In this dispute, preferential treatment was given to illicit drug producing countries by the EC, with hopes that illicit drug production could be replaced by the production of legitimate goods. The WTO dispute panel ruled, however, that the Article XX (b) exception could not apply as an exception for a measure intended to protect purely extra-territorial (i.e. local) human health concerns. In the US Shrimp-Turtle dispute, a similar question about the extra-territorial reach of Article XX exceptions was asked with regards to subsection (g), relating to the protection of exhaustible natural resources. While it can be said that the protection of sea turtles would also fall under Article XX (b), the case was not argued under this exception.

In the US Shrimp-Turtle dispute, at issue was a U.S. ban on the importation of shrimp from countries that failed to implement adequate measures to protect turtles from being caught in shrimp nets. Under the US Endangered Species Act of 1973, U.S. shrimp trawlers were required to use turtle exclusion devices in their nets. In 1989, the U.S. enacted a law addressing imports. Section 609 of US Public Law 101-102 stipulated that shrimp harvested with technology that could adversely affect turtles was prohibited from being imported unless the exporting country was found to have a regulatory programme similar to that of the U.S., such that incidental damage to turtles could be shown to be minimal.64

62 GATT, Agreement on Sanitary and Phytosanitary Measures, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 15 April 1994, art. 5.7. 63 Condon, supra note 61. See also Bradly Condon, “Multilateral Environmental Agreements and the WTO: Is the Sky Really Falling?” (2000) 9 Tulsa J. Comp. & Int’l L. 533 at 541-542. 64 World Trade Organization, “India etc versus US: ‘shrimp-turtle’”, online: WTO <http://www.wto.org/english/tratop_e/envir_e/edis08_e.htm>.

16 ASPER REVIEW [Vol. VII

The US Shrimp-Turtle dispute took place after the US-Tuna/Dolphin cases and these decisions seem to provide conflicting opinions as to the extra-territorial application of GATT Article XX exceptions. In the US-Tuna/Dolphin cases, the panels found that the ban of “dolphin unfriendly” tuna violated MFN treatment obligations and could not be justified under Article XX (b), as this exception could not extend to interests beyond U.S. borders.65 However, the panel decisions were never actually adopted by the WTO, as the disputes were settled by the parties. Accordingly, some would argue that US Shrimp-Turtle, having been adjudicated by the WTO Appellate Body and having actually been adopted, is the leading authority on principles of GATT Article XX extra-territorial application generally.66 Yet it must be noted that the WTO does not officially bind itself by precedents. In the WTO appellate panel decision for US Shrimp-Turtle, it was held that the U.S. measures were inconsistent with GATT obligations, as they failed to meet the chapeau—that is, they failed to comply with the lead paragraph of Article XX because they were not applied consistently for all WTO member nations.67 However, the panel also said that measures to protect sea turtles, if they did not discriminate, would be perfectly acceptable and countries generally have the right to use trade measures to protect the environment. The problem in this case was that the United States, in applying their trade measures, gave certain countries technical assistance, financial assistance, and longer deadlines to begin using turtle exclusion devices.68 The United States subsequently revised its laws, eliminating discriminatory provisions. Yet Malaysia still challenged the laws, suggesting that a complete lift on import bans was necessary. The WTO appellate panel recognized the need for international cooperation in protecting sea turtles, and held that because the United States had engaged in good faith negotiations to implement a sea turtle protection agreement, it was justified in continuing its import restrictions.69 Some suggest that the wording of the U.S. regulations was also of great

65 WTO, supra note 44. 66 C. O’Neal Taylor, “Impossible Cases: Lessons from the First Decade of WTO Dispute Settlement” (Summer 2007) 28 U. Pa. J. Int'l Econ. L. 309 at 398. See also Trebilcock & Howse, supra note 39 at 16. 67 WTO, Report of the Appellate Body on United States—Import prohibition of certain shrimp and shrimp products, (1998) WTO Doc. DS58/AB/R, para. 187(c), online: WTO <http://www.wto.org/English/tratop_e/dispu_e/cases_e/ds58_e.htm>. 68 Ibid. at para. 186. 69 WTO, Article 21.5 Report of the Appellate Body on United States—Import prohibition of certain shrimp and shrimp products, (2001) WTO Doc. WT/DS58/AB/RW at para. 134, online: WTO <http://www.wto.org/English/tratop_e/dispu_e/cases_e/ds58_e.htm>.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 17 importance, as it did not require the actual of use of turtle exclusion devices. Rather, it provided flexibility in simply requiring results comparable to those achieved by use of TEDs.70 In the end, the US Shrimp-Turtle dispute supports the notion that Article XX exceptions, perhaps generally speaking, or perhaps just for subparagraph (g), can extend to protect extra-territorial interests.71 Following this case, Minnesota might argue that it would be justified in regulating against imports of energy that result in adverse impacts to human rights or on the environment, based on this extra-territorial application of Article XX exceptions. The environmental exception in sub-paragraph (g), which was the focus of the US Shrimp-Turtle dispute, however, would probably not work, as the Canadian Boreal Forest has no relation to U.S. restrictions on domestic production or consumption. That is, there is no connection with sufficient proximity to United States interests to justify the imposition of trade measures.

While it may seem that the decision in US Shrimp-Turtle illustrates a shift in WTO dispute resolution policy, allowing for trade measures to be used in the protection of extra-territorial interests, an important line can be drawn, requiring at least some proximity of interest for an Article XX exception to apply. The US Shrimp-Turtle decision never went so far as to suggest that Article XX exceptions could apply to strictly local interests. Sea turtles, as an endangered species, are a global interest. Due to U.S. membership in the Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”), the United States has a legal interest in protecting sea turtles. The existence of such a multilateral environmental agreement (“MEA”) has been suggested as a key element in allowing extra-territorial applications of GATT exceptions by some academics.72 Furthermore, as the United States is a part of the sea turtle migratory pattern, sea turtles also have a jurisdictional connection to the U.S., as they are in part, a type of U.S. marine wildlife.73

With regards to aboriginal communities in Northern Manitoba and the Canadian Boreal Forest, however, the United States has no real proximity of interest, aside from a global interest in clean air. Such a universal interest cannot be used to justify an Article XX exception, however, as it would then become too easy to justify any breaches of GATT provisions, as actions with negative impacts on air quality occur regularly in countries across the globe. In the case of the United States, its decision not to sign onto the Kyoto Protocol makes using air quality

70 Nita Ghei, “Evaluating the WTO’s two step test for environmental measures under Article XX” (2007) 18 Colo. J. Int’l Envt’l L. & Pol’y 117 at 148-149 (WL). 71 “Multilateral Environmental Agreements and the WTO,” supra note 63 at 545. 72 Ibid. at 552. 73 Condon, supra note 61 at 146-147.

18 ASPER REVIEW [Vol. VII concerns to justify trade measures even more difficult.74 In light of multilateral negotiations for the protection of the environment, the United States opted not to participate in the agreement. Accordingly, they cannot be said to have passed the good faith negotiations requirement set out in the US Shrimp-Turtle second panel decision.

With regards to a claim based on human health and life based on Article XX (b), a similar question of good faith negotiations would arise. In the face of international efforts to establish a Declaration on the Rights of Indigenous Peoples75 through the United Nations, the United States expressed opposition to this declaration based on the text allegedly being fundamentally flawed.76 While some would believe that the U.S. simply would have preferred further negotiations to perfect the text of the declaration, others would argue that this was simply opposition to the declaration in general,77 which would mean that the U.S. would not be justified in implementing trade measures based on the protection of aboriginal rights. However, it should be noted that the United States, through its participation in the Organization of American States, has previously worked towards solidifying aboriginal rights.78 Regardless, the treatment of aboriginal peoples or Canadian communities in general, lacks the proximity of interest necessary to establish an Article XX exception. No domestic resource argument can be made and no legal connection exists, as no treaty is in place that deals with the extra-territorial protection of aboriginal communities. Accordingly, as the treatment of aboriginal peoples in Canada is a purely local interest touching the heart of Canadian sovereignty, no Article XX exception will be available to Minnesota to justify a potential breach of their national treatment or MFN treatment obligations. Government Procurement

Government procurement often makes up a large proportion of expenditures made in a country’s economy. What makes government

74 “Conference of the Parties to the Framework Convention on Climate Change: Kyoto Protocol” 37 I.L.M. 22 (1998). 75 UN Commissioner for Human Rights, Declaration on the Rights of Indigenous Peoples, 2006/2, online: UNCHR <http://www.ohchr.org/english/issues/indigenous/docs/declaration.doc>. 76 Indian and Northern Affairs Canada “Canada’s Position—United Nations Declaration on Rights of Indigenous Peoples” (29 June 2006), online: INAC <http://www.ainc-inac.gc.ca/nr/spch/unp/06/ddr_e.html>. 77 Haider Rizvi, “Native Peoples Renew Call for U.N. Recognition” Inter Press Service News Agency, online: IPS <http://www.ipsnews.net/news.asp?idnews=38593>. 78 Organization of American States, “American Declaration On The Rights Of Indigenous Peoples” (5 June 2001) AG/RES. 1780 (XXXI-O/01).

2007] East vs. West: Evaluating Manitoba Hydro’s Options 19 procurement distinct from private expenditures, however, is that governments may use their purchasing power to promote various domestic political, social, and economic policies.79 Generally speaking, there is nothing wrong with such a use of a government’s economic and financial power.80 Government procurement policies in particular have historically been used to influence foreign government’s policies on many occasions. Two well known examples of this from the United States are the Helms-Burton law,81 which extends trade embargo sanctions on foreign companies that deal with Cuba,82 and the Iran and Libya Sanctions Act,83 which restricts foreign companies that do business in Iran and Libya from winning government contracts.84 Other examples involve combating Apartheid in South Africa, Holocaust-related deposits in Switzerland, Indonesian activities in East Timor, and the list goes on.85 As international interest in human rights issues such as abusive labour conditions continue to grow, the temptation of governments to continue to attempt to influence the practices of foreign governments becomes even greater.86 From a moral standpoint, this use of government procurement policies seems to be a positive thing.

Yet government procurement obligations under international agreements such as the GPA and NAFTA prevent this type of government behavior. Such obligations are aimed at protecting the sovereignty of nations involved in international trade, as ideally, political disagreements should not disrupt trade. When considering Bill SF2096 from this standpoint, it becomes more apparent why it may violate international free trade obligations. Political considerations such as the welfare of communities in Northern Manitoba, especially aboriginal communities, are concerns that should be for the Canadian government to deal with. Thus, trade regulations made pursuant to Bill SF2096 reports may be contrary to the spirit of government procurement obligations.

On point is the case of United States—Measure Affecting Government Procurement (Massachusetts-Myanmar). In 1996, the Massachusetts state legislature passed an Act that prevented public authorities of the state from procuring any goods or services from any persons who did business with Myanmar (Burma). The European

79 Trebilcock & Howse, supra note 39 at 292. 80 McCrudden, supra note 50 at 11. 81 Cuban Liberty and Democratic Solidarity (Libertad) Act of 1996, Pub. L. No. 104-114, 110 Stat. 785 (more commonly known as the Helms-Burton Act). 82 American University “Helms-Burton Case, Fate of the Cuba Embargo”, online: American University <http://www.american.edu/TED/helms.htm>. 83 Iran and Libya Sanctions Act of 1996, Pub. L. No. 104-172, 110 Stat. 1541. 84 Cable News Network, “Clinton signs Iran-Libya sanctions act” (5 August 1996), online: CNN.com <http://www.cnn.com/US/9608/05/clinton/>. 85 McCrudden, supra note 50 at 6-7. 86 Ibid. at 6, f.n. 9.

20 ASPER REVIEW [Vol. VII Community and Japan brought forth complaints to the WTO alleging that these provisions violated agreements under the GPA. They argued that the Massachusetts legislation was in contravention of: Article VIII(b), as it imposed conditions on tendering companies that were irrelevant to the firm’s capability of fulfilling the contract; Article X, as it imposed “qualification criteria based on political rather than economic considerations”; and Article XIII, to the extent that the statute allowed the “award of contracts to be based on political instead of economic considerations.”87

Unfortunately, from the perspective of those seeking legal certainty, the Massachusetts legislation was set aside by American courts because it intruded on federal jurisdiction to impose trade sanctions.88 The court, in making its decision, relied in part on the fact that complaints were brought to the WTO in rendering its decision.89 Because of this decision, the WTO dispute panel never had an opportunity to answer the question of whether or not the Massachusetts legislation violated GPA obligations. It is interesting to note, however, that when the legislation was passed, Massachusetts legislators admittedly were not even aware of GPA obligations.90

Although no formal ruling was ever made, academics still discuss the legality of the Massachusetts law with respect to international trade obligations.91 One author concludes that the law was in fact inconsistent with government procurement obligations and discusses potential methods of compliance.92 He suggests the possibility of simply insisting, as a term of contract, that businesses refrain from doing business with Myanmar. Such an arrangement might be legal from an international law standpoint, as it would not impose any conditions making it more difficult for companies doing business with Myanmar to win a contract. However, it can be argued that by imposing terms on the contract that cannot be imposed as qualifications, a purchaser would be taking a “backdoor” approach to something that would otherwise be prohibited.93 Furthermore, even if such an approach were acceptable from a policy standpoint, a breach of these terms could not be punished, as no value to damages could be claimed.

While the Massachusetts-Myanmar case never went to a WTO panel, the controversy that it stirred up and the challenge raised by the

87 Ibid. at 25. (emphasis in original) 88 See National Foreign Trade Council v. Andrew S. Natsios (Massachusetts), 181 F.3d 38 (1st Cir. 1999). 89 Mitsuo Matsushita, “Major WTO Dispute Cases Concerning Government Procurement” (September 2006) 1 Asian J. WTO & Int’l Health L. & Pol’y 299. 90 McCrudden, supra note 50 at 6. 91 Ibid. at 30. 92 See ibid. 93 Ibid. at 31.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 21 international community suggest that tenable arguments opposing the legality of such a prohibition can be made. Returning to the East vs. West debate and considering the question of what the State of Minnesota might do with the information that the LEETF seeks to obtain, it might be inappropriate, based on international free trade obligations, and ineffective, for Minnesota energy distributors to impose environmental accountability or proper treatment of aboriginal communities in Northern Manitoba as a term of contract. Of course, including such criteria as a necessary qualification for a contract would also be inappropriate.

a. WTO Procurement Obligations Under the Agreement on

Government Procurement As a part of the free trade movement, under the Agreement on

Government Procurement (“GPA”),94 countries can no longer impose their values on foreign governments so freely. Free trade, arguably for better or worse, has taken priority over human rights to some degree due to international agreements.95 Under the GPA, signatory nations are obliged to follow certain practices when listed government entities undertake to purchase goods or services of significant value. These obligations are echoed in NAFTA, where provisions dealing with government procurement are nearly identical.96

The GPA requires signatory states to go through a tendering process, whereby tenders are selected based upon technical specifications that are made by “performance rather than design, and [are] based on international standards, where they exist, or otherwise on national technical regulations, recognized national standards, or building codes.”97 Ultimately, the agreement aims to promote non-protectionist obligations, preventing signatory states from discriminating against foreign bids based on irrelevant technical specifications.

94 GPA, supra note 49. 95 See World Trade Organization, “What’s wrong with the WTO? You must subordinate human rights to free trade”, online: World Trade Organization <http://www.speakeasy.org/~peterc/wtow/wto-hrs.htm>. See also “What’s wrong with the WTO? You cannot restrict trade in a good based on how it is produced”, online: World Trade Organization <http://www.speakeasy.org/~peterc/wtow/wto-ppm.htm>. 96 Compare GPA arts. VIII, X & XIII (supra note 50) with NAFTA arts. 1003 & 1007 (supra note 35). 97 World Trade Organization, “Overview of the Agreement on Government Procurement,” online: WTO <http://www.wto.org/english/tratop_e/gproc_e/over_e.htm>. See also title of Annex 3 to Appendix I of the Government Procurement Agreement), supra note 50, which covers “[a]ll other entities which procure in accordance with the Agreement, in general public enterprises or public authorities such as utilities.”


Bill SF2096 suggests that the state of affairs in communities of Northern Manitoba might become a factor in the selection process for Minnesota’s purchase of energy. This factor would not be based on performance, international standards, technical regulations, or building codes, as would be required by provisions in the GPA. The GPA arguably prevents Minnesota from considering the information sought out by the LEETF in making their decision to purchase energy from Manitoba Hydro.

An issue as to the applicability of the GPA arises here, however. While the Agreement envisions the inclusion of government entities, sub-central government entities, and “other entities such as utilities,”98 only procuring entities that member states have listed in their respective schedules are bound by terms of the agreement. Under Annex 1 of the GPA, the United States Federal Department of Energy is listed.99 Annex 2 of the GPA sets out the U.S. sub-central governmental entities covered by the agreement, and for Minnesota, “Executive Branch Agencies” are listed.100 The relevant agency would thus be the Department of Natural Resources, and under this department, the Public Utilities Commission. However, neither of these bodies actually purchases and distributes energy. The Public Utilities Commission merely regulates the practices of private energy companies.

In Minnesota, the importing of energy produced by Manitoba Hydro is done by private corporations, and thus, energy purchases may not be considered acts of government procurement. The issue therefore becomes one of analyzing the connection between Minnesota State, the LEETF, the Public Utilities Commission, and the private entities running the energy trade and determining whether it is sufficiently close such that GPA provisions might apply. This question was the focus of the Korea—Measures Affecting Government Procurement (Airport Construction) dispute.

In 1999, the United States launched a complaint against Korea for alleged violations of GPA obligations. An airport was being built in Korea and certain provisions regarding bid deadlines and licensing requirements based on local investment were allegedly in conflict with the GPA. Since it was not a GPA-listed Korean governmental authority itself that was responsible for the airport construction, there was an issue as to the applicability of the GPA. Ultimately, it was found that GPA provisions did not apply to the entity responsible for airport construction. However, the complainant United States argued that they could still implement responsive measures based on impairment of their benefits

98 WTO, “Overview of the Agreement on Government Procurement”, online: WTO <http://www.wto.org/English/tratop_e/gproc_e/over_e.htm>. 99 See GPA, supra note 50, Appendix I—United States—Annex 1 at 13. 100 See ibid., Appendix I—United States—Annex 2 at “Minnesota.”

2007] East vs. West: Evaluating Manitoba Hydro’s Options 23 under the GPA, despite a finding that Korea had not actually violated its obligations. In the end, this argument was also rejected.

In this dispute, a test was set out to determine whether or not a government entity would be covered by GPA obligations:

[O]ur view is that the relevant questions are: (1) Whether an entity […] is essentially a part of a listed central government entity […]—in other words, are the entities, legally unified? and (2) Whether [the recipient-of-power agency] and its successors have been acting on behalf of [the donor-of-power agency].101 As mentioned earlier, according to the Annex of obligations for the

United States, the Federal Department of Energy and Minnesota’s Executive Branch Agencies are included in the GPA.102 Thus, in the case of Minnesota power companies, the relevant questions are whether or not the energy distributors are legally unified with the Department of Energy or the Minnesota Department of Natural Resources, and whether in purchasing and distributing energy, they act on behalf of these agencies. While it may be the responsibility of the Department of Energy and the Public Utilities Commission, a branch of the Department of Natural Resources, to implement regulations that ensure that power is readily available, legal unification seems to be missing. As there are four electric and six natural gas utility companies in Minnesota, including publicly traded companies,103 it is apparent that government entities covered under the GPA and private energy distributors are not legally unified. Accordingly, GPA provisions do not apply.

The analysis does not end here, however. Seeing as government procurement obligations are always open to extend to more entities as negotiations continue, it is important to consider another factor that was discussed in the Korea—Government Procurement case104—the claim for relief based on the impairment of benefits.

101 WTO, Report of the Appellate Panel on Korea—Measures Affecting Government Procurement, WTO Doc. WT/DS163/R, (1 May 2000) online: WTO <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds163_e.htm> at para. 7.59. 102 GPA, supra note 50, Appendix I—United States—Annex 1 at 13. See also GPA, supra note 50, Appendix I—United States—Annex 2 at “Minnesota.” 103 For example, see Xcel Energy, “Overview”, online: Xcel Energy <http://phx.corporate-ir.net/phoenix.zhtml?c=89458&p=irol-IRHome>. See also the parent company for Minnesota Power, ALLETE, “Investors”, online: ALLETE <http://www.allete.com/invest/index.html>. 104 Report of the Appellate Panel on Korea—Measures Affecting Government Procurement, supra note 101.


Regarding this claim, the panel in this case recognized the criteria set out in Japan—Film:105

The text of Article XXIII:1(b) establishes three elements that a complaining party must demonstrate in order to make out a cognizable claim under Article XXIII:1(b): (1) application of a measure by a WTO Member; (2) a benefit accruing under the relevant agreement; and (3) nullification or impairment of the benefit as the result of the application of the measure.106

The United States, in their argument, characterized these criteria slightly differently:

The United States slightly re-arranges the test enunciated by the Japan—Film panel and proposes that a successful determination of a non-violation nullification and impairment in the GPA requires the finding of the following three elements: (1) a concession was negotiated and exists; (2) a measure is applied that upsets the established competitive relationship; and (3) the measure could not have been reasonably anticipated at the time the concession was negotiated.107 The Panel accepted the U.S. characterization, but ultimately

found that the first criterion was not met—there was no negotiation concession regarding procurement by airport authorities, as the airport authorities in this case were not found to be covered by the GPA. However, had these authorities been included, if the United States suffered impairment of their reasonably expected benefits, they would be justified in applying reactionary measures, regardless of whether or not Korea had actually violated any obligations under the GPA. According to the Panel in the Korea-Government Procurement case, the non-violation remedy is used to enforce the basic principle that under GATT/WTO jurisprudence, Members should not take actions, even if consistent with

105 WTO, Report of the Panel on Japan—Measures Affecting Consumer Photographic Film and Paper, Panel Report, WTO Doc. WT/DS44/R, online: WTO <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds44_e.htm>. 106 Report of the Appellate Panel on Korea—Measures Affecting Government Procurement, supra note 101 at para. 7.85, citing Japan—Film, at para. 10.41, citing, EEC—Oilseeds, BISD 37S/86, paras. 142-152; Australian Subsidy on Ammonium Sulphate, BISD II/188, 192-193. 107 Ibid. at para. 7.88.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 25 their enumerated obligations, that might undermine the reasonable expectations of other Members.108

Returning to the issue of the East vs. West transmission line debate, this means that if the potential energy purchasers of Minnesota were covered by the GPA, their use of information gathered by the LEETF could justify a non-violation remedy for Canada, whether or not the use of the information gathered is actually inconsistent with GPA provisions. This becomes clear when the elements outlined in Japan—Film and Korea—Measures Affecting Government Procurement are considered. Implementing the Manitoba Hydro investigative measure set out in Bill SF2096 would upset the established competitive relationship if the findings were unflattering. It cannot be said that such investigative measures were reasonably anticipated at the time the GPA was put into effect either. Thus, if the GPA were to cover energy distributors in Minnesota, Bill SF2096 could lead to remedial action for the benefit of Manitoba Hydro.

It should be noted that actually attaining the remedy granted could always be an issue, however, as the United States has demonstrated an unwillingness to honour adverse judgments handed out from WTO panels in the past.109 With respect to making challenges based on GPA obligations, it is also clear that challenging the validity of legislation through U.S. courts is not an option. Section 102(c) of the Uruguay Round Agreements Act,110 which implemented the Uruguay Round Agreements (establishing the WTO, GATT 1994, the GPA, inter alia.) in the United States, prohibits private actions based on these agreements in U.S. Courts.111

b. Procurement Obligations under NAFTA

Government procurement requirements under NAFTA Chapter 10

are essentially the same as those required under the GPA, with clauses requiring national treatment,112 non-discrimination against foreign bids,113 and technical specifications based on performance or national/international standards.114 However, under NAFTA, the issue of

108 Ibid. at para. 7.93. 109 For example, consider the Antigua gambling dispute. See ICTSD, “US-Antigua Gambling Dispute Raises Systemic Issues” Bridges Weekly Trade News Digest 8:40 (24 November 2004), online: International Centre for Trade and Sustainable Development <http://www.ictsd.org/weekly/04-11-24/story4.htm>. 110 Uruguay Round Agreements Act, Pub. L. No. 103-465, § 102(c)(1)(b), 108 Stat. 4809 (1994). 111 McCrudden, supra note 50 at 22-23. 112 NAFTA, supra note 35, art. 1003. 113 Ibid. 114 Ibid., art. 1007.

26 ASPER REVIEW [Vol. VII applicability has an additional factor to consider, as the scope of coverage extends to “government enterprises” of US$250,000 and over for contracts of goods and services.115 Under the definitions section, “enterprise” is defined as “any entity […] whether privately-owned or governmentally-owned, including any corporation […].”116 With the elimination of the private vs. public distinction, it would seem that the purchase and distribution of energy by any Minnesota distributors would fall under NAFTA government procurement obligations.

Looking at NAFTA Annex 1001.1a-1, the Schedule of the United States,117 the Department of Energy is covered as a federal government entity under the agreement. However, negotiations have not yet gone so far as to have state departments or provincial government entities included under NAFTA government procurement agreements. Thus, Minnesota State, its Department of Natural Resources, and the Public Utilities Commission are not currently covered by NAFTA government procurement obligations. Similarly, private energy distributors operating in Minnesota are also not covered by NAFTA government procurement provisions. Thus, at this point in time, it appears that NAFTA does nothing to inhibit the ability of Minnesota energy distributors from taking into account the environmental impact of Manitoba Hydro projects in assessing potential suppliers of energy.

Ultimately, while international government procurement obligations under the GPA and NAFTA might have prevented entities covered under these agreements from discriminating against Manitoba Hydro based on potential adverse impacts on communities near power generating sites or the environment, it seems that these obligations do not apply to Minnesota energy distributors. Accordingly, damage done by Manitoba Hydro’s generating projects, even those from the past, may adversely affect future Manitoba Hydro bids to sell energy.

Conclusion on Legality of Minnesota Bill SF2096

While simply having the LEETF request information may be consistent with international free trade obligations, it appears that international free trade obligations would prevent import restrictions or new regulations from being passed based on environmental impacts or adverse impacts on local communities of Manitoba Hydro projects in Canada. However, they would not go so far as to prevent the publication of a LEETF report card, given that such reports are made for all energy providers, both domestic and foreign. GATT/WTO jurisprudence has

115 Ibid., art. 1001(1)(c)(ii). 116 Ibid., art. 201. 117 Ibid., Annex 1001.1a.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 27 shown that consumer awareness practices, given that they are not discriminatory, are perfectly acceptable.

It seems that at this point, government procurement obligations do not impact Minnesota energy distributors, and therefore, these energy distributors may very well opt not to purchase from Manitoba Hydro based on Canadian environmental or local community impact concerns. Accordingly, Manitoba Hydro must be wary in scaring away their Minnesota customer base through reckless behavior or their unwillingness to clean up past mistakes. The need for Manitoba Hydro to take better care in minimizing environmental damage, cleaning up its messes, and working towards positive and sustainable development, where it is welcomed, in communities near any energy generation or distribution projects, becomes more than just an issue of morality—it becomes a major marketing concern. If Manitoba Hydro wishes to retain its Minnesota customer base, future project development must be more diligently planned and current practices must be refined such that come January 2008, Manitoba Hydro will be able to produce for the LEETF a positive report.

As will be discussed below, the case can be made that the East option is potentially superior from the environmental perspective and also that of alleviating poverty, which is a key element of the larger principle of international law—that States should be promoting sustainable development. While it is legitimate to wonder whether the East route will create a damaging perspective in the eyes of potential buyers in Minnesota, it might be argued that pursuing the West option has the potential to raise objections that are, in logic and fact, more powerful. The practical politics may be that thus far, the cries of high-profile environmentalists have been in relation to a potential East option. However, if the West option is chosen, Manitoba authorities may eventually have to answer some embarrassing questions about why it has chosen to waste a massive amount of renewable energy and how it missed an opportunity to involve some of Canada’s poorest and least healthy communities in opportunities for development. It may well be true that any visible damage, even if minor, to the Eastside, would trigger more objections from the United States and from environmentalists than the invisible damage caused by wasting hydro power would. It is not a certainty, however, that the latter will continue to be overlooked.

28 ASPER REVIEW [Vol. VII DOES THE WORLD HERITAGE SITE NOMINATION PRESENT A BARRIER TO THE EAST OPTION? About the World Heritage Centre and its World Heritage Sites

HE WORLD HERITAGE CENTRE (“WHC”), a branch of the United Nations Educational, Scientific, and Cultural Organization, exists to “encourage the identification, protection and preservation of

cultural and natural heritage around the world considered to be of outstanding value to humanity” in accordance with the Convention concerning the Protection of the World Cultural and Natural Heritage.118 Accordingly, the WHC selects World Heritage sites based on ten criteria of outstanding universal value.119 In addition, the protection,

118 World Heritage Centre, “About World Heritage”, online: WHC <http://whc.unesco.org/en/about/>. 119 These criteria include six natural criteria and four cultural criteria:

i. to represent a masterpiece of human creative genius; ii. to exhibit an important interchange of human values, over a span of time or within a cultural area of the world, on developments in architecture or technology, monumental arts, town-planning or landscape design; iii. to bear a unique or at least exceptional testimony to a cultural tradition or to a civilization which is living or which has disappeared; iv. to be an outstanding example of a type of building, architectural or technological ensemble or landscape which illustrates (a) significant stage(s) in human history; v. to be an outstanding example of a traditional human settlement, land-use, or sea-use which is representative of a culture (or cultures), or human interaction with the environment especially when it has become vulnerable under the impact of irreversible change; vi. to be directly or tangibly associated with events or living traditions, with ideas, or with beliefs, with artistic and literary works of outstanding universal significance. (The Committee considers that this criterion should preferably be used in conjunction with other criteria); vii. to contain superlative natural phenomena or areas of exceptional natural beauty and aesthetic importance; viii. to be outstanding examples representing major stages of earth’s history, including the record of life, significant on-going geological processes in the development of landforms, or significant geomorphic or physiographic features; ix. to be outstanding examples representing significant on-going ecological and biological processes in the evolution and development of terrestrial, fresh water, coastal and marine ecosystems and communities of plants and animals;

T

2007] East vs. West: Evaluating Manitoba Hydro’s Options 29 management, authenticity, and integrity of properties are taken into account.120 Sites that are given the World Heritage Site designation are expected to receive adequate protection from local governments and, in return, governments receive support from the WHC by way of site monitoring, education, awareness-raising, national training and research, financial support from the World Heritage Fund, and the provision of general international assistance.121 Will the transmission line negatively affect the bid to become a World Heritage site?

The Canadian Boreal Forest site seeking protection is located in Eastern Manitoba and Northwestern Ontario. The area covers approximately 8,500 square kilometers and contains various provincial parks on both sides of the Manitoba-Ontario border.122 In its bid to become a World Heritage Site, this region boasts the following justification of outstanding universal value based on four of the ten available World Heritage Site selection criteria:

(v) The site, which represents an outstanding example of traditional lifeways by Aboriginal people in the boreal ecozone, exemplifies a land use representative of a culture and human interaction with the environment; (vii) It has exceptional natural scenic values, with wild rivers and extensive undisturbed boreal forests, lakes and wetlands; (ix) It is an intact boreal landscape demonstrating a range of ecological processes relating to glacial history and fire ecology; (x) It contains a good variety of species typical of the region as well as one threatened species (woodland

x. to contain the most important and significant natural habitats for in-situ conservation of biological diversity, including those containing threatened species of outstanding universal value from the point of view of science or conservation.

See World Heritage Centre, “The Criteria for Selection”, online: WHC <http://whc.unesco.org/en/criteria/>. 120 Ibid. 121 Intergovernmental Committee for the Protection of the World Cultural and Natural Heritage, Operational Guidelines for the Implementation of the World Heritage Convention (UNESCO, 2005) at paras. 169-176 & 212-235 [Operational Guidelines]. 122 Parks Canada, “Canada’s Tentative List for World Heritage Sites: Atikaki/Woodland Caribou/Accord First Nations” (March 2004), online: Parks Canada <http://www.pc.gc.ca/progs/spm-whs/itm3-/site11/page3_E.asp>.


caribou) and one species of special concern (chestnut lamprey).123 In analyzing the impact of a hydro-transmission line on the claim

of outstanding universal value, the effects on scenic values, ecological processes, and wildlife can be separated from the effect on the lifeways of Aboriginal peoples. Clearly, the construction of such a line would not positively support the former. However, with 8,500 square kilometers of Boreal Forest, a 60m-wide transmission line diligently constructed and managed should not compromise a potential finding of outstanding universal value, given its relatively negligible size. Nonetheless, some critics suggest that the impact of a transmission line would go far beyond its physical boundaries. It is suggested that large amounts of forest would need to be removed to make way for a transmission line and the regular application of pesticides would be necessary to prevent forest regrowth near the transmission lines, which would adversely affect caribou populations, while increased traffic from motor vehicles would further disrupt the forest’s wildlife.124 However, other commentators have noted that Manitoba Hydro does not in fact use pesticides to prevent regrowth, and existing transmission lines to the West of Lake Winnipeg are said to have caused little disruption to caribou populations in those areas.125 Of course, the exact impact that a transmission line would have is unknown at this point in time, as it would depend on the diligence taken by those responsible for planning and construction.

What makes the East option attractive from the standpoint of providing outstanding universal value is its potential to bolster the claim of “outstanding example of traditional lifeways by Aboriginal people.” While there certainly is opposition to the East option from aboriginal communities in Northern Manitoba, communities in this area face serious social problems. There is no outstanding universal value in being amongst the nation-leaders with regards to poverty, suicide, and tuberculosis rates. Some infrastructure in terms of airports and roads could go a long way in relieving some of the medical woes, while the creation of jobs may provide economic stability and diversification to the region. Arguably, this could result in fewer youths leaving these communities for the big cities, thus actually helping to preserve

123 Ibid. 124 Don Sullivan, “East side power line wrong” Winnipeg Free Press (25 July 2007) Editorial Leaders. 125 Chief George Kemp, supra note 6. “These power line corridors have existed for about 40 years on the west side of the lake and the woodland caribou have not disappeared from the area. Therefore, all the arguments put forth by Sullivan amount to no more than environmental ‘fear mongering’ by a non-resident of the area and region.”

2007] East vs. West: Evaluating Manitoba Hydro’s Options 31 traditional aboriginal ways of life. Ultimately, the potential promise of the East option to alleviate sickness, underdevelopment, and poverty from an impoverished part of the nation might in fact improve the attractiveness of the Boreal Forest area as one that demonstrates outstanding universal value.

Because of the promise of development that the East option brings, Elijah Harper, a former MP of the Manitoba Legislature and a First Nations Band Chief, strongly supports the East option and has been active in rallying support from aboriginal communities in Northeastern Manitoba.126 Recognizing that these communities represent the poorest region in the country, Harper has articulated a desire to achieve a degree of economic independence, not wanting to continue relying on government handouts.127 First Nations could bargain with the province to receive substantial ongoing economic benefits in return for the consent and cooperation of First Nations in proceeding with the project. The province could take the larger view that even First Nations on the Eastside that are not directly affected or traversed by the route should share in the “Eastside dividend”—the massive amount of money saved by proceeding with an Eastside route rather than the Westside. The money could be used to build infrastructure on the Eastside or create large economic development funds. As well, there could be some opportunities for residents of the Eastside to gain employment on the construction and maintenance of the line.128 David Chartrand, President of the Manitoba Métis Federation, has also expressed support for the East option, suggesting that the environmental impact would be minimal.129

However, there appears to be a great divide from a policy standpoint among provincial political leaders. Conservative leader Hugh McFadyen has articulated support for the East option after recognizing the dire need for some development in Eastern Manitoba. Meanwhile, the reigning NDP government is adamantly opposed to the East option,130 as

126 Dan Lett, “Hydro won’t get cheapest route, Province rejects line down east lakeshore” Winnipeg Free Press (29 May 2005) A1. 127 The Canadian Press, “Environmentalists applaud Manitoba: Construction of power line zapped” Daily Commercial News (1 June 2005), online: Daily Commercial News and Construction Record <http://www.dcnonl.com/article/20050601750>. 128 Elijah Harper, “Only a Matter of Time” (Powerpoint presented to the Federation of Saskatchewan Indian Nations Lands and Resources Secretariat, Air and Energy Efficiency Conference, Regina, 2-4 October 2007) [unpublished]. 129 Fallding, supra note 3. 130 Mary Agnes Welch, “McFadyen visits Island Lake reserves” Winnipeg Free Press (13 May 2007) A4. The Liberal party has also expressed concerns with regards to the high costs associated with the West option. The party is suggesting “an all-party screening of the corporation’s [Manitoba Hydro’s] new board

32 ASPER REVIEW [Vol. VII it presents the possibility of an environmental detriment and a potential source of dispute with respect to aboriginal land rights. In their 2007 election campaign, the NDP government promised to enact legislation that would protect the Boreal Forest Network from development.131

As mentioned, in addition to the outstanding universal value criteria, other considerations for the selection of World Heritage Sites include available assurances of integrity and authenticity. Integrity deals with the measure of wholeness and intactness of the natural heritage and its attributes, while authenticity addresses the knowledge and sources of knowledge available in relation to original and subsequent characteristics of a cultural heritage.

In a statement of integrity, applicants are required to set out the elements found in the property that are necessary to demonstrate universal value, the adequacy of the property’s size in terms of ensuring complete representation of the features and processes conveying the property’s significance, and the degree to which the property suffers from adverse effects of development.132 Thus, it can be said that adverse effects from development are anticipated to some degree and if the impact of such development is minimal, these effects are acceptable. The Operational Guidelines recognize that “no area is totally pristine and that all natural areas […] to some extent involve contact with people. Human activities […] often occur in natural areas. These activities may be consistent with the outstanding universal value of the area where they are ecologically sustainable.”133 Thus, the key is sustainability, which is consistent with the sustainable development principle that guides UNESCO, and accordingly, the WHC. This principle will be discussed in detail below.

Regarding overall integrity, it seems that a transmission line constructed and managed diligently that results in a one-time disruption and minimal ongoing impact on the Boreal Forest should not compromise the integrity, as defined by the World Heritage Organization in terms of sustainability, of the Canadian Boreal Forest Network. However, as mentioned above, debates still loom over what the actual impact on the Boreal Forest would be, and there are those who believe that the environmental impacts of a transmission line would in fact be detrimental.

members” to improve accountability with regards to such decisions. See Joyanne Pursaga, “Toeing the line? Hydro board reform urged” Winnipeg Sun (9 October 2007), online: Winnipeg Sun <http://www.winnipegsun.com/News/Manitoba/2007/10/09/pf-4561050.html>. 131 Mia Rabson, “Doer vows to protect pristine reserve” Winnipeg Free Press (12 May 2007) A16. 132 Operational Guidelines, supra note 121 at para. 88. 133 Ibid. at para. 90.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 33

The WHC authenticity requirements only extend to criteria nominated under sections (i) – (vi) of the WHC Operational Guidelines.134 In this case, the authenticity requirement would only apply to the claim that the Canadian Boreal Forest Network “represents an outstanding example of traditional lifeways by Aboriginal people in the boreal ecozone [and] exemplifies a land use representative of a culture and human interaction with the environment.”135 Under the authenticity requirements, World Heritage Site nominees must indicate which attributes in their site express the claimed properties of cultural heritage and then must assess the degree to which authenticity is found in these attributes. Paragraph 82 of the Operational Guidelines sets out a list of attributes that might demonstrate these properties of cultural heritage. From this list, it is the “location and setting,” the “traditions, techniques, and management systems,” and the unique languages of the aboriginal communities that would best exemplify the properties of cultural heritage claimed for the Canadian Boreal Forest region. Considering these indicia of authenticity, it seems unlikely that the construction of a transmission line would compromise authenticity. With some projects, critics express the concern that the economic activity associated with construction and ongoing operations will draw people away from traditional activities such as hunting, fishing, and trapping.136 The construction of an Eastern transmission line, however, would involve constructions jobs over only a limited period and then only modest employment on maintenance thereafter. If the transmission project is accompanied by provincial grants of economic development money for First Nations, the better resourced communities would in fact be better able to retain population and buy equipment needed to engage in traditional activities as full- or part-time activities. The continuation of poverty and disease among the residents of the Eastside, one assumes, is not a dimension of “authenticity” that international legal conventions and organizations applying them, such as UNESCO, are at all interested in preserving.

134 Ibid. at para. 77. 135 Parks Canada, supra note 122. 136 Hoffman, supra note 32. Hydro has made it clear, however, that the construction and maintenance of an Eastside transmission line will involve significant job creation; see Manitoba Hydro, “Future Transmission of Line Development on the Eastside” (2002), online: Manitoba Hydro <www.hydro.mb.ca>. Far more plausible, in our view, is that if the transmission project was accompanied by economic development money for First Nations, the better resourced communities would in fact be better able to retain population and buy equipment needed to engage in traditional activities as full- or part-time activities; see the discussion at supra note 32.

34 ASPER REVIEW [Vol. VII Would the World Heritage Operational Guidelines make the East option unavailable?

In its Operational Guidelines for the Implementation of the World Heritage Convention, the WHC sets out requirements of protection and management that are considered in assessing outstanding universal value, and the process for removing a site from the World Heritage List. These are the criteria that the East option must be weighed against in order to ensure that interference with the Boreal Forest caused by the East option would not compromise a finding of overall outstanding universal value.

The WHC mandates in its Operational Guidelines that all properties on the World Heritage List must “have adequate long-term legislative, regulatory, institutional and/or traditional protection and management to ensure their safeguarding.” Protection is to include “adequately delineated boundaries” and should include protection at the national, regional, and municipal levels.137

The Operational Guidelines then go on to discuss the requirement of boundaries.138 It is explained that boundaries are intended to include all areas that reflect outstanding universal value and reflect spatial requirements of habitats, processes, species, or phenomena that occur within the site. However, nothing in this section suggests that industrial developments must be excluded from these boundaries.

Later in the document, the management systems requirement is discussed.139 The guidelines appear to apply the broad mandate of simply ensuring effective protection of nominated properties for present and future generations. No specific requirements are set out. The language in the guidelines takes a permissive tone, recognizing the diversity in cultural perspectives, available resources, and other factors between countries. For example, “[participant countries] may incorporate traditional practices, existing urban or regional planning instruments, and other planning control mechanisms.”140 In addition, the guidelines are so lenient as to merely “invite” members to inform the Committee of intentions to authorize or undertake new constructions.141 It appears that with the permissive tone of these provisions, nothing in this section would therefore prohibit the construction of a power transmission line.

Finally, the document goes on to discuss sustainable use. Thus, World Heritage properties may support various proposed uses given that they are ecologically and culturally sustainable. In the context of the

137 Operational Guidelines, supra note 121 at para. 97. 138 Ibid. at para. 99. 139 Ibid. at para. 108. 140 Ibid. at para. 110. 141 Ibid. at para. 172.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 35 power transmission line, if the implementation of the line results in a minimal, sufficiently short-term, one-time disruption only, does not pollute the area, and causes no further disturbances in the future, the construction of this power transmission line would not compromise a World Heritage Site designation given to the Manitoba-Ontario region of the Canadian Boreal Forest Network. Thus, a successful World Heritage Site designation should not mean that the East option would no longer be available.

A recent decision of the World Heritage Committee to delete the Oryx Sanctuary in Oman from the World Heritage List demonstrates the level of encroachment necessary to affect a property’s status as a World Heritage Site. Oman, in violation of the World Heritage Operational Guidelines, reduced the size of the protected area by 90 percent. This was the first time a site had ever been removed from this list.142 Relative to the reduction of protection in the Oman Oryx Sanctuary case, the potential encroachment on protection that a 60m-wide hydro-transmission line might cause to the 8,500 square kilometer Boreal Forest region is negligible. Accordingly, it seems that WHC protection requirements would not preclude the East option from being implemented nor would the East option create a risk of deletion from the World Heritage List, were the Canadian Boreal Forest to have been added to the list earlier.

It should also be noted that in the World Heritage Centre’s 2007 selections, the Boreal Forest Network was not chosen as a World Heritage Site.143 Thus, it can be said that consideration of post-designation WHC protection requirements might not be of great concern at this point. Is the East option consistent with the WHC’s guiding principle of sustainable development?

UNESCO, among their numerous goals, sets out to “help countries implement a national strategy for sustainable development.”144 As a branch of UNESCO, the World Heritage Centre, in making decisions about World Heritage Site designations, should therefore look more

142 World Heritage Centre, “Oman's Arabian Oryx Sanctuary: first site ever to be deleted from UNESCO's World Heritage List” (28 June 2007), online: World Heritage Centre <http://whc.unesco.org/en/news/362>. 143 The Rideau Canal in Ottawa was the only Canadian site to be given the designation for the year 2007. See Steven Edwards, “Rideau Canal new world landmark” The National Post (29 June 2007), online: The National Post <http://www.canada.com/nationalpost/news/story.html?id=6c54a65e-99a1-4bd5-939f-99ecfa1e7a30&k=63784>. 144 United Nations Educational, Scientific, and Cultural Organization, “About UNESCO”, online: UNESCO <http://portal.unesco.org/en/ev.php-URL_ID=3328&URL_DO=DO_TOPIC&URL_SECTION=201.html>.

36 ASPER REVIEW [Vol. VII favourably upon nominees who demonstrate an ability to achieve sustainable development goals. The question then becomes, for the purposes of this debate, is the East option or the West option better able to achieve sustainable development goals? A common perception may be that sustainable development simply involves protecting the environment at the expense of commercial development. While international documents utilizing the term do encourage environmental protection, development is generally encouraged as well. For example, in the United Nations 2005 World Summit Outcome Report, three components of sustainable development are identified: economic development, social development, and environmental protection.145 It is therefore apparent that environmental protection makes up only a part of the sustainable development agenda. The Brundtland Report,146 produced by the World Commission on Environment and Development in 1987, is said to have first coined the phrase “sustainable development”:

Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:

• the concept of ‘needs’, in particular the essential needs of the world’s poor, to which overriding priority should be given; and

• the idea of limitations imposed by the state of technology and social organization on the environment’s ability to meet present and future needs.

It can be said then, that sustainable development attempts to balance present and future interests, as well as combat poverty. These concepts are echoed in subsequent international documents.

For example, in the United Nations Report of the World Commission on Environment and Development, it was once again recognized that sustainable development “implies meeting the needs of the present without compromising the ability of future generations to

145 2005 World Summit Outcome, UN GA, 60th Sess., UN Doc. A/60/L.1 (15 September 2005) at para. 48. 146 Our Common Future: Report of the World Commission on Environment and Development, UN Doc. A/42/427 (1987) at c. 2.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 37 meet their own needs.”147 In the United Nations Rio Declaration on Environment and Development,148 a number of principles are set out. Among these principles are the desire to balance the needs of present and future generations and the goal of eradicating poverty.149 In the UN 2005 World Summit Outcome Report, the eradication of poverty was once again set out as an essential requirement for sustainable development.150 Meanwhile, UNESCO, as one of its enumerated strategic goals, has also committed to combating poverty.151

It can thus be said that sustainable development is not simply about limiting development or consumption in the present. In attempting to meet the needs of the present and to work towards eradicating poverty, it becomes clear that this guiding UN principle would support development of underdeveloped areas. In addition, with respect to the environmental protection aspect of sustainable development, combating poverty has generally been linked to environmental protection, as poverty reduces the ability of communities to use resources in a sustainable manner.152 Accordingly, with regards to the East vs. West debate, it seems that it may be contrary to principles of sustainable development to simply “Go West,” and not consider the East option, just to avoid disturbing the pristine Boreal Forest Network. This would deprive impoverished communities in the East from a much needed development opportunity.

As mentioned previously, Eastern Manitoba is known as the poorest region of Canada. Basic sewage and other infrastructure, inter alia, are lacking, while rates of disease are high. Meanwhile, serious social problems persist. While there are those who believe that Manitoba Hydro projects causing environmental damage might contribute to poverty, it is also clear that a large-scale project such as the construction of a hydro-electric transmission line has the potential to create the necessary jobs, training, and infrastructure to significantly contribute to the alleviation of poverty. With regards to environmental protection, in the case of aboriginal societies that would place great value on the preservation of their land, it seems that added financial resources would certainly result in better environmental protection for the Boreal Forest

147 Report of the World Commission on Environment and Development, UN GA, 1987, UN Doc. A/RES/42/187. 148 United Nations Environment Programme, Rio Declaration on Environment and Development (June 1992), online: UNEP <http://www.unep.org/Documents.Multilingual/Default.asp?DocumentID=78&ArticleID=1163>. 149 Ibid. at Principles 3 & 5. 150 2005 World Summit Outcome, supra note 145. 151 See United Nations Environment Programme, supra note 148, art. 5. 152 Our Common Future, supra note 146 at c. 2, para. 29.

38 ASPER REVIEW [Vol. VII Network. Accordingly, from a sustainable development standpoint, it seems that the East option is indeed a viable one.

On the other hand, the East option, because of its potential disruption of the pristine Boreal Forest Network, does raise concerns about environmental protection and the ability to meet the needs of future generations. Faced with past problems with flooding in the North, environmentalists and local communities, legitimately so, can ask hard questions about the potential impact of the East option. To ask questions, however, is not the same as assuming answers, especially negative ones. While comparisons to massive flooding projects have been made, the most relevant comparison may be to the environmental impact of the existing Westside line, which does not appear to have triggered complaints. Furthermore, projects with potentially significant environmental impacts undergo environmental assessments in Manitoba under provincial law, and these may involve public hearings. If a line was built on the Eastside, the likely path would be that in the face of public scrutiny and concerns from the local First Nations communities, design of the project would be carried out with a view to ensuring that there are, at the end of the day, minimal adverse effects.153

Furthermore, the environmental impact of the Eastside option has to be compared to that of the West option. The West option would be longer, so the sheer size of its potential impact might be greater. More importantly, the West option, precisely because it is longer, would result in a massive amount of energy lost in transmission. One proponent of the project has estimated that over a billion dollars worth of renewable energy would simply be wasted. Thus, there appears to be a very strong argument that the West option would in fact be far more objectionable than the East option from the environmental perspective.

Even if the Eastside option was not superior from an environmental perspective, and the issue was therefore one of tradeoffs, international documents discussing sustainable development have made it clear that eradicating poverty is a top priority. For example, the first principle of the United Nations Rio Declaration is that “human beings are at the centre of concerns for sustainable development.”154 Accordingly, the alleviation of severe poverty, as an objective dealing with the fundamentals of human life, can plausibly be viewed as taking the highest priority among sustainable development goals. This prioritization is further echoed in the Brundtland Report.155 Given the general

153 See Canadian Environmental Assessment Act, 1992, c.37, which is often used as a guideline in provincial assessments. See also Report on Public Hearings: Wuskwatim Generation and Transmission Projects (Winnipeg: Manitoba Clean Environment Commission, September 2004) at 1. 154 Rio Declaration, supra note 148 at Principle 1. 155 Our Common Future, supra note 146.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 39 principles of international law concerning the environment and sustainable development, as well as the potential of the East option to assist in the alleviation of poverty, the World Heritage Organization, as a branch of the United Nations, could reasonably see itself as obliged to support this option.

CONCLUSION

HILE THE EAST VS. WEST DEBATE seemed to fall off the radar over the summer of 2007, discussions gained renewed interest in the fall.156 With the Canadian Boreal Forest Network still hoping for

a World Heritage Site designation and newly passed laws in Minnesota mandating investigations into Manitoba Hydro’s practices, it is clear that the debate regarding what may be the last real opportunity for development of aboriginal communities in Eastern Manitoba is far from settled.

An issue that is not discussed in depth in this paper, but which also arises from the crossing of aboriginal reserve land and traditional territories to which First Nations have a right of access under historic treaties (a right that was constitutionally amended by the Natural Resource Transfer Agreement in 1930 to exclude commercial rights, but to permit the First Nations to harvest on unoccupied Crown lands throughout the province). Under the Mikisew case, where traditional territory is “taken up for settlement,” (a right that governments have under the treaties) there is a duty on the part of the Crown (federal or provincial) to consult and accommodate the First Nations concerned.157 Accordingly, any transmission line that crosses reserve or traditional territories will result in a situation where the Crown extensively consults the First Nations affected, including addressing environmental concerns, and offers them compensation packages for at least any harm inflicted, if not necessarily rent as such. Current practice, as in the Wuskwatum project, is that the provincial government will offer a substantial compensation package in return for the consent of the affected First Nation, special employment and contracting opportunities for First Nations citizens and enterprises with respect to building and maintenance, and the opportunities to become part-owners of the project and share in the revenues. The East option therefore offers the opportunity for the province to work with First Nations to variously compensate them for the use or damage with respect to their traditional territories and offers First Nations (even those not in the environmental footprint of the project) opportunities to become part-owners in return for

156 See supra note 2 for a comment on the latest developments on this topic. 157 See generally, Mikisew Cree First Nation v. Canada (Minister of Canadian Heritage), [2005] 3 S.C.R. 388, 2005 SCC 69.

W

40 ASPER REVIEW [Vol. VII making an investment in the capital costs of the project. The province could use the “Eastside dividend”—money saved from foregoing the extra costs arising in the West option—to create a fund that would be used for building infrastructure on the Eastside, such as small airports, all-season roads, hospitals, and so on.

Another issue that this paper does not explore in depth, but would be worthy of exploration in its own right, is the international obligation to protect the rights of First Nations. With regards to these obligations, recent developments in the international community have provided some guidance as to how the international law is developing. While there has been some controversy over opposition by Canada and the United States in the matter, in June 2006, the UN Human Rights Council adopted the Declaration on the Rights of Indigenous Peoples,158 which had been in the works for decades, and recommended its adoption to the UN General Assembly. In this document, among the relevant norms being developed, are the protection of traditional rights and the offering to First Nations of opportunities to participate in economic development. Based on these developments, there appears to be added strength in the case for proceeding with the East option. There is political support for this option already among many First Nations, provided that it is carried out with adequate consultation with First Nations and respect for the environment, and that First Nations are able to benefit through terms such as revenue-sharing, job and contracting opportunities, and the development of infrastructure. However, the Poplar River Band appears to be strongly against this development, and according to both Canadian and international law, its concerns must be reasonably accommodated. This might mean that such steps might be taken as to route the line so that it is entirely outside of Poplar River’s reserve or traditional territories (the limits of which appear to be the subject of some dispute), or so that the line traverses Poplar River territories to the least extent and with the minimum impact possible. What are the international law considerations for the East vs. West decision?

Minnesota’s probing into the impact of Manitoba Hydro projects on local communities is certainly a reason for concern from a moral and political standpoint. If practices within Canada have attracted international attention and actual legal responses abroad have resulted, it is clear that more regard to the regulation of energy initiatives and their impacts should be taken. Few would dispute that the treatment of

158 Declaration on the Rights of Indigenous Peoples, Human Rights Council Resolution 2006/2, (29 June 2006).

2007] East vs. West: Evaluating Manitoba Hydro’s Options 41 aboriginal communities affected by the 1970 floods was unacceptable and that these mistakes should not be repeated.

After analyzing Minnesota’s Bill SF2096 with regards to United States international free trade obligations, it can be said that this law, because of its mere investigatory nature, does not by itself violate any of these obligations. However, while the provision in Bill SF2096 that requires the request of information from Manitoba Hydro may be consistent with international free trade obligations, many measures that might be taken in response to the receipt of an unsatisfactory report from Manitoba Hydro, or a refusal to supply the requested information, would likely be in violation.

Discriminatory regulations or laws relating to Manitoba Hydro or to adverse effects of production would seem to violate national treatment or MFN treatment obligations under GATT. However, government procurement obligations under the GPA and NAFTA do not apply to energy distributors in Minnesota. Accordingly, those distributors are free to take into account any information regarding the negative impacts of Manitoba Hydro’s activities in deciding whether or not to purchase energy from them. Accordingly, if general reports on all energy producers were to be circulated, Minnesota energy distributors, in attempting to promote positive environmental policies, might opt to purchase energy elsewhere. Thus, from a financial as well as moral standpoint, it seems that the new Minnesota legislation is indeed an issue requiring attention. Manitoba Hydro will thus need to put greater emphasis on the impact on local communities and the environment that its projects have.

With respect to the potential World Heritage Site designation of the Canadian Boreal Forest Network, analysis of the selection criteria and operational guidelines has shown that ultimately, it is the outstanding universal value of a site that is important. Outstanding universal value can be demonstrated numerous ways. Meanwhile, successful nominations also require certain assurances of authenticity and integrity. In the case of the Canadian Boreal Forest, the claim to outstanding universal value includes environmental processes, diversity of plant and wildlife, and traditional land use by the local Aboriginal peoples. While common sense shows that the East option has the potential to diminish this claim by disrupting or damaging the Boreal Forest Network, it also has the potential to bolster this claim by providing economic resources to local communities that would take responsibility in caring for the land, while assisting in a finding of outstanding universal value by combating the poverty epidemic of the present. More importantly, with sustainable development goals as overarching themes for UNESCO and accordingly, the WHC, it seems that initiatives that would further these goals would be viewed favourably with respect to attaining World Heritage Site designations. Analysis of UNESCO’s sustainable development mandate has shown that alleviation

42 ASPER REVIEW [Vol. VII of poverty is a universal theme in international sustainable development literature. Accordingly, with expectations of substantial development and regular revenues arising from the East option, it seems that this option would in fact better support the initiative of the Canadian Boreal Forest Network to achieve their sought after World Heritage Site designation. Meanwhile, with 8,500 square kilometers of Boreal Forest covered in the protected area, an argument can be made that a 60m-wide transmission line would create an insignificant environmental disturbance, assuming that it was constructed diligently. Which option can be better justified? East or West?

With private energy distributors in the State of Minnesota not bound by government procurement obligations and with the Canadian Boreal Forest Network still seeking a World Heritage Site designation, the opinion of the Minnesota LEETF and a consideration of World Heritage Site selection criteria are still important factors for Manitoba Hydro to consider. It is therefore imperative to ask, which option would Manitoba Hydro best be able to justify before the LEETF, Minnesota energy distributors, and the World Heritage Centre?

From the standpoint of assessing impacts on local communities, the East option presents strength in its ability to provide much needed development to an impoverished region of the country. The construction of transmission lines would lead to the development of currently lacking infrastructure, would create jobs, and would bring massive revenues into the local aboriginal communities. Project proposals have estimated that $1 billion would go into construction, and communities would receive $17 million in profit annually for the first 25 years of the project, while capital repayment plans would still be in place.159 These revenues, it would seem, give local communities the ability to combat poverty by creating jobs and job training, further develop basic infrastructure, and provide the social programs necessary to deal with their numerous social troubles of the present.

With regards to environmental protection and preservation, it is also believed that this development can contribute to the cause, as it would provide local communities with the necessary resources to effectively manage their land. The East option presents further positives from an environmental standpoint, as it would result in significant energy savings by allowing for more efficient energy transportation of a source of renewable energy. While building more dams may itself create environmental concerns, the issue in the East-West debate is not whether they will be built or not, which appears to be an independent

159 Harper, supra note 128.

2007] East vs. West: Evaluating Manitoba Hydro’s Options 43 question, but what the most appropriate way is to carry the energy produced.

The East option, by utilizing a shorter, therefore more environmentally friendly transmission line, increasing the resources that could be put towards land maintenance, creating much needed infrastructure and job training, while generating massive revenue inflows, has the potential to create benefits to both the environment and local communities of much greater magnitude than its converse. In other words, the potential for good arguably greatly outweighs the likely harm.

ARTICLES

UNITED STATES ANTI-DUMPING POLICY AND THE NEGOTIATION OF A FREE TRADE AREA

OF THE AMERICAS: THE IMPACT OF PROTECTIONIST MEASURES ON

REGIONAL TRADE INTEGRATION

Patrick J. Glen∗

We cannot have trade and commerce in world markets and international waters exclusively on our terms, governed by our laws, and resolved in our courts.1

- Chief Justice Warren E. Burger I. INTRODUCTION

LTHOUGH THE ABOVE-CITED QUOTE arose in a case dealing with the legitimacy of a forum selection clause in an international contract for towage, the logic of Chief Justice Burger is perhaps

even more apparent in the context of the ongoing regional and global integration of trade regimes. Since the 1994 Marrakesh Agreement, the World Trade Organization (“WTO”) has represented a certain, though not total, measure of trade integration at the global level. The WTO oversees states’ duties with respect to the General Agreement on Tariffs and Trade (“GATT”), the General Agreement on Trade in Services (“GATS”), the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), and certain plurilateral agreements dealing with trade in civil aircraft, government procurement, dairy products, and bovine meat. To aid in the enforcement of the provisions contained within these agreements, there is also a dispute settlement mechanism within the WTO to handle disputes arising under any of the aforementioned agreements. Though the WTO has represented a major step towards the global integration of trade, agreement on such a broad scale between participants of remarkably different economic prowess, production capability, and product focus has inevitably created a regime left with many jurisdictional questions. In a pseudo-protectionist vein, (although some would argue, and quite convincingly so, that these measures are

∗ LL.M. (Georgetown University Law Center); J.D. (Ohio Northern University, Pettit College of Law). The views expressed in Mr. Glen's article do not represent those of the U.S. government or the Department of Justice. 1 The Bremen et al. v. Zapata Off-Shore Co., 407 U.S. 1 at 9; 92 S. Ct. 1907 at 1913 (1972).

A

48 ASPER REVIEW [Vol. VII applied in only a protectionist manner) the GATT allows for the imposition of anti-dumping and countervailing duties. One of the most important aspects of the WTO is its allowance for regional integration agreements,2 which are often able to bridge certain gaps the resolutions of which are presently impossible in the global context. The European Union (“EU”) provides the best example of regional integration at the moment, but other instruments have set up similar, though not identical, types of arrangements throughout the world. In North America, the North American Free Trade Agreement (“NAFTA”) between the U.S., Canada, and Mexico has been operating rather smoothly for years. In Central and South America there are also various agreements operating on differing levels of integration, including the Canada-Chile Free Trade Agreement, the Central American Common Market, the Andean Community, the Caribbean Community and Common Market, and the Southern Common Market (“MERCOSUR”). These agreements represent regional and sub-regional attempts to integrate trade with consistent and like-minded trading partners. Yet the launch of negotiations for a Free Trade Area of the Americas (“FTAA”) has highlighted, on a regional level, the same problems that have been faced in the global context.

The key question then asked is how can nations of such differing backgrounds see eye-to-eye and agree on the important issues? The Americas’ situation is a perfect example, in microcosm, of the disparities that exist globally: the nations situated between the tip of Chile in the South and the uppermost reaches of Canada in the North represent economies ranging from the richest in the world to the poorest.

While this is a broadly formulated question, this paper focuses on the continuing existence of protectionist measures in U.S. law, specifically the U.S. policy of zeroing when making determinations of dumping. Part II of this paper will analyze the existing statutory and regulatory schemes of U.S. law in the context of dumping determinations, as well as Federal court cases on the subject. Part III will focus on the WTO’s agreement on anti-dumping measures and a series of cases heard pursuant to the Dispute Settlement Understanding of the WTO implicating U.S. policy on this point. Part IV will examine the importance of eliminating protectionist measures in the context of an FTAA and the logical ways in which the U.S. may work to make this elimination a reality. In concluding, it should become apparent that any

2 See General Agreement on Tariffs and Trade, 30 October 1947, 58 U.N.T.S. 187, Can. T.S. 1947 No. 27 (entered into force 1 January 1948), art. XXIV [GATT 1947]. See also General Agreement on Trade in Services, art. V, Annex IB to the Agreement Establishing the World Trade Organization, online: World Trade Organization <http://www.wto.org/English/docs_e/legal_e/26-gats.pdf> [GATS].

2007] U.S. Anti-Dumping Policy 49 sort of protectionist measures are incompatible with trade integration, and if the U.S. truly does wish to move towards a global economy, it must heed the words of Chief Justice Burger: such integration cannot be had solely on its terms. II. U.S. ANTI-DUMPING POLICY

.S. ANTI-DUMPING POLICY has been one of the main focal points of international criticism in the years subsequent to the establishment of the WTO. Policy and practice in this area have

been criticized in and of themselves, but U.S. action, or more appropriately non-action, in the face of unfavorable WTO dispute settlement decisions has exacerbated what had already been a fractious issue. In the view of the international community, not only does the U.S. adhere to policy and practice that is contrary to its international obligations, but further, it will not abide by a decision of illegality rendered by a body to whose jurisdiction it had previously subjected itself. Although this tension is readily apparent as a practical matter within the context of the WTO, the inevitability of future tension in an FTAA has raised significant questions that must be answered if a free trade area spanning the Americas is to be achieved. The purpose of this section is to elucidate U.S. law, policy, and jurisprudence on the subject of dumping determinations. Part A will present the statutory and policy aspects of how a dumping determination can be made, while Part B will examine certain decisions of the U.S. Court of International Trade and the U.S. Court of Appeals for the Federal Circuit dealing with the Department of Commerce’s policy of “zeroing.” A. Statutory Law and Policy on Dumping Dumping refers to “the import of goods at a price below the home- market or a third-country price of below the cost of production,”3 while the term “anti-dumping” refers to the regime of trade laws aimed at eliminating any unfair trade advantages or practices related to dumping.4 The United States Code and Code of Federal Regulations provide for complicated and comprehensive procedures to determine when a

3 Berta Gomez, “Commerce Dept. Rule Unfair Subsidies on Canada Softwood Lumber” (22 March 2002), online: The Embassy of the United States of America, Ottawa <http://canada.usembassy.gov/content/textonly.asp?section=can_usa&subsection1=softwoodlumber&document=softwood_lumber_032202>. 4 See e.g. Eugenia S. Pintos & Patricia Murphy, “Congress Dumps the International Antidumping Code” (1968) 18 Cath. U.L. Rev. 180 at 180.

U

50 ASPER REVIEW [Vol. VII dumping investigation can be initiated, how that investigation should proceed, what margin should be levied against the offender, and when the anti-dumping duty should be lifted, including provisions for periodic and sunset reviews of the anti-dumping order. Although there are many contentious aspects of this mechanism, including the proper standard of review to be employed during the periodic and sunset reviews, within the scope of this paper, only two code provisions are implicated. The main problem with these provisions is their ambiguity, which, when coupled with the traditional heightened deference U.S. courts grant agency interpretations of statutes, has given rise to the policy of zeroing and acquiescence to this policy by the Federal courts. The first statutory provision provides that: “The term ‘dumping margin’ means the amount by which the normal value exceeds the export price or constructed export price of the subject merchandise.”5 The second provision provides that: “The term ‘weighted average dumping margin’ is the percentage determined by dividing the aggregate dumping margin determined for a specific exporter or producer by the aggregate export prices and constructed export prices of such exporter or producer.”6 Taken together, these two provisions set out, in a very general way, the procedure the Department of Commerce should use in arriving at a determination of dumping. The problem has its roots in what will be explored below in the examination of the jurisprudence on point: judicial deference to agency interpretations.

The Department of Commerce, because of the ambiguity of this language, has employed a policy of “zeroing” when determining the weighted average dumping margin. “‘Zeroing’ is the practice of assigning a zero value to ‘sales of merchandise that were sold at non-dumped prices when determining the aggregate dumping margin.’”7 This is a two-step process. “First, the Department of Commerce averages all sales of a single product to determine whether that specific product is dumped.”8 After this, the Department “segregates the ‘good’ (fairly traded) products from the ‘bad’ (dumped) products and calculates the remedial measures by averaging the dumped products.”9 One of the main reasons this policy was employed in the first place and was consistently upheld as a permissible interpretation of the statute by the courts, is its underlying logic: that if non-dumped sales are taken into account, it allows exporters to “water-down” violations of the law with legal sales. This 5 Tariff Act of 1930, 19 U.S.C.A. §1677(35)(A) (1996). 6 Ibid., §1677(35)(B). 7 J. Steven Jarreau, “Department: Recent Development: International Law” (April/May 2005) 52 L.A. Bar Jnl. 473 at 474. 8 Deborah Long, Press Release, “U.S. Antidumping Calculations Are Logical and Legal” (15 December 2004), online: Southern Shrimp Alliance <www.shrimpalliance.com/Press%20Releases/12-15-04%20Zeroing.pdf>. 9 Ibid.

2007] U.S. Anti-Dumping Policy 51 rationale is based on a recognition that the Department should concentrate only on violations of the law rather than on instances where the exporter has complied with the law. A hypothetical dumping determination will highlight the distortionary effect this policy has on foreign exporters.10 Imagine that a foreign corporation exports five kinds of widgets to the U.S. made of rubber, plastic, metal, brick, and stone. All are sold in the U.S. at the price for which they are sold in the home market, except for the rubber and stone widgets. The rubber widget is sold at $.50 less in the home market than in the U.S., while the stone widget is sold at $.50 less in the U.S. than it is in the home market. The stone widget thus has a positive (dumped) margin while the rubber widget has a negative (i.e. fairly traded) margin. The table below graphically represents the results of a Department of Commerce investigation of these facts. Product Code

Net U.S. Price

Net H.M. Price

Unit Margin

U.S. Quantity

Total Margin

Total PUDD

Total Value

Rubber $1.00 $0.50 -$0.50 100 -$50 $0 $100 Plastic $1.00 $1.00 $0.00 100 $0 $0 $100 Metal $1.00 $1.00 $0.00 100 $0 $0 $100 Brick $1.00 $1.00 $0.00 100 $0 $0 $100 Stone $1.00 $1.50 $0.50 100 $50 $50 $100 The total margin in this case turns out to be $0.00 because of the three sales at identical prices in both markets and the counterbalancing of the positive and negative margins. Because of the zeroing of the negative margin on the rubber widgets, however, the total PUDD (potentially uncollected dumping duties) is $50. The total value of the products exported is $500, and thus under § 771(35)(B) of the Tariff Act of 1930,11 the Department of Commerce would divide this number by the $50 PUDD, arriving at an aggregate weighted dumping margin of 10.00%. Under the zeroing methodology, the total margin of “0” is disregarded, the negative margin is zeroed, and a dumping margin arises even though the foreign exporter has received no real benefit from his actions. In nearly every case brought before the U.S. Court of International Trade challenging a Department of Commerce dumping

10 The following example is provided by Daniel Ikenson, Abuse of Discretion: Time to Fix the Administration of the U.S. Antidumping Law (Working Paper No. 31, CATO Institute, 6 October 2005) at 10, online: CATO’s Center for Trade Policy Studies <http://www.freetrade.org/pubs/pas/tpa-031.pdf> (cited with author’s permission). 11 19 U.S.C.A. §1677(35)(B).

52 ASPER REVIEW [Vol. VII determination, the petitioners have challenged this policy. These challenges have been categorically unsuccessful, and a brief examination of the latest case on point will demonstrate why. B. “Zeroing” Jurisprudence The Court of International Trade and the Court of Appeals for the Federal Circuit have consistently upheld Department of Commerce determinations based on the zeroing methodology.12 An analysis of the most recent case will demonstrate that this is a function of two U.S. legal principles: the Chevron doctrine and the Charming Betsy doctrine. First, as a matter of administrative law, the Federal Courts have granted Commerce determinations a substantial degree of deference under the second prong of the test set out in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (“Chevron”). The Chevron test is derived from a United States Supreme Court decision mandating deference to agency interpretations of ambiguous statutory provisions. The two-prong test is meant to determine whether a reviewing court should grant deference to an agency interpretation:

First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines that Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction of the statute, as would be necessary in the absence of administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency’s answer is based on a permissible construction of the statute.13

12 See generally NSK Ltd. v. United States, 358 F. Supp. 2d 1276 (Ct. Int’l Trade 2005); SNR Roulements v. United States, 341 F. Supp. 2d 1334 (Ct. Int’l Trade 2004); Corus Eng’g Steels Ltd. v. United States, 2003 Ct. Int’l Trade LEXIS 110 (Ct. Int’l Trade 2003); PAM S.p.A. v. United States Department of Commerce, 265 F. Supp. 2d 1362 (Ct. Int’l Trade 2003); Slater Steels Corp. v. United States, 297 F. Supp. 2d 1351 (Ct. Int’l Trade 2003). 13 Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 at 842-43 (1984).

2007] U.S. Anti-Dumping Policy 53

Secondly, in relation to the Charming Betsy14 doctrine, the Courts have decided to avoid entanglement with foreign affairs and policy questions unless and until the political branches of the Federal government have seen fit to change U.S. law on the relevant point. As such, the Courts have refused to grant deference to WTO decisions or the language and provisions of the WTO agreements that are inconsistent with existing U.S. law. Both of these facts can be seen through an examination of Corus Staal BV v. Department of Commerce (“Corus”),15 a 2005 Federal Circuit case. Corus dealt with a Department of Commerce determination of dumping made in the course of an administrative investigation. The Department had calculated a preliminary weighted average dumping margin of 2.44% for Corus on the import of hot-rolled carbon steel flat products during the period of 1 October 1999 through 30 September 2000. Corus appealed this determination to the United States Court of International Trade, which held that: 1) 19 U.S.C. §1677(35)(A) & (B) neither required nor prohibited the Department of Commerce from considering non-dumped sales, and 2) zeroing was a reasonable interpretation of the statute.16 Corus then appealed to the United States Court of Appeals for the Federal Circuit, arguing that zeroing was inconsistent with the unambiguous statutory scheme for administrative investigations, thus making that practice both unlawful and unreasonable. Corus further argued that Commerce’s zeroing methodology violated the U.S.’s obligations to interpret §1677(35) in conformity with WTO decisions prohibiting zeroing.17 Corus’ first argument implicates the second prong of the Chevron test, while its second argument deals with the Charming Betsy doctrine.

Prong two of the Chevron test becomes important in understanding the inertia surrounding zeroing methodology, as the statutory provision at issue does not explicitly require the Department of Commerce to ignore or take into account sales at non-dumped prices. Thus, as long as the methodology can be seen as a permissible interpretation of the statute, the decision of the agency will be upheld against challenge. The Court in Corus could find no compelling reason to find the practice an unreasonable interpretation of the statute, and thus extended the logic of their previous decision in Timken18 to administrative reviews by Commerce. 14 Murray v. The Schooner Charming Betsy, 6 U.S. (2 Cranch) 64; 2 L.Ed. 208 (1804). 15 Corus Staal BV v. Department of Commerce, 395 F.3d 1343 (Fed. Cir. 2005). 16 Corus Staal BV v. United States Department of Commerce, 259 F. Supp.2d 1253 at 1261-63 (Ct. Int’l Trade 2003). 17 Corus Staal BV v. Department of Commerce, supra note 15 at 1346. 18 Timken Co. v. United States, 354 F. 3d 1334 (Fed. Cir. 2004). In Timken, the Federal Circuit had upheld the zeroing methodology against a similar challenge


The existence of Chevron deference in this context makes it a virtual certainty that a foreign importer contesting the imposition of anti-dumping duties will not prevail in the federal judiciary. Compounding the presence of Chevron deference in this context is the court’s refusal to give deference to international decisions on U.S. policy. Although those decisions will be dealt with in the subsequent section, the logic of the U.S. court’s refusal to adhere to these decisions is important within the context of domestic jurisprudence. Going hand-in-hand with the second prong of the Chevron test is the general principle that “[w]here the intent of Congress is not clear, the reviewing court, as an aid to assessing the reasonableness of the agency’s interpretation, may turn to a pertinent international obligation of the United States, and construe the statute in harmony with it, if possible.”19 The genesis of this doctrine lay with an early United States Supreme Court decision where Chief Justice John Marshall stated “[…] an act of Congress ought never to be construed to violate the law of nations if any other possible construction remains […].”20 This canon of statutory interpretation has since been included in the Restatement (Third) of the Foreign Relations Law of the United States.21 The import of this rule to anti-dumping determinations by Commerce would seem to be that the federal courts should consider an interpretation of the statute permissible only if it does not conflict with international law or international agreements of the U.S. Corus argued this, noting the language of the WTO Anti-Dumping Agreement, as well as the rulings of the Appellate Body that found zeroing to be contrary to the U.S.’s obligations under that agreement, but the Court was not persuaded by this logic. The reasoning of the Court on this point is linked with basic separation of powers issues and the limits of the judiciary in areas that implicate foreign policy. As the Court notes, “[...] the conduct of foreign relations is committed by the Constitution to the political departments of

in the context of an administrative review. Corus argued that the distinction between an investigation and review meant that the Timken rationale was not controlling, but the Court was not persuaded by this argument. Thus, the Timken rationale does control, and absent any other evidence of unreasonableness, Commerce’s methodology is a reasonable interpretation of the statute. 19 Elizabeth C. Seastrum, “Chevron Deference and The Charming Betsy: Is There a Place for the Schooner in the Standard of Review of Commerce Antidumping and Countervailing Duty Determinations?” (2003/2004) 13 Fed. Cir. B.J. 229 at 232. 20 Murray v. The Schooner Charming Betsy, supra note 14 at 118. 21 Restatement (Third) of the Foreign Relations Law of the United States §114 (1987). (“Where fairly possible, a United States statute is to be construed so as not to conflict with international law or with an international agreement of the United States.”)

2007] U.S. Anti-Dumping Policy 55 the Federal Government […].”22 Turning to the stated policy of the political branches, it is clear that international law that is contrary to U.S. law should not be granted deference. The power granted to the United States Trade Representative,23 as well as the statute implementing U.S. obligations after the Uruguay Round of the WTO, are unambiguous on this point.24 The Court then concludes by noting that substantial deference is due the Commerce Department’s determination, notwithstanding contrary international law, and that the federal judiciary

will not attempt to perform duties that fall within the exclusive province of the political branches, and we therefore refuse to overturn Commerce’s zeroing practice based on any ruling by the WTO or other international body unless and until such ruling has been adopted pursuant to the specified statutory scheme.25

The coupling of ambiguous statutory provisions and judicial deference to agency determinations means that policy will change only if the political branches of the government can be persuaded. Considering the sustained existence of the Byrd Amendment26 and previous practice 22 United States v. Pink, 315 U.S. 203 at 222-23; 86 L.Ed. 796; 62 S. Ct. 552 (1942). 23 Corus Staal BV v. Department of Commerce, supra note 15 at 1349. “Congress has enacted legislation to deal with the conflict presented here. It has authorized the United States Trade Representative, an arm of the Executive branch, in consultation with various congressional and executive bodies and agencies, to determine whether or not to implement WTO reports and determinations and, if so implemented, the extent of implementation.” 24 19 U.S.C.A. §3512(a)(1) (2000). (“No provision of any of the Uruguay Round Agreements [e.g., the ADA], nor the application of any such provision to any person or circumstance, that is inconsistent with any law of the United States shall have effect.”) See also 19 U.S.C.A. §2504(a) (2000). (“No provision of any trade agreement […] nor the application of any such provision to any person or circumstance, which is in conflict with any statute of the United States shall be given effect under the law of the United States.”) 25 Corus Staal BV v. Department of Commerce, supra note 15 at 1349. 26 See WTO, United States—Continued Dumping and Subsidy Offset Act of 2000, WTO Doc. WT/DS217/AB/R, WT/DS234/AB/R (2003), online: WTO <http://docsonline.wto.org>. This Act (known as the “Byrd Amendment” because of its sponsor, Senator Robert Byrd of West Virginia) imposed anti-dumping and countervailing duties on a class of imports that threatened U.S. producers, mostly in the steel industry. Not only were heightened duties imposed, but the duties actually collected were paid to the original U.S. complainants resulting in an effective double penalty on foreign importers. The Appellate Body of the WTO condemned the practice, and after the U.S. refused to comply with the decision, permission was given for the imposition of punitive trade measures by those countries affected by the Amendment (joint complaint by Australia, Brazil, Chile,

56 ASPER REVIEW [Vol. VII on the issue of dumping, it is unclear when, or even if, this change will come about.

The next two sections explain why U.S. policy is contrary to international law and what must be done to reduce the friction caused by the continued use of zeroing methodology so as to allow for the creation of an FTAA.

III. THE AGREEMENTS AND DECISIONAL LAW OF THE WTO

HE FOCUS OF THIS SECTION turns from the domestic law of the U.S. to international trade law and jurisprudence under the auspices of the WTO. Implicated specifically is the Agreement on

Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-dumping Agreement” or the “ADA”),27 which deals with the availability and mechanics of anti-dumping determinations within the context of the WTO, and the decisional jurisprudence of the WTO’s Dispute Settlement Body (“DSB”) on the practice of zeroing. Although the agreement mentioned is arguably as ambiguous in its substantive provisions as U.S. trade law, it is clear that the WTO Dispute Settlement Body has reached dramatically different conclusions as to the permissibility of zeroing. Part A of this section will review the main substantive article of the ADA on point, while Part B will analyze the reports made on the policy of zeroing by the WTO dispute settlement body. A. The WTO’s Anti-dumping Agreement Similar to U.S. laws on dumping, the WTO’s ADA establishes a comprehensive and exclusive framework by which members of the WTO may impose anti-dumping duties. Despite U.S. disagreement on this point, the exclusivity of the Agreement is clear from a simple reading of Article 1: “An anti-dumping measure shall be applied only under the circumstances provided for in Article VI of GATT 1994 and pursuant to investigations initiated and conducted in accordance with the provisions of

European Communities, India, Indonesia, Japan, Korea, and Thailand, and joint complaint by Canada and Mexico). Despite the continued existence of these counteracting measures, the U.S. has not changed course, an action that might represent a foreboding of the U.S. response to criticism of its zeroing methodology during potential FTAA negotiations. 27 WTO, Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (Anti-dumping Agreement), 14 April 1994, online: World Trade Organization <http://www.wto.org/english/docs_e/legal_e/19-adp.pdf>.

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2007] U.S. Anti-Dumping Policy 57 this Agreement.” (italics added) Subsequent articles deal with making a determination of dumping,28 determining injury and causation,29 the proper way in which to define the domestic industry,30 the initiation of investigations,31 propriety of subsequent investigations,32 the proper evidence admissible during the course of these investigations,33 the availability of provisional measures,34 the imposition and collection of anti-dumping duties,35 and the cognizance of panels to hear complaints arising under the Agreement.36 Arguments against the zeroing methodology have centered on Article 2:4:2 of the ADA. That Article reads as follows:

Subject to the provisions governing fair comparison in paragraph 4, the existence of margins of dumping during the investigation phase shall normally be established on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions or by a comparison of normal value and export prices on a transaction-to-transaction basis. A normal value established on a weighted average basis may be compared to prices of individual export transactions if the authorities find a pattern of export prices which differ significantly among different purchasers, regions or time periods, and if an explanation is provided as to why such differences cannot be taken into account appropriately by the use of a weighted average-to-weighted average or transaction-to-transaction comparison.

The language concerning the determination of margins requiring that “all comparable export transactions” should be used seems clear enough. To 28 Ibid., art. 2. 29 Ibid., art. 3. Article 3 of the ADA requires that, notwithstanding the existence of dumping as technically defined, to institute an anti-dumping action, dumping must cause or threaten to cause “material” injury to a domestic industry or market. See also J.-G. Castel & C.M. Gastle, “Deep Economic Integration Between Canada and the United States, the Emergence of Strategic Innovation Policy and the Need for Trade Law Reform” (1998) 7 Minn. J. Global Trade 1 at 2; Presentations at the Fourth Annual Conference of the United States-Mexico Law Institute, “Comments on the Tension Between Trade and Antitrust Laws” (1996) 4 U.S.-Mex. L.J. 61 at 62. 30 Ibid., art. 4. 31 Ibid., art. 5. 32 Ibid. 33 Ibid., art. 6. 34 Ibid., art. 7. 35 Ibid., art. 9. 36 Ibid., art. 17.

58 ASPER REVIEW [Vol. VII return to the hypothetical determination made in Part II.A, this means that the total margin and PUDD should be equal to each other. Zeroing is what causes the discrepancy, and, ultimately, this is due to the fact that not all transactions were taken into account.

There is an exception to the “all” language of Article 2:4:2, but it is only available upon a valid explanation of why every transaction should not be used and if there has been a pattern of differences in the export prices of a particular foreign exporter. In the cases that follow below, this exception is clearly not applicable. This begs the question, why does the U.S. maintain its policy in the face of such unequivocal language? Despite the seeming clarity of the term “all,” the U.S. has consistently argued before the WTO that the term is relative rather than absolute, thus leaving room for the permissibility of the zeroing methodology. What follows is an examination of the relevant decisions of WTO panels and the Appellate Body. B. Decisions Under the WTO Dispute Settlement Mechanism Disputes alleging that the U.S. methodology of zeroing was contrary to its obligations under the Anti-dumping Agreement ballooned following the WTO’s Appellate Body decision in EC-Bed Linen, decided in March 2001.37 That case was the first opportunity that the Appellate Body had to rule on the legality of zeroing under the Anti-dumping Agreement and they minced few words in their decision. The practice of zeroing clearly violated Article 2:4:2 of the Agreement because it inherently did not take into account “all transactions.” The EC readily complied with the decision and discontinued use of the methodology. Despite this definitive ruling, the U.S. did not change its own policy, and from a jurisprudential view, argued that the reasoning of the Appellate Body was not binding on it, as the U.S. had not been party to the case. In the wake of this political entrenchment, a rash of cases was brought under the Dispute Settlement Understanding and the Anti-dumping Agreement, with plaintiffs seeking a ruling regarding U.S. policy similar to the ruling made in relation to EC policy.38 This paper focuses on two

37 WTO, Report of the Appellate Body on European Communities—Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India, WTO Doc. WT/DS141/AB/R (2001), online: WTO <http://docsonline.wto.org>. 38 See WTO, Report of the Appellate Body on United States—Anti-Dumping Measures on Oil Country Tubular Goods (OCTG) from Mexico, WTO Doc. WT/DS282/AB/R (2005); WTO, United States—Anti-Dumping Determinations Regarding Stainless Steel from Mexico, WTO Doc. DS325 (2005); WTO, United States—Measures Relating to Zeroing and Sunset Reviews, WTO Doc. DS322 (2004); WTO, United States—Anti-Dumping Measures on Cement from Mexico,

2007] U.S. Anti-Dumping Policy 59 specific decisions: Final Dumping Determination on Softwood Lumber from Canada39 and Laws, Regulations and Methodology for Calculating Dumping Margins (Zeroing) (“Zeroing Case”).40 The Softwood Lumber case arose from a Department of Commerce (“DOC”) dumping determination made on 2 April 2002 that established dumping margins ranging from 2.18% to 12.44% for the six largest exporters of softwood lumber from Canada.41 The initial Panel decision found that the U.S. had acted consistently with its obligations under the Anti-dumping Agreement, except for its use of the zeroing methodology which violated Article 2:4:2.42 Canada appealed the determination that the U.S. had acted consistently on the issues other than zeroing, while the U.S. appealed the decision that the zeroing methodology violated the Anti-dumping Agreement.

In making its appeal, the U.S. made five main arguments. First, they argued that the phrase “margins of dumping” by definition applies only to dumped sales and not non-dumped sales, and thus even if aggregation is required, it only applies to the aggregation of dumped sales.43 The second argument was that non-dumped sales are not comparable dumped sales, as set out within the language of Article 2:4:2.44 Thirdly, it was argued that the language “all comparable sales” is applicable only to the average-to-average methodology and not to the other two methodologies provided for by the ADA.45 Fourthly, they argued that the negotiating history of the ADA demonstrates that zeroing had been permissible prior to the Agreement, and nothing in the Agreement itself explicitly changed this.46 Finally, it was suggested that the EC-Bed Linen case was not applicable to the case at hand because the U.S. was not a party in EC-Bed Linen, its practice of zeroing was not at issue in

WTO Doc. DS281 (2003); WTO, United States—Sunset Reviews of Anti-Dumping and Countervailing Duties on Certain Steel Products from France and Germany, WTO Doc. DS262 (2002); WTO, United States—Anti-Dumping Duties on Silicon Metal from Brazil, WTO Doc. DS239 (2001), online: WTO <http://docsonline.wto.org>. 39 WTO, Report of the Appellate Body on United States—Final Dumping Determination on Softwood Lumber from Canada (Softwood Lumber), WTO Doc. WT/DS264/AB/R (2004), online: WTO <http://docsonline.wto.org>. 40 WTO, Report of the Panel on United States—Laws, Regulations and Methodology for Calculating Dumping Margins (“Zeroing”), WTO Doc. WT/DS294/R (2005), online: WTO <http://docsonline.wto.org>. 41 Softwood Lumber, supra note 39 at para. 2. 42 Ibid. at paras. 4-5. 43 Ibid. at para. 12. 44 Ibid. at para. 14. 45 Ibid. at para. 15. 46 Ibid. at para. 16.

60 ASPER REVIEW [Vol. VII that case, and the arguments presented by the U.S. and the EC in the two cases were different.47 Thus the issue before the Appellate Body was:

whether the Panel erred in finding […] that the United States acted inconsistently with Article 2:4:2 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (the “Anti-Dumping Agreement”) in determining the existence of margins of dumping on the basis of a methodology incorporating the practice of ‘zeroing.’48

The Appellate Body begins its decision by defining the exact scope

of its ruling, namely the methodology of zeroing in this case alone, rather than the permissibility of the practice generally.49 It then goes on to note the three types of methodologies that are permissible under Article 2:4:2: 1) comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions, 2) comparison of normal value and export prices on a transaction by transaction basis, and 3) comparison of weighted average normal value with prices of individual export transactions.50 This case dealt only with the DOC’s use of the first methodology.51 The U.S. argued that “Article 2:4:2 deals only with multiple comparisons at sub-group levels, and does not address the issue of how the results of such comparisons are to be aggregated in order to calculate an overall margin of dumping for the product as a whole.”52 In effect, then, the U.S. methodology is permissible because the Agreement is silent as to its validity. Both the Appellate Body and Canada agreed that multiple averaging, as was done in this case, is permissible under the agreement.53 The disagreement was centered on different interpretations of the phrases “all comparable transactions”54 and “margins of dumping.”55 In one sense, the language of the ADA is unequivocal: a state may only compare comparable transactions and they must compare all such comparable transactions.56 The DOC complied with this dictate at the subgroup level, but the discrepancy arises from the aggregation of the

47 Ibid. at para. 17. 48 Ibid. at para. 62(a). 49 Ibid. at para. 63. 50 Ibid. at para. 76. 51 Ibid. at para. 77. 52 Ibid. at para. 79. 53 Ibid. at para. 81. 54 Ibid. at paras. 82-83. 55 Ibid. at para. 84. 56 Ibid. at para. 86.

2007] U.S. Anti-Dumping Policy 61 initial multiple comparisons.57 At the final aggregation stage, the U.S. zeroed out the negative margins so as, under their argument, to avoid watering down violations with legal sales.58 Although the ultimate dispute is focused on the phrase “all comparable sales,” the root of the interpretative problem lies with the meaning given “dumping” and “margin of dumping” within the ADA.59 As noted earlier, the U.S. has consistently interpreted these terms to encompass only positive margins. Under this view, a negative margin would mean that the product wasn’t dumped and thus shouldn’t be taken into account for purposes of determining the margin of dumping. Yet this interpretation is clearly at odds with the language of the ADA. The phrase “dumping,” from a textual standpoint, clearly relates to an investigation and calculation of the subject product as a whole.60 Since this is the case, the phrase “margin of dumping” similarly must take into account sales of the product on the whole and not just the aggregation of positive dumping margins.61 Zeroing is explicitly in contravention of this principle. Dumping relates to all transactions, and thus every transaction of a specific product must be taken into account in determining the margin of dumping. Ignoring negative margins will thus be a violation of the language of Article 2:4:2 and the broader logic of the ADA.62 The Appellate Body made short shrift of a U.S. argument based on the negotiating history of the ADA agreement. While no evidence suggested that the ADA was meant to allow or prohibit zeroing, a plain reading of the text of Article 2:4:2 leads to the conclusion that zeroing is inconsistent with the proper way to calculate the margin of dumping.63 The Appellate Body then reached its final conclusion after determining the inapplicability of several other U.S. arguments extraneous to the scope of this paper: “In light of the foregoing, we uphold the Panel’s findings that the U.S. acted inconsistently with Article 2:4:2 of the Anti-Dumping Agreement in determining the existence of margins of dumping on the basis of a methodology incorporating the practice of ‘zeroing.’”64

Yet the U.S. was not quick to comply, either with the specific directive in this case or with the broader finding that the zeroing methodology violated the ADA. This, in part, could be seen as a natural result of the Appellate Body’s own stated limited scope of decision—its statement that zeroing was only being implicated in this case and not as

57 Ibid. at paras. 87-88. 58 Ibid. at para. 88. 59 Ibid. at para. 90. 60 Ibid. at paras. 93-94 (citing arts. 2, 9.2, & 6.10 of the ADA for further support). 61 Ibid. at paras. 96-98. 62 Ibid. at paras. 101-103. 63 Ibid. at para. 108. 64 Ibid. at para. 117.

62 ASPER REVIEW [Vol. VII a general proposition. A Panel was able to revisit the issue just over a year later, in October 2005. A Panel issued its report in United States—Laws, Regulations and Methodology for Calculating Dumping Margins (Zeroing) on 31 October 2005. The case was initially brought by the European Community, and on 5 February 2004, after consultations with the U.S. had failed, they requested the establishment of a Panel. The case itself concerned the imposition of anti-dumping duties in several cases implicating exporters in almost all of the EC. The main point of importance in the case was that the challenge was not to zeroing “as applied” (i.e. in a specific case) but rather to zeroing “as such”:

The European Communities requests the Panel to find that: […] The ‘Standard Zeroing Procedures’ used by the United States in original investigations (or the U.S. practice or methodology of zeroing) […] are as such inconsistent with […] Article 2:4:2[.]65

Before making this determination, however, the Panel did have to determine whether, in this case, the use of the zeroing methodology was inconsistent with the ADA. The U.S. made the same arguments it had previously made in the Softwood Lumber case, basically concerning the proper definition of “all comparable transactions” and “margin of dumping,” while additionally arguing, to escape the logic of that case, that the Appellate Body had erred in its decision. The arguments of the EC mirrored those of Canada in the Softwood Lumber case, and thus the Panel was confronted with an issue that had been definitively decided already by the Appellate Body. Taking note of both the Softwood Lumber and EC-Bed Linen cases, and the general deference that a Panel should grant to a previous decision of the Appellate Body, the Panel saw no reason to depart from these prior decisions and accordingly, found that the U.S. methodology of zeroing was inconsistent with its obligations under the ADA.66 The Panel then turned its attention to the EC’s “as such” claim against zeroing. An “as such” claim implicates the actual policy or methodology at issue rather than only the application of a certain methodology in a specific case. For a claim to be allowed, there must be a clear methodology at issue rather than a mere discretionary practice or temporary policy. The Appellate Body has laid down the general reasoning that should govern the allowance of an “as such” claim:

65 Report of the Panel on United States—Laws, Regulations and Methodology for Calculating Dumping Margins (“Zeroing”), supra note 40 at para. 7.1(b) (bold in original). 66 See ibid. at paras. 7.24-7.32.


[…] the disciplines of the GATT and the WTO, as well as the dispute settlement system, are intended to protect not only existing trade but also the security and predictability needed to conduct future trade. This objective would be frustrated if instruments setting out rules or norms inconsistent with a Member’s obligations could not be brought before a panel once they have been adopted and irrespective of any particular instance of application of such rules or norms. It would also lead to a multiplicity of litigation if instruments embodying rules or norms could not be challenged as such, but only in the instances of their application. Thus, allowing claims against measures, as such, serves the purpose of preventing future disputes by allowing the root of WTO-inconsistent behaviour to be eliminated.67

Thus a well-established norm or methodology that consistently

and predictably leads to WTO-inconsistent action can be challenged and struck “as such” instead of waiting for a judgment in each and every case where the policy or methodology is employed. In relation to the methodology of zeroing utilized by the U.S.:

The evidence before the Panel […] indicates that this exclusion of comparison results with negative margins has been invariably performed by the USDOC for an extended period of time. In response to a panel question whether there have been cases in which the Anti-Dumping Margin Program has been applied without zeroing, the United States states that, whether calculations have been done by hand or by computer, it is unable to identify any instance where USDOC had given a credit for non-dumped sales. The United States has not contested in this proceeding that USDOC’s zeroing methodology reflects a deliberate policy.68

The evidence available to the Panel indicates:

67 WTO, Report of the Appellate Body on US—Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan, WTO Doc. WT/DS244/AB/R (2002) at para. 82, online: WTO <http://docsonline.wto.org>. 68 Report of the Panel on United States—Laws, Regulations and Methodology for Calculating Dumping Margins (“Zeroing”), supra note 40 at para. 7.103.


that the zeroing methodology manifested in the ‘Standard Zeroing Procedures’ represents a well-established and well-defined norm followed by the United States DOC and that it is possible based on this evidence to identify with precision the specific content of that norm and the future conduct that it will entail.69

As the methodology had been found inconsistent with the ADA “as applied” in the specific instances that were the subject of this case, as well as previous cases such as Softwood Lumber, the Panel thought it clear that the “USDOC maintains a norm that will necessarily produce WTO-inconsistent actions.”70 This being the case, and “in light of all the foregoing considerations, the Panel finds that the United States’ zeroing methodology, as it relates to original investigations, is a norm which, as such, is inconsistent with Article 2:4:2 of the AD Agreement.”71 Moving a step beyond the previous Appellate Body rulings on zeroing, this case is extremely important for its “as such” ruling. Whereas the previous cases had provided no incentive for the U.S. to change its policy because of the narrowness of review, it is clear that to become WTO-consistent, the U.S. must cease applying its zeroing methodology. Although the case has been appealed, there is little reason to believe that, confronted with the identical issue, the Appellate Body will waver from the reasoning of the Panel.72 Of course, the larger question is whether the U.S. will eventually comply. The answer to that question, which is unfortunately a probable “no,” is the subject of the remainder of this paper: Will the U.S. change course and reduce the friction its policies have created in the sphere of international trade, and, if so, how can this be done?

69 Ibid. at para. 7.104. 70 Ibid. at para. 7.105. 71 Ibid. at para. 7.106 (bold in original). 72 The Appellate Body has since upheld the decision of the panel, on slightly different grounds, and that decision has been adopted by the Dispute Settlement Body. See WTO, Report of the Appellate Body on United States—Laws, Regulations and Methodology for Calculating Dumping Margins (“Zeroing”), WTO Doc. WT/DS294/AB/R (2006), online: WTO <http://docsonline.wto.org>. The United States has objected to virtually all points of the Appellate Body’s decision in a communication circulated to the DSB members. See WTO, United States—Laws, Regulations and Methodology for Calculating Dumping Margins (zeroing), Communication from the United States, WTO Doc. WT/DS294/16 (2006), online: WTO <http://docsonline.wto.org>.

2007] U.S. Anti-Dumping Policy 65 IV. THE FRICTION OF “ZEROING” AND WAYS TO EASE THE TENSION

HE OPINION OF THE WORLD in regard to the U.S.’s continued refusal to abandon the methodology of zeroing is succinctly summed up by Robin Lanier in a letter written to Commerce

Secretary Donald Evans following the WTO decision in the Softwood Lumber case:

Refusal to abandon zeroing in the face of decisive WTO rulings that the practice itself, regardless of the commodity to which it is applied, violates WTO rules, demeans both the United States as a world trade leader and the WTO as a credible dispute-settlement body. As you know, the WTO first determined that zeroing was inconsistent with world trade rules in a case brought against the European Union regarding bed linens. While the EU might have taken the position that the ruling was applicable only to the facts of the specific case involved, it chose to discontinue zeroing across the board. Your letter indicates that the United States, while tacitly admitting this policy cannot stand international scrutiny, will resort to technical legalisms and procedural delaying tactics to avoid doing the right thing in this situation. The obvious question this attitude raises is how the United States can expect other nations to respect and comply with WTO rulings, and to engage in the “competitive liberalization” that the Administration seeks, when we refuse to do the same?73

In effect, Lanier posed the following question:

In an international arena in which America’s commitment to the international rule of law is questioned by some of her closest allies, are these fights politically prudent, even if some of them may make sense from a technical, legal perspective?74

These questions refer to the fact that, despite intense criticism from the international community, the U.S. did have glimmers of “daylight” in

73 Letter from Robin Lanier, Executive Director, Consumers for World Trade, to Commerce Secretary Donald Evans (5 January 2005) on file with author. 74 Raj Bhala & David A. Gantz, “WTO Case Review 2004” (2005) 22 Ariz. J. Int’l & Comp. Law 99 at 121.

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66 ASPER REVIEW [Vol. VII relation to retaining the policy of zeroing, most notably the Appellate Body’s stated jurisprudential limitation of ruling zeroing inconsistent only on the particular facts presented. This situation has changed since these statements were made, as a Panel has ruled zeroing “as such” inconsistent with the ADA, and the Appellate Body has concurred in this finding. The result is that the potential for the U.S. to use technical arguments to uphold its zeroing practice has been greatly diminished, if not eliminated entirely. Thus, it has become a political question that must be addressed if the U.S. is to avoid becoming an international trade pariah.

This section will proceed in Part A by taking note of the status of “zeroing” within the FTAA negotiations; Part B will examine the specific importance of abandoning the protectionist policy of zeroing within the context of an FTAA; and finally, Part C will explain the mechanics of how this can in fact be accomplished.

A. Zeroing Within the FTAA: A Toothless Text The FTAA negotiations have been criticized for involving substantial debate while producing little substantive result. The texts that have been produced are heavily bracketed, reflecting a lack of consensus on the key issues that could give rise to an FTAA. This is especially true in relation to the Chapters on Subsidies, Antidumping and Countervailing Duties that have been drafted thus far. Although these draft agreements represent a desire to move away from protectionist trade remedy laws, that desire has yet to become a reality. When the Negotiating Group on Subsidies, Antidumping and Countervailing Measures began debate within their mandate, they were directed “[t]o achieve a common understanding with a view to improving, where possible, the rules and procedures regarding the operation and application of trade remedy laws in order to not create unjustified barriers to trade in the Hemisphere.”75 A heightened level of importance was seemingly added to the work of the Negotiating Group at the Sixth Meeting of Ministers of Trade:

We instruct the Negotiating Group on Subsidies, Antidumping and Countervailing Duties to intensify its efforts to reach a common understanding with a view to improving, where possible, the rules and procedures for the operation and enforcement of trade remedy laws, so as

75 Free Trade Area of the Americas, Summit of the Americas Fourth Trade Ministerial Joint Declaration San Jose, Costa Rica, (1998) “Annex II: Objectives by Issue Area”, online: Free Trade Area of the Americas <http://www.ftaa-alca.org/Ministerials/SanJose/SanJose_e.asp>.


not to create unjustified obstacles to free trade within the Hemisphere [...].76

It is clear that the Ministers of Trade view trade remedies law as an important aspect of the FTAA negotiation process, but have their desires been heeded by the participants? Yes and no. In the first draft of the Article dealing with making a determination of dumping, the Negotiating Group came up with the following text:

[2.4.2 Subject to the provisions governing fair comparison in paragraph 4, the existence of margins of dumping during the investigation phase shall [only] be established on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions or by a comparison of normal value and export prices on a transaction-to-transaction basis. [In the calculation of the margin of dumping “zeroing” will not be used.]]77

The bracketed and italicized text represents language that has not been agreed upon. It has obviously been supported by certain states, hence its inclusion, but interests are not such that consensus could be reached. This lack of agreement is most likely due to strong U.S. opposition to dealing with trade remedy law in the regional context, an issue that will be dealt with in greater detail in the next section.

In the second draft, concerning dumping determinations, zeroing is still mentioned in all three proposed texts, but it remains bracketed. More importantly, the language itself is a step back from the blanket prohibition on zeroing contained in proposed Article 2.4.2 of the first draft; all three proposed articles use the phrase “[i]n the case where there are different types of products, ‘zeroing’ will not be allowed.”78 This is a

76 Free Trade Area of the Americas, Sixth Meeting of Ministers of Trade of the Hemisphere Ministerial Declaration Buenos Aires, Argentina, (2001) “Annex I: Instructions to the Negotiating Groups” at D(2), online: Free Trade Area of the Americas <http://www.ftaa-alca.org/Ministerials/BA/BA_e.asp> (emphasis added). 77 Free Trade Area of the Americas, First Draft FTAA Agreement, FTAA.TNC/w/133/Rev.1 (2001) “Subsidies, Antidumping and Countervailing Duties,” art. 2.4.2, online: Free Trade Area of the Americas <http://www.ftaa-alca.org/FTAADraft/ngsu1_e.asp#c> (bold and italics in original). 78 Free Trade Area of the Americas, Second Draft FTAA Agreement, FTAA.TNC/w/133/Rev.2 (2002) “Subsidies, Antidumping and Countervailing Duties,” art. 2.8, online: Free Trade Area of the Americas <http://www.ftaa-alca.org/ftaadraft02/ngsu1_e.asp#Subsidies>.

68 ASPER REVIEW [Vol. VII retreat from the broader initial prohibition, perhaps evidencing the intent of certain countries to garner U.S. support for a limited relaxation of its trade remedies law. However, if this was in fact a retreat from a stauncher position on dumping determinations, it was short-lived. The language of the third draft returned to absolute prohibition: “In the calculation of the margin of dumping, zeroing will not be allowed.”79 Yet again, the text is bracketed and has not been agreed upon by the participants. The Negotiating Group has heeded its mandate, as is evidenced by this language, but it has not received the support it needs from the participants themselves. The stalemate reflects entrenched interests that will be difficult to change. The U.S.’s potential partners in an FTAA must recognize, and most likely do, that to get a compromise on dumping issues, they must concede on issues they hold dear. Whether they will actually undertake this high-stakes game of give and take is yet to be seen. An issue as important to the U.S. as anti-dumping law will simply not be altered without the U.S. receiving significant concessions from the other negotiating states. Unfortunately, the likelihood of achieving true regional consensus on an issue like dumping was dealt a severe blow at the Miami Ministerial Meeting. In the declaration issued by the Ministers, they endorsed what has been termed an FTAA à la carte (or FTAA “light”):

Taking into account and acknowledging existing mandates, Ministers recognize that countries may assume different levels of commitments. We will seek to develop a common and balanced set of rights and obligations applicable to all countries. In addition, negotiations should allow for countries that so choose, within the FTAA, to agree to additional obligations and benefits. One possible course of action would be for these countries to conduct plurilateral negotiations within the FTAA to define the obligations in the respective individual areas.80

This step away from a truly regional instrument encompassing all

areas of trade within the Americas will probably end any chance of consensus on dumping law. The U.S. may be able to push it from the table into one of the plurilateral agreements and avoid the issue entirely. If not, the text of the FTAA might remain toothless while other states take 79 Free Trade Area of the Americas, Third Draft FTAA Agreement, FTAA.TNC/w133/Rev.3 (2003) “Subsidies, Antidumping and Countervailing Duties,” art. 3.9, online: Free Trade Area of the Americas <http://www.ftaa-alca.org/FTAADraft03/ChapterXV_e.asp>. 80 Free Trade Area of the Americas, Eighth Ministerial Meeting Miami, USA, (2003) at para. 7, online: Free Trade Area of the Americas <http://www.ftaa-alca.org/Ministerials/Miami/Miami_e.asp>.

2007] U.S. Anti-Dumping Policy 69 on deeper obligations vis-à-vis trade remedy laws in separate plurilateral agreements addressing specific aspects of dumping and subsidies. The pressure that might have brought the U.S. around will simply no longer exist when obligations and benefits can be picked piecemeal from the assortment that the FTAA will offer. With the same prospect greeting them, the Southern countries might as well forget about concessions, allow the U.S. to keep zeroing, and maintain some of their own protectionist policies.

It is unclear what actual effect the à la carte approach might have, but there exist very few scenarios in which it could possibly contribute to reaching an agreement on the proposed provisions in the Chapter on dumping. Most likely, an aggressive FTAA prohibiting zeroing will be put to rest in favor of an animal that will have far fewer teeth and a weaker bite. B. The Obstacle of Protectionism Within the Context of the FTAA The obstacle presented by zeroing specifically, and anti-dumping duties generally, is actually two-fold. First, anti-dumping has been argued to be nothing more than a veiled national protectionist measure. Second, the U.S. has been extremely reticent in undertaking negotiations of the anti-dumping issue on a sub-global level, leaving foreign negotiators attempting to press a regional agenda to speak into an effectively deaf ear. Since the 1994 Marrakesh Agreement was put into effect, establishing the WTO, the U.S. has largely become a protectionist power.81 The Byrd Amendment and like-designed measures initially bore the brunt of foreign criticism, but increasingly that criticism has been directed at contingent protection, such as the anti-dumping laws. In recent years, it has been the U.S.’s utilization, administration, and employment of safeguard, anti-dumping, and anti-subsidy remedies that has drawn the greatest ire.82 Some believe that these trade remedies laws are “many times imposed for purely protectionist reasons.”83

81 Dr. Mario E. Carranza, “Latin American Perspective: MERCOSUR, The Free Trade Area of the Americas, and the Future of U.S. Hegemony in Latin America” (2004) 27 Fordham Int’l L.J. 1029 at 1063. 82 Colin B. Picker, “Reputationial Fallacies in International Law: A Comparative Review of United States and Canadian Trade Actions” (2004) 30 Brooklyn J. Int’l L. 67; Kelly Henry, “Is the United States the World’s Dumping Ground for Steel? Recent Influxes in Steel Imports in the United States, the Effects, and the Possible Remedies” (2003) 25 Hous. J. Int’l L. 381 at 383-84. 83 Thomas Andrew O’Keefe, Esq., “Chile: Team Player, Free Market Economic Power, and Entrant into the Adversarial Criminal Procedure System: The


Of course, the situation is not this one-sided. Perceptions on the issue of anti-dumping vary widely, “ranging from the perception that antidumping is an appropriate response to an activity that is condemned by the GATT to the view that antidumping is straightforward protectionism without any economic justification.”84 This assessment, however, is not exactly on point with the U.S. situation. While many countries do have anti-dumping laws, the U.S. has been one of the few to employ zeroing and after the EC-Bed Linen case, it is the last significant trade power to retain this methodology. This has led to the conclusion that U.S. practice, as opposed to just the legal regime, is predominantly simple protectionism.85

Compounding the situation is the fact that these types of protectionist policies, once put into place, are extremely difficult to reverse and thus, present a greater threat to trade integration than is generally appreciated.86 The lobby that was successful in getting Congress to implement the policy in question has a much easier time perpetuating the law, and a general xenophobic distrust of global trade regimes by large segments of the U.S. decision-making hierarchy helps ensure the survival of such barriers. Even if the U.S. does retain allies in the imposition of anti-dumping duties on a global level, the great majority of opinion within the Americas is directed against such policy and methodology. So great is this opposition that some commentators have stated that “[t]he United States’ abundant anti-dumping legislation is currently seen as the

Evolution of Chilean Trade Policy in the Americas: From Lone Ranger to Team Player” (1998) 5 Sw. J.L. & Trade Am. 251 at 252. 84 Bernard Hoekman, “Free Trade and Deep Integration: Antidumping and Antitrust in Regional Agreements” (Working paper No. 1950, The World Bank, 1998) at 1, online: The World Bank <http://www.worldbank.org/html/dec/Publications/Workpapers/WPS1900series/wps1950/wps1950.pdf>; Gilbert R. Winham & Heather A. Grant, “Antidumping and Countervailing Duties in Regional Trade Agreements: Canada-U.S. FTA, NAFTA and Beyond” (1994) 3 Minn. J. Global Trade 1 at 4; Jon M. Tate, “Sweeping Protectionism Under the Rug: Neoprotectionist Measures Among MERCOSUR Countries in a Time of Trade-Liberalization” (1999) 27 Ga. J. Int’l & Comp. L. 389 at 405. (“Some view the use of such measures as a way to remedy unfair trade practices such as dumping […]. Another view taken is that antidumping measures and countervailing duties are politically motivated contingency protection measures, designed to protect certain areas from outside competition.”) 85 Hoekman, ibid. at 13; Joel R. Paul, “Do International Trade Institutions Contribute to Economic Growth and Development?” (2003) 44 Va. J. Int’l L. 285 at 331. 86 James M. Cooper, “Spirits in the Material World: A Post-Modern Approach to United States Trade Policy” (1999) 14 Am. U. Int’l L. Rev. 957 at 1022.

2007] U.S. Anti-Dumping Policy 71 biggest hurdle to finalizing negotiations on the [FTAA …].”87 Brazil, which has evolved into the de facto voice of the South in pressing for regional interests, views the U.S. definition of “dumping” as too broad and the imposition of duties in most cases a function of protectionism rather than a truly remedial trade action.88

This view is not based on an abstract or theoretical view of the anti-dumping laws. It is based solidly on past U.S. action where several Southern countries, most notably Brazil and Argentina within MERCOSUR, have been the victims of anti-dumping determinations distorted by zeroing and other methodology employed by the U.S. Department of Commerce.89 This will make negotiations with the South far more difficult than the administration’s negotiations with Mexico in coming to terms on NAFTA, as Mexico had not yet been stung by the full-breadth of U.S. trade remedies law.90 Dumping will be placed squarely at the forefront of negotiations, and U.S. action on this point may be the determinative factor in whether or not an FTAA is realized. As the following text demonstrates, however, the outlook for this prospect is not particularly promising. The protectionist characterization of these policies is exacerbated by the U.S.’s entrenchment on the issue of non-negotiability. In every trade instrument negotiated between the U.S. and another country, either bilaterally, multilaterally, or plurilaterally, the U.S. has refused to make any concessions on dumping.91 In the narrow context of an FTAA, the U.S. has entirely removed trade remedies law from the negotiating table, not even allowing debate on the issue.92

87 Gustavo Gonzalez, “U.S. Antidumping Laws—a Hurdle to Free Trade in the Americas” Third World Network (27 April 2001), online: Third World Network <http://www.twnside.org.sg/title/hurdle.htm>. 88 Robert Grosse & Roy C. Nelson, “Expected Impact of FTAA on Latin American Countries” (2004) 1 Loy. Int’l L. Rev. 139 at 152; see also Andrea Miller, “The United States Antidumping Statutes: Can a Trade Agreement With the United States be both ‘Free’ and Fair? A Case Study of Chile” (2005) 54 Cath. U.L. Rev. 627 at 655. (“ […] Brazil views U.S. antidumping law as an unacceptable protectionist measure.” Ibid. at 656-57.) 89 Thomas Andrew O’Keefe, Esq., “Potential Conflict Areas in Any Future Negotiations Between MERCOSUR and the NAFTA to Create a Free Trade Area of the Americas” (1997) 14 Ariz. J. Int’l & Comp. Law 305 at 316. 90 Ibid. 91 Carranza, supra note 81 at 1051; Jurgen Kurtz, “A General Investment Agreement in the WTO? Lessons From Chapter 11 of NAFTA and the OECD Multilateral Agreement on Investment” (2002) 23 U. Pa. J. Int’l Econ. L. 713 at 775. 92 Trade Act of 2002, 107 Pub. L. 210, 116 Stat. 933 (2002). Under Subdivision B, titled Bipartisan Trade Promotion Authority, the extent of negotiability on trade remedies is starkly curtailed. Section 2102(b)(14) reads:


This reluctance to change the domestic trade remedies regime is more a “political constraint than a technical one. In every recent trade negotiation, the U.S. Congress has expressed its opposition to any modification that could undermine the effectiveness of the current protection regime.”93 Political will, or rather, the lack thereof, is due mainly to the strength of the respective lobbies that are protected by the present regime. The only situation where this might change is if the potential beneficiaries of the FTAA had a stronger presence in Washington than those that would be negatively affected. Although there has been significant debate over whether the U.S. would stand to gain in an economically significant way from an FTAA, it is likely that even if it did, this would not be “sufficient to offset the almost theological devotion of the U.S. Congress to maintain antidumping laws, which provide the safeguards measure of choice for protectionist lobbies.”94

Between the absence of concessions offered by the U.S. in existing sub-international trade agreements and its unwillingness to negotiate the issue on a regional level, it is likely that serious talk on the present trade remedies regime will have to wait until the next round of WTO negotiations.95

Trade Remedy Laws.-- The principal negotiating objectives of the United States with respect to trade remedy laws are - … (A) to preserve the ability of the United States to enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws, and avoid agreements that lessen the effectiveness of domestic and international disciplines on unfair trade, especially dumping and subsidies, or that lessen the effectiveness of domestic and international safeguard provisions[.]

See also Marcos Sawaya Jank & Zuleika Arashiro, “Free Trade in the Americas: Where Are We? Where Could We Be Headed?” in Inter-American Dialogue, Free Trade in the Americas: Getting There from Here (October 2004) 27 at 28, online: Inter-American Dialogue <http://www.thedialogue.org/publications/program_reports/trade/ftaa_1004.pdf>. 93 Jaime Zabludovsky, “The Long and Winding Road to Hemispheric Integration: Ten Key Elements in Understanding the FTAA” in Inter-American Dialogue, Free Trade in the Americas: Getting There from Here (October 2004) 7 at 12, online: Inter-American Dialogue <http://www.thedialogue.org/publications/program_reports/trade/ftaa_1004.pdf>. 94 Jeffrey J. Schott, “Whither the Free Trade Area of the Americas?” in Inter-American Dialogue, Free Trade in the Americas: Getting There from Here (October 2004) 17 at 25, online: Inter-American Dialogue <http://www.thedialogue.org/publications/program_reports/trade/ftaa_1004.pdf>. 95 Ibid.

2007] U.S. Anti-Dumping Policy 73 C. Easing the Friction: The Need for Policy Changes The friction caused by the U.S. anti-dumping methodology can be eased, but it will require affirmative action from our political officials. This paper identifies three distinct ways in which the friction caused by anti-dumping measures can be eased and an FTAA could hypothetically proceed: 1) the elimination of anti-dumping measures solely between members of the potential FTAA, 2) an FTAA specific anti-dumping agreement accompanied by a dispute settlement mechanism, and 3) special treatment during the investigative phase of the dumping determination for FTAA members. The first option is to eliminate the availability of anti-dumping measures solely between members of the FTAA. Several preferential trade agreements “have illustrated that governments can abolish antidumping on intra-area trade flows.”96 The European Union evolved along similar lines, disallowing the imposition of anti-dumping duties as between members, but continuing their use vis-à-vis third parties. Within the American experience, the Canada-Chile Free Trade Agreement provides an example that could be referred to within the FTAA negotiations. That agreement “obligates both countries to phase out the use of antidumping duties against imports from either country.”97

A situation such as this may provide the best of both worlds. Although ultimately the countries involved would have to totally eliminate the imposition of anti-dumping duties as between members, they would have a predetermined amount of time to implement them while retaining the ability to impose duties against non-members. This avenue also makes the most economic sense, as price discrimination cannot occur between intra-block members, undercutting one of the significant justifications for the existence of anti-dumping laws.98 At the very least, the U.S. should look to eliminate the use of its zeroing methodology as between members of an FTAA. This would represent a middle ground that could potentially be built upon through the course of negotiations and experience.

Whatever view is taken of this policy-change, and there is no doubt that even a limited abandonment of anti-dumping laws would send certain political constituencies clamoring to Washington, “[e]xperience

96 Hoekman, supra note 84 at 2. 97 O’Keefe, supra note 89 at 306. 98 David A. Gantz, “The United States and the Expansion of Western Hemisphere Free Trade: Participant or Observer?” (1997) 14 Ariz. J. Int’l & Comp. Law 381 at 404.

74 ASPER REVIEW [Vol. VII has revealed that antidumping can be eliminated in the regional context.”99 Second, an FTAA specific anti-dumping agreement could be explored. Roughly 50 countries around the world still maintain anti-dumping laws.100 To this end, “[s]ome FTAA partners have underscored the need for a comprehensive, well-balanced arrangement which includes new disciplines in the area of antidumping.”101 This agreement could definitively establish the applicable rules as to FTAA members, and if a dispute settlement mechanism is established by the general agreement, disputes arising under the anti-dumping agreement could be deemed justiciable. There are two problems with this course of action. First, and perhaps most importantly, the U.S., as mentioned earlier, has been almost categorically opposed to the negotiation of such a comprehensive regional discipline. To jar the U.S. from its malaise at this juncture seems an unlikely prospect, yet the idea should not be abandoned. The second criticism would be directed at the U.S. record before the Panels and Appellate Body of the WTO. Although it has complied with a number of rulings, it has retained policies inconsistent with others. The Byrd Amendment and zeroing are just two examples of a broader systemic problem that might give the Southern countries pause before viewing this type of solution as a panacea. Of some moment is the remarkably better record of the U.S. before NAFTA panels, as well as the Federal judiciary’s greater willingness to give deference to NAFTA decisions than to WTO decisions. Perhaps another regional body, as opposed to an international body, would gain similar respect within the U.S. Finally, instead of an explicit agreement delineating anti-dumping rules within the Americas, “special treatment for FTAA partners in safeguards cases might be possible following, to some extent, the precedent set in NAFTA.”102 These policies would basically mirror what has been offered above, but in a more informal setting. Zeroing, for instance, could be eliminated between FTAA partners, as its use is within the sole discretion of the Department of Commerce. Another possible option would be to increase the de minimis exceptions that presently exist. At the moment they are at 2%, but between partners this

99 Hoekman, supra note 84 at 41. 100 Chad P. Brown, Global Antidumping Database Version 1.0 (Working paper No. 3737, The World Bank, 2005), online: Brandeis University <http://people.brandeis.edu/~cbown/global_ad/bown-global-ad-v1.0.pdf>. See also Maurizio Zanaradi, “Antidumping: What are the Numbers to Discuss at Doha?” (2004) 27(3) The World Economy 403. 101 Kathy-Ann Brown et. al., “Proceedings of the Second Annual Legal and Policy Issues in the Americas, 2001: V. What Economic Integration in the Hemisphere Means to Florida Industries: Now and in 2005: B. Panel Discussion” (2001) 14 Fla. J. Int’l L. 82 at 97. 102 Schott, supra note 94 at 25.

2007] U.S. Anti-Dumping Policy 75 percentage could be raised, helping to exclude a number of determinations that would have found dumping. Given the discretion that has been granted both the Department of Commerce and the International Trade Commission, “preferential” treatment to member states might provide the best alternative yet examined. No explicit alterations of domestic law and policy would be needed, and the abandoned policies could be used as a negotiating tool, kept in the wings as a bargaining chip. Even though discretion and judicial deference have largely been the cause of the present problems concerning zeroing, it could be possible to use these aspects of the U.S. system to the advantage of the FTAA. Further, the U.S. would again be able to maintain its existing policies in regard to third party imports. These potential negotiation routes have their own pros and cons. They are, however, certainly viable ways in which to ease the friction and increase the potential for the realization of an FTAA in the near future. Unfortunately, there is probably little that the rest of the world can do to precipitate these changes. That impetus must come from domestic initiatives by those who are brave enough to face the inevitable political fallout that such suggestions might cause. There is a growing sentiment that protectionism must be abandoned and that the U.S. should commit itself more fully to the observance of the international rule of law. These concepts, coupled with education on the gains an FTAA would bring consumers and producers in the U.S., conveyed from the right positions within the U.S. hierarchy, just might be enough to change the present stagnation. V. CONCLUSION

ITH ALL THAT HAS BEEN DISCUSSED in this paper, the words of Chief Justice Burger seem to take on an almost apocryphal meaning. As trade integration moves forward at an ever

increasing pace, on both regional and global levels, the U.S. will risk either being left behind or engendering greater bitterness in their partners through strong-arm tactics and the imposition of U.S.-centric policies. The only option available to stem this tide is to heed the words of Burger C.J. and change those policies that have been definitively ruled inconsistent with U.S. obligations under international law. This paper has presented one such problem in the form of zeroing and has offered clear ways in which the U.S. can ease the tension caused by the continued use of this methodology. Ultimately it seems that the determination of this issue will reside in the political sphere rather than the legal. What U.S. policy makers need to know is that without expanding our agenda and without compromise with even our weakest partners, that Delphic prophecy made almost 35 years ago could

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76 ASPER REVIEW [Vol. VII culminate in a world free of trade restriction, save the U.S., which would remain alone and isolated in the swirl of integration.

WTO CASE STUDY: UNITED STATES—MEASURES AFFECTING THE CROSS-BORDER SUPPLY OF GAMBLING

AND BETTING SERVICES

Tom Newnham*

INTRODUCTION: THE EVOLUTION OF ONLINE GAMBLING1

HE WORD “GAMBLING” readily brings a variety of images to mind. Glamorous images include the neon lights of the Las Vegas strip, the historic casinos of Monte Carlo, high-rollers throwing dice at

the craps tables, and high-stakes poker games behind closed doors. Less glamorous images, such as seedy racetracks and smoke-filled bingo halls, also come to mind. Yet regardless of the size of the player’s bankroll, the common thread among all traditional forms of gambling was once a concrete physical environment. However, since the first online gambling site was launched in 1995, a new breed of gamblers has

* B.Comm. (UM); LL.B. (UM, 2008) 1 Since this article was originally written, there have been some important developments on this topic which are beyond the scope of this paper. On 4 May 2007, the U.S. made the unprecedented move of withdrawing its commitments in the gambling and betting services sector from its GATS schedule. Since that time, Antigua has filed a claim for $3.44 billion, which it will seek primarily through the suspension of global copyright and intellectual property rights agreements. These sanctions, if approved, could be implemented immediately and could have serious implications for American companies such as Microsoft and Disney, which would face billions of dollars in lost revenue if Antigua was allowed to suspend all intellectual property obligations to the United States. The U.S. also faces claims from other WTO members, including the European Union, China, Chinese Taipei, India, Japan, Brazil, Costa Rica, and Mexico for compensation under the WTO rules pertaining to withdrawn commitments.

In addition, political support towards the prohibition of online gambling within the U.S. has cooled recently. Republican Barney Frank’s Bill, the Internet Gambling Regulation and Enforcement Act of 2007 (U.S., Bill H.R. 2046, Internet Gambling Regulation and Enforcement Act of 2007, 110th Cong., 2007), which would legalize, regulate, license, and tax online gambling, has received increasing support from U.S. Congressmen. This comes at a time of mounting support to repeal the Unlawful Internet Gambling Enforcement Act of 2006 (U.S., Bill H.R. 4411, Unlawful Internet Gambling Enforcement Act of 2006, 109th Cong., 2006). Observers of this topic will be watching for further developments with interest.

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78 ASPER REVIEW [Vol. VII emerged.2 At present, the American Gaming Association estimates that “there are well over 2,000 Internet gambling Web sites offering various wagering options, including sports betting, casino games, lotteries and bingo.”3 Many of the perks customarily associated with casinos, such as complimentary drinks and hotel rooms, are still offered; however, the quintessential bricks and mortar casino is no longer the only game in town. The new arena where fortunes are won and lost is cyberspace. Players around the world no longer need to leave their homes to gamble, and with a few clicks of a mouse, players can compete online against other players from all over the world in the comfort and convenience of their own homes. Poker has commonly been identified as the catalyst which brought online gambling to the mainstream. Ironically, the low profitability of poker which made it an unattractive offering at casinos is what spurred the game’s growth on the Internet.4 As casinos continued to replace poker tables with more profitable slot machines, the game flourished on the Internet, where much lower overhead costs made offering poker significantly more profitable. Poker is well-suited to the Internet because poker sites are able to match players seeking a game at any time. Since poker is a game of skill, rather than dependent on the random generation of numbers, many players are attracted to the game for the opportunity to win money at the expense of weaker players. In recent years, the popularity of online poker has soared with televised events and celebrity tournaments. Successful online players such as 2003 World Series of Poker winner Chris Moneymaker and 2004 World Series of Poker winner Greg Raymer have become some of the industry’s biggest marketers and celebrities in their own right.5 However, even though the poker craze continued to fuel the growth of the worldwide online gambling industry, there was one big obstacle standing in the way—the United States. The U.S. contains the majority of the world’s online gamblers, yet the nation’s laws have hampered the efforts of

2 American Gaming Association, Industry Information, Fact Sheets: Industry Issues, “Internet Gambling”, online: American Gaming Association <http://www.americangaming.org/Industry/factsheets/issues_detail.cfv?id=17>. 3 Ibid. 4 The opportunity costs of offering poker at casinos are very high, since more profitable slot machines could be placed in the same location and generate higher revenue. “Online/Internet Gambling”, online: SportsPool.com <http://www.sportspool.com/gambling/>. 5 Chris Moneymaker has been credited with revolutionizing the game after being the first Internet qualifier to win the World Series of Poker. Moneymaker took home the top prize of $2.5 million in the 2003 event after qualifying online at PokerStars.com. Associated Press, “Mr. Moneymaker nets $2.5M poker prize” Offbeat News (24 May 2003), online: CNN.com/US <http://www.cnn.com/2003/US/West/05/24/offbeat.poker.win.ap/>.

2007] Cross-Border Supply of Gambling 79 online gaming operators in Antigua from legally serving this lucrative market. The WTO dispute between these two nations will be chronicled in this paper. THE WTO DISPUTE SETTLEMENT SYSTEM

ROPONENTS OF THE WORLD TRADE ORGANIZATION’S (“WTO”) role in globalization eagerly contend that the WTO trading system allows for the fair adjudication of trade disputes between member nations.

The result, supporters argue, is that all member nations are placed on an even playing field regardless of size or economic resources. The rationale is that “[t]he WTO trading system can be characterized as a ‘rule-oriented international trade order’ as opposed to a ‘power-oriented international trade order.’”6 Under a power-oriented system, the party with stronger economic, political, and even military power has greater leverage, while the weaker state with less economic resources and political influence must suffer a disadvantage. In this type of trading system, the weaker party is often pressed to make concessions against its will. Under the rule-oriented WTO dispute settlement system, however, Panels and the Appellate Body do not take into account factors such as economic or political power when resolving disputes.7 The only relevant factor is the legitimacy of the legal claims of the parties under the WTO rules. It is argued that this system provides more stability, fairness, and predictability in international trade relationships than does a power-oriented model, and it is especially beneficial to developing country members. A developing country can bring a case against a more powerful developed country member to the WTO and prevail under the dispute settlement system, as long as the developing country makes persuasive legal arguments.

An obvious example of a developing country benefiting from the rule-oriented dispute system, which also represented the WTO Dispute Settlement Body’s first direct engagement with the Internet,8 is the

6 Mitsuo Matsushita, “Accomplishment of the WTO Dispute Settlement system—A Review of Some WTO Jurisprudence” (Keynote Speech at the Intensive Course on WTO Dispute Settlement Mechanisms, delivered at the Thailand Resident Mission, Bangkok, Thailand, 20 June 2006) at 4, online: Asian Development Bank <http://www.asiandevbank.org/Documents/Events/2006/WTO-Dispute-Settlement-Mechanisms/paper-matsushitsa.pdf>. 7 Ibid. 8 Anupam Chander, “Globalization and Distrust” (Paper presented to The Yale Law Journal’s Symposium on Democratic Ground: New Perspectives on John Hart Ely: Democracy and Distrust, 12-13 November 2004), (2005) 114 Yale L.J. 1193 at 1211.

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80 ASPER REVIEW [Vol. VII dispute which occurred between Antigua and Barbuda (“Antigua”), a tiny twin-island Caribbean nation-state and the smallest WTO member nation, and the U.S. In an April 2005 Appellant Body decision which took the U.S. and most gambling experts and commentators by surprise, Antigua charged the U.S. with violating international trade law in a dispute over its ban on remote Internet gambling and was victorious.

However, while the Appellate Body’s decision appears to be a major victory for Antigua, the decision has not yet proven to be the unqualified success that many WTO advocates claim. Specifically, the Appellate Body’s partial reversal of the Dispute Panel’s finding that, with the exception of the potentially discriminating Interstate Horseracing Act (“IHA”), the ban was “necessary to protect public morals or maintain public order,” has led to some confusion about who the real victor was in this dispute.9 Until very recently, there were two distinct interpretations of the decision’s practical meaning going forward. On one hand, Antigua had declared that “[d]espite the occasionally ambiguous language contained in the Report, the end result is the same as the result of the Panel Report […] ” and thus, the U.S. was in violation of its obligations under the General Agreement on Trade in Services (“GATS”).10 On the other hand, U.S. trade representatives disagreed with Antigua’s interpretation of the decision, pointing to the exception under the GATS, whereby a country can enforce laws intended to protect “public morals.”11 The American interpretation is that the Appellate Body did not find that it failed to meet the standards specified in the chapeau of Article XIV, but that that Appellate Body ruled that so long as the U.S. alters the IHA so that it is not discriminatory against foreign competitors, the U.S. will be in compliance with its obligations under the GATS.12

This paper will summarize the progression of the WTO dispute, with a focus on recent developments. Special attention will be paid to the shortcomings in the WTO dispute settlement system, which even

9 WTO, Report of the Appellate Body on United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services on 7 April 2005, WTO Doc. WT/DS285/AB/R at para. 373(D)(vi)(a), online: WTO <http://docsonline.wto.org>. 10 Mendell Blumenfeld LLP, “Memorandum Re: Report of the Appellate Body of the World Trade Organisation on the United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services” at 2 (2006), online: The Antigua-US WTO Dispute over Internet Gambling <http://www.antiguawto.com/wto/Summary_WTO_Case_March06.pdf>. 11 Fox Butterfield, “U.S. Limits on Internet Gambling Are Backed” The New York Times (8 April 2005) C14, online: The New York Times <http://www.antiguawto.com/wto/07_NewsArt_NYTimes_8April05.pdf>. 12 I. Nelson Rose, “Internet Gaming: U.S. Beats Antigua in WTO” Casino City Times (22 May 2005), online: Casino City Times <http://rose.casinocitytimes.com/articles/19020.html>.

2007] Cross-Border Supply of Gambling 81 following the recent Article 21.5 Panel Report, have resulted in a lack of certainty for online gambling operators concerning the legality of their operations. The adjudication of the Antigua-U.S. dispute represents the first time the WTO has considered the “public morals” exception under Article XIV.13 As such, it is critical that the WTO’s final ruling in this case deliver an unambiguous message regarding the applicability of this Article XIV defence, so that a clear precedent can be set and future trade disputes can avoid the protracted litigation which has characterized this matter. In addition, to add a greater degree of certainty and finality to Appellate Body decisions, the WTO should consider formal recognition of stare decisis. Moreover, an international regulatory scheme should be pursued by WTO members as a beneficial and more pragmatic alternative to the present prohibition which still survives in many jurisdictions. THE RELEVANT LAW UNDER THE GATS

HE GATS GOVERNS TRADE IN SERVICES among WTO members and sets out the general principles that regulate the specific commitments entered into by each member nation. Under the GATS, each

member is required to establish its own schedule of commitments. There are two significant principles under the GATS that each member must comply with regarding its individual schedule of commitments: 1) market access and 2) national treatment.

Market access is applicable to all WTO members and denotes that, concerning market access, each member will treat other members no less favourably than what is provided for under its Schedule.14 Under the market access principle, the GATS stipulates that, according to a country’s specific commitments, a country cannot use specific types of trade restraints, such as quotas.15

National treatment also applies to all WTO members and requires that each member treat all other members no less favourably than how it treats its own suppliers of like services.16

However, the GATS does provide for exceptions to the principles of market access and national treatment. Members are allowed to adopt 13 Report of the Appellate Body on United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services on 7 April 2005, supra note 9 at para. 291, f.n. 351 (noting that the United States—Antigua dispute is also the first instance defining public morals). 14 General Agreement on Trade in Services, art. XVI(1), Annex IB to the Agreement Establishing the World Trade Organization, online: World Trade Organization <http://www.wto.org/English/docs_e/legal_e/26-gats.pdf>. 15 Ibid., art. XVI(2). 16 Ibid., art. XVII(1).

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82 ASPER REVIEW [Vol. VII measures which are necessary to protect public morals, human life, or health, and to prevent fraudulent practices.17 THE DEVELOPMENT OF THE OFF-SHORE GAMBLING AND BETTING INDUSTRY IN ANTIGUA

HE ECONOMY OF ANTIGUA WAS BASED PRIMARILY on the exportation of sugar cane until the 1960s.18 A sudden drop in the price of sugar cane led Antigua to shift its focus to tourism later in the twentieth

century.19 However, following a recent decline in the tourism industry, Antigua, with few other natural resources, sought to build up an Internet gambling industry to provide jobs to replace those in its fading tourist industry.20 In the last decade, Antigua has successfully diversified its economy by developing infrastructure which supports gambling and betting services that operate primarily over the Internet. Antigua was one of the first nations to legalize, license, and regulate online wagering. By 1997, the island was recognized as a centre for online gambling companies, with over twenty gambling and Internet betting businesses operating in Antigua. By 1999, following a government-licensing program, employment in Antigua’s gambling and betting industry reached 3000.21 By this time, there were 119 fully licensed Internet gambling and betting operations in Antigua, with the Antiguan government receiving over $7.4 million dollars annually in licensing fees, accounting for over ten percent of the tiny nation’s gross domestic product.22

However, the success of the thriving industry attracted unsavory elements in the form of money laundering and organized crime. To placate growing concerns in the U.S. and the U.K.,23 Antigua increased regulation of its gambling and betting industry.24 However, once the tighter regulations were adopted, the economic boom from Antigua’s gambling and betting industry lost much of its momentum. Between

17 Ibid., art. XIV. 18 WTO, United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services: First Submission of Antigua and Barbuda on 1 October 2003, WTO Doc. WT/DS285 at para. 8, online: The Antigua-US WTO Dispute over Internet Gambling <http://www.antiguawto.com/wto/06_AB_1st_%20Submission_1Oct03.pdf>. 19 Ibid. 20 Ibid. 21 Ibid. at para. 30. 22 Ibid. 23 In 1999, the U.S. and the U.K. advised investors to be cautious of transactions involving financial institutions in Antigua. Ibid. at para. 31. 24 Ibid.

T

2007] Cross-Border Supply of Gambling 83 1999 and 2002, the Antiguan economy was devastated by the closure of thirty-five licensed banks, a drastic decrease in gambling and betting operations, and the resulting decrease in government licensing fees.25 Antigua had good reason to be alarmed about the sudden downturn in its infant online gambling industry. Estimates place the number of online gamblers at fifteen million, with revenue in excess of six billion dollars annually.26 Four percent of Americans, or about twelve million people, currently engage in online gambling.27 While this figure may seem insignificant given that one in four Americans visits offline casinos each year, it should be noted that the number of Americans gambling online doubled in 2005.28 The typical online bettor can best be described as a marketer’s dream. “The typical U.S. Internet gambler is under 40, college-educated, male, and more affluent than his fellow citizens […].”29 Furthermore, this demographic continues to grow—it is estimated that “a quarter of male college students now play card games online at least once a month.”30

In total, Americans make up one-half of online gamblers31 and are estimated to be responsible for 65% of Internet gambling revenues worldwide.32 Background to the Antigua-U.S. WTO dispute

The dispute commenced on 27 March 2003, when the

government of Antigua requested formal consultation with the U.S. and the WTO concerning the U.S.’s “total prohibition” on cross-border gambling services offered by Antiguan operators to consumers in the lucrative U.S. market.33 Antigua asserted that the U.S. had violated its 25 James D. Thayer, “The Trade of Cross-Border Gambling and Betting: The WTO Dispute between Antigua and the United States” [2004] Duke L. & Tech. Rev. 0013 at para. 6. 26 John D. Andrle, “A Winning Hand: A Proposal for an International Regulatory Schema With Respect to the Growing Online Gambling Dilemma in the United States” (2004) 37.5 Vand. J. of Transnat’l L. 1389 at 1391. 27 “Busted Flush” The Economist (5 October 2006), online: Economist.com <http://www.economist.com/business/displaystory.cfm?story_id=7997055>. 28 Ibid. 29 Out-law.com, “Illegal internet gambling soars in the US” The Register (10 May 2006), online: The Register <http://www.theregister.co.uk/2006/05/10/internet_gambling_soars/>. (Statistics cited from Reuters.) 30 “Busted Flush,”supra note 27. 31 Interactive Gaming Council, “Benefits of Joining the IGC” at 2, online: IGC <http://www.igcouncil.org/join/IGCBenefits.doc>. 32 Andrle, supra note 26 at 1391. 33 WTO, United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services: Request for Consultations by Antigua and Barbuda on 27

84 ASPER REVIEW [Vol. VII commitments under the GATS to open “other recreational services” to trade by prohibiting the cross-border provision of gambling services via the Internet.

The U.S. responded to the allegations by arguing that it had never committed to opening up competition in gambling services, which should be considered “sporting” services, explicitly separate from the American liberalization commitment. The U.S. contended that in the alternative, even if it had made such a commitment, the preservation of public morals compelled it to prohibit cross-border online gambling.34 Offshore remote gambling, the U.S. argued, might produce money laundering, fraud,35 and contribute to underage gambling36 and gambling addiction among adults.37

After consultations between the parties failed to produce a satisfactory settlement to the dispute, and on Antigua’s request, the WTO Dispute Settlement Body (“DSB”) established a panel to resolve the matter.38 The WTO Dispute Panel Report (10 November 2004)

The Dispute Panel concluded that the U.S.’s schedule under the

GATS included specific commitments on gambling and betting services under Section 10.D—Other Recreational Services (Excluding Sporting). The Panel found specifically that three U.S. federal laws, the Wire Act,39 the Travel Act,40 and the Illegal Gambling Business Act,41 failed to present services and service suppliers of Antigua treatment no less favourable than that provided for under the terms, limitations, and conditions March 2003, WTO Doc. WT/DS285/1 at 1, online: WTO <http://docsonline.wto.org>. 34 A nation is permitted to maintain a trade-restrictive measure if “necessary to protect public morals or to maintain public order.” General Agreement on Trade in Services, supra note 14, art. XIV(a). 35 WTO, United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services: First Written Submission of the United States on 7 November 2003, WTO Doc. WT/DS285 at para. 9, online: Office of the United States Trade Representative <http://www.ustr.gov/assets/Trade_Agreements/Monitoring_Enforcement/Dispute_Settlement/WTO/Dispute_Settlement_Listings/asset_upload_file732_5581.pdf>. 36 Ibid. at para. 16. 37 Ibid. at para. 100. 38 WTO, Report of the Panel on United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services on 10 November 2004, WTO Doc. WT/DS285/R at para. 1.2, online: WTO <http://docsonline.wto.org>. 39 18 U.S.C. § 1084. 40 18 U.S.C. § 1952. 41 Ibid., § 1955.

2007] Cross-Border Supply of Gambling 85 agreed and specified in its Schedule, contrary to Article XVI:1 and Article XVI:2 of the GATS. The Panel concluded that the U.S. was unable to demonstrate that these laws were provisionally justified under Articles XIV(a) and XIV(c) of the GATS. Furthermore, none of the laws at issue were found to be consistent with the requirements of the chapeau of Article XIV of the GATS. The Panel recommended that the WTO request the U.S. bring the applicable laws into compliance with its obligations under GATS, essentially requiring the U.S. to provide Antiguan gambling and betting service providers with market access to consumers in the U.S.

The Panel’s unanimous ruling in favour of Antigua was hailed by Antigua’s WTO ambassador as a “great victory” for a “little country.”42 The Panel held that the U.S. had committed to market access for gambling services and that this commitment extended to all means of delivery, including the Internet.43 Furthermore, the Panel rejected the U.S.’s defence of the protection of public morals, concluding that it had failed to engage in good faith discussions with Antigua with respect to finding a solution that might have met American concerns while allowing Antigua market access.44 The WTO Report of the Appellate Body (7 April 2005)

The U.S. appealed the decision of the Panel, and the matter was

considered by the WTO Appellate Body. After considering additional arguments filed by Antigua and the U.S., the WTO issued the Report of the Appellate Body, which upheld the Dispute Panel’s report, though on slightly different and narrower grounds. In its report, the Appellate Body made four key rulings.45

First, the Appellate Body ruled that the U.S. had indeed made a commitment to free trade in gambling and betting services in its schedule

42 Daniel Pruzin, “Antigua-Barbuda Wins WTO Interim Ruling Against U.S. Internet Gambling Restrictions” International Trade Reporter 21:13 (25 March 2004) 514, online: BNA <http://www.bna.com/index.html>. 43 Report of the Panel on United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services on 10 November 2004, supra note 38 at para. 6.287. 44 Ibid. at para. 6.534. 45 Antigua was represented by a team of attorneys in this case from two separate firms, Mark Mendel and Robert Blumenfeld of the law firm of Mendel Blumenfeld, LLP (with offices in both Texas and Ireland), and Craig Pouncey and Lode Van Den Hende from the Brussels office of the London-based firm of Herbert Smith. Mendel’s summary of the case thus far is available: Mark E. Mendel, “Antigua-United States WTO Internet Gambling Case”, online: The Antigua-US WTO Dispute over Internet Gambling <http://www.antiguawto.com/WTODispPg.html>.

86 ASPER REVIEW [Vol. VII of commitments under the GATS. The Appellate Body disagreed with the U.S. position that it had never made such a commitment and held that the commitment was made in Section 10.D of the U.S.’s GATS Schedule, under the heading “Other Recreational Services (Excluding Sporting).”46 This finding was consistent with the preceding Panel Report.

Second, the Appellate Body held that the U.S. did adopt measures that interfered with its obligation under GATS to provide free trade in gambling and betting services with Antigua. The Appellate Body upheld the Dispute Panel’s report, finding that the three federal laws at issue—the Wire Act of 1961, the Travel Act, and the Illegal Gaming Business Act—did in fact prohibit Antigua’s online gambling services.47

Antigua had submitted a long list of additional U.S. federal and state laws which it argued were measures that also violated its GATS commitment. Antigua also purported that the U.S. maintained a “total prohibition” against Antiguan online gambling service providers, and that this was in itself a violation. The Appellate Body disagreed with these additional submissions, finding that the long list of federal and state laws was not discussed in sufficient detail in Antigua’s submission.48 The Appellate Body added that a “total prohibition” cannot serve as a measure by itself and limited the offending measures found to include only the three federal laws listed above. 49

Third, the Appellate Body ruled that the measures established by Antigua—the three federal laws listed above—violated Article XVI of the GATS. In particular, the Appellate Body agreed that the U.S. prohibition limits service providers from Antigua in such a way as to violate Article XVI of the GATS.50

Fourth, the Appellate Body concluded that the U.S. could not rely on a “public morals” defence against its violation of the GATS under Article XIV. In order for the U.S. to establish this morals defence, the U.S. was required to meet a two-pronged test: (1) prove that the three federal statutes are necessary51 to protect public morals or maintain

46 Report of the Appellate Body on United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services on 7 April 2005, supra note 9 at para. 213. Also noted at para. 373(B)(i). 47 Ibid. at para. 373(A)(ii). 48 Ibid. at para. 150, f.n. 172. 49 Ibid. at para. 373(A)(i). 50 Ibid. at para. 373(C)(ii). 51 The “necessity test” involves balancing three factors: “(1) the degree to which the common interests or values that the measure protects are vital and important, (2) whether alternative measures are ‘reasonably available’ to accomplish the stated objective, and (3) whether alternative measures are inconsistent with the Member’s WTO obligations.” See Tatjana Eres, “The Limits of GATT Article XX: A Back Door for Human Rights?” [2004] 35 Geo. J. Int’l L. 597 at 624-625.

2007] Cross-Border Supply of Gambling 87 public order and (2) satisfy a legal balancing test, referred to as the “chapeau,” which requires that measures are not applied in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or serve as a disguised restriction on trade in services.52

With respect to the “Necessity test,” the Appellate Body decided, overruling the Dispute Panel, that the three federal statutes were necessary to protect public morals or maintain public order. The Appellate Body refuted the Dispute Panel’s requirement that the necessity of a measure requires consultation and instead ruled that necessity is based on an objective assessment of reasonable alternatives.53 It then noted that all of the other factors expressed by the Dispute Panel weighed in favor of necessity (“very important societal interests” warranting strict controls) and that the three statutes in question “contribute to the realization of the ends that they pursue”—thus the U.S. measures were found to satisfy the necessity test.54

However, with respect to the second prong of the test, the Appellate Body concluded that the U.S. did not establish the chapeau. The Appellate Body disagreed with the Dispute Panel’s finding that the U.S. enforced its gambling laws more strictly against foreigners than against domestic suppliers, but agreed with the Dispute Panel in ruling that the U.S. could not establish the chapeau because the U.S. permitted “remote gambling” in the U.S. in the form of off-track account wagering on horse races.55 The Appellate Body noted that there were numerous companies in the U.S. that provided telephone and Internet betting services on horse races and that these companies were fully-sanctioned to provide these services by the IHA. Based on this finding, and not the other Dispute Panel findings, the Appellate Body concluded that the U.S. could not justify why it permitted U.S.-based companies to offer remote gambling while the U.S. prohibited Antiguan companies from offering the same type of gambling services. Consequently, the Appellate Body determined that the U.S. measures were contrary to the principle of national treatment.56 What does the WTO Ruling mean?

Regardless of whether the Appellate Body decision is ultimately

interpreted as a victory for Antigua or the U.S., the WTO ruling is important in several respects. The decision legitimizes the online

52 Ibid. at para. 339. 53 Ibid. at paras. 316-17. 54 Ibid. at paras. 322-27. 55 Ibid. at para. 361. 56 Matsushita, supra note 6 at 5.

88 ASPER REVIEW [Vol. VII gambling and betting services industry as providing a tradeable service recognized by the WTO.57 In addition, the decision has provided an ongoing forum for Antigua-U.S. negotiations regarding the access of Antiguan operators in the rapidly-growing U.S. gambling market. Furthermore, and potentially most importantly, the decision places international pressure on the U.S. to comply with the WTO ruling. This idea is based on the theory that if the U.S. refused to stand by its own WTO commitments, it would not only ensure “[…] constant frictions with the rest of the world, but also would diminish that nation’s ability to invoke those international rules that served its own national purposes.”58

Following the Appellate Body’s ruling, it was predicted that new financial and media opportunities would open up for Antiguan gaming operators. The ruling was expected to end subpoenas or the threat of prosecution from the federal government to U.S. companies who choose to do business with Antiguan offshore gaming companies.59 Following the ruling, Texas-based counsel which had represented Antigua throughout the WTO dispute process predicted,

[…] major internet search engines, including Google and Yahoo, financial institutions and credit card service providers will be required to accept transactions and advertising from Antiguan internet gaming sites as they do currently with U.S. gaming interests, including hundreds of American casinos and state lotteries.60

U.S. NONCOMPLIANCE AND RECENT DEVELOPMENTS a) “Reasonable Time”

Following the formal adoption of the Appellate Body’s report by the DSB, the U.S. expressed its intention to comply with the recommendations and rulings of the report, but failed to expressly indicate its plan to do so. The U.S. and Antigua were unable to agree on a “reasonable period of time” in which the U.S. would comply with the

57 Mendel, supra note 45. 58 Harold Hongju Koh, “International Law as Part of Our Law” (2004) 98 Am. J. Int’l L. 43 at 44. 59 Previously U.S. companies such as Citibank, Chase Manhattan, Bank of America, Clear Channel Communication, Discovery TV, Yahoo, and MSN were discouraged from conducting financial transactions or broadcasting advertisements involving online gaming products. See Mendel, supra note 45. 60 Ibid.

2007] Cross-Border Supply of Gambling 89 recommendations of the DSB and thus the determination went to binding arbitration under WTO procedures. The arbitrator gave the U.S. until 3 April 2006 to come into compliance with the rulings and recommendations of the DSB.61

b) The Leach Bill and the Goodlatte Bill

Following the introduction into Congress of the Unlawful Internet

Gambling Enforcement Act of 200562 (“The Leach Bill”) on 18 November 2005 and the Internet Gambling Prohibition Act63 (“The Goodlatte Bill”) in February 2006, the Antiguan Ambassador and WTO representative wrote to the U.S. Trade Representative (“USTR”), complaining that the bills were “non-responsive” and “baldly contrary to the rulings and recommendations of the DSB.”64 Antigua noted that the Goodlatte Bill was essentially an amendment to the Wire Act of 1961, designed to extend the federal criminal statute’s coverage to include most types of gambling services offered over the Internet. The Leach Bill, Antigua noted, does not expressly purport to prohibit remote betting per se, but rather seeks to criminalize the facilitation of or participation in certain financial transactions associated with what is defined in the legislation as “unlawful Internet gambling.” Antigua noted that both bills contain three significant exceptions from their coverage: 1) transactions made in accordance with the IHA; 2) “intrastate transactions” as defined in the Leach Bill, in effect allowing remote gambling that occurs within the borders of a U.S. state; and 3) remote gambling conducted by Native American tribes in accordance with existing federal legislation. Antigua contended that neither of the bills provides Antiguan gambling and betting services with any access to U.S. consumers, nor was either bill responsive to the recommendations and rulings of the DSB. Antigua stated that the three exceptions to the coverage of the bills serve to highlight the chapeau failure and the discriminatory and trade restrictive application of U.S. laws.

61 In accordance with WTO, Understanding on Rules and Procedures Governing the Settlement of Disputes, art. 21.3(c), Annex 2 to the Agreement Establishing the World Trade Organization, online: WTO <http://www.wto.org/english/tratop_e/dispu_e/dsu_e.htm> (the “DSU”). 62 U.S., Bill H.R. 4411, Internet Gambling Prohibition and Enforcement Act, 109th Cong., 2005. 63 U.S., Bill H.R. 4777, Internet Gambling Prohibition Act, 109th Cong., 2005. 64 Daniel Pruzin, “Antigua Preparing to Impose WTO Sanctions Against U.S. in Internet Gambling Dispute” International Trade Reporter 23:8 (23 February 2006) 281, online: BNA <http://www.bna.com/index.html> (citing excerpts from 16 February 2006 letter, from Dr. John W. Ashe, Ambassador/Permanent Representative to the WTO to Mr. Rob Portman, USTR).

90 ASPER REVIEW [Vol. VII c) Antigua’s Response

Following a meeting of the DSB on 17 March 2006, during which

the USTR representative had described the status of its compliance with the rulings and recommendations of the DSB by simply noting that it was “working with Congress” on the matter, the Antiguan Ambassador delivered a scathing address to the assembled delegates, in which he criticized the “complete lack of information from the United States on this most important matter facing the small and delicate economy of Antigua and Barbuda.”65 In regards to the new American bills, the ambassador stated that,

[…] each proposal is about as directly contrary to the recommendations and rulings of the DSB as could possibly be imagined. Not only do these bills do nothing to provide Antiguan operators with any access whatsoever to the vast American gambling market, but in fact each would further entrench the anti-GATS nature of United States gambling law by expressly exempting from its application domestic Internet gambling on horse racing, Internet gambling conducted by Native American tribes and […] Internet gambling that occurs entirely within the border of a particular state.66

The ambassador contended that the pending legislation was

concrete proof that the American prohibition was really based upon the cross-border nature of the services rather than any of the true “evils” associated with remote gambling as Antigua had argued all along.67 He

65 H.E. Dr. John W. Ashe, Ambassador of Antigua and Barbuda to the World Trade Organisation, (Statement at the Meeting of the Dispute Resolution Body, 17 March 2006), online: Antigua and Barbuda <http://www.antigua-barbuda.com/business_politics/Dr_Ashe_Speech_WTO.asp>. 66 Ibid. 67 See Gavin Clarkson, “Online Sovereignty: How Tribes Can Use Technology to Offer Internet-Based Gaming” (Working Paper, University of Michigan, 2005) [unpublished] at 3, online: University of Michigan <http://www.si.umich.edu/~gsmc/pub/InternetGamingWhitePaper.pdf>. In his article, Professor Gavin Clarkson expressed a similar sentiment noting, “One motivation for Internet gambling legislation, in addition to all the speeches about protecting the morals of the community, is that states stand to lose revenue with online gamblers directing funds out-of-state or out of the country instead of spending this gambling money with state-sponsored lotteries or state-licensed casinos.” (cited with author’s permission)

2007] Cross-Border Supply of Gambling 91 also emphasized that the proposed legislation had already negatively impacted Antigua’s economy, noting that American-based money transfer service Western Union had recently ceased providing money transfer services to and from Antigua, despite the nation’s tightly regulated and overseen financial services sector and record of cooperating with other countries around the globe to detect, deter, and prevent financial crimes.68 The ambassador noted that Antigua’s membership in the WTO was rooted in the desire to compete with larger economies and, in the case of a dispute, to “achieve a fair and balanced hearing which would provide us with a meaningful remedy despite our limited global economic consequence.”69 The ambassador challenged the U.S. to act as a responsible stakeholder in the WTO and demonstrate that the WTO is not merely a “one-way street” for large economies to further enrich themselves at the expense of lesser ones.70 d) Recourse to Article 21.5 of the DSU by Antigua and Barbuda

Consultation between the parties stalled in June 2006 as the

parties continued to disagree about the existence and consistency of the measures taken by the U.S. to comply with the recommendations and rulings of the DSB. On 6 July 2006, the delegation from Antigua requested the establishment of an Article 21.5 Panel and in August 2006, the matter was referred back to the Panel. e) Economic Impact Abroad

While the debate continued at the WTO, the economic fallout had

already begun, and Antigua was not the only country where businesses and individuals were being affected.

Since most U.S. banks prohibit the use of their debit cards for the purpose of Internet gambling, and as most U.S. residents are unable to use credit cards at Internet gambling sites, a number of e-money services, including NeTeller, Firepay, and Moneybookers have sprung up to service this niche by providing online accounts for the purposes of funding online gambling. 71

NeTeller has been one of the high-profile companies negatively affected by the Unlawful Internet Gambling Enforcement Act, which was

68 Ashe, supra note 65. 69 Ibid. 70 Ibid. 71 U.S., United States General Accounting Office, Report to Congressional Requestors: Internet Gambling—An Overview of the Issues (2002) at 27 & 53, online: GAO <http://www.gao.gov/new.items/d0389.pdf>.

92 ASPER REVIEW [Vol. VII passed by U.S. Congress in October of 2006. The company, which is publicly listed on the London Stock Exchange and has its corporate headquarters on the Isle of Man, was founded by two former Canadian lawyers in 1999.72 The online payment processor, which allows customers to use their NeTeller accounts to transfer funds online and deposit into or withdraw from banks around the world, was relatively small until PayPal discontinued accepting gambling-related transactions in 2002.73 In 2006, the company processed an estimated seven billion dollars (U.S.) in online payments.74 However, the passage of the Unlawful Internet Gambling Enforcement Act resulted in the company’s stock falling by 60% in October of 2006.75 Since the Act prohibits “financial transaction providers” from transferring funds to online gambling sites, legal commentators noted that NeTeller could be prohibited from allowing customers to send money from their online NeTeller accounts to gambling sites as a result of this new legislation.76 f) January 2007 Developments

On 15 January 2007, in a move which captured the full attention

of the online gambling world, the two NeTeller founders were arrested separately in the U.S. and charged with conspiring to distribute funds “with the intent to promote illegal gambling.”77 These arrests are particularly noteworthy, as both men are former directors of the company with no present connection to the corporation besides owning shares. Regardless, the two Canadians are only the latest to be arrested in the U.S. crackdown on Internet gambling.78 Following the arrests, the 72 “Their Gambling Divide” The Globe and Mail (19 January 2007) A.12. 73 Joanna Glasner, “EBay Says No to PayPal Gambling” Wired (9 July 2002), online: Wired <http://www.wired.com/news/business/0,1367,53703,00.html>. 74 “The Gambling Divide,” supra note 72. 75 “US Stocks Crushed by Online Gaming Act” SEC Investor (2 October 2006), online: SEC Investor <http://www.secinvestor.com/default,month,2006-10.aspx>. 76 I. Nelson Rose, “Gambling and the Law—The Unlawful Internet Gambling Enforcement Act of 2006 Analyzed” (2006), online: Gambling and the Law <http://www.gamblingandthelaw.com/columns/2006_act.htm>. 77 “The Gambling Divide,” supra note 72. 78 In July 2006, U.S. authorities arrested BetonSports CEO, David Carruthers, in Texas as he was changing planes while traveling from London to Costa Rica. He had previously been charged in a sealed indictment of violating nine federal U.S. statutes, including the Wire Act. See Harry Wallop, “US attack on online gaming” The Daily Telegraph (19 July 2006), online: Telegraph Newspaper Online <http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/18/cnfbi18.xml>. In September 2006, U.S. authorities detained the chairman of SportingBet PLC, a publicly-traded British online gaming company, based on a Louisiana warrant while he was traveling in New York. Louisiana is one of the few

2007] Cross-Border Supply of Gambling 93 company temporarily suspended share trading and subsequently announced it would discontinue offering its services to U.S. customers.79 Following its exit from the U.S. market, the company announced 220 layoffs at its Calgary offices and additional layoffs in the U.K. were also confirmed.80 The company currently retains 425 staff members worldwide, a decrease from 1000 in mid-2006.81

On 25 January 2007, USTR officials confirmed that the preliminary confidential report issued to the parties indicated that the WTO Article 21.5 Panel was not persuaded that the U.S. had taken the necessary steps to comply with the Appellate Body’s report.82 However, following its receipt of the preliminary report, the U.S. submitted further comments to the Panel to be considered before the Panel issued its final report. g) The Article 21.5 Panel Report and the Future

On 30 March 2007, the Article 21.5 Panel Report was formally

issued to the parties. The report contained three important findings with respect to U.S. compliance. Firstly, the Panel held that the U.S. had taken no action towards compliance with the DSB’s recommendations and thus was out of compliance.83 Secondly, the Panel noted that the U.S. was not entitled in the compliance proceedings to reargue the case

U.S. States which has a specific law prohibiting online gambling. At the end of the month, New York dismissed the Louisiana warrant, but by that time the chairman had already resigned from his position at the company. See Julie Kollewe, “Former gambling chief Dicks is freed in US” The Independent (30 September 2006), online: The Independent <http://news.independent.co.uk/business/news/article1772362.ece>. Note: both of these arrests took place prior to the passage of the Unlawful Internet Gambling Enforcement Act, under which the founders of NeTeller were charged. 79 “Neteller cuts 220 Calgary jobs as U.S. business falls” The Globe and Mail (17 February 2007) B7. 80 Ibid. 81 The Neteller Group, Press Release, “NETELLER Group Rationalisation Programme Substantially Complete” (16 February 2007), online: The Neteller Group <http://www.neteller-group.com/press/en/125.htm>. 82 Doug Palmer, “U.S. confirms loss in Internet gambling trade case” SignOnSanDiego.com (25 January 2007), online: The Antigua-US WTO Dispute over Internet Gambling <http://www.antiguawto.com/wto/Reuters_USconfirms_loss_in_tradecase_25jan07.pdf>. 83 WTO, Report of the Panel on United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services: Recourse to Article 21.5 of the DSU by Antigua and Barbuda on 30 March 2007, WTO Doc. WT/DS285/RW at para. 6.38, online: WTO <http://docsonline.wto.org>.

94 ASPER REVIEW [Vol. VII that had failed before the Dispute Panel and the Appellate Body.84 Thirdly, the Panel added that even assuming the U.S. had been entitled to present new or additional arguments on its failed case, based upon the materials before the Panel in this proceeding, the U.S. case would still fail.85

The Panel also held that the U.S. was not entitled to maintain its offending measures—the Wire Act, the Travel Act, and the Illegal Gambling Business Act—under the “public morals” exception.86 Furthermore, the Panel provided clarification on the divide between the Dispute Panel Report and the report of the Appellate Body, holding that because the U.S. measures were inconsistent with the GATS and the U.S. did not satisfy both parts of the “public morals” exception, it lost the case.

It is true that the Appellate Body found that the United States had demonstrated that the measures at issue were justified under paragraph (a) of [the ‘public morals’ defence]. However, this was not a finding on [the defence] in its entirety. The Appellate Body expressly confirmed that [the defence] contemplates a ‘two-tier analysis’—first, under one of the paragraphs of Article XIV and then under the chapeau. There was no finding that the measures were consistent with the chapeau or with Article XIV in its entirety nor, hence, with the United States’ obligations under the GATS […].87 The Panel also made several other key findings which will have an

impact on the case going forward. The Panel observed that in light of recent prosecutions by the U.S. of foreign operators, combined with a clear lack of prosecutions of domestic operators, remote interstate wagering under the IHA is “tolerated, even if not authorized under federal law.”88 The Panel also noted that the Unlawful Internet Gambling Enforcement Act appears to have recognized that regulation of remote gambling is feasible, yet nevertheless decided to retain the ambiguity regarding the IHA rather than “clarifying” it in the way the U.S. had argued to the Panel.89 The Panel also admonished the U.S. for

84 Ibid. at paras. 6.57 & 6.85. 85 Ibid. at para. 6.110. 86 Ibid. at para. 6.26. 87 Ibid. at para. 6.29. (emphasis in original) 88 Ibid. at para. 6.128. 89 Ibid. at paras. 6.130 & 6.133.

2007] Cross-Border Supply of Gambling 95 commenting publicly in January on an interim version of its report, which had been circulated under strict rules of confidentiality.

The U.S. has sixty days to announce whether it will appeal to the WTO’s Appellate Body, which seems to be the most likely outcome, given the history of the dispute. The appeal, if there is one, would last approximately three months, so a final resolution on the issue can be expected this summer.90 In the meantime, the Panel Report’s most significant short-term impact may be that it makes it virtually impossible for the U.S. to continue to maintain its position that it somehow “won” the dispute, or that the WTO had ruled that the U.S. was entitled to prohibit the provision of Internet gambling services from Antigua.

Should Antigua ultimately be vindicated in this prolonged trade dispute, it would be the smallest nation ever to win a WTO case.91 Furthermore, a victory for Antigua would mean that the country would be allowed to take retaliatory trade measures against the U.S., such as tariffs on imports, designed to “encourage” the U.S. to meet its obligations under the GATS. Pragmatically, however, such action is unlikely to influence U.S. lawmakers, given the small size of the Antiguan economy, which is heavily dependent on trade with the U.S.92 Imposing additional duties on the few imports from the U.S. would simply make American goods more expensive to Antiguans.

Perhaps somewhat ironically, the biggest threat after the WTO case is decided may not even come from Antigua, but rather from the Internet gambling industry in the European Union, which had previously stated it was an “interested party” in the case.93 Recent prosecutions by U.S. authorities could pave the way for the EU to pursue a fair trade case against the U.S., which the U.S. might have to take more seriously, given the more significant impact that trade sanctions from the EU could have on the U.S.

90 Despite the lack of finality in this dispute, shares in London-listed gaming stocks rose after the March 30th announcement. Leisure & Gaming PLC closed up 11 percent, while PartyGaming PLC rose 4.5 percent, after initially surging by 16 percent. 888 Holdings PLC climbed 3 percent. See Bradley S. Klapper, “WTO Rebuffs U.S. on Internet Betting Ban” Houston Chronicle (30 March 2007), online: The Antigua-US WTO Dispute over Internet Gambling <http://www.antiguawto.com/wto/HoustonChronBradleyKlapperAP_WTORebuffsUS_30mar07.pdf>. For a brief description of the developments on this topic, see supra note 1. 91 “WTO rules against US in Internet gambling case” Financial Times (26 January 2007), online: The Antigua-US WTO Dispute over Internet Gambling <http://www.antiguawto.com/wto/FinancialTimes_WTO_Rules_against_US_26jan07.pdf>. 92 Ibid. 93 Ibid.


While it is possible that the Appellate Body may dilute some of the Panel’s findings, as the Appellate Body did with the Dispute Panel Report, it seems unlikely that the key findings of the most recent report will change in any material respect. If the final Appellate Body Report is adverse to the U.S., as most experts predict it will be, it raises an interesting dilemma for a nation which has a relatively good record of compliance with WTO panel decisions. The U.S. clearly realized that its passage of the Unlawful Internet Gambling Enforcement Act was not in compliance with the WTO ruling and was merely trying to buy time. However, once the U.S. exhausts its appeals, it will have to make a difficult decision: ban all remote gambling in the U.S., open their doors to Antiguan operators, or continue to ignore the WTO ruling and suffer the consequences. Clearly the U.S. will not ban all remote gambling within its borders, given the revenue implications to the horse racing industry, which lobbied vigorously for the provision given under the IHA, and are unlikely to relinquish those rights in an effort to appease the government. It is also highly unlikely that the U.S. will ease access to companies with servers licensed in a nation with only 80,000 people, whose legal efforts were largely bankrolled by British-owned Internet gambling operators, especially given all the rhetoric it spouted in the past about morals.94 Thus, it seems that the U.S. will choose to ignore the ruling and allow Antigua to retaliate with trade sanctions. This wouldn’t be the first time the U.S. has chosen this route, as it ignored several rulings in favour of Canada relating to the softwood lumber dispute, resulting in Canada eventually offering the U.S. many concessions simply to end the ongoing fight.95 Unlike the situation with Canada, however, the U.S. will have a much larger problem if it chooses to ignore the WTO ruling relating to Antigua. Japan, Chinese Taipei, the European Union (representing several European countries), Canada, and Mexico all chose to participate in the most recent panel as interested third parties and their motivation seems obvious. Each of these member countries had disputes with the U.S. in which the WTO ruled in favour of the U.S. Each of these countries consequently abided by the WTO decision and complied with the ruling to their own economic detriment.96 The U.S. has clearly been the greatest benefactor of WTO rulings and Antigua will be a test case for the world to see what the U.S. will do if the roles are

94 Klapper, supra note 90. 95 Hartley Henderson, “WTO Ruling: The U.S. Lost Again. Now What … ” MajorWager (1 April 2007), online: MajorWager <http://www.antiguawto.com/wto/MajorWager_WTOTheUSLostAgain_1Apr07.pdf>. 96 “With Japan, this related to carbon steel and apples; with Chinese Taipei, it related to steel; with Canada, it related to beef; and, very recently, the U.S. won a WTO dispute against Mexico over beverage taxes. And with regards to the EU, the United States won several disputes with European countries.” Ibid.

2007] Cross-Border Supply of Gambling 97 reversed. If the U.S. chooses simply to ignore the final WTO ruling favouring Antigua, other countries may decide based on its actions that WTO rulings are not applicable and as a result, they may just decide to stop abiding by previous or future findings themselves. This chain of events would greatly undermine the WTO dispute settlement system, making it appear as a “toothless tiger,” which in the end would hurt U.S. interests the most.97

It is uncertain how the U.S. will proceed once its stalling tactics cease to be effective. However, considering the long-term damage that ignoring the ruling would do to the credibility of the U.S. and the WTO dispute settlement system, it seems the U.S. will eventually have no choice but to enter into meaningful negotiations with Antigua to resolve this dispute.

CONCLUSION

LTHOUGH THE RECENT ARTICLE 21.5 PANEL REPORT unequivocally upholds Antigua’s arguments, over two years have passed since the Appellate Body report was issued and yet the issue still

remains largely unresolved. Much of the delay has stemmed from the manner in which the Appellate Body’s report blatantly undermined the findings of the original Dispute Panel. The unfortunate result was a report which had:

[…] certain hallmarks of a political decision […] the Appellate Body decided that Antigua deserved the win under the law, but wanted to make the win as thin and ambiguous as it could under the circumstances.98

This shortcoming in the WTO Dispute Settlement system could

best be addressed by adopting formal stare decisis, which would result in a significantly greater degree of certainty for member nations. In addition, an international regulatory scheme for Internet gambling should be embraced by WTO members, as a result of the unique global nature of the Internet.

97 Ibid. 98 Mendell Blumenfeld LLP, supra note 10.

A

98 ASPER REVIEW [Vol. VII a) The WTO should set a Clear Precedent re: the Article XIV Defence and Consider Recognizing de jure Stare Decisis

The Antigua-U.S. dispute marks the first occasion for the WTO to

consider the “public morals” exception under Article XIV. As a result, the Dispute Panel was unable to refer to prior GATS jurisprudence as precedent.99 Nevertheless, even if previous decisions interpreting Article XIV existed, stare decisis does not apply to the WTO.100 However, previous decisions remain persuasive and may have a binding nature as the WTO currently has a system of de facto stare decisis.101 The WTO should formally address the binding nature of previous Dispute Panel and Appellate Body decisions in order to eliminate inconsistent Appellate Body decisions. While the concept of stare decisis is already common in Appellate Body reports, the WTO needs to address the precise extent to which past decisions are binding. “If the Appellate Body is explicitly bound by the reasoning used in past decisions, the WTO will benefit from a Dispute Settlement system that is fair, predictable, and credible.”102 This additional measure of certainty would place first and third world countries on an equal footing by creating legitimacy in Appellate Body decisions.103 A further benefit of adopting stare decisis would be the reduction of tension between first and third world countries, as first world countries would be unable “to use their political or economic power to influence the outcome of a dispute.”104

99 Report of the Panel on United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services on 10 November 2004, supra note 38 at para. 6.447. 100 Richard H. Steinberg, “Judicial Lawmaking at the WTO: Discursive, Constitutional, and Political Constraints” (2004) 98 Am. J. Int’l L. 247 at 254. 101 Kelly Ann M. Tran, “The WTO Appellate Body Gambles on the Future of the GATS: Analyzing the Internet Gambling Dispute between Antigua and the United States before the World Trade Organization” (Working Paper No. 1803, bePress Legal Series, 2006) at 145, online: bePress Legal Repository <http://law.bepress.com/cgi/viewcontent.cgi?article=8556&context=expresso>. 102 Ibid. 103 Ibid. at 145-46. 104 Ibid. at 147 (noting that the consensus requirement assures the automatic adoption of final reports because of the assumption that the winning party will be “unwilling to join any consensus against a ruling in its favor”).

2007] Cross-Border Supply of Gambling 99 b) WTO Members should adopt an International Regulatory Scheme for Internet Gambling

No business on the Internet generates as much revenue as online

gambling.105 In a report issued by the National Gambling Impact Study Commission describing the potential influence of online gambling on the American population, it stated that “[o]nline wagering promises to revolutionize the way Americans gamble because it opens up the possibility of immediate, individual, 24-hour access to the full range of gambling in every home.”106 Currently in the U.S., gambling is legal in nearly every state and when considering the ample amount of legal land-based gambling, it tends to erode the rationale for continued prohibition of online gambling.107

As the Antigua-U.S. WTO dispute over online gambling has demonstrated, controlling online gambling is not an issue confined to any one specific nation. Online gambling is a global issue affecting virtually all countries and consequently, any meaningful analysis of online gambling requires an international perspective. Although substantial revenues are generated from online gambling, there exist a myriad of domestic problems which accompany gambling.108 In light of these policy concerns and the long global history of gambling, it is imperative that all nations develop an international scheme to deal with the situation. “Several countries have successfully moved toward Internet gambling regulations, such as Britain, Australia, and Belgium, all of which passed new legislation regulating online gambling.”109

Considering the decision of the Appellate Body in the Antigua-U.S. case and based on the recently issued Article 21.5 Panel Report, it appears that the only truly viable solution involves choosing regulation over prohibition.110 The model solution would consist of an “international regulatory schema that preserves each country’s individual right to

105 Andrle, supra note 26 at 1390. 106 Ibid. at 1391. 107 See Wesley S. Ashton, “Criminalizing Internet Gambling: Should the Federal Government Keep Bluffing or Fold?” (Working Paper No. 1304, bePress Legal Series, 2006) at 21, online: bePress Legal Repository <http://law.bepress.com/expresso/eps/1304/>. (Noting that 37 states offer lotteries, 11 states permit commercial casino gambling and nearly half of U.S. states host Class III Indian Gaming.) 108 Common social problems associated with gambling include: “divorce, bankruptcy, crime, domestic violence, child neglect, addictive gambling, and alcohol and drug offences.” Andrle, supra note 26 at 1392. 109 Tran, supra note 101 at 149. 110 Unless a nation prohibits all “remote” gambling activities within its own borders.

100 ASPER REVIEW [Vol. VII decide the specifics of its online gambling laws while still creating a legitimate method of enforcement”111 which complies with the GATS.

The advantages of pursuing an international regulatory scheme are readily apparent. Nations would be empowered to design their own online gambling laws with reference to specific domestic social and moral concerns. International regulation combined with the official adoption of stare decisis at the WTO would create increased certainty for online gaming companies, online payment processors, financial institutions, and credit card companies regarding the legality of their operations vis-à-vis online gambling. Perhaps most importantly, the forgotten stakeholder in this entire debate—the 23 million estimated online gamblers globally—would be able to enjoy the entertainment provided by gambling in the comfort of their own homes without the constant fear of prosecution.112

111 Andrle, supra note 26 at 1393. 112 American Gaming Association, supra note 2.

SANITARY AND PHYTOSANITARY MEASURES AT THE WTO:

BALANCING BIOLOGICAL RISK AND COMMERCIAL INTEREST

Peter Ward*

INTRODUCTION

HE AGREEMENT ON THE APPLICATION of Sanitary and Phytosanitary Measures (“SPS Agreement”), a side agreement of the 1994 World Trade Organization (“WTO”), was designed to accommodate

national health and environmental standards within an international effort to reduce trade barriers. WTO members were concerned that they might give up their ability to protect their populations from harmful foreign products if they were more open to imports, as other countries were able to allow higher concentrations of harmful residues in food products that posed unacceptable risks to human health. They were also concerned about imports having the potential to carry damaging pests that could be costly to domestic producers or the natural environment. As each country has its own particular vulnerability to animal or plant health because of unique climatic and biological conditions, the SPS Agreement appeared beneficial because it allowed governments to protect these vulnerabilities.

While WTO members have not been willing to give up control over the products that come into their countries, they have also recognized that importing countries are tempted to use any ability that they have available to limit imports for the benefit of domestic producers. This suspicion was reinforced by the increasing use of non-tariff barriers in the latter part of the GATT era. For example, 57% of food imports into the U.S. were subject to non-tariff barriers in 1966. By 1986, this figure had risen to 90%.1 The tension between the legitimate protection of human, animal, and plant health as an expression of national sovereignty and the facilitating of international trade underscores the SPS Agreement and its application.

WTO members agreed that scientific evidence should be required to justify SPS measures and distinguish them from disguised barriers to trade. An analysis of the first four cases where WTO Panels and Appellate

* B.A. (Honours); M.A. Sociology; LL.B. (UM, 2008) 1 David G. Victor, “The Sanitary and Phytosanitary Agreement of the World Trade Organization: An Assessment After Five Years” (2000) 32 N.Y.U. J. Int’l L. & Pol. 865 at 874.

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102 ASPER REVIEW [Vol. VII Bodies have ruled on SPS measures, however, shows that there are a number of non-scientific choices that determine the balance between the competing interests of national sovereignty and international trade. These choices include: on whom the onus lies; what standard of proof must be met; the deference given to minority scientific opinion; and whether countries must tolerate some minimum level of risk. The role accorded to scientific evidence is circumscribed by these considerations that ultimately establish the balance between commercial and national sovereignty interests. Scientific Evidence Requirement

Article 2.2 of the Agreement holds that an SPS measure must be based on scientific evidence. There must be evidence of the existence of the risk and that the measure effectively reduces that risk.2 In the absence of any such evidence, there is a danger that the measure is a disguised barrier to trade. On the other hand, where a country has scientific evidence of a risk and evidence that the SPS measure would effectively reduce it, the country legitimately expresses its sovereignty through the SPS measure. The terms of the SPS Agreement suggest that members may set their own level of tolerance for risk as long as they can establish a risk and scientifically justify their response to it. Where a possible hazard has been detected, a country may provisionally adopt measures based on what is known at the time. The country must, however, seek additional evidence to either support or replace the measure within a reasonable period of time.3

Since the Agreement was signed in 1994, there have been many disputes between WTO members over SPS measures. Twenty-four of these have resulted in complaints to the WTO, of which seven have been resolved by mutual agreement. Ten disputes have been pending for a number of years, likely having been abandoned by the complainants. Three further disputes are at various stages of being heard by the dispute settlement Panels.4 Prior to the Japan—Apples case, the subject of the following, only three had been fully adjudicated: 1) a U.S. and Canadian complaint against a European Union (“EU”) prohibition on the importation of beef raised using growth hormones (Beef Hormones); 2) a Canadian complaint against an Australian ban on salmon imports 2 Alan O. Sykes, “Domestic Regulation, Sovereignty, and Scientific Evidence Requirements: A Pessimistic View” (2002) 3 Chi. J. Int’l L. 353 at 354. 3 GATT, Agreement on Sanitary and Phytosanitary Measures, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, 15 April 1994, art. 5.7. 4 WTO, Committee on Sanitary and Phytosanitary Measures: Major Decisions and Documents, (Summer, 2006) at Appendix B, online: World Trade Organization <http://www.wto.org/english/tratop_e/sps_e/decisions06_e.pdf>.

2007] Sanitary and Phytosanitary Measures at the WTO 103 (Australia—Salmon); and 3) a U.S. complaint against Japanese measures aimed at keeping the codling moth from becoming established in Japan (Japan—Varietals Testing). Japan—Apples arose out of a US complaint that Japanese measures designed to prevent the spread of fire blight into Japan were unjustified barriers to trade.5

The complainants have been successful in all four cases, as each of the measures was found to have been contrary to the SPS Agreement. However, the effort and expense required to bring these cases before a dispute resolution body may limit the remedy to the few countries that have sufficient resources.6 Even where there are resources, it may not be economical to complain about some SPS measures if the possible benefit does not justify the cost. For example, both Australia and South Africa have complete bans on US apple imports because they do not want to be exposed to fire blight.7 The same arguments and evidence that the US used in Japan—Apples to remove Japanese barriers to imports would apply equally to the Australian or South African restrictions. The difference, however, is that Australia and South Africa are significant and efficient producers and exporters of apples in their own rights. Even if the barriers to US imports were removed, the US could not expect to sell apples in those markets. A complaint is likely only brought forward for adjudication when the complainant believes that it has a very strong case and there is enough at stake to make the complaint worthwhile.8

The Japan—Apples case does not break any new ground in the interpretation of the SPS Agreement. It does, however, refine elements of the three earlier decisions and give a stronger indication of how a WTO dispute settlement body will balance national protective measures against the commercial interests of exporters. The parties, particularly Japan, were able to craft their arguments and scientific evidence according to what they had learned in previous disputes. In doing so, they were able to focus the Panel more closely on the issue of what is required of scientific evidence to support a risk assessment on which an SPS measure can be based. The First Three Disputes

The first dispute over an SPS measure was the Beef Hormones complaint. The ban began in 1981, long before GATT 1994 and the SPS Agreement. Moreover, the measure was clearly not intended to be a 5 Ibid. 6 Victor, supra note 1 at 897-898. 7 Linda Calvin & Barry Krissof, “Resolution of the U.S.-Japan Apple Dispute: New Opportunities for Trade” United States Department of Agriculture, FTS-318-01, (October 2005) at 10, f.n. 4, online: U.S. Dep’t of Agriculture <http://www.ers.usda.gov/publications/FTS/Oct05/fts31801/fts31801.pdf>. 8 Victor, supra note 1 at 897-898.

104 ASPER REVIEW [Vol. VII disguised attempt to favour domestic producers over foreign beef imports. The ban on the use of growth hormones for cows was the response to a scandal arising from an incident at a convent school in Italy. Teachers and students at this school were exposed to high levels of growth hormone residues, to the extent that boys between the ages of three and thirteen began to develop breasts because a farmer had improperly administered hormones to his cattle.9 The EU eventually prohibited the use of hormones in domestic production and prohibited imports of beef from hormone treated cattle.10 Overnight, US exports to the EU fell from $100 million annually to nothing.11

The first argument that the US put forward was that the EU breached the SPS Agreement by insisting on standards that were stricter than those contained in international standards. Such standards did exist for the residues of some of the proscribed hormones, and the US argued that the Preamble and Article 3.1 of the SPS Agreement mandated that those standards had to be accepted by signatories to the agreement.12 The US was arguing, in effect, that by joining the WTO, members gave up the right to determine risks and set national priorities about responses to risks. No SPS measure that was more stringent than an existing international standard could be valid. The Panel accepted the US argument, but the Appellate Body did not.13 No complainant has made this argument since. It can thus be said that international standards, where they exist, are not binding on WTO members.

Nevertheless, the Appellate Body did rule in favour of the US because the hormone ban violated Article 5.1.14 This article states that an SPS measure must be based on a risk assessment. There was no requirement that “a certain magnitude or threshold level of risk be demonstrated.”15 Nor did the risk need to be the view of the majority of scientists to be valid according to the Body. It is enough that there was a rational relationship between the measure and the risk assessment.

The EU tried to demonstrate the risk of hormone treated beef indirectly by showing that the ingestion of the hormones by women in hormone replacement therapy caused cancer. Extrapolating from this, an

9 Charan Devereaux, Robert Z. Lawrence & Michael D. Watkins, Case Studies in US Trade Negotiation, Vol. 2: Resolving Disputes (Washington, D.C.: Institute for International Economics, 2006) at 37-38. 10 Ibid. at 41. 11 Ibid. at 51. 12 Victor, supra note 1 at 900. 13 Ibid. 14 WTO, EC Measures Concerning Meat and Meat Products (Hormones), Report of the Appellate Body, P180, WTO Doc. WT/DS26/AB/R at para. 208, online: WorldTradeLaw.net <http://www.worldtradelaw.net/reports/wtoab/ec-hormones(ab).pdf> [Beef Hormones]. 15 Ibid. at para. 186.

2007] Sanitary and Phytosanitary Measures at the WTO 105 expert estimated the risk of developing cancer from eating meat from hormone treated cattle to be one in a million.16 The Appellate Body rejected this evidence, stating that a proper risk assessment had to specifically evaluate the carcinogenic potential of hormone treated beef and that it was not acceptable to generalize the evidence from hormone replacement therapy.17 The EU then argued that the WTO ought to consider the risks that the hormones would be overused. After all, it was the improper use of growth hormones that had caused the incident at the Italian convent school in the first place. There was also ample evidence that US ranchers had ignored veterinary evidence and used growth hormones improperly in the past.18 The Appellate Body responded that the EU had not shown any evidence of the extent of this possibility. Consequently, there was no ‘rational relationship’ between the risk assessment and the SPS measures, and it ruled that the measures were invalid.19

The Appellate Body was not explicit on what constituted a rational relationship between a risk assessment and an SPS measure. What had become clear, however, was that the onus was clearly on the importing country to justify its measures, and there was a de facto presumption of invalidity. Also, the result of the measure, not the intention behind it, was the relevant factor when determining if a measure was valid. That the EU never intended the ban to be a trade barrier was not germane. The decision in Beef Hormones gave a mixed message about the acceptability of minority scientific opinions. On one hand, the Appellate Body held that it could legitimately justify an SPS measure. On the other, the Body was not influenced by the one proffered in the particular case.20

Australia—Salmon began with a Canadian complaint about a ban on the importation of fresh or frozen salmon. Australia argued that the ban was necessary to prevent the introduction of twenty-four aquatic diseases into Australian waters. Canada argued that the risk of the diseases spreading to Australian waters through headless and eviscerated salmon was based on an implausible chain of events.21

Australia countered that an infected fish could plausibly be packaged and shipped while remaining infectious. Some part of this fish could then be discarded raw into a vulnerable waterway in a quantity that would allow the disease to survive and spread.22 16 Ibid. at para. 198, f.n. 181. 17 Ibid. at para. 199. 18 Devereaux, supra note 9 at 35-37. 19 EC Measures Concerning Meat and Meat Products (Hormones), Report of the Appellate Body, supra note 14 at para. 193. 20 Sykes, supra note 2 at 360. 21 Victor, supra note 1 at 904-906. 22 Ibid. at 906. See also WTO, Report of the Panel on Australia Measures Affecting


Like in Beef Hormones, the Appellate Body ruled that the measures were not based on a risk assessment. It set out three criteria for a valid assessment. An importing country had to 1) identify the diseases and their possible consequences; 2) evaluate the likelihood of “entry, establishment and spreading” of the pathogen; and 3) evaluate the effect of the SPS measures on this likelihood.23 This ruling is difficult to reconcile with the Appellate Body’s previous expressions on risk assessments. In Beef Hormones, risk assessments could include qualitative factors and no minimum level of risk had to be demonstrated.24 In Australia—Salmon, however, the requirement to evaluate the likelihood of a risk implies a quantification of the risk. Moreover, that the measure be evaluated for its effectiveness in reducing the risk suggests that there is a minimum quantitative threshold for a risk to justify an SPS measure.

The WTO ruling was clouded because Australia did not apply its SPS measures consistently. Specifically, it allowed ornamental fish for aquaria and frozen bait fish to be imported. Both were possible vectors for the aquatic diseases, and the chain of events necessary to introduce them into pristine Australian waters was more plausible than for Canadian salmon.25 Live ornamental fish are more likely to bring disease into Australia than dead salmon, and ornamental fish are likely to be disposed of into waterways. Frozen bait fish are just as likely as salmon to be infectious, and they are intended to be put into natural waterways.26 In Australia—Salmon, it was unclear if a country could not apply a zero-risk policy at all or, if it was willing to tolerate some risk by allowing some imports, it could not prohibit imports with an equivalent or lesser risk. There was little doubt, however, that the SPS measures were in fact enacted to protect the developing Australian salmon farming industry.

The Japan—Varietals Testing case started with a US complaint about a Japanese measure designed to prevent the spread of the codling moth to Japan. Japan required that most fruit and nut imports be fumigated to kill the eggs and larvae of the moth. The US did not complain of this stipulation, but that the exporters were required to demonstrate the effectiveness of fumigation on each separate variety. Consequently, the US had to show its procedures were effective with Granny Smith apples, and then do the same for Fuji apples, and so on. The US argued that Japan had no evidence that the test results from one

Importation of Salmon—Recourse to Article 21.5 by Canada, WTO Doc. WT/DS18/R at paras. 4.69-4.74, online: WTO <http://docsonline.wto.org>. 23 Victor, supra note 1 at 906-907. 24 Ibid. at 900-901. 25 Ibid. at 906. 26 Ibid.

2007] Sanitary and Phytosanitary Measures at the WTO 107 variety would differ from the results for another variety and that the expense and delay of testing each variety was more restrictive of trade than required. Japan replied that the different times that varieties matured meant that the moths were in different stages of development for different varieties, so the tests were justified. Moreover, Japan argued that Article 5.7 allowed it to adopt more restrictive standards when there was not enough evidence available to allow it to rule out the risk.27

The Appellate Body ruled that the onus was on Japan to demonstrate the risks and justify the testing of varietals. Also, raising the prospect of the risk was not sufficient to justify an SPS measure. Article 5.7 did allow countries to institute measures to counter a risk before it had been formally assessed, but Japan could not avail itself of this because it had not sought the information required to justify the measure within a reasonable amount of time.28

Going into the Japan—Apples case, WTO members were faced with conflicting indications from previous disputes about the nature of the evidence required to justify an SPS measure. The dispute resolution bodies had stated that minority scientific opinion was a valid justification, that importers did not have to accept any minimum level of risk, that risks could take into account qualitative factors, and that importers could take into account ‘real world’ risks. Previous cases had shown that importers could not necessarily rely on these statements to allow them to control risks as they saw fit, which the judgment in the Japan—Apples dispute was to reinforce. JAPAN—APPLES: THE DISPUTE

HE JAPANESE OPENED THEIR MARKETS to apple imports in 1971, but few countries took advantage of the opportunity, since Japan maintained strong SPS measures against many known pests. To

control the codling moth, Japan mandated that fruit imports had to be fumigated, which lessened the quality of imported fruit. The measures that were directed at minimizing the risk of fire blight spreading to Japan were also onerous. The US was only authorized to export from Oregon and Washington State, and growers were required to register their orchards with the Japanese at the beginning of each growing season. The US Department of Agriculture (“USDA”) was required to inspect every tree in these orchards three times during the growing season, the third time in the presence of a Japanese inspector. Each orchard was required to have a 500m buffer zone, which also required inspection. If fire blight was detected anywhere in the orchard or in the buffer zone, the orchard

27 Ibid. at 909-912. 28 Ibid. at 912.

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108 ASPER REVIEW [Vol. VII was disqualified from exporting to Japan. In 1994-95, the first season these rules were in effect, only half of the acres originally registered still qualified for export at harvest time. No other country required orchard inspections to control fire blight, although Australia and South Africa prohibited US apple imports entirely because of the fire blight risk.29

Japan also required that harvested apples be washed in a disinfectant. The packing facility also had to be cleaned with the disinfectant, and fruit destined for Japan had to be kept separate from fruit for other markets. Further, the US was required to certify that the fruit was fire blight free. Japanese officials had to be given the access required to inspect and certify the harvested apples and the packing facilities.30 American growers found these measures so onerous that for five of the eleven years that this export regime was in force, US growers registered no acreage at all.31 The USDA calculated that the SPS measures cost US growers $143.6 million per year in 2005.32 While Japan is the thirteenth largest producer of apples in the world, its industry is made up of thousands of small, relatively inefficient growers. With the import barriers, the high cost of domestic production, and declining domestic production, Japan has a low per capita rate of apple consumption. Consequently, US producers believe that the Japanese market has considerable potential.33

The WTO’s dispute settlement Panel first heard the US’s complaint about the fire blight regulations in July 2003 and ruled in favour of the US.34 The Appellate Body confirmed this ruling in December 2003.35 Japan responded by slightly revising its SPS measures, reducing the buffer zone around registered orchards from 500m to 10m.36 This did not satisfy the US, who again complained to the WTO, and also asked to collect damages for the amount of apple sales the US claims that it lost due to these measures. The US argued, as it had done in 2003, that there was no scientific evidence that mature, symptomless apples could be infected and act as a vector for the fire blight bacteria.37

29 Calvin & Krissof, supra note 7. 30 WTO, Japan—Measures Affecting the Importation of Apples, Article 21.5 Panel Report, WTO Doc. WT/DS245/RW (23 June 2005) at paras. 8.94-8.118, online: WTO <http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds245_e.htm>. [Japan—Apples] 31 Calvin & Krissof, supra note 7 at 11. 32 Ibid. at 21. 33 Ibid. 34 Ibid. at 6. 35 Ibid. 36 Japan—Apples, supra note 30 at para 2.22(c) and Calvin & Krissof, supra note 7 at 6. 37 Calvin & Krissof, ibid.

2007] Sanitary and Phytosanitary Measures at the WTO 109 Scientific Arguments

Japan argued the risk of the spread of fire blight was twofold.

First, a failure of US export controls could cause infected plant material to be exported to Japan. Second, latently infected symptomless apples could carry fire blight, which could then infect the Japanese environment. Having failed to defend its SPS measures in 2003, Japan had to produce scientific evidence to support its measures. Just pointing to the risk and claiming a zero-risk policy was not sufficient. Consequently, Japan sponsored four studies that were intended to meet the scientific requirements called for in the SPS Agreement. The first three were to demonstrate a pathway by which infected mature apples could spread fire blight to Japan and the fourth quantified the risk and the effectiveness of the SPS measures.38

The first study had to demonstrate that mature fruit could be infected by the fire blight bacteria. This was an important point to establish, since infection was said to stop the fruit from maturing. The Japanese researchers removed a protective layer (abscission layer) between the twig and the fruit and placed a solution carrying the bacteria on the wound. Some of the bacteria were later detected in the fruit.39 The second study had to show that the bacteria could survive within the apples throughout cold storage and shipment. The researchers again artificially contaminated the apples by removing the abscission layer and introducing the bacteria into the fruit. The apples were then placed in an incubator where they were left for nine days at high temperatures (twenty-five degrees Celsius) and relatively high humidity, before putting them in cold storage (five degrees Celsius). The bacteria survived for months in the fruit.40

The next step of the pathway that had to be demonstrated was that the bacteria could move from a latently infected apple to vulnerable plants. The study purported to show that flies could carry the infection from a discarded apple core to vulnerable plant material. The researchers first sedated some flies and confined them to the cut surfaces of artificially contaminated fruit for six hours to show that flies could pick up the bacteria from fruit. The flies did, in fact, have small concentrations of the bacteria on them.41 Other flies were sedated, surface sterilized, then dunked into a solution containing the bacteria. They were then left in a small enclosure with surface damaged apples, pears, and plant material. The infected flies were observed feeding on the

38 Japan—Apples, supra note 30 at paras. 4.25-4.67. 39 Ibid. at paras. 4.38-4.44. 40 Ibid. at para. 4.25. 41 Ibid. at para. 5.46.

110 ASPER REVIEW [Vol. VII fruit in the enclosure.42 The fourth study used the previous three to quantitatively describe the risk and to show the effectiveness of the SPS measures. The Japanese researchers asserted that of garbage in Japan disposed of outside, ten percent was made up of apple cores or peels. With this, the risk from mature, symptomless fruit was an infection once every 565 years. The effective SPS measures reduced this risk to one infection every 1,898 years.43

The US representatives argued against these conclusions because the studies were not realistic to orchard and production conditions.44 For example, the cold storage conditions were not similar to the actual conditions that export apples are subject to. Apples are never placed in incubators for nine days—instead, they are put in cold storage (zero to two degrees Celsius) within twenty-four hours of harvesting. Similarly, there was no evidence that flies would become infectious and infect vulnerable plant material if left on their own. The first three studies were similarly and obviously flawed. The fourth study was compromised by its reliance on the first three and its assumption about the proportion of garbage that is made up of apple cores and peels. Moreover, the US argued that there was no evidence that a mature, symptomless apple had ever been latently infected with the fire blight bacteria except deliberately in laboratory conditions.45 The Ruling

The Panel canvassed the US and Japanese positions on this research and then put a series of questions to four experts. In effect, they all agreed with the US arguments and the Panel concluded that Japan did “not provide sufficient scientific evidence to establish, in natural conditions, the risks which Japan tries to support […].”46 Orchard and buffer zone inspection and disinfection of fruit and packing facilities were thus found to be unjustified.47 The US, however, was required to certify that it was only exporting mature, symptomless apples and Japan was justified in verifying this.48

The panel ruled that Article 5.1, which requires that SPS measures should be based on a risk assessment, should be read together with Article 2.2, the obligation to base an SPS measure on scientific evidence.49 It is a specific application of the more general obligation.50

42 Ibid. at paras. 4.64 & 5.47. 43 Ibid. at paras. 4.57-4.67. 44 Ibid. at para. 8.50. 45 Ibid. at para. 4.47. 46 Ibid. at para. 8.71. 47 Ibid. at paras. 8.95-8.102. 48 Ibid. at para. 8.121. 49 Beef Hormones, supra note 14 at para. 180.

2007] Sanitary and Phytosanitary Measures at the WTO 111 Consequently, the Panel determined that the risk assessment, based as it was on the four studies criticized in the Article 2.2 analysis, was not appropriate to the circumstances.51 The failure to convince the Panel that the risk of fire blight spread was scientifically plausible meant that the risk assessment could not support the SPS measure.

The US argued that considering the conclusions of the experts that mature, symptomless apples carried little likelihood of spreading fire blight, current US export controls were sufficient to provide Japan with the SPS protection that it desired. Japan countered that the US procedures amounted to little more than current industry practice and that while the US may insist that its export controls are sufficient, it has failed to show that these procedures guarantee Japan’s chosen level of protection. The possibility of the failure of US export controls posed a risk of the spread of fire blight to Japan. Japan pointed to the recent failure of the US export procedures to keep codling moths out of shipments of apples to Taiwan as a cause of concern.52 The panel, however, was not prepared to accept this argument. Japan had not demonstrated a quantifiable risk to justify its SPS measures.53 CONCLUSIONS

HROUGHOUT THE JAPAN—APPLES DISPUTE, neither the US nor the WTO alleged that the impugned measures were intended as a disguised barrier to trade. The USDA noted that other apple exporting

countries were similarly disadvantaged by a range of Japanese SPS measures, and that Japanese producers saw no real benefit from them.54 No protectionist purpose was alleged here, as Japanese production was already in decline for its own internal reasons. Instead, this dispute pitted the commercial aspirations of American apple growers against the biologically protective aspirations of the Japanese government. The WTO dispute settlement bodies have shown that they will rule in favour of the commercial interests over national sovereignty, largely by the mechanism of what they demand of scientific evidence.

Japan—Apples presents an important gloss on the earlier decisions about SPS measures. The onus clearly lies with the importer to justify the SPS measure by showing that it is rationally related to a risk assessment, based on scientific evidence. This case shows that the WTO will judge the risk assessment by evaluating the scientific evidence that it

50 Japan—Apples, supra note 30 at para. 8.124. 51 Ibid. at paras. 8.156-157. 52 Ibid. at paras. 8.166-168. 53 Ibid. at paras. 8.169-8.181. 54 Calvin & Krissof, supra note 7 at 5 & 8.

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112 ASPER REVIEW [Vol. VII is based on. In this case, the science was found unconvincing, so the risk assessment was not appropriate. The approach of the panel in this case suggests that the preponderance of scientific evidence must support a measure, not just the presence of some evidence. It may be that the studies that the Japanese relied on here were so transparent and unconvincing that they could not support a measure at all. Whether an importer must justify its risk assessment by showing that the weight of scientific evidence is in its favour or whether it must just meet some minimal standard will have to wait for a future case where the evidence in favour of an SPS measure is better than it was here. Nevertheless, it is clear that the WTO will evaluate the scientific evidence and hold it to some standard. Just as in Beef Hormones, the risk assessment cannot generalize—it must weigh the particular risk in the specific circumstances.

As yet, the WTO bodies have not clearly stated what particular burden an importer must meet. The Panel judged that Japan “did not provide convincing evidence,”55 that it “does not establish” a pathway,56 and that the studies put forward by Japan “do not demonstrate” a risk in natural conditions.57 It used measured scientific language to make a distinction that is better suited to legal analogies. After all, Japan could never muster sufficient scientific evidence to demonstrate a pathway with certainty if it had to meet a scientific burden of proof. Instead, the choice that the Panel had to make, i.e. whether to approve the SPS measures or not, is better approached through legal burdens of proof. In none of the decisions about SPS measures, however, has a WTO body articulated the standard of proof required: does an importer need to show an ‘air of reality’ to a risk, the risk ‘on the balance of probabilities,’ or does it have to demonstrate the risk ‘beyond a reasonable doubt’?

In Beef Hormones, the Appellate Body stated that a valid risk assessment could be based on a minority scientific opinion. It was certainly the case in Japan—Apples that the majority scientific opinion favoured the US position and yet a minority still supported the Japanese position. This minority was not enough to save the measures. If in fact the WTO bodies are going to weigh the evidence in favour against the evidence opposed to an SPS measure, the minority opinion will count for little. So far, the minority opinion has not been enough in either Beef Hormones or Japan—Apples to justify a measure.

Decisions in Beef Hormones and Australia—Salmon spoke of allowing countries to choose their own toleration of risk. WTO bodies have stated that a country may choose to have a zero-risk policy as long as it is based on a risk assessment. Moreover, these bodies have stated

55 Japan—Apples, supra note 30 at para. 8.50. 56 Ibid. at para. 8.65. 57 Ibid. at para. 8.140.

2007] Sanitary and Phytosanitary Measures at the WTO 113 that countries may take qualitative factors into account in their risk assessment and thus they do not have to have strictly quantitative assessments of risk. All this would suggest that there is a low standard for risk assessments. In effect, a country’s ability to choose its own level of acceptable SPS risk would be paramount over any concerns that the SPS measures were being misused as disguised barriers to trade.

This assertion is increasingly difficult to defend and it appears that a minimum threshold of risk must be reached to validate an SPS measure. Japan did not claim that there was a strong likelihood of infection from US apples. Even without the protection of its SPS measures, the Japanese expected infection only once every 565 years. The studies that they relied on suggested that infection was merely possible. In light of the Japanese zero-tolerance policy, this was enough to justify the measures, since anything that reduced contact between infected American plant material and pristine Japanese flora was sensible. The WTO, on the other hand, found the measures invalid because the studies did “not demonstrate a risk” in natural conditions, or “establish a pathway.”58 In effect, the Japanese tried to justify their measures on the possibility of infection while the WTO expected them to demonstrate the probability of infection. Where a risk is very slight, convincingly (and scientifically) establishing with precision what exactly the risk is and how an SPS measure will quantifiably reduce that risk may not be possible. The risk, however slight, may carry serious consequences for an importing country and still lack a sufficiently precise description to justify an SPS measure before the WTO.

In Japan—Apples, the Panel showed a tendency to overlook the arguments in favour of a zero-risk policy, which it showed by its consideration of the spread of fire blight to Great Britain in the late 1940’s. The Panel suggested that the infection was likely, but not certainly, caused by contact between a wooden packing box, which had come into contact with infected plant material in the US, and vulnerable plant material in England. The Panel used this as evidence to support the US position that the fruit themselves were unlikely to spread the disease, since the spread required only one-time contact.59 But viewed from a Japanese perspective, the incident could support the SPS measures. The fact that only one contact was needed to establish fire blight could be a compelling argument to limit the possibilities of contact. Also, the chain of events that led to the spread to Britain was no less implausible than those put forward by Japan in its arguments in favour of its precautions. Infected plant material had to be accidentally packed; the bacteria had to rub off on the box; after the pears were removed, the

58 Ibid. at paras. 8.65 & 8.140. 59 Ibid. at para. 4.118.

114 ASPER REVIEW [Vol. VII box had to be disassembled and come into contact with a vulnerable plant, all before the elements could kill the bacteria.

The refusal of the WTO to consider the failure of export controls when ruling on SPS measures is also strongly in favour of the exporter. After all, Japan was able to point to a recent failure of the US’s export controls when shipping apples with viable codling moths still present, despite the fact that export procedures should be able to kill moth eggs and larvae. Yet the WTO, here and in Beef Hormones, did not consider such failures when it ruled on importers’ precautionary measures.

What does balance the interests between importers and exporters is that few SPS measures actually get challenged. Australia’s and South Africa’s measures against US apples are just as vulnerable as Japan’s, but it is just not worth the expense to complain to the WTO about them. Further, when the WTO does find invalid measures, it removes them only very specifically for individual products. For example, it was only their orchard and buffer zone inspections and the disinfecting that was ruled invalid for apples. Other measures for apples, such as fumigation, continue and inspections are not ruled out for other products. While the actual rulings appear to favour the commercial interests of exporters, there is an institutional bias in favour of the importer’s measures. Moreover, an importer, such as Japan in this case, could ignore the ruling and the US would have to apply countervailing duties against Japanese exports to the US. The EU has done this in the Beef Hormones dispute where it still will not permit beef raised using hormones to be imported. Japan has the resources to pay approximately $150 million a year in duties to the US if its SPS measures are sufficiently important to it. Also, the costs of the duties are not necessarily borne by the exporter. If US consumers are going to buy the Japanese goods regardless, it is the US consumers who end up paying the countervailing duties.

Scientific evidence has not been a neutral means of distinguishing between valid efforts to protect a country’s SPS integrity and disguised barriers to trade. In order to justify an SPS measure, evidence must meet standards, which are still not clear. The rigour of these standards has proven to be a barrier to SPS measures. WTO bodies have not tried to distinguish between those measures that are motivated to protect human, animal, and plant health and those designed to benefit domestic producers. Such an approach, however, is probably necessary to counterbalance the institutional factors that cause SPS measures to be created and overlooked by trading partners once they are in place.

THE POLITICAL ECONOMY OF SOVEREIGNTY REVISITED: A RE-EXAMINATION OF THE

PUBLIC CHOICE MODEL IN LIGHT OF CHINA’S ACCESSION

TO THE WORLD TRADE ORGANIZATION

Miron Mushkat* & Roda Mushkat**

INTRODUCTION

HE STATE HAS LONG BEEN the principal actor in the international arena. This remains the case, notwithstanding the proliferation of supra-national institutions and sub-national organizations. State

action, in turn, continues to reflect the notion of sovereignty in its largely traditional (undiluted but not unfettered) form. The international system may have acquired a less differentiated character since the Second World War, yet the principle of state independence and equality has not lost its theoretical and practical relevance.

National interests, however defined, are thus often placed above all others. Moreover, the pursuit of such interests generally involves the exercise of a high measure of discretion on the part of the state. In this respect, current practices do not diverge significantly from those that prevailed in broadly similar circumstances in the past. The institutional infrastructure has clearly undergone a transformation. Today’s international discourse (rhetoric?) may also have undertones indicative of a greater willingness to transcend parochial interests than witnessed prior to the establishment of the United Nations. State behavior nevertheless seems to be mostly consistent with the historical pattern.1

At the same time, there has been a marked increase in the number of international agreements entered into by sovereign parties and, as noted, multilateral organizations have experienced very rapid growth. This trend is difficult to reconcile with the persistence of state

* Visiting Professor, Department of Politics and Public Administration, University of Hong Kong ** Professor and Director of the Center for International and Public Law, Brunel Law School, Brunel University, and Honorary Professor, Faculty of Law, University of Hong Kong 1 See generally Michael Ross Fowler & Julie Marie Bunck, Law, Power, and the Sovereign State (University Park: The Pennsylvania State University Press, 1995); Stephen D. Krasner, Sovereignty: Organized Hypocrisy (Princeton: Princeton University Press, 1999).

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116 ASPER REVIEW [Vol. VII power. On the one hand, the quest for national autonomy apparently manifests itself as strongly as ever; on the other hand, developments are taking place on the international front that, on the face of it, point in the opposite direction. These developments have such momentum that one may be inclined to embrace the idea that the reluctance to surrender a meaningful degree of sovereignty is either the exception to the norm or a posture that cannot be effectively adopted in contemporary international settings.2

There is no dearth of legal scholars favorably disposed toward this proposition.3 Some argue, however, that the contradictions observed are the product of inaccurate reading of state actions rather than blurred international realities. According to the latter, the root of the problem lies in the academic tendency to attribute, in an old-style fashion, to policy makers engaged in the conduct of foreign affairs (or, for that matter, in any other policy domain) motives that are overly idealistic in nature. If the less utopian public choice theoretical framework is employed, the picture that emerges, it is claimed, does not generate conflicting signals.4

This relatively new framework has evolved as a possible alternative to its older public interest counterpart, although the two diametrically opposed perspectives may be viewed as complementary in character. The assumption underlying the latter is that policy makers are driven by a desire to maximize the common good/public interest (whether in the national or sub-national context). In pursuit of this lofty goal, they endeavor to serve the community in an optimal manner by addressing thoroughly collective action problems and tackling expertly private market failures, either through a direct production of goods and services or via regulation in its various forms.5

The public interest model has been criticized for offering insights into government functioning that are simply not credible. Two of its supposed limitations have been subject to particularly close scrutiny: the

2 See generally Rodney Bruce Hall, National Collective Identity: Social Constructs and International Systems (New York: Columbia University Press, 1999); Daniel Philpott, Revolutions in Sovereignty (Princeton: Princeton University Press, 2001). 3 See generally William Bradford, “International Legal Compliance: Surveying the Field” (Winter, 2005) 36 Geo. J. Int’l L. 495. 4 Ibid.; see generally Kenneth W. Abbott, “The Trading Nation’s Dilemma: The Functions of the Law of International Trade” (1985) 26:2 Harv. Int’l L.J. 501; Catherine England, Governing Banking’s Future: Markets vs. Regulation (Washington: Cato Institute, 1991); Enrico Colombatto & Jonathan R. Macey, “A Public Choice Model of International Economic Cooperation and the Decline of the Nation State” (1996) 18 Cardozo L. Rev. 925; Kal Raustiala, “Rethinking the Sovereignty Debate in International Economic Law” (2003) 6 J. Int’l Econ. L. 841. 5 See generally Robert E. McCormick & Robert D. Tollison, Politicians, Legislation, and the Economy: An Inquiry into the Interest-group Theory of Government (Boston: Martinus Nijhoff Publishing, 1981).

2007] The Political Economy of Sovereignty Revisited 117 notion that policy makers invariably operate at the benevolent end of the attitudinal spectrum and that they possess the ability to identify all relevant problems and opportunities and can respond to them in a timely and competent manner. The point is that government malevolence manifests itself often in authoritarian settings, and even in democratic environments, the selfless quest for ways to provide the best service to the public is a rare phenomenon. By the same token, government failure—reflecting, inter alia, inadequate capabilities—is a common occurrence.6

The public choice school aims to inject a measure of realism into the analysis of behavior on the supply side of the political arena. Its members argue that elected and unelected officials (predominantly bureaucrats in the case of the latter) are “rationally self-interested.” This implies that, like actors in the private sector, they seek to maximize personal advantage (“utility,” which encompasses power, wealth, etc.), even when such selfish conduct is inconsistent with the common good. They also display fallibility in the exercise of their duties (partly because of inner orientation, and partly because of the prevalence of various individual and organizational constraints).7

The notion of rational self-interest is by no means one with which students of international relations (including international law) are generally unfamiliar. It features prominently in regime theory, which qualifies as a mainstream component of the field (“regimes” can be loosely defined as sets of explicit “principles, norms, rules, and decision-making procedures around which actor expectations converge in a given issue-area”; regimes may similarly be viewed as “man-made arrangements [social institutions] for managing conflict in a setting of interdependence”).8

Regime theory is underpinned by a more limited conception of rational self-interest, however, than its public choice counterpart. The crucial difference between these two perspectives lies in the fact that, whereas the former attributes rational self-interest to states, the latter makes individuals the focus of its attention. Or, to put it differently, while regime theory posits that governments have interests and preferences independent of the personal interests and preferences of actors (bureaucrats, politicians, representatives of pressure groups, etc.) who

6 Ibid. 7 See generally Philip P. Frickey, Law and Public Choice: A Critical Introduction (Chicago: The University of Chicago Press, 1991). 8 See Stephen D. Krasner, International Regimes (Ithaca: Cornell University Press, 1983) at 1-2, 23 & 26. See also Robert Owen Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (Princeton: Princeton University Press, 1984).

118 ASPER REVIEW [Vol. VII shape national policy, members of the public choice school claim that individual-level influences are paramount.9

The emphasis on the personal dimension of state behavior reflects strong misgivings about ascribing interests and preferences to collective entities of any kind. The fundamental assumption is that institutions in general, and governments in particular, do not have interests and preferences in the strict sense of the term; individuals are the ones who express them and they thus constitute the appropriate unit of analysis in this context. It follows that public policy is driven by the interests and preferences of powerful constituents, rather than inspired by some mythically determined and scrupulously adhered to abstract construct, such as the “common good” or even “national interest.”10

If this argument is accepted as valid, one may be able to portray the persistent quest for maximizing the state’s freedom of action as not being at variance with the willingness to surrender sovereignty in multilateral contexts, a phenomenon otherwise inevitably viewed as a paradox. Key players in the domestic arena have no intention, ceteris paribus, of diluting their authority (a proxy for a host of personal privileges) by entering into agreements with representatives of different governments. It is nevertheless in their interest to do so when shifts in the socio-economic environment (market processes, technological change, and similar exogenous variables) deprive them of the power to operate unilaterally. In such circumstances, resorting to international cooperation is a tactic conducive to political survival.11

A number of empirical studies lend support to this controversial hypothesis. The legal scholars who have conducted them demonstrate compellingly that domestic policy makers apparently bent on preserving their high degree of discretion (again, a proxy for a host of personal privileges) enter into international agreements because, given the external constraints, the alternative is less palatable. Somewhat counter-intuitively, opportunistically-managed sacrifice is thus an effective means to minimize threats to one’s position, where appropriate. Clinging unrealistically to a narrowly-focused national strategy could at times be an unproductive course of action, for it might lead to an erosion of power of players displaying such inflexibility.12

The problem lies in the fact that this conclusion rests on a rather thin empirical foundation. Only a handful of relevant international cases have been analyzed within the public choice framework as outlined here. Virtually all of them involve economic/financial regulation and have a

9 Frickey, supra note 7. 10 Ibid. 11 Abbott, supra note 4; England, supra note 4; Colombatto & Macey, supra note 4; Raustiala, supra note 4. 12 Ibid.

2007] The Political Economy of Sovereignty Revisited 119 pronounced contemporary American dimension. The scope of extrapolating broadly from such a modest sample is therefore distinctly limited. Additional studies need to be undertaken, and the perspective, in terms of policy issues and geographical/historical representation, should be widened. The purpose of this paper is to contribute toward that effort by examining, from a public choice standpoint, China’s decision to seek accession to the WTO. A multifaceted appraisal of this complex strategic move—focusing initially on the ramifications of far-reaching liberalization measures implemented across the Chinese economic policy spectrum, particularly on the foreign investment and trade front, and followed by an empirical assessment of the strengths and limitations of the public choice model—suggests that elite opportunism may not be the sole factor affecting the exercise of sovereignty in elaborate multilateral settings. THE IMPLICATIONS OF “DEEP” INTEGRATION INTO THE WORLD ECONOMY

NSTITUTIONAL REFORMS ARE NORMALLY CHARACTERIZED as “gradual” or “radical.”13 In China’s case, these adjectives are not entirely useful. The revamping of the pre-1978 structures, marked by both an

extremely high degree of centralization and an extraordinary level of arbitrariness, has been a very long process. Yet, it would be inappropriate to equate such managed change with gradualism. During the extended retreat from Maoism, some radical decisions have been made, most notably to open the totally isolated country to foreign investment/trade and restore private property rights in the agricultural sector.14

While Gorbachev-style large-scale shock therapy has not been adopted, Chinese reforms for the past three decades or so have thus featured a mixture of steady movement and dramatic leaps forward. It is hence tempting to view WTO accession as an event which is no more likely to destabilize the current system than any other major strategic initiative embarked upon since 1978. One may legitimately argue, however, that it has potentially greater political ramifications than almost any other similar step taken by the post-Mao leadership. After all,

13 See generally Gordon G. Chang, The Coming Collapse of China (New York: Random House, 2001); Joe Studwell, The China Dream: The Quest for the Last Great Untapped Market on Earth (London: Profile Books Ltd., 2002); Minxin Pei, China’s Trapped Transition: The Limits of Developmental Autocracy (Cambridge: Harvard University Press, 2006); James Mann, The China Fantasy: How Our Leaders Explain Away Chinese Repression (New York: Viking Adult, 2007); Susan L. Shirk, China: Fragile Superpower (Oxford: Oxford University Press, 2007). 14 Ibid.

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120 ASPER REVIEW [Vol. VII the signing, on 11 November 2001, of the 900-page document paving the way for entry into the WTO was the culmination of truly tortuous and heavily contested negotiations stretching over 15 years.

The net economic benefits of accession are not easy to assess precisely. Nevertheless, it is possible to obtain a general picture, if the time horizon is varied to allow the traditional distinction between “long-term” and “medium-term” dynamics (the short-term perspective being of limited relevance here). Unsurprisingly, the consensus view is that, in the long-run, China will gain significantly from its WTO membership, provided that it adheres to the letter and spirit of the normative framework within which it is expected to operate. The advantages that China will derive from its new status will stem from the far-reaching liberalization program which it is formally committed to implement and from the greater freedom of action that it will enjoy as a bona fide member of the international economic community.15

In technical parlance, such long-term forecasts have “face validity” (i.e., they are valid, “on the face of it”).16 It is difficult to dispute the underlying logic, which is grounded in both common sense and historical observation. That said, predictions about the distant future inevitably lack a certain degree of credibility. One cannot dismiss them readily, but it is not appropriate to embrace them uncritically either, even if they are underpinned by sound reasoning and presented elegantly. Further, public choice theorists argue that politicians and bureaucrats are generally myopic.17 The corollary is that it is more productive to focus on the medium-term aspects of China’s entry into the WTO.

From this perspective, the outlook is rather challenging. In the agricultural sector, which is increasingly overshadowed by its dynamic industrial counterpart but remains a vital source of employment, large-scale inflows of foreign farm goods could accelerate the shedding of rural labor, possibly precipitating massive social unrest. An effective social security system might cushion the impact of a severe adjustment in this inherently unstable segment of the economy and significant job creation in the service sector, a potential pocket of rapid growth, would have even more favorable consequences. It is not at all certain, however, whether progress on those two fronts is likely to be sufficiently decisive to offset entirely the disruption caused by a flood of agricultural imports.18 15 See generally Nicholas R. Lardy, Integrating China into the Global Economy (Washington: Brookings Institution, 2002). 16 See generally W. Lawrence Neuman, Social Research Methods (Boston: Allyn and Bacon, 2000). 17 Frickey, supra note 7. 18 See generally Peter Drysdale & Ligang Song, China’s Entry into the World Trade Organization (London: Routledge, 2000); Supachai Panitchpakdi & Mark L. Clifford, China and the WTO: Changing China, Changing World Trade (Singapore:

2007] The Political Economy of Sovereignty Revisited 121

Industry, particularly the state-controlled element, might experience an equally painful transition. The parts that are not foreign-driven have muddled through, successfully or otherwise, because of government support, both explicit and implicit (in recent years, the balance has shifted in favor of the latter). They display a lack of clear profit orientation, do not enjoy full commercial autonomy, are burdened with over-employment, and continue to be saddled with heavy social obligations (i.e., function as a substitute for public welfare). Greater exposure to foreign competition would place them under intense pressure, leading to deep retrenchment, with distinctly adverse political ramifications.19

The external threat facing the domestic banking system (broadly defined) is deemed to be particularly serious. The problem here lies in the fact that state-owned enterprises (“SOEs”) no longer receive subsidies directly from the government, which now provides them with funds via the financial intermediaries that it controls, with scarcely any reference to rigorous credit allocation standards. This politically-inspired modus operandi has resulted in ballooning non-performing loans, propelling the banking industry closer to insolvency than any of its equivalents in other countries that are relevant in this context, including Japan.20

More importantly, given that insolvency may to some extent be regarded tactically as an accounting entry, Chinese state-controlled banks are illiquid to boot. Specifically, the bulk of their “assets,” in the form of loans to the SOEs, are by definition long-term, in that they must be rolled over to avoid triggering a debilitating financial crisis. Their liabilities, on the other hand, are short-term, and it is new deposits that are funding withdrawals. This is the classic formula for collapse, witnessed elsewhere in similar circumstances at various historical junctures.21

The plight of the rural cooperatives compounds the difficulties. The level of non-performing loans at these institutions, which constitute the backbone of the financial system in the traditionally volatile countryside, is estimated to be twice as high as at their urban counterparts. Nor should policy concerns be confined to banks and rural cooperatives. Another type of financial intermediary, namely the illegal deposit-taking company, has mushroomed in recent years. The entities

John Wiley & Sons (Asia) Pte Ltd., 2002); Deepak Bhattasali, Shantong Li & Will Martin, China and WTO (Washington: World Bank, 2004). 19 Ibid. 20 Chang, supra note 13; Studwell, supra note 13; Minxin Pei, supra note 13; Mann, supra note 13; Shirk, supra note 13. 21 See generally ibid. The authors of these five non-mainstream but entirely credible works systematically expose serious cracks in China’s institutional facade and argue compellingly that its seemingly relentless modernization drive rests on potentially shaky politico-economic foundations.

122 ASPER REVIEW [Vol. VII which fall into this category are almost invariably grossly undercapitalized and poorly managed. They implode with worrisome regularity, obviously with no effective protection for their large number of customers.22

Foreign competition could increase the fragility of the entire banking system, although paradoxically the mainstream component might be the most vulnerable. This observation reflects the assumption that, if financial liberalization proceeded as expected, depositors would have a real choice between shaky domestic institutions and sound foreign equivalents. It is reasonable to conclude that, ceteris paribus, they would opt for the latter. Some doomsayers envision a massive outflow of deposits from domestic sources to the foreign side.23 Even if the shift was on a more modest scale, it could exacerbate strains within the ailing banking industry, posing great risks for the regime.24

Financial liberalization, in the wake of WTO accession, could deliver the coup de grace to such institutions. This might prove beneficial in the long-run, but the political costs of the cleansing process could turn out to be high during the transition from the current unhealthy state of affairs to an inherently more stable environment. Should the re-engineering of the banking industry in general and the emergence of genuine competition as a result of the entry of foreign players in particular give rise to large-scale socio-economic turbulence, the regime might experience serious strains.25

The challenge does not stem merely from the potential disruption in specific sectors, such as agriculture, industry, and finance—at least in the short/medium-term. WTO accession is likely to lead to fundamental adjustment to the rules of the political game in China, materially limiting the room to maneuver of the ruling elite/Communist Party, a development that is bound to be viewed unfavorably by members of the policy/bureaucratic establishment (who nevertheless have opted for joining the organization on present terms). The significant adjustment

22 Ibid. 23 Ibid. 24 Ibid. 25 Ibid. The far-reaching liberalization to which China has committed itself upon entering the WTO should not be underestimated. While the organization’s rules for trade in goods apply effectively to all members, the obligations regarding services depend on each country’s specific undertakings. And a few members at equivalent stages of socio-economic development have agreed to expose their financial industry to foreign competition at a pace and on a scale similar to that of China. See generally Drysdale & Ligang Song, supra note 18; Panitchpakdi & Clifford, supra note 18; Bhattasali, Shantong Li & Martin, supra note 18.

2007] The Political Economy of Sovereignty Revisited 123 envisioned in this respect is regarded as the inevitable by-product of the internationalization of the Chinese economy.26

Internationalization is a somewhat ambiguous concept employed “by a variety of writers in a variety of ways.”27 Its elastic nature partly reflects the tendency, both in academic and policy contexts, to equate internationalization with globalization.28 The meaning attributed to it also varies considerably with a host of factors that impinge on the construction in specific circumstances. Cultural influences, for example, may play a role in the process, as the contrasting approaches of Anglo-Saxon and Japanese scholars illustrate: “the definition of ‘internationalization’ differs between political scientists in Britain and America on the one hand, and those in Japan on the other. The former perceive internationalization as doing to others, while the latter perceive it as adjusting to others.”29

These observations notwithstanding, it may be legitimately argued that internationalization manifests itself in three forms—concurrently, albeit not necessarily so. First, the internationalization of the world economy, mostly seen in the observable increase of flows of goods, services, and capital across national borders,30 which is underpinned by the “exogenous easing of international exchange.”31 Second, the internationalization of the state, which features the restructuring of domestic institutions and policies as a response to internationalized production in the world economy. And third, a firm may be viewed as internationalized when “it organizes and coordinates multiple value-adding activities across national boundaries and [when] it internalizes the cross-border markets for the intermediate products arising from these activities.”32

The internationalization of the Chinese economy has progressed apace in the past three decades or so in terms of integration into its world counterpart. The rapid expansion of foreign trade and the sharp rise in foreign investment serve as a powerful symbol of China’s remarkable transformation from a model of autarky into a major

26 See generally Yongjin Zhang, “Reconsidering the Economic Internationalization of China: Implications of the WTO Membership” (2003) 12(37) J. Contemp. China 699. 27 See Robert O. Keohane & Helen V. Milner, Internationalization and Domestic Politics (Cambridge: Cambridge University Press, 1996) at 3. 28 See generally Peter Dicken, Global Shift: The Internationalization of Economic Activity, 2d ed. (New York: The Guilford Press, 1992). 29 See generally Glenn D. Hook & Michael A. Weiner, The Internationalization of Japan (London: Routledge, 1992) at 119. (emphasis in original) 30 See generally Keohane & Milner, supra note 27. 31 See ibid. at 25. 32 See John H. Dunning, Multinational Enterprises and the Global Economy (New York: Addison-Wesley Publishers Ltd., 1993) at 4.

124 ASPER REVIEW [Vol. VII international economic force, acting as a vital source of exports of goods and services (and increasingly capital), as well as a strong magnet for a wide range of imports (including capital). The latest, and perhaps the most intriguing, development on that front is the massive accumulation of foreign currency reserves by the central bank and their recycling through the international financial markets.33

There has also been growing acceptance of the norms governing conduct in the global arena and the practices derived from those norms (which are solidly grounded in Western notions of free market and open economy). This “conformity,” which is an expression of the second dimension of internationalization, still falls short of qualifying as universal. However, it is becoming quite common and often involves reliance on quintessentially capitalist strategies/tactics (e.g., tapping the global capital markets by issuing bonds and seeking listings on stock exchanges throughout the world). While it is premature to suggest that the internationalization of the Chinese firm is accelerating significantly, fundamental changes are taking place even in this respect.34

Viewing the external side of the post-1978 reform process from such a three-dimensional perspective is useful, in that it brings into sharp focus the fact that internationalization does not feature merely the lifting of barriers to the free flow of foreign trade and capital, but also has far-reaching domestic ramifications, including those of the political variety. This is practically taken for granted when the internal side of the picture (agriculture, industry, and urban environment) is examined—with special reference to the decentralization of decision-making from the capital to the provinces, and from ministries to enterprises—yet is not sufficiently highlighted otherwise.35

In many respects, internal reforms, which aim at a gradual liberalization and marketization of the economy, involve the adoption of institutions and practices embedded in the world economy (i.e., enhancing compatibility between the internal and external settings, or yu shije jingji jiegui). However, this has never been an entirely smooth evolution, with the policy pendulum swinging from active promotion to deliberate restraint. National and provincial decision-makers have had ample discretion to vary the form and pace of internal restructuring in accordance with prevailing needs and constraints, and have imported external ideas and systems in a controlled fashion.36

Moreover, the reforms undertaken by China’s leaders on their own initiative are often inspired by (ultimately status-enhancing, public choice-style!) instrumental calculations. For example, foreign trade

33 Yongjin Zhang, supra note 26. 34 See generally ibid. 35 Ibid. 36 Ibid.

2007] The Political Economy of Sovereignty Revisited 125 liberalization was embraced to some extent in order to boost export growth. By the same token, the opening of domestic financial markets was partly due to a desire to attract the international capital needed to sustain the modernization drive. Such cost-benefit logic may have played a role in virtually every significant restructuring effort. Indeed, it may have overshadowed the normative element (i.e., the reformist vision) in most circumstances.37

The WTO factor arguably shifts the equation toward the normative end of the strategic spectrum. On the face of it, entry into the organization implies not just mechanical compliance with its principles and rules, but also a genuine endeavor to create a viable normative basis for such compliance. To state it differently, instrumental maneuvering may prove insufficient for the full implementation of the commitments to the world trade club that the country has joined. The process of the internalization of standards, laws, and institutions (i.e., norms) must take a quantum leap beyond instrumental action.38

The corollary presumably is that the rules of the domestic political game would have to be rewritten significantly to reflect the new external realities. The post-1998 regime has been far less arbitrary than its predecessor and has over time developed a code of conduct that restricts the autonomy of government/party officials, including those ensconced atop the power pyramid. Nevertheless, this set of formal and informal guidelines (an appropriate term even where they are incorporated into legal instruments) lacks solid normative underpinnings, is not comprehensive in nature, and can hardly be described as uniformly binding.39 WTO membership should entail a much deeper commitment to operating within a robust framework of international rules and a willingness to relinquish considerable control over the policy levers. This could undermine the foundations of a system which has not completely shed its authoritarian character and could thus have a debilitating effect on the elite presiding over it. The decision to sacrifice strategic discretion on such a scale, to countenance such radical shifts in the command structure, and to expose the leadership to such great risks does not appear to be entirely consistent with the self-interest of those who, following protracted negotiations, have opted for a potentially costly compromise.40 This decision seems sufficiently critical and intriguing to prompt a re-examination of the emerging theories of sovereignty.

37 Ibid. 38 Ibid.; Anyuan Yuan, “China’s Entry into the WTO: Impact on China’s Regulating Regime of Foreign Direct Investment” (Spring, 2001) 35 Int’l Law. 195. 39 Yongjin Zhang, supra note 26. 40 Chang, supra note 13; Studwell, supra note 13; Minxin Pei, supra note 13; Mann, supra note 13; Shirk, supra note 13.

126 ASPER REVIEW [Vol. VII PARADIGM PARTIALLY VALIDATED

PRELIMINARY ASSESSMENT is likely to lead to the conclusion that the public choice model of strategic action featuring the voluntary curtailment of state autonomy should be consigned to oblivion,

given the steps taken by the Chinese government on the WTO front. The temptation to adopt such a negative stance perhaps ought to be resisted, however, for it might be inappropriate to discard this theoretical perspective altogether. After all, one cannot rule out the possibility that policy makers in Beijing assume, rightly or wrongly, that they would be able to maximize the benefits and minimize the costs of accession.41

The challenges the regime confronts are formidable, but they are not without precedent. At least two previous crucial decisions (to open the door to foreign investment and trade and dismantle collective farms) were fraught with similar dangers, yet the political system was not seriously destabilized following their implementation. The strategic view in the corridors of power in China may well be that not joining the WTO at this stage of the country’s development is not a viable option. The costs of procrastination could be higher than those incurred upon entry. To the extent that the latter may be effectively controlled (again, not necessarily a valid premise), accession can be portrayed as the “lesser of the two evils” from the standpoint of the ruling elite.42

This rather simple account is not without logical appeal, notwithstanding its overly macroscopic nature. It may nevertheless be enhanced by introducing the distinction between policy formulation and policy implementation. This distinction does not loom large in the public choice literature, where all phases of the strategic decision making process tend to be regarded as indistinguishable from one another, for both analytical and practical purposes.43 The distinction is useful in the present context, for it paves the way for the development of a more complex, and hence more realistic, rational choice-type explanation of Chinese entry into the WTO.

Such an explanation should center on the proposition that policy commitments made when states assume bilateral/multilateral obligations are not invariably adhered to thereafter. International legal compliance is a problem that manifests itself across the geographical spectrum, but it may prove particularly hard to deal with in a transitional setting where the country involved has considerable bargaining power.44 It is conceivable that China’s leaders expect to reap

41 See generally ibid. 42 Ibid. 43 Bradford, supra note 3. 44 Ibid.

A

2007] The Political Economy of Sovereignty Revisited 127 most of the benefits of WTO membership without fully delivering for the foreseeable future their “part of the bargain,” either because of sheer opportunism or because they realize that, as matters stand, their country just does not have the capacity to scrupulously implement the elaborate multilateral agreement which should govern its foreign economic relations in the coming years.

One needs to acknowledge that the issue of international legal compliance is shrouded in controversy. There is no dearth of scholars, including very prominent ones, who hold the view that this is not a matter of serious, or perhaps even legitimate, concern. For example, a leading authority, Henkin, asserts that “almost all nations observe almost all principles of international law and almost all of their obligations almost all of the time.”45 If this is the case, the question of Chinese conformity with its international contractual commitments does not merit careful attention.

Unfortunately, there is ample evidence to suggest that this is not the pattern in general nor is it the pattern in the WTO (or WTO-like) context in particular. Thus, two researchers who conducted a detailed study of adherence to obligations under the General Agreement on Tariffs and Trade (GATT) concluded that non-compliance with panel rulings was close to 30% and nearly 60% of rulings failed to elicit full compliance.46 While conformity with rules is to some extent subject to conflicting interpretations—or, to state it differently, “in the eyes of the beholder”—these figures cannot be overlooked. There is apparently considerable scope here for a country so disposed to shift the complex WTO cost-benefit equation in its favor.

This statement is consistent with the picture painted by scholars who subscribe to the enforcement approach to international legal 45 See Louis Henkin, How Nations Behave: Law and Foreign Policy, 2d ed. (New York: Columbia University Press, 1979) at 47. (original emphasis omitted) 46 See Kal Raustiala & Anne-Marie Slaughter, “International Law, International Relations and Compliance,” in Walter Carlsnaes, Thomas Risse & Beth A. Simmons, eds., Handbook of International Relations (Thousand Oaks: SAGE Publications, 2002) 538 at 549. See also Sebastiaan Princen, “EC Compliance with WTO Law: The Interplay of Law and Politics” (2004) 15(3) Eur. J. Int’l L. 555. It should be noted that non-compliance under the WTO regime poses a greater challenge than it did under its GATT predecessor. Be that as it may, the room to maneuver remains considerable. For a general discussion, see Peter Van den Bossche, The Law and Policy of the World Trade Organization: Text, Cases, and Materials (Cambridge: Cambridge University Press, 2005); John H. Barton et al., The Evolution of the Trade Regime: Politics, Law, and Economics of the GATT and the WTO (Princeton: Princeton University Press, 2006); John H. Jackson, Sovereignty, the WTO, and Changing Fundamentals of International Law (Cambridge: Cambridge University Press, 2006); John H. Jackson, The Jurisprudence of GATT and the WTO: Insights on Treaty Law and Economic Relations (Cambridge: Cambridge University Press, 2007).

128 ASPER REVIEW [Vol. VII compliance, and whose dissection of foreign policy is rooted in the political economy tradition of game theory and the analysis of collective action. They posit that states, or the elites that control state organs, operate like rational entities and hence they systematically assess the costs and benefits of alternative choices when making compliance decisions in international settings. Both the sources of non-compliance and the solutions to the problem emanate from the incentive structure. States opt to defect when confronted with an incentive structure in which the benefits of shirking exceed the costs of defection. By implication, strategies designed to secure compliance should seek to increase the likelihood and costs of defection through monitoring and the threat of sanctions.47

The argument that states may deliberately choose not to comply hinges on the assumption that the motivation for entering into an internationally “binding” contract focuses largely on the signature part of the process, rather than compliance. According to Haas, “[e]ven if a state may believe that signing a treaty is in its best interest, the political calculations associated with the subsequent decision actually to comply with international agreements are distinct and quite different.”48 The point is that states may attach symbolic or practical importance to the act of participation and signing, but place a low value on the specific content of the rules and consequently have no reservations about violating treaty provisions. The decision not to comply may also reflect conflicting priorities in that resources channeled in one direction are not available for other uses.49

Enforcement theorists normally stipulate that the likelihood of international shirking depends on the problem structure of the particular cooperative context. Collaboration or mixed-motive situations carry greater incentives to defect than coordination situations, where states have strong reasons to cooperate in order to avoid common aversions. In collaboration situations, states have an incentive to renege on their commitments, because they gain more from the agreement if they reap all the benefits without investing their own fair share. Since collaboration is the predominant problem structure in inter-state relations, international treaties are seldom effective without proper incentive mechanisms.50

In the absence of such mechanisms, shirking is the inevitable outcome. Monitoring compliance and implementing sanctions constitute

47 Bradford, supra note 3. 48 See Peter M. Haas, “Compliance with EU Directives: Insights from International Relations and Comparative Politics” (1998) 5(1) J. Euro. Pub. Pol’y 17 at 19. 49 Bradford, supra note 3. 50 Ibid.

2007] The Political Economy of Sovereignty Revisited 129 the two key components of the enforcement strategy. The former enhances transparency and facilitates identification of non-complying parties/action. The latter increase the costs of shirking and render non-compliance a less appealing option. When pursued effectively, monitoring compliance and implementing sanctions can deter behavior that is incompatible with agreed-upon standards and induce compliance. According to Downs, “[a] punishment strategy is sufficient to enforce a treaty when each side knows that if it cheats it will suffer enough from the punishment that the net benefit will not be positive.”51

From a public choice perspective, China has an incentive to stretch the limits of the “defection” strategy within the WTO “game” as far as possible. By the same token, the monitoring and enforcement instruments are not sufficiently robust to render this an unproductive course of action. The US, a major trading partner and a key source of foreign investment, plays a crucial role in that respect. It monitors the fulfillment of treaty obligations via three channels: unilateral devices, intergovernmental coordination, and multilateral arrangements. The infrastructure supporting the undertaking is elaborate and managed effectively.52

The unilateral component is the backbone of the system. The resources involved exceed those mobilized to oversee any other trade agreement and consist, inter alia, of a substantial professional team based in Washington, Geneva, and a number of large Chinese cities. The pivot of this mechanism is an inter-agency group called the Trade Policy Staff Committee (“TPSC”), particularly its Sub-committee on China’s WTO Compliance, formed by the Bush administration. The TPSC is chaired by the US Trade Representative Office’s Deputy Assistant and brings together experts from some twenty different government agencies, including the Departments of Treasury, Commerce, Agriculture, Labor, and State.53

This inter-agency group is one of the three layers that make up the hierarchical structure responsible for monitoring Chinese adherence to WTO rules. While the actual surveillance and processing of incoming information takes place at the TPSC level, significant strategic issues are addressed at the deputy-level Trade Policy Review Group. For practical purposes, the cabinet-level National Economic Council, headed by the

51 See George W. Downs, David M. Rocke, & Peter N. Barsoom, “Is the Good News About Compliance the Good News About Cooperation” (1996) 50(3) Int’l Org. 379 at 385. See also A. Walter Dorn & Andrew Fulton, “Securing Compliance with Disarmament Treaties: Carrots, Sticks, and the Case of North Korea” (1997) 3 Global Governance 17; Arild Underdal, “Explaining Compliance and Defection: Three Models” (March, 1998) 4 Eur. J. of Int’l Rel. 5. 52 See generally Gerald Chan, “China and the WTO: The Theory and Practice of Compliance” (2004) 4(1) Int’l Rel. Asia-Pacific 47. 53 Ibid. at 59.

130 ASPER REVIEW [Vol. VII chief economic adviser to the president, constitutes the apex of this system, although formally the chain of command extends to the holder of the highest political office in the land.54

In monitoring conformity with contractual commitments, the TPSC acts as a clearing-house for information assembled by American businesses operating in China, as well as by US government agencies that follow and analyze events as they unfold over time. Since the private sector possesses critical mass and enjoys market penetration that its public counterpart perhaps lacks, it can probably provide the most extensive insights into compliance by the Chinese government and generate appropriate signals in a reasonably timely fashion. The administration has thus forged a close partnership with the American Chamber of Commerce in Beijing and Shanghai, the US–China Business Council, and the US Chamber of Commerce.55

In terms of public sector efforts at ground level, the Department of State is leading a network of groups that carry out surveillance in the field. Four Department of Commerce compliance officers are attached for this purpose to the US Embassy in Beijing. The Embassy has established a WTO Implementation Coordination Committee, which is chaired by the Economic Minister. Its aim is to furnish a focal point for monitoring, compliance, technical assistance, and outreach activities undertaken by officials with diverse professional backgrounds (not confined to economics, commerce, agriculture, and customs, but also including environment, science and technology, and public affairs).56

The WTO Implementation Coordination Committee is responsible for tracking and examining changes in laws and regulations, maintaining ongoing dialogue with US policy makers, systematically supplying information to the Chinese government and other relevant parties, and meeting frequently with members of the private sector and other diplomatic missions to assess progress and identify emerging problems. The five consulates in Shanghai, Guangzhou, Chengdu, Shenyang, and Hong Kong also contribute meaningfully to this thorough and well-coordinated multi-functional undertaking.57

The US government is aware of the challenges China faces in seeking to implement (which encompasses the enforcement function) WTO rules and that, besides policing and playing a quasi-judicial role, it needs to educate and facilitate. To this end, it has embarked—in conjunction with the private sector, multilateral institutions, and the Chinese authorities at various levels—on an ambitious training program featuring numerous seminars and workshops in major urban centers.

54 Ibid. 55 Ibid. at 59-60. 56 Ibid. at 60-61. 57 Ibid. at 61.

2007] The Political Economy of Sovereignty Revisited 131 According to Chan, “[t]he topics covered include the rule of law, financial services, protection of intellectual property and trade standards.” Other countries—notably, Australia, Canada, Germany, Japan, and the United Kingdom—engage in similar capacity-building activities.58 The process of ensuring that China actually follows the line where necessary—that is, exerting pressure and employing moral suasion ex post as distinct from ex ante—is equally intensive. From an organizational perspective, it is driven by the US Department of Commerce through its Market Access and Compliance unit, whose goal is to “obtain market access for American firms and workers and to achieve full compliance by foreign nations with trade agreements they sign with [the US].”59 A Trade Compliance Center, a key component of this unit, actively supports American traders who have legitimate grievances against other countries, including China. The Department of Commerce Trade Facilitation Office in Beijing provides positive reinforcement, as does the US Congress, both directly and indirectly.60

As indicated, this is not a solo effort, even if the US is the most active and influential trading nation involved. Other countries pursue a similar agenda and employ similar strategies, albeit on a more modest scale. Again, Australia, Canada, Germany, Japan, and the UK may be singled out for this purpose. There is also a considerable degree of international cooperation in that respect—particularly, but not exclusively, in the European context—often featuring a coalition of countries rather than merely the US and one of its partners. Multilateral institutions, such as the Asian Development Bank and the World Bank, and non-governmental organizations, such as private foundations and universities, play a supportive role as well, notably in relation to capacity building.61

If all else fails, the US, alone or in concert with some of its allies, can resort to the Transition Review Mechanism (“TRM”) and Dispute Settlement Mechanism (“DSM”) of the WTO in order to seek redress from the Chinese side. The former is a rather unusual and wide-ranging instrument that compels the targeted country to provide detailed information to members and offer them the opportunity to scrutinize its record. In this specific case, China’s trading practices are to be examined annually and comprehensively during the first eight years following accession, and a final and most probing review is to be undertaken in the ninth and tenth years. The results will be reported to the WTO General Council for high-level assessment and will serve as an organizational

58 Ibid. 59 Ibid. at 61-62 (brackets in original). 60 Ibid. at 62. 61 Ibid.

132 ASPER REVIEW [Vol. VII vehicle for preventing and correcting deviation from agreed-upon standards.62

The DSM is a more focused tool available to members who have reason to believe that they are not being treated fairly by trading partners bound by WTO rules. The common practice in such circumstances is to seek an effective dialogue with the target country involved. When this fails to produce a satisfactory response, the complaining member has the option to move for a settlement before a tribunal. If the offending party disregards the recommendations of the adjudicators, the aggrieved one may adopt appropriate retaliatory measures. Additional protective mechanisms built into the Chinese accession protocol include non-market economy anti-dumping devices, product-specific safeguards, textile safeguards, and national security-related exceptions.63

We have discussed in considerable detail some of the decisive steps taken and powerful instruments designed to minimize the scope for Chinese shirking in the WTO context. On the face of it, this is not a fertile ground for testing, let alone validating, public choice-type propositions regarding sovereignty. It is tempting to conclude that the checks-and-balances are so sound that the system is virtually foolproof. Indeed, it is tempting to pursue this argument further and suggest that the institutional architects responsible for the blueprint were inspired, directly or indirectly, by the ideas floated by enforcement theorists (interestingly, successful adoption of these ideas could render them obsolete, a phenomenon highlighted in the “Lucas critique”).64

The blueprint and the system that embodies it are undoubtedly extensive and tight. They do not qualify as foolproof, however. Retaliation, hardly an attractive course of action, is by no means automatic, as there are channels for appeal.65 To make matters worse, the tribunal phase preceding it can stretch over a long period of time and take place in an organizational environment characterized by a high

62 Ibid. at 62-63. 63 Ibid. at 63. For further discussion of the WTO DSM, see Van den Bossche, supra note 46; Barton et al., supra note 46; Sovereignty, the WTO, and Changing Fundamentals of International Law, supra note 46; The Jurisprudence of GATT and the WTO: Insights on Treaty Law and Economic Relations, supra note 46. 64 See Robert E. Lucas, Jr., Studies in Business-Cycle Theory (Cambridge: MIT Press, 1981) at 104-130. 65 See generally Bhagirath Lal Das, The World Trade Organisation: A Guide to the Framework for International Trade (London: Zed Books Ltd., 1999); David Smith & Zhu Guobin, China and the WTO: Going West (Hong Kong: Sweet & Maxwell, 2002); Qingjiang Kong, China and the World Trade Organization: A Legal Perspective (Singapore: World Scientific Publishing Co. Pte. Ltd., 2002); Bhagirath Lal Das, The WTO and the Multilateral Trading System: Past, Present and Future (London: Zed Books Ltd., 2004).

2007] The Political Economy of Sovereignty Revisited 133 degree of fragmentation (and a favorable outcome is not guaranteed).66 The disputants thus prefer to manage the conflict on a bilateral basis, without submitting to external adjudication. This, in turn, is often a protracted process that does not necessarily culminate in an unambiguous resolution.67

Monitoring private agents’ and public officials’ behavior in China is a formidable challenge, even if the strategic commitment is firm and the resources devoted to the task are substantial. The country is large, diverse, and multi-layered, and the picture one sees lacks transparency. By the same token, this is not an ideal setting for effective problem solving. The Chinese bureaucracy is driven by its own dynamics, and it is not easy to deflect it from its path. The government structure affords virtual (i.e., non-electoral) representation to economic groups. Those groups pursue vigorously their narrow interests and resist strongly any efforts to undermine them, particularly from external sources.68

Another noteworthy feature of the political system is its surprisingly decentralized nature. This is a legacy of the Maoist era. In two mass campaigns, the Great Leap Forward (1958) and the Cultural Revolution (1966-69), Mao Zedong sought to accelerate economic growth and social transformation in the face of stubborn opposition from status quo-oriented officials in Beijing. He embraced a policy of “playing to the provinces,” or mobilizing provincial support as a counterweight to the center. Mao appealed to provincial leaders by delegating power to them and by co-opting them into top-level decision-making bodies.69

During each of the campaigns, the macro- and micro-economic management apparatus was flattened significantly, and control and

66 See generally Jeffrey J. Schott, The WTO after Seattle (Washington: Institute for International Economics, 2000). 67 See generally Chan, supra note 52; Qingjiang Kong, supra note 65; Chad P. Bown, “The Economics of Trade Disputes, the GATT’s Article XXIII, and the WTO’s Dispute Settlement Understanding” (2002) 14(3) Econ. & Pol. 283; Daniel L. M. Kennedy & James D. Southwick, The Political Economy of International Trade Law: Essays in Honor of Robert E. Hudec (Cambridge: Cambridge University Press, 2002). 68 See generally Kenneth G. Lieberthal & Michel C. Oksenberg, Policy Making in China (Princeton: Princeton University Press, 1990); Kenneth G. Lieberthal & David M. Lampton, Bureaucracy, Politics, and Decision Making in Post-Mao China (Studies on China, No. 14) (Berkeley: University of California Press, 1992); Susan L. Shirk, The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993); Susan L. Shirk, How China Opened its Door: The Political Success of the PRC’s Foreign Trade and Investment Reforms (Washington: Brookings Institution, 1994); Jianrong Huang, The Applicability of Policy-Making Theories in Post-Mao China (Aldershot: Ashgate Pub. Ltd., 1999); Feng Hui, The Politics of China’s Accession to the World Trade Organization: The Dragon Goes Global (London: Routledge, 2006). 69 Ibid.

134 ASPER REVIEW [Vol. VII resources were shifted dramatically from Beijing to the provinces. The Cultural Revolution was marked by an almost total collapse of the traditional state organs of power in the wake of the sending down of a large number of central government bureaucrats to the countryside for the purpose of revitalizing their ideological convictions through manual work. In the aftermath of the campaigns, both of which were ultimately deemed to be an unmitigated failure, Beijing reclaimed some but not all of the power it previously surrendered.70

Indeed, Mao’s successor as paramount leader, Deng Xiaoping, was inspired by his predecessor’s historical example, even though he was propelled by a fundamentally different strategic vision. Deng consistently promoted market reform by playing to the provinces in a broadly similar fashion, an option which, for example, was not available to the centrally-constrained Gorbachev in equivalent circumstances. Under Deng’s guidance, local officials became the largest bloc in the Central Committee during the reform era, and a radical decentralization of the fiscal system was carried out during the early stages of the post-1978 restructuring process.71

China was not only more decentralized, it also lagged behind the Soviet Union in granting institutions, as distinct from personalities, the authority to make decisions. It was, after all, a newer and less established member of the communist fraternity. Its evolution from a personalized rule to an institutionalized one was impeded by Mao’s use of mass campaigns to prevent the routinization of the revolution. The authority of the Soviet Central Committee to choose party leaders was established definitively in 1957. By contrast, its Chinese equivalent had to share power with party elders who did not hold any official posts throughout the last two decades of the 20th century and possibly beyond.72

The upshot is that policy implementation often takes the form of “particularistic contracting.” Instead of standardized rules applied uniformly across the organizational spectrum, the strategic configuration reflects ad hoc arrangements negotiated by the parties involved (at central, provincial, city, rural, and enterprise levels). This policy selectivism results in great strategic flexibility and diversity. It may be viewed as a source of dynamism, in that it facilitates institutional adaptation in a complex socio-economic setting. At the same time, it may also lead to policy incoherence because signals emanating from the

70 Ibid. 71 Ibid. 72 Ibid.; June Teufel Dreyer et al., China’s Political System (Upper Saddle River: Pearson Education, 2003).

2007] The Political Economy of Sovereignty Revisited 135 administrative center are not transmitted effectively to the administrative periphery.73

There are numerous examples to illustrate this phenomenon, including ones that are worth highlighting in this particular context. Perhaps most telling in that respect is China’s decidedly mixed record in implementing the international regime for protecting intellectual property rights (“IPR”). This record has been the subject of several studies. Researchers addressing it from a political economy perspective have generally observed that, the center’s supposedly honorable intentions notwithstanding, progress has been limited due to defiance at the periphery. Thus, “[a]t a minimum, even well-designed policies and institutions encounter resistance from provinces and localities where local officials are under tremendous pressure to show substantial results from their efforts at economic development and to whom copyright infringement may pose a strong lure.”74

A less familiar, but equally illuminating example is that of the Chinese Green Food program and the persistent attempts to adapt it to the requirements of the global organic food regime. This is another area of international strategic initiative that has been examined in considerable detail. Again, the achievements in terms of actual harmonization with global standards have been distinctly uneven. Implementation failures have rendered this a rather frustrating experience from an international regulatory standpoint, prompting one concerned social scientist to portray rural China as a “fragmented entrepreneurial state in which officials use state authority to privilege market activity.”75 In such an environment, “[s]tate entrepreneurs pursue alternative forms of compliance, disguise state participation in the market, and exploit their control over information, in an effort to resist monitoring and enforcement regimes.”76

Given these institutional dynamics, public choice arguments regarding elite behavior, while originally developed in a political milieu where interest mobilization proceeds in a largely unconstrained fashion, merit consideration. Communist China had never been a monolithic entity and the post-communist version still does not conform to

73 Lieberthal & Oksenberg, supra note 68; Lieberthal & Lampton, supra note 68; The Political Logic of Economic Reform in China, supra note 68; How China Opened its Door, supra note 68; Jianrong Huang, supra note 68; Feng Hui, supra note 68. 74 See Margaret M. Pearson, “China’s Integration into the International Trade and Investment Regime,” in Elizabeth C. Economy & M. C. Oksenberg, eds., China Joins the World: Progress & Prospects (New York: Council on Foreign Relations, 1999) 161 at 173. 75 Paul Thiers, “Challenges for WTO Implementation: Lessons from China’s Deep Integration into an International Trade Regime” (2002) 11(32) J. Contemp. China 413. 76 Ibid.

136 ASPER REVIEW [Vol. VII simplistic Confucian stereotypes. Surprisingly powerful centrifugal forces are at work at all levels of the political pyramid. Nor is opportunism, a strong motivating factor in capitalist and non-capitalist settings alike, conspicuous by its absence. Public choice theories may legitimately be invoked to explain foreign policy decisions in general, and in relation to the WTO membership in particular. NOT A ONE-DIMENSIONAL PATTERN

HE PRINCIPAL ATTRACTION OF MODELS lies in their economy of expression. They capture relevant aspects of reality and weave them elegantly into a compact analytical structure. Careful filtering

and tight integration enhance clarity and focus attention on key variables in the picture. This may be viewed negatively, however, in that the highly disciplined process of elimination and synthesis leads, at times, to loss of information and hence factual misrepresentation. The more careful the filtering and the tighter the integration, the greater is the risk of distortion.77 The limitations of the narrow framework constructed by public choice theorists to account for the apparent contradictions inherent in the exercise of sovereign power can be exposed by exploring further the Chinese willingness to join the WTO on challenging terms.

The notion of “strategic intent” may help to identify perhaps the most obvious shortcoming of this overly focused framework. Implementation failures in themselves are not necessarily indicative of a deliberate attempt to outmaneuver the other parties to the bargain. The intent may well be to adhere to the provisions of the agreement, but the outcome may diverge from expectations because of the impact of a host of “uncontrollable” factors. To the extent that the decision to make a binding international legal commitment does not rest explicitly on the Machiavellian assumption that countervailing forces will dilute it without provoking serious retaliation, the public choice conceptual edifice loses some of its luster. The lack of an effective distinction (other than among scholars associated with the enforcement approach to international legal compliance) between policy formulation and policy implementation compounds the problem.

It is, of course, possible to argue that implementation failures were fully anticipated and that this indeed prompted shrewd strategic planners to enter into an arrangement which offered considerable upside and modest downside (i.e., the opportunity to “have the proverbial cake and eat it too”). One could reasonably claim, in light of the available evidence (despite its tentative nature), that this was an element of the equation. The question is whether it was a significant element. Public

77 See generally Neuman, supra note 16.

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2007] The Political Economy of Sovereignty Revisited 137 choice theorists might contend that suggestions to the contrary would not be consistent with logically compelling and empirically sound models of human/political behavior. Nevertheless, the facts in this particular case, while not unambiguous, support a broader interpretation of the policy dynamics.

There is thus a substantial body of academic literature emphasizing the role of ideas, as distinct from pure interests, in China’s strategic evolution, both before and after 1997. The past three decades or so, the relevant period in this context, have witnessed much tension, latent and open, between segments of the policy establishment favorably disposed toward institutional innovation and those unenthusiastic about politico-economic restructuring. Four distinct groups have endeavored to actively promote their particular vision of the social order: reformists, moderates, soft conservatives, and ultra conservatives. Following an intense power struggle, the ultra conservatives were ruthlessly vanquished as a source of strategic influence and their soft counterparts were effectively marginalized.78

Reformist and moderate factions comprise the core of the Chinese policy elite today. The strategic pendulum swings from one end of the ideological spectrum (reformist) to the other (moderate), depending on the state of the system (equilibrium fosters a reformist spirit and disequilibrium a moderate one) and on the policy issues involved (reformist instincts come into play when the economic side of the strategic agenda is addressed and moderate ones surface when the political side is under consideration).79 From this perspective, WTO accession may be viewed as a bold step taken by high-level decision makers so firmly wedded to the reformist blueprint that they were willing to tolerate considerable disruption in pursuit of their goals. Indeed, some China watchers argue, compellingly or otherwise, that those who embrace the blueprint most passionately regard WTO membership as a potential means to remove the remaining pockets of resistance to rapid and comprehensive economic restructuring.80

If the policy commitment to the international obligations assumed were as ambiguous as public choice theorists might claim, senior Chinese officials would have been less earnest in seeking to turn it into a workable proposition. The Ministry of Foreign Trade and Cooperation (“MOFTEC”) has thus scrupulously reviewed and properly amended/repealed without hesitation thousands of laws and regulations (both of the State Council and its own). It has also concluded numerous bilateral agreements, bilateral investment pacts, and tax treaties. The

78 See generally Shirk, supra note 13. 79 Ibid. 80 See generally Chang, supra note 13; Studwell, supra note 13; Minxin Pei, supra note 13; Mann, supra note 13; Shirk, supra note 13.

138 ASPER REVIEW [Vol. VII process of legislative adjustment undertaken following entry into the WTO is ongoing and has progressed smoothly throughout the entire period, notwithstanding the technical and organizational difficulties involved.81

By the same token, a network of WTO centers has been created in key urban areas. In addition, several private centers have been established to disseminate relevant information and provide appropriate guidelines to the necessary parties and the community at large. Main government departments have formed WTO committees to scrutinize industry-specific laws under the supervision of the State Council. “To meet public demand, a wide range of books about the WTO has been published and prominently displayed in major bookstores across the country.” This amounts to a massive educational campaign, albeit one focused more on the cities than the countryside.82

Two MOFTEC initiatives merit closer attention: the setting up of a Department of WTO Affairs and a Fair Trade Bureau for Imports and Exports. The former “comprises six offices, each staffed by four to eight people.” Its organizational roots stem from MOFTEC’s Department of International Trade and Economic Affairs, which was responsible for Chinese bilateral and multilateral negotiations in the bid to gain WTO membership. The mission of the new organizational arm is to secure compliance with the goods trade and services trade agreement and prevent statutory/regulatory deviation from WTO principles.83

“The Fair Trade Bureau, consisting of eight offices with a total of about forty staff, is responsible for conducting investigations into imports and for determining whether or not anti-dumping, anti-subsidy and protective measures are applicable.” It guides local companies, collectively and individually, when they face allegations of dumping and subsidy. The Bureau also studies other countries’ discriminatory trade policies vis-à-vis China and acts, through bilateral and multilateral channels, to promote fair treatment for Chinese enterprises in the global commercial arena (the Investigation Bureau for Domestic Industry Injury, created by the State Economic Trade Commission, plays a similar role).84

The China-Business Review, a periodical produced by the US-China Business Council, paints a generally favorable picture of top-down broad Chinese government efforts to ensure adherence to WTO rules. It highlights the fact that Stewart and Stewart, an American law firm, has been retained by the US-China Commission to prepare a report whose purpose is to establish benchmarks for future efforts to monitor and

81 See Chan, supra note 52 at 64-65. 82 Ibid. at 65. 83 Ibid. at 66. 84 Ibid.

2007] The Political Economy of Sovereignty Revisited 139 assess Chinese compliance with those rules.85 The willingness to allow an independent Western professional organization to shape the framework effectively in a solo fashion may be viewed as indicative of the seriousness with which senior policy makers and the foreign trade establishments approach the WTO agenda.

Given this pattern of action, one cannot dismiss lightly the argument that reformist ideas, as distinct from purely parochial interests, have inspired the leadership to take considerable risks in order to facilitate China’s integration into the world economy. Moreover, to demonstrate otherwise, one would have to show convincingly that strategic decisions in Beijing are taken in a manner largely consistent with public choice assumptions, whether explicit or implicit. Yet, there is no solid evidence to suggest that this is the case. On the contrary, the procedural norms governing policy formulation that have crystallized since the late 1970’s limit to all appearances the scope for group-centered opportunistic maneuvers, although the door is by no means hermetically closed.

It should thus be noted that the Chinese bureaucracy addresses problems, particularly those with wide ramifications, through “delegation by consensus.” Specifically, the Communist Party delegates to the State Council the authority to make specific decisions. Senior members of the latter, in turn, delegate to their subordinates the authority to make decisions if the agents agree. If the agents reach a consensus, the decision is automatically ratified by the higher level. If the agents cannot agree, then the authorities step in to make the decision, or the issue is dropped altogether, or tabled until a consensus can be achieved. Delegation by consensus is practiced at each level of the organizational hierarchy: State Council to commissions, commissions to ministries and provinces, ministries and provinces to bureaus and cities, and so on.86

From the standpoint of the principal, delegation by consensus functions effectively when it encourages groups to articulate their interests while creating incentives for them to reconcile their differences without external intervention. Needless to say, the flow of events does not invariably follow the official script. Public choice-style tactics and other factors may disrupt the rhythm. In such circumstances, it has become increasingly common over the years for the principals to escalate their coordination efforts. They seem to have been sufficiently successful, albeit more so in recent years than during the early phases of the reform

85 Ibid. at 65. 86 See generally Lieberthal & Oksenberg, supra note 68; Lieberthal & Lampton, supra note 68; The Political Logic of Economic Reform in China, supra note 68; How China Opened its Door, supra note 68; Jianrong Huang, supra note 68; Feng Hui, supra note 68.

140 ASPER REVIEW [Vol. VII program, to sustain delegation by consensus as a viable balancing institutional mechanism.87

Another procedural norm closely adhered to by top political strategists is “incrementalism.” The pace of restructuring is expected to be moderate and socio-economic change is pursued in a piecemeal fashion. Radical transformation of the entire system and the key components thereof are to be avoided. Sequencing of reforms, preferably systematic in nature, is also favored because it minimizes the risks of costly blunders, simplifies error correction, and makes a backlash from potentially disaffected constituencies a less likely prospect. The corollary is that policy formulation is a distinctly elaborate process, often stretching over an extended period of time.88

An equally salient feature of high-level bureaucratic decision making is the emphasis on maintaining rapid output expansion, other things being equal. Robust economic growth tends to keep core strata of society content and fosters a climate supportive of fundamental reconstruction. It helps to accomplish an objective that, according to Hirschman,89 has often eluded reformers—namely, turning a complex “game” that is inherently redistributive into one in which everybody wins, or at least no one is worse off than before the shift in the status quo.90

The issue of WTO membership must have been managed within a framework reflecting this modus operandi. The implication is that it has inevitably been subjected to an exceptionally broad-based and painfully slow assessment geared toward securing tangible benefits and preventing unnecessary discomfort to as many players in the domestic arena as possible. The course eventually followed is not without major redistributive consequences. Nor has it been charted by institutional architects operating in a setting free of partisan influences. Nevertheless, one cannot really see how in such an environment a small group of powerful officials could capture the policy agenda and proceed forcefully to reshape it in a manner entirely consistent with its narrow interests.

There can be little doubt that senior bureaucrats are broadly aware of the redistributive consequences and that they are not oblivious to the fact that, fortuitously, sluggish implementation might somehow mitigate them. It would be inappropriate to infer, however, that they have embarked on this extraordinarily challenging venture assuming confidently that they would be able to maximize net gains to themselves 87 Ibid. 88 Ibid. 89 See generally Albert O. Hirschman, The Strategy of Economic Development (New Haven: Yale University Press, 1958). 90 See generally Lieberthal & Oksenberg, supra note 68; Lieberthal & Lampton, supra note 68; The Political Logic of Economic Reform in China, supra note 68; How China Opened its Door, supra note 68; Jianrong Huang, supra note 68; Feng Hui, supra note 68.

2007] The Political Economy of Sovereignty Revisited 141 because the fallout would be contained as a result of selective execution at ground level and China’s ability to escape serious sanctions due to its mixed compliance record. Opportunistic considerations may have played a part in the decision making process, but the picture painted here suggests that it has not been a prominent one and that the interests of the nation have been accorded a higher priority (even if opportunistically so, in certain respects) than those of the political elite or segments thereof.

Indeed, the policy establishment may not have had the foresight to fully anticipate the extent to which wide-ranging and deep-rooted implementation problems would impede progress on the WTO front. Public choice theorists posit that actors in the political arena are well-informed and rational. This proposition is not universally shared and there is ample evidence to the contrary, including in the Chinese context.91 The quantum leap taken to facilitate China’s integration into the world economy may have been the product of a mix of strategic factors (e.g. long-term benefits outweighing the short-term/medium-term costs), ideological convictions (e.g. reformist zeal), and opportunistic motives (some pertaining to the nation and some to its leaders). In addition, there may have been an element of “ignorance” and “miscalculation” (and, of course, “randomness”) in the equation.

One feature of the Chinese institutional façade which is commonly perceived as a stumbling block to smooth implementation of WTO rules is the ineffectiveness of the judiciary (in fact, the entire legal system). As matters stand, judicial independence remains a mirage rather than an ingrained aspect of social reality. Kong states:

According to the practice of cadre administration, judges, who fall within the category of cadres, are selected and appointed either by the Party Committee within the court or the local Party Committee. Although the Organizational Law of People’s Courts and the Judges Law provide that court presidents, vice presidents, chief judges of court divisions and judges are appointed by the standing committees of local People’s Congresses at corresponding levels, these personnel are in practice recommended by the local Party committee to the people’s congress for approval.92 Moreover, courts are viewed as Party/state organs and judges,

particularly senior ones, and are normally former Party/government

91 Chang, supra note 13; Studwell, supra note 13; Minxin Pei, supra note 13; Mann, supra note 13; Shirk, supra note 13. 92 See Qingjiang Kong, supra note 65 at 101.

142 ASPER REVIEW [Vol. VII officials. The interaction between judges and other members of the politico-bureaucratic machinery is frequent and close. It is also asymmetrical, in that the pattern is usually determined by the latter. By the same token, for purposes of budget administration, courts are treated just like any typical Party/state organ, given that their budgets are appropriated by the local people’s government through the financial department, whose budget plan is subject to the approval of the local People’s Congress. To make matters worse, according to Kong, “the local Party political-legal committee, which is a leadership organ within the Party for political and legal work, orders that the important and difficult cases be referred to it for ‘discussion.’”93

Judicial autonomy is further circumscribed because the rigidly hierarchical structure of the judiciary prevents judges from adjudicating cases in a genuinely independent fashion. Rather than being equal in the professional sense of the term, judges are a component of a relentlessly top-down driven multi-layered system. Each one is strictly accountable to the head of division he/she belongs to, and the division is fully responsible to the Judicial Committee that is led by the President of the court. In most cases, it is the division head, the president, or the Judicial Committee, not the judge(s) actually involved, who render the judgment. If the case is deemed to be of considerable significance, the Judicial Committee plays invariably the dominant role.94

The heavy reliance on the top layers of the hierarchy also reflects the low professionalization of the judiciary in that judges are not viewed as performing a function that calls for in-depth and systematic training. The 1995 Judges Law stipulates that judges should be graduates of tertiary-level educational institutions “in law or in other subjects who have acquired specialized legal knowledge.” However, it allows judges who do not meet such standards but were appointed before this law came into effect to retain their posts by completing the relevant training. According to Kong, most of them, in fact, have not graduated from such institutions, but are former military officers. For presidents, vice presidents, and other senior court officials, extensive Party/government/military experience is effectively the norm.95

In addition, judges operate in an environment characterized by strong aversion to litigation. The social preference is for non-adversarial conflict resolution and this manifests itself inevitably in judicial settings. A striking example of the ingrained desire to avoid confrontational tactics is the Civil Procedure Law (“CPL”), which explicitly encourages judges to promote non-adversarial processes even during court proceedings. In this context, cases are often adjudicated according to the principle of

93 Ibid. at 101-102. 94 Ibid. at 102. 95 Ibid. at 103.

2007] The Political Economy of Sovereignty Revisited 143 “equality and mutual benefit,” a pattern not conducive to seeking, in a determined manner, outcomes consistent with the rights and obligations of the affected parties as provided for by the pertinent laws and regulations.96

A more problematic feature of the situation is corruption, which is rampant in China and afflicts the judiciary as well. Attempting to influence judicial decisions through financial means is a common practice, indicative of a lack of public respect for the legal system. Although court officials are prohibited from meeting privately with litigants and their representatives, approaching judges and discussing contested matters with them, an illegal practice in countries with well-functioning legal institutions, is regarded as acceptable conduct. Interestingly, such discussions frequently take place over meals and/or in karaoke lounges.97

Whether or not corruption impinges on the outcome, judicial decisions may be diluted or even rendered completely irrelevant due to political machinations which are unavoidable in this vast and diverse developing country. According to Kong, “[i]n theory, all local powers stem from the centre.” Even areas with large ethnic minorities, where a certain degree of self-government is formally granted, do not enjoy as much autonomy as sub-federal units in federal nations. Nevertheless, economic reform has led to an erosion of central controls and accumulation of power at local levels. The corollary is that laws and regulations are implemented haphazardly throughout the country. The resistance of local authorities often assumes the form of interference with judicial processes, particularly when it concerns “the enforcement of judgments unfavorable to local interests.”98

The difficulties to which decentralization gives rise are not confined to the judicial/legal domain. While the absence of tight central controls enhances sensitivity to local conditions and fosters grassroots initiative, which in turn underpins economic dynamism, the loose authority structure breeds “local protectionism.” Strategic impulses originating in Beijing are consequently transformed in the course of transmission to a point whereby realities on the ground do not correspond closely to central policy intentions. Deviations from this pattern are few and far between. They are to be found mostly in areas of economic activity such as distribution, insurance, and retail, which have emerged in recent years and are not yet dominated by vested interests.99

96 Ibid. at 105. 97 Ibid. at 103-105. 98 Ibid. at 102-103. 99 See generally Andrew C. Mertha & Ka Zeng, “Political Institutions, Resistance, and China’s Harmonization with International Law” (2005) 182 China Q. 319.


The problems encountered in executing centrally-inspired plans, including ones which have international ramifications, extend beyond those with which relevant domestic and external actors are fully or partially familiar. A notable example is the guanxi culture, which is deeply embedded in the social fabric. The literal meaning of the term is “relationship,” but it refers specifically to “personal connection” in everyday parlance. It is established through the exchange of favors, and reinforced through the exchange of trust. To the Chinese, guanxi has been an essential element of life, allowing them to rely on mutual support within a closely-knit interpersonal network during periods of famine, group violence, political turbulence, and war.100

The traditional, socially defensive version of guanxi appears to have given way in the past two decades to a more opportunistic, socially manipulative one. Due to the rapid spread of materialism, the maximization of personal economic gains has become a key motive for building socially rewarding relationships. A well-functioning guanxi network is increasingly viewed as a form of social investment, potentially paving the way for the exploitation of profit-making opportunities and economic advancement. The term is now often equated with a modus operandi whose emphasis is on going through the backdoor, using personal connections, and obtaining concrete advantages as a result.101

The distorted guanxi culture impedes China’s systematic transformation. From an international economic perspective, foreign firms, as outsiders to the domestically nurtured networks, are denied access to sensitive information, are subject to discriminatory treatment, and need to incur extra costs in order to secure a wide range of services. This deviates from the spirit and letter of internationally binding agreements, but the countervailing cultural forces are simply too powerful to be contained effectively at this early juncture in the modernization process. The picture may well change in the long-term, yet such expectations, even if valid, cannot provide reassurance in the short to medium-term.102

These constraints need to be highlighted because of their seriousness and prevalence. Adherence to WTO rules in the face of such corrosive bottom-up influences is bound to be a highly selective exercise. The objective of bringing them into focus is not to bolster this compelling argument, however, since in itself it does not shift the balance of the theoretical claims examined here in one direction or another. Indeed, our contention is that they mostly serve to illustrate that the Chinese political center simply does not have the capabilities to ensure a high

100 See generally Icksoo Kim, “Accession into the WTO: External Pressure for Internal Reforms in China” (2002) 11(32) J. Contemp. China 438. 101 Ibid. at 454. 102 Ibid.

2007] The Political Economy of Sovereignty Revisited 145 degree of compliance, and may not even be fully aware of the magnitude of the task it confronts. Thus, they should not be construed as reflecting public choice-style efforts to convert the national agenda into a vehicle for the accumulation of personal benefits for those strategically positioned to shape it, other than on a relatively modest scale.

The evidence buttressing this contention is in the form of measures embraced by the central government to minimize the adverse impact of the barriers to compliance with the WTO regime. For example, mechanisms have been introduced not just to reduce the vulnerability of the potentially fragile banking industry to exogenous shocks, primarily through more effective regulation and supervision, but also to prepare it for intense external competition, via a mixture of financial reinforcement (e.g. recapitalization) and gradual liberalization. By the same token, the less feeble but heavily protected telecommunications industry has been streamlined and transformed into a configuration roughly akin to that of a level-playing field. Such initiatives have been witnessed across the industrial spectrum, often featuring consolidation and centralization (or to be precise, recentralization) designed, where appropriate, to wrest control from vested interests at the national and local levels, particularly the latter.103

Legal reform poses a greater challenge because of its implications for system-wide governance, but it has by no means been frozen. Notably, in 1999, the Supreme People’s Court (“SPR”) unveiled an ambitious and comprehensive plan for overhauling the structure of the judiciary. Among the steps announced were various actions to enhance judicial independence and the integrity of organizational operations. Typical in this respect was the decision to switch gradually from “two-fold leadership” to “vertical leadership,” allowing the supervising court to have a more tangible input into the selection and appointment of ranking judges of a lower court, which was previously the exclusive domain of the local Party Committee.104

Another significant development was the adoption, initially on an experimental basis, of the principle of “judge in charge,” literally aimed at creating a framework whereby members of the judiciary directly involved could enjoy a meaningful degree of autonomy in deciding cases. Since the promulgation of the 1999 SPC plan, the drive to increase judicial professionalism has gained considerable momentum. Recruitment standards have been raised and training programs have been expanded. The process of legal reform is in its early stages and there is substantial scope for further adjustments, including areas having a bearing on adherence to WTO rules (e.g. in terms of establishing the precedence of these rules over domestic laws). Nevertheless, the general course

103 See generally Mertha & Ka Zeng, supra note 99. 104 See Qingjiang Kong, supra note 65 at 106.

146 ASPER REVIEW [Vol. VII pursued cannot be readily reconciled with the notion that nothing but elite opportunism is propelling China on the international economic front.105

In the final analysis, it is difficult to avoid the conclusion that policy capabilities, or a lack thereof, are an important factor in the delicate equation examined here. This is a side of the picture that public choice theorists and proponents of the enforcement approach to international legal compliance choose to de-emphasize. For enlightenment from this particular perspective, one needs to turn to the management school, whose members highlight the propensity of states to adhere to the provisions of international agreements and ascribe this pattern to efficiency considerations, self-interest, and widely-held values. According to them, non-compliance, when it manifests itself in concrete form, is seldom the result of a deliberate intent to breach established treaty obligations, but the unfortunate effect of capacity limitations and rule ambiguity. The corollary is that deviations from international legal commitments should be addressed through a progressive strategy of capacity building, rule clarification, and better transparency, rather than through coercive enforcement.106

Capacity constraints feature prominently in the managerial-type dissection of the causes of non-compliance. As Young has observed, “[t]he effectiveness of international institutions varies directly with the capacity of the governments of members to implement their provisions.”107 Political capacity constraints stem from the inability of signatories to induce public and private actors in the domestic arena to behave in a manner consistent with the terms of international agreements. Governments may fail to secure ratification, ensure adherence to treaty obligations (whether partially or across the board), or display the necessary administrative skills. Economic capacity constraints come into play when financial limitations impinge on states’ abilities to fulfill international legal commitments. A lack of sufficient resources may directly hamper compliance efforts, and macroeconomic forces may exert influence indirectly by affecting the overall climate in which public and private actors operate.108

Managerial theorists further argue that non-compliance may be inadvertent. For a number of reasons, both general and determined by specific circumstances, treaty language is at times imprecise and unclear, and this results in misinterpretation by states. Thus, “more 105 Ibid. at 105-111. 106 Bradford, supra note 3. 107 See Oran R. Young, “The Effectiveness of International Institutions: Hard Cases and Critical Variables” in James N. Rosenau & Ernst-Otto Czempiel, eds., Governance without Government: Order and Change in World Politics (Cambridge: Cambridge University Press, 1992) 160 at 183. (italics omitted) 108 Bradford, supra note 3.

2007] The Political Economy of Sovereignty Revisited 147 often than not there will be a considerable range within which parties may reasonably adopt differing positions as to the meaning of the relevant treaty language.”109 Inadvertent non-compliance may also have its origins in the uncertainty involved in choosing the strategies required to meet treaty targets (given that different strategies can be pursued in such contexts). The problem manifests itself commonly, for example, in the area of international environmental law.110

The diagnosis of the causes of state actions inconsistent with international legal obligations translates into prescriptions for addressing violations. As Chayes and Handler Chayes claim in their seminal work on the subject: “If we are correct that the principal source of non-compliance is not willful disobedience but the lack of capability or clarity or priority, then coercive enforcement is as misguided as it is costly.”111 The attention accorded to this mode of compliance management in the academic literature does not reflect its actual use and success, maintain the two scholars. Or, to state it more specifically, “sanctioning authority is rarely granted by treaty, rarely used when granted, and likely to be ineffective when used.”112

Instead, proponents of managerialism highlight the merits of capacity building, rule clarification, and enhanced transparency as remedies for non-compliance. Whereas some political and economic capacity constraints cannot readily be alleviated through international corrective measures, deficits in technical expertise, bureaucratic effectiveness, and financial resources may be partially or even entirely eliminated via systematic capacity building. By the same token, authoritative rule interpretation in appropriate international legal settings may significantly reduce non-compliance stemming from ambiguous treaty language.113

In this line of theorizing, dispute settlement is viewed primarily as clarifying common norms through interpretation and adjudication rather than serving as a channel for enforcement. However, it should be emphasized that the mechanisms of rule interpretation need not be confined to formal devices, and non-binding meditative processes may

109 See Abram Chayes & Antonia Handler Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Cambridge: Harvard University Press, 1995) at 11. It should be noted that the WTO dispute settlement blueprint reflects more ambitious international community aspirations regarding sanctioning authority. For an overview, see Van den Bossche, supra note 46; Barton et al., supra note 46; Sovereignty, the WTO, and Changing Fundamentals of International Law, supra note 46; The Jurisprudence of GATT and the WTO: Insights on Treaty Law and Economic Relations, supra note 46. 110 See generally ibid., Chayes & Handler Chayes. 111 Ibid. at 22. 112 Ibid. at 32-33. 113 See generally ibid.

148 ASPER REVIEW [Vol. VII also clarify treaty rules. Enhanced transparency, the third remedy, may provide positive reinforcement in this respect by contributing toward ambiguity reduction and fostering a sense of confidence among players in the substantive and procedural dimensions of the agreement.114

This case study should not be regarded as offering an endorsement of the management approach to international legal compliance and the visions of sovereignty loosely associated with it. Proponents of this gentle paradigm depict the global political landscape as devoid of virtually any opportunistic elements, providing an overly idealistic perspective on the conduct of foreign policy, which is to some extent out of tune with prevailing realities. Certain assumptions upon which it rests would also need to be adjusted in order to make them more relevant in the present context. There can be little doubt, for example, that Chinese officials have a firm grasp of WTO rules and that subtle differences in the interpretation of those rules are not the root of the problem. On the other hand, they may not fully appreciate the complexities and constraints which they face and may thus inadvertently deviate from the agreed-upon script.115

The virtues of managerialism nevertheless should not be overlooked. It incorporates values other than self-interest and treats international cooperation as a phenomenon which is not invariably the product of Machiavellian machinations. It does not portray strategic decision making as a single step and differentiates explicitly between policy formulation and policy implementation. The focus on the implementation component of the process encourages analysts to display constructive concern for institutional capabilities and the adverse implications for international law of the inadequacies exhibited by states in this respect. Scholars who embrace the postulates of management school also put forward progressive ideas regarding compliance enhancement which extend beyond traditional-style enforcement. Thus they effectively complement, but do not render fruitless, the analytical contributions of their public choice counterparts.

CONCLUSION

HE CONCEPT OF SOVEREIGNTY has long featured prominently in the study of international law and international relations. In recent years, it has been subject to a stream of intellectual innovations,

resulting in considerable theoretical broadening and deepening. The insights generated by members of the public choice schools have been

114 Ibid. 115 See generally Donald C. Clarke, “China’s Legal System and the WTO: Prospects for Compliance” (2003) 2 Wash. U. Global Stud. L. Rev. 97.

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2007] The Political Economy of Sovereignty Revisited 149 particularly illuminating because of their radical nature (in the sense of being unconventional, even counter-intuitive), rigorous structure, high degree of transparency, and far-reaching ramifications for the maintenance of the international order. Importantly, those insights have been examined empirically in international legal settings and have apparently emerged intact.

However, the empirical testing has been confined to a number of American case studies, undertaken in an environment where the political system operates in a manner similar to that of the economic marketplace. China’s decision to seek entry into the WTO, on not entirely favorable terms, at least initially, allows academic researchers to extend the process geographically and culturally, and productively and reliably so, because it has been rather well documented. The conclusion we draw on the basis of our exploration of the available evidence is that the public choice framework is viable irrespective of national boundaries and historical experience, albeit not to a point of being able to offer a comprehensive account of sovereign action involving international law.

Elite opportunism seems to be merely one of several factors inducing the domestic political establishment to accept external legal constraints which are not without negative consequences, including influences which are fundamentally at variance with the motives attributed to state representatives by public choice theorists (e.g. the basically selfless commitment to the idea of an open and deregulated economy which functions efficiently and equitably). Strategy implementation also needs to be decoupled analytically from strategy formulation and accorded careful attention as a source of impulses potentially undermining international law. To the extent that institutional capabilities are sub-optimal, they should loom large on the international policy agenda, alongside traditional enforcement mechanisms.

HOW TO SEE A JAR OF PEANUT BUTTER: EVALUATING EMPIRICAL STUDIES OF

PATENTS AND PATENT LAW

Katie Lula*

INTRODUCTION

HEN I STUDIED ABROAD IN EUROPE for a semester as an undergraduate in college, one of the most wonderful discoveries I made was at a small grocery store near the San Lorenzo piazza

in Florence, Italy. Along one of the narrow aisles, on a shelf amidst jars of every imaginable flavor of jam and jelly, was a jar of peanut butter. And not just any peanut butter, but my favorite brand: Skippy. Fumbled by the joy of my discovery, my initial reaction was a bit presumptuous: “Well, of course, it’s a jar of Skippy,” I thought. “Skippy is the best.”

I tell you this story because a year later, when I entered law school and began to study patent law, I encountered the same presumptuous reasoning. The theoretical justifications argued by the majority of legal scholars for the existence and structure of current patent law seemed to boil down to something of an ultimatum: “We must have our patent laws because they are the best and only line of defense against the anarchical cessation of scientific innovation and human productivity.”

In my opinion, this was the same absurd, circular reasoning as that of my initial reaction at finding a jar of peanut butter in Europe. Simply because I find a jar of Skippy peanut butter on a shelf in a Florentine grocery store does not mean that Skippy peanut butter is the best and only brand of peanut butter to buy. Rather, it means that Skippy peanut butter is the only brand to buy at that store at that particular time; there are other peanut butter brands available at other stores around the world, and at various times, depending upon distribution schedules and local tastes.1

* B.A. (University of Kansas); J.D. (University of Kansas Law School) 1 I will not inquire into the possibility that the lone jar of peanut butter was misplaced and usually sold in another aisle. The possibility of misplaced peanut butter implies the possibility of misapplied patent law and, consequently, the malpractice and flawed jurisprudence of innumerable legal scholars and practitioners, which is an implication beyond the power and scope of this article. I assumed upon finding the jar of peanut butter that it was where it was supposed to be, so this article assumes that patent law, whatever it may be, is practiced and functions in the way it is supposed to be practiced and to function.

W


Similarly, simply because current patent law exists and functions in the manner that it does, whatever that manner is, this does not and should not imply that it is the best and only means to protect and to promote scientific innovation and human productivity. There may be other ways to accomplish such an objective, such as ceremonies that award honors and recognition to inventors, or perhaps more essentially, global treaties that promote peace and free trade, thereby allowing people to live in peace and to exchange both goods and ideas. Inventors would be hard pressed to invent in situations where they are taking shelter from war and as a result, are cut off from knowledge of innovations elsewhere around the world that could enrich their own ideas. However, considering that most legal scholars as well as economists interested in the subject of patents have devoted their efforts to studying and debating current patent law, little effort has been devoted to acknowledging, developing, articulating, studying, and debating alternatives.

If any legal scholars wish to persist in their belief that the current existence and structure of patent law is the best means to protect and to promote scientific innovation and human productivity, then they should prove their belief not with circular arguments, but with hard facts founded in empirical studies. Unfortunately, it has proven extremely difficult to study accurately and empirically the effects of patent law and the relationships between patents, scientific innovation, and human productivity in the form of overall economic progress. Some studies have been conducted, but their conclusions are in many instances, limited, misinterpreted, and contradictory.

This article examines and evaluates a broad but hopefully representative sample of such empirical studies, ranging from the first primitive but frequently cited studies, to the more recent but perhaps lesser known studies. To do so, this article attempts to determine the validity of these studies, that is, what exactly the studies allegedly prove and whether they actually prove it. In addition, this article discusses what the validity of those studies says about the effectiveness of current patent law in satisfying the purposes of patent law.

In more colloquial terms, we learn how to see a jar of peanut butter: if it is the only jar on the grocery store shelf, does this mean that it is the best brand of peanut butter, or does it mean that it is simply the only one currently available? As discussed in brief above, common sense concludes that the answer is the latter, but in the context of patents and

However, even when a law operates exactly the way it is designed to operate, it sometimes tends to have unforeseen opposite, alternative, or indirect effects which deviate from the law’s original purpose. Therefore, the question this article explores is, does the operation of current patent law satisfy effectively the alleged purposes of patent law?

2007] Evaluating Empirical Studies of Patents 153 patent law, this article aims to come to the same conclusion through a more formal discussion.

In Section I, we begin our formal discussion by understanding exactly what we are supposed to be empirically studying: that is, what patents are and the theoretical justifications for patent law. We also explore whether current patent law officially acknowledges and articulates these theoretical justifications as purposes for the law itself, and if not, what silence may say about the law’s effectiveness.

In Section II, we use these justifications, regardless of the extent to which patent law officially acknowledges and articulates them or not, to examine and evaluate a broad sample of empirical studies of patents and patent law. If these studies empirically prove what they conclude with respect to the theoretical justifications for patent law, that is, that patents encourage scientific innovation and economic progress, then it can be said that current patent law is effective in satisfying its purpose, to the extent that the purpose embodies the major theoretical justifications for patent law. If, on the other hand, these studies fail to empirically prove their conclusions with respect to the relationship between patent law and the theoretical justifications for that law, then their conclusions are possibly misguided, and the current existence, structure, and operation of patent law should be re-evaluated and not taken for granted.

I. A GENERAL INTRODUCTION TO PATENTS

EFORE WE CAN EVALUATE EMPIRICAL STUDIES of patents, we must understand the concept of a patent and determine the standard for evaluation. In this Section, we first define a patent using

various sources, such as dictionaries, legal texts, national legislation, and international conventions. Second, we articulate the theoretical justifications for patent law that are most commonly argued by legal scholars and economists. If these justifications are acknowledged and articulated in patent law, particularly in international patent conventions, as official purposes for the laws those conventions promulgate, then they will be the appropriate standards by which we can evaluate empirical studies of patents and patent law.

A. Defining a Patent The definition of a patent is relatively straightforward and

consistent among various sources.2 Linguistically, the Canadian Oxford

2 In this article, I use various sources to define a patent because variations in definitions reflect and imply the level of uncertainty to the understanding of a

B

154 ASPER REVIEW [Vol. VII English Dictionary3 defines a “patent” as a right or title that is conferred by “a government authority to an individual or organization […]. The sole right to make, use, or sell some invention [...].”4 Similarly, the American Heritage College Dictionary defines a “patent” as “a grant made by a government that confers upon the creator of an invention the sole right to make, use, and sell that invention for a set period of time.”5

From a legal perspective, a patent reflects these linguistic definitions; in both international conventions and national legislation, a patent is an exclusive right granted by a government to an individual to protect “a new and useful idea.”6 For instance, the 1883 Paris Convention for the Protection of Industrial Property defines patents as “industrial property” determined by national legislation:7

Industrial property shall be understood in the broadest sense and shall apply not only to industry and commerce proper, but likewise to agricultural and extractive industries and to all manufactured or natural products, for example, wines, grain, tobacco leaf, fruit, cattle, minerals, mineral waters, beer, flowers, and flour.8 Similarly, the United States Code grants patents for the invention

or discovery of “any new and useful process, machine, manufacture, or

word and concept, and consequently its effects in the real world. If the meaning of a word and concept possesses significant variations from one source to another, then it becomes more difficult to study the concept accurately and empirically in the real world. Conversely, if the meaning of a word and concept is for the most part similar from one source to another, then it becomes easier to study the concept accurately and empirically in the real world. 3 The New Shorter Oxford English Dictionary is frequently used by the World Trade Organization Appellate Body in its panel decisions for determining the plain meaning and legal definition of words. See Raj Bhala, International Trade Law: Theory and Practice, 2d ed. (Kansas: Matthew Bender, 2000) at 981-986. 4 The Canadian Oxford English Dictionary (Canada: Oxford University Press, 2004) at 1138. 5 The American Heritage College Dictionary, 4th ed. (Boston: Houghton Mifflin Company, 2002) at 1020. 6 Kamil Idris, Intellectual Property: A Power Tool for Economic Growth, 2d ed. (2003) at 9, online: WIPO <http://www.wipo.int/export/sites/www/freepublications/en/intproperty/888/wipo_pub_888_1.pdf>. 7 Paris Convention for the Protection of Industrial Property, 20 March 1883, 21 U.S.T. 1583, art. 1(4). 8 Ibid., art. 1(3).

2007] Evaluating Empirical Studies of Patents 155 composition of matter, or any new and useful improvement thereof,”9 so long as the invention, discovery, improvement is also “non-obvious.”10

While consistent with each other, the significance of these linguistic and legal definitions is that they do not explicitly state, or even remotely imply, that a patent is a natural, inherent right in the scientific innovation to which it attaches. A patent is itself an invention, an artificial and arbitrary right created and granted by a government. In general, to acquire a patent, an individual files an application with his or her local government, explaining the invention and detailing how it differs from other inventions.11 The government reviews the application extensively and grants the patent only if the invention meets its criteria for being new and useful.12 Afterwards, the owner of the patent is not required to use the patented invention, but he or she can enjoin others from using it without permission.13 While it appears from the investigatory nature of these general procedures that creating and granting a patent for an invention is not arbitrary, it has the potential to be; governments can always choose not to create or grant patents or even to promulgate patent law.14 Governments may operate under the presumptuous reasoning that they must grant patents and promulgate patent law in order to stimulate scientific innovation, but as will be discussed in further detail in Section I.B, they do not have to.

Their choice is the same as ours when we walk down a narrow grocery store aisle and decide not to buy a jar of peanut butter either because we do not like the taste of peanut butter in general, or we do not feel like buying it at the moment for any given reason. It may simply not be necessary; there may be things that we can buy other than peanut butter, such as something similar, like hummus, or something completely different, like toilet paper. Even if we change our minds and choose to buy the jar for whatever reason, substantial or trivial, the point is, we do not have to make the purchase.

9 35 U.S.C. § 101 (2007). 10 Ibid., § 102-103. 11 Adam B. Jaffe & Josh Lerner, Innovation and Its Discontents (New Jersey: Princeton University Press, 2004) at 3. 12 Ibid. 13 Ibid. 14 William Pretorius, “TRIPS and Developing Countries: How Level is the Playing Field?” in Peter Drahos & Ruth Mayne, eds., Global Intellectual Property Rights (USA: Palgrave, 2002) at 184. For example, the Indian government has recently begun a movement to protect certain yoga practices from being patented in other countries by instead cataloguing it as traditional knowledge. See Suketu Mehta, “Can you patent wisdom?” International Herald Tribune (7 May 2007) Editorials.

156 ASPER REVIEW [Vol. VII B. Justifications for Patent Law

Concluding that a patent is generally an exclusive right created

arbitrarily and granted by a government for a limited time to make, use, or sell some useful, new, and non-obvious mechanical or scientific process or invention, or at least to stop others from doing so, we now articulate the justifications for patent law. In particular, we focus on the theoretical justifications that are most commonly argued by legal scholars and economists: to encourage innovation and to ensure public disclosure.

Surprisingly, however, these justifications are rarely acknowledged or articulated in international patent conventions as official purposes for the laws those conventions promulgate. This ambiguity and silence opens a Pandora’s box of implications: Do absolutely no purposes exist for patent law, or do none exist on which the signatories to the conventions could agree? If it is the case that the signatories simply could not agree at least on acknowledging or articulating the two major theoretical justifications for patent law, which many legal scholars and economists argue and support, why is this so? Are those theories in practice insufficient to justify current patent law? Is the empirical evidence too weak to support the theories, and if so, does that invalidate them as justifications for patent law? What does all this say about the purpose and effectiveness of current patent law, that law being allegedly based on unsupported, unacknowledged, and unarticulated theoretical justifications? These questions will be discussed in further detail in Section II. For now, we must first understand the theoretical justifications themselves, valid or not.

1. Theoretical Justifications Justifications are derived from the motivations of the people

interested in receiving, possessing, or using patents. Everybody has ideas; thus, anybody can invent. Across the world, in even the poorest countries, “there are people with the capacity to invent and create, some at a world-class level.”15 Such people range

from “knowledge workers” in labs and garages, in university spin-off companies, to executives in medium-size technology firms and multinational corporations [… who operate] between the extremes of personal achievement and uncompensated fame on the one hand,

15 Robert M. Sherwood, “Human Creativity for Economic Development: Patents Propel Technology” (2000) 33 Akron L. Rev. 351 at 352.

2007] Evaluating Empirical Studies of Patents 157

and faceless but comfortable […] fortune on the other[:]16 At one point on the […] continuum from the first technical application of a basic scientific discovery to commercial empire is the lone scientist problem-solver of lore, for whom financial incentives in the form of patent royalties may be utterly meaningless […]. At another is the modern technological firm, for which innovation through commercialization of new inventions is primarily a source of shareholder confidence sustaining thousands or tens of thousands of well-paying jobs […].17 Most legal scholars argue that the issue of whether an

individual’s scientific innovation “is mobilized for national economic development, or wasted, is largely a function of the availability of [patent] protection […].”18 Laws establishing, protecting, and regulating patents are designed to avoid what is called the “inventor’s paradox,” where inventors cannot sell their creations for fear of their ideas and knowledge being taken and used commercially without them receiving fair compensation, and where buyers will not invest in new inventions about which they know nothing.

Any potential buyer, of course, will not pay a high price, or perhaps any price at all, unless sufficient details are disclosed. The inventor, however, does not want to disclose too much, for fear the would-be buyer will instead become an independent producer of the invention’s commercial embodiment, and a competitor of the true inventor. The inventor’s paradox may be solved by a patent, which gives the inventor the freedom to disclose without fear of self-induced competition.19 As a result, a patent is a “policy instrument,” or perhaps more

colloquially, a security blanket, designed to build confidence and to create a balance between all these competing interests, in order to encourage scientific innovation that both the inventor and the public will put to practical use.20 Most legal scholars and economists therefore

16 Graeme B. Dinwoodie et al., International and Comparative Patent Law (Ohio, LexisNexis, 2002) at 51. 17 Ibid. at 50-51. 18 Sherwood, supra note 15 at 352. 19 Donald S. Chisum et al., Principles of Patent Law, 2d ed. (USA: Foundation Press, 2001) at 66. 20 Organisation for Economic Co-Operation & Development, “Compendium of Patent Statistics” (2005) at 41, online: OECD <http://www.oecd.org/dataoecd/60/24/8208325.pdf> [OECD Compendium].

158 ASPER REVIEW [Vol. VII argue two theoretical justifications for laws protecting and regulating patents: first, to encourage the innovation of new technology, and second, to ensure public disclosure of the new technological information.21

a. To Encourage Innovation

This first category of theoretical justifications for patent laws—

encouraging the introduction of new technology—provides two private incentives to the patent owner: “an incentive to invent and an incentive to invest.”22 The interaction of these two incentives is demonstrated by the careers of Thomas Edison, Alfred Nobel, Chester Carlson, Edwin Land, and other 19th and 20th century inventor-entrepreneurs who “built great commercial enterprises on the success of their patented inventions.”23 It is a continuous, self-feeding cycle: royalties from patented inventions pay for further research and the development of newer, better inventions and technologies, which are then patented and commercialized, earning more royalties which pay for more research and development.

From a micro-economic perspective, a patent is a sort of “shelter from the forces of market competition” for the individual possessing the patent24:

The shelter is limited to the precise terms of the claims of the patent, but it is sturdy and durable for many years. The premise of the patent […] is that this shelter and the resulting competitive advantage encourage invention because inventors know that they can reap a financial reward from their ingenuity.

The patent system also promotes technological and business competition because patent holders must disclose the details of their inventions in exchange for the specified period during which they have exclusive rights over their exploitation. As a result, both they and their competitors race to improve those inventions and to use the technology to create new ones […].25 Encouraging the introduction of new technology also provides a

public incentive. From a macro-economic perspective, patents stimulate

21 Dinwoodie et al., supra note 16 at 49. 22 Ibid. at 50 (emphasis in original). 23 Ibid. 24 Idris, supra note 6. 25 Ibid.

2007] Evaluating Empirical Studies of Patents 159 a nation’s economic growth, in four main ways. First, they facilitate technology transfer and investment. Second, they encourage and facilitate research and development at universities and research centers. Third, they lead to new technologies and businesses. Fourth, they generate revenue for businesses that accumulate and use patents in licensing, joint ventures, and other revenue-generating transactions.26

Using patents for economic growth requires a patent policy structured to promote economic growth.27 A patent policy “should be designed to promote patent licensing, joint ventures and strategic alliances, as these can encourage invention at the national level as well as [at the private, individual level].”28 These can also encourage research and development in universities and research centers.29 “Handled properly, patents are efficient drivers of national innovation, [research and development], product creation and business transactions that have beneficial macro and micro economic effects.”30

b. To Ensure Public Disclosure

The second category of theoretical justifications for patent law is

ensuring public disclosure of new technological information. Indeed, public disclosure is perhaps the most significant aspect of creation and invention, for what good is an idea if not known or realized? An idea in the mind of one person is well and good, but an idea spread among the masses inarguably has greater influence and strength. Therefore, the more important justification and purpose of patent law is public disclosure, as “[t]he history of intellectual property is essentially the emergence of recognition that a community benefits when it encourages its creative and inventive people by honoring the products of their minds.”31

However, while the social value of public disclosure “is rarely questioned,”32 the belief that government action is required to ensure it is not universally accepted. Many legal scholars and economists generally believe that government intervention, through promulgation of patent law, is needed to create a balance between the competing interests of inventors and the public, but some dissenters argue that “government action of any kind, including the awarding of […] patents, is

26 Ibid. at 10. 27 Ibid. at 17. 28 Ibid. 29 See ibid. 30 Ibid. 31 Sherwood, supra note 15 at 354. 32 Dinwoodie et al., supra note 16 at 51.

160 ASPER REVIEW [Vol. VII unnecessary” to stimulate scientific innovation.33 These dissenters argue that the private and public economic incentives, articulated above, are enough, and that mandatory public disclosure of new technological information is unnecessary to justify the existence of patent law.34 Other dissenters entirely reject the theory that patent law, by providing exclusive rights to new technologies, ensures public disclosure of new technological information; instead, these groups emphasize the preservation of “traditional cultural values and beliefs”35 and the inherent and predominant right of the public to free access to all intellectual property.36

2. Justifications Declared in International Patent

Conventions While “the trend of [national] legislatures and courts in developed

nations over the past three decades has been favorable to […] stronger patent protection,”37 surprisingly, the theoretical justifications discussed above are rarely acknowledged or articulated in international patent conventions as official purposes for the current existence, structure, and operation of patent law. Instead, most of the conventions seem to adopt a “Because I Said So” attitude.

For the past 130 years, the majority of international patent conventions, even when amended, have remained silent on the purposes for the patent laws that they promulgate. For instance, the 1883 Paris Convention for the Protection of Industrial Property, the 1925 Hague Agreement Concerning the International Deposit of Industrial Designs, the 1968 Locarno Agreement Establishing an International Classification for Industrial Designs, the 1970 Patent Cooperation Treaty, the 1977 Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure, the 1999 Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs, and the 2000 Patent Law Treaty all remain silent regarding justifications either for the international patent laws they promulgate or for the national patent laws that they attempt to harmonize internationally.

33 Stanley M. Besen & Leo J. Raskind, “An Introduction to the Law and Economics of Intellectual Property” in Keith E. Maskus, ed., The WTO, Intellectual Property Rights and the Knowledge Economy (Northampton: Edward Elgar Publishing Ltd., 2004) at 123-124. 34 Dinwoodie et al., supra note 16 at 49. 35 Ibid.; see also Katie Lula, “A New Idea of Copyright” (May 2007) (unpublished manuscript, on file with author). 36 See ibid. 37 Ibid. at 52.


In contrast, the 1967 Convention Establishing the World Intellectual Property Organization (“WIPO Convention”), the 1971 Strasbourg Agreement Concerning the International Patent Classification (“the Strasbourg Agreement”), and the 1994 Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPs”) imply purposes for patent laws, but they contain no language specifically referencing the theoretical justifications discussed above.

For instance, the preamble to the WIPO Convention speaks of a desire “to encourage creative activity” and “to promote the protection of intellectual property throughout the world,”38 but there are a variety of ways to accomplish these objectives without necessarily promulgating patent laws. For example, the basic purpose of the Scientific and Technical Awards of the Academy of Motion Picture Arts and Sciences is to recognize and honor the “ingenuity, efficiency and economy” of “[a]ny device, method, formula, discovery, or invention of special and outstanding value to the arts and sciences of motion pictures.”39 These awards strive to accomplish the same purpose as the WIPO Convention, that is, the promotion of creativity around the world, but without the creation and granting of patents and the promulgation of patent law.

Similarly, the preamble to the Strasbourg Agreement states that the patent law that it promulgates “is in the general interest.”40 However, what is the “general interest”? In the balancing act between inventors and the public, which patent law is intended to negotiate, the general interest could be either one of the two categories of theoretical justifications discussed above. That is, the “general interest” in the Strasbourg Agreement could be either to encourage the introduction of new technology, thereby favouring the general interest of inventors in excluding others from making, using, or selling their inventions, or to ensure public disclosure of the new technological information, thereby favouring the general interest of the public’s welfare.

To complicate matters further, the Strasbourg Agreement could, by using the word “general,” be referring to the interests of both inventors and the public. The Strasbourg Agreement therefore acknowledges, through one interpretation or another, the theoretical justifications of patent law. On the other hand, its vague choice of words fails to sufficiently articulate those justifications. Such ambiguity could mean indecision, uncertainty, and doubt on the part of the drafters’ and signatories’ own beliefs in the theoretical justifications of the law they 38 Convention Establishing the World Intellectual Property Organization, 14 July 1967, 21 U.S.T. 1749, pmbl. 39 Academy of Motion Picture Arts and Sciences, “Scientific and Technical Awards”, online: Academy of Motion Picture Arts and Sciences <http://www.oscars.org/scitech/index.html>. 40 Strasbourg Agreement Concerning the International Patent Classification, 24 March 1971, 26 U.S.T. 1793, pmbl.

162 ASPER REVIEW [Vol. VII were promulgating. Why is it that drafters were unable to agree on articulating more clearly the two major theoretical justifications for patent law, which many legal scholars and economists strongly support? Are those theories in practice insufficient to justify current patent law? Their ambiguity and doubt on the matter in turn strengthens our own doubts and questions about whether the theoretical justifications are in practice insufficient, whether patent law, in its current existence, structure, and operation, does indeed have the practical purpose it is believed to have, and whether it can effectively satisfy this purpose. In sum, the Strasbourg Agreement promulgates international patent law that attempts to harmonize national patent law, neither for which it provides adequate justification or purpose.

Justifications set out in TRIPs fare slightly better, but by saying more, the agreement in fact says less. Like the Strasbourg Agreement, TRIPs acknowledges the major theoretical justifications for patent law, but in its attempt to articulate them, its language becomes contradictory. Its preamble introduces “the need to promote effective and adequate protection of [patent] rights” and “the need for new rules and disciplines concerning […] the provision of adequate standards and principles concerning the availability, scope and use” of patents.41 However, it does not explain why there exist such “needs.” A “need” is “something required […; a] necessity; [an] obligation.”42 A “need” is arguably too strong a word for TRIPs to use, in saying that we “need” to protect and regulate patents, particularly when in fact patents are themselves inventions, artificial and arbitrary rights created and granted by governments, as discussed above in Section I.A.

Furthermore, without providing any logical reasoning or explanation, TRIPs simply declares that patents are “private rights,”43 which seems to imply that an inventor’s interest in excluding others from making, using, or selling their inventions, takes precedence over the public’s interest in its welfare, which depends upon public disclosure of new technological information. Yet in the same breath, TRIPs acknowledges “underlying public policy objectives of national systems for

41 Agreement on Trade-Related Aspects of Intellectual Property Rights [TRIPs], Annex 1C to the Marrakesh Agreement Establishing the World Trade Organization, 15 April 1994, 319 at 320; General Agreement on Tariffs and Trade—Multilateral Trade Negotiations (The Uruguay Round): Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods 33 I.L.M. 81 (1994) at 84. While the preamble in TRIPs refers to “trade-related intellectual property rights” and not specifically patents, Part II ss. 5 and 6 of TRIPs do include specific references to and provisions regulating patents. Therefore, by implication, patents are trade-related intellectual property rights and within the scope of the preamble. 42 The American Heritage College Dictionary, 3d ed. at 912. 43 TRIPs, supra note 41.

2007] Evaluating Empirical Studies of Patents 163 the protection of intellectual property, including developmental and technological objectives.”44

However, TRIPs does not adequately explain what developmental and technological “public policy objectives” are; if anything, provisions within the agreement contradict one another. Article 7 attempts to define such “objectives”:

The protection and enforcement of [patent] rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.45 On the other hand, Article 8, entitled “Principles,” states that

nations may adopt laws “necessary to protect public [welfare] and to promote the public interest in [… their] socio-economic and technological development […].”46 If TRIPs intends to promulgate laws ultimately to serve these purposes stated in Article 8, then it may do so with any kind of law, not simply patent law. For instance, laws prohibiting war47 or promoting free trade48 all protect and promote public welfare and development. TRIPs may also serve the purposes stated in Article 8 by simply not existing itself, considering that human civilization has endured for millennia without the existence of modern patent laws.49

44 Ibid. 45 Ibid., art. 7. 46 Ibid., art. 8. 47 For example, the United Nations prohibits war for the obvious reason, “to save succeeding generations from the scourge of war,” for a less obvious but equally important reason, “to employ international machinery for the promotion of the economic and social advancement of all peoples,” and for other humanitarian reasons. See Charter of the United Nations, 26 June 1945, Can. T.S. 1945 No. 7, pmbl. 48 For example, the General Agreement on Tariffs and Trade promotes free trade in order to promote global public welfare and development, which it refers to in economic terms, as “raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, developing the full use of the resources of the world, and expanding the production and exchange of goods.” See General Agreement on Tariffs and Trade, 30 October 1947, 58 U.N.T.S. 187, Can T.S. 1947 No. 27 (entered into force 1 January 1948) at pmbl. [GATT 1947]. 49 In the 4th century B.C., Aristotle recorded the first reference to the concept of patents and patent law as “a system of rewards to those who discover things useful to the state,” but he condemned the concept as “likely to lead to instability.” See Robert P. Merges et al., Intellectual Property in the New


Even if we conclude that the vague language contained in the WIPO Convention, the Strasbourg Agreement, and TRIPs is an adequate articulation of purposes for patent law, those purposes, which are the same theoretical justifications that legal scholars support, are still not completely persuasive. If we accept the dissenters’ argument, discussed above, that private economic incentives are enough50 to encourage innovation without governmental intervention in the form of establishing, granting, protecting, and regulating patents to inventions, then patent law is “unnecessary.”51 The converse is also true: if private incentives, economic or otherwise, are not enough to stimulate scientific innovation, then patent law alone cannot be an effective substitutable stimulant. It over-indulges unworthy inventors and causes allocative inefficiency:

[First, i]n a winner-take-all system like that governing patents, competition to get the patent (and thus control over future innovations based on that patent) may result in an excessive amount of resources being devoted to obtaining the prize. In fact, the combined expenditures of two firms seeking the same patentable invention in a patent race may not only be larger than that of a single firm, but their combined expenditures may be greater than is socially optimal […]. [Second, p]roviding incentives for the creation of many new works may encourage resources to be devoted to innovative activity. However, if the new innovations are not widely used, the system may be less beneficial than one with less creativity, but where the materials created are more broadly disseminated […]. [Third, t]he less that innovation depends on the resources invested and the potential economic rewards, the more

Technological Age, 2d ed. (USA: Aspen Publishers, 2003) at 123. His condemnation seemed to be accepted as universal common sense, because the concept of patents and patent law disappeared for almost a millennium, while human civilization continued to develop and progress, even through the “dark” ages. See Jean Gimpel, The Medieval Machine: The Industrial Revolution of the Middle Ages (New York: Holt, Rinehart, and Winston, 1976). The first modern patent legal regime originated in Venice in the fifteenth century; soon afterwards, the concept of patents and patent law gained popularity through the growth of trade and the spread of ideas throughout Europe and the rest of the world. See Merges et al., ibid. at 125. 50 Dinwoodie et al., supra note 16 at 49. 51 Besen & Raskind, supra note 33.


limited is the case for granting substantial rights to creators.52 In the context of our peanut butter analogy, neither public

incentives nor any amount of colorful marketing schemes or sales promotions can induce us to consume a jar of peanut butter if we do not have our own private incentive to do so. Admittedly, a familiar brand name, a fancy advertising slogan, a coupon, or a discount may induce a temporary craving and persuade us to purchase a jar, but when we return home, if we have no true desire to eat the peanut butter, either because we are not hungry, we do not feel like eating it, we suddenly develop an allergy to it, or any other reason, then the jar remains unopened and wasted. Furthermore, the money we spent to buy the jar, as well as the energy expended to earn the money to buy the jar, is wasted. We ourselves must already have a true personal desire for the jar of peanut butter in order for it to be resourcefully purchased and consumed. II. EVALUATING EMPIRICAL STUDIES OF PATENT LAW

HILE IT IS ONE THING TO ARGUE a theory or idea, it is something entirely different to empirically study it. For instance, we could theorize that promulgating patent law in “the developing

countries will boost the creation and application of new technology, as it has in the developed countries, with consequent economic growth and increased public welfare benefit,” but few developing countries have promulgated patent law to such an extent that will provide sufficient empirical information to support an empirical study of that theory.53

Even if there were sufficient empirical information available to study, we must determine the standards by which to judge what the information indicates. In many instances, patent statistics are increasingly manipulated to indicate a nation’s level of innovation and rate of technological progress.54 Meanwhile, claims regarding innovation

52 Ibid. at 125-126. However, with respect to the first point, it is uncertain whether patent races are common or just theoretical. Again, empirical studies clarifying this issue are few and limited. 53 Ibid. 54 World Intellectual Property Organization, “WIPO Patent Report: Statistics on Worldwide Patent Activities” (2006) at 4, online: WIPO <http://www.wipo.int/ipstats/en/statistics/patents/pdf/patent_report_2006.pdf>. [“WIPO Patent Report”]; see also Chisum et al., supra note 19 at 59.

W

166 ASPER REVIEW [Vol. VII and technological process are generally presumed to be accurate.55 For example, “many government agencies regularly interpret the number of patents or patent applications held by domestic firms and individual inventors as a measure of their nation’s technological prowess.”56 To improve upon this method, legal scholars and economists consider the possibility of weighing patents by their importance or value, and generating value-weighted patent counts.57

By manipulating patent statistics, many legal scholars and economists assume that patent law, by “providing a legal framework for protecting inventions,” stimulates innovation and thereby increases productivity and technological progress.58 It is assumed that patents indicate the inventive performance and productivity of nations, regions, industries, and firms, the diffusion of knowledge across regions and industries, the level of research and development of specific industries and technologies, and other economic developments.59 Four rationales attempt to explain this assumption. First, “patents cover a broad range of technologies on which there are sometimes few other sources of data.”60 Second, “the contents of patent documents are a rich source of information,”61 although there is no consensus on what that information means.62 Third, “patent data are readily available from patent offices.”63 Fourth, “patents have a close link to inventions,”64 but this rationale is exactly the sort of flawed, circular reasoning discussed in the Introduction to this article. Colloquially, it is like reasoning that the chicken comes from the egg because the egg comes from the chicken. With patents, it is not credible to reason that patent law stimulates invention because invention is linked to the granting of patents—at least, not without hard empirical evidence that clarifies the link between the two, and as will be discussed in further detail below, there is a lack of empirical evidence available to sufficiently prove this.

There remains “no [empirical] consensus as to the impact of patent [law] on the growth of technology,” or on other issues relevant to the existence of patent law and its effects on nations,65 because the

55 See Dietmar Harhoff, Frederic M. Scherer & Katrin Vopel, “Citations, Family Size, Opposition and the Value of Patent Rights” (2003) 32 Res. Pol. 1343 at 1344. 56 Ibid. 57 Ibid. 58 OECD Compendium, supra note 20 at 41. 59 Ibid. 60 Ibid. 61 Ibid. 62 See Besen & Raskind, supra note 33 at 126. 63 OECD Compendium, supra note 20 at 41. 64 Ibid. 65 Besen & Raskind, supra note 33 at 128.

2007] Evaluating Empirical Studies of Patents 167 standards by which to judge what the empirical information indicates remains ambiguous:

[P]atents are subject to certain drawbacks: a) the value distribution of patents is skewed as many patents have no industrial application (and hence are of little value to society) whereas a few are of substantial value; b) many inventions are not patented because they are not patentable or inventors may protect the inventions using other methods, such as secrecy […] c) the propensity to patent differs across countries and industries; d) differences in patent regulations make it difficult to compare counts across countries; and e) changes in patent law over the years make it difficult to analyse trends over time.66 Josh Lerner, who has extensively studied empirical data on

patents and patent law, identified three “key lessons” that he learned from studying nations’ policy shifts in patent law. First, patent law and any significant amendments to the law, reflecting shifts in patent policy, “emerged only after long and contentious debates, often cast in moral, rather than economic, terms.”67 Second, the law and amendments were promulgated permanently, without any “legislative provisions for the review or evaluation of the changes.”68 Third, “while each of the changes had an apparently substantial impact on patenting activity, the impact on innovation was much less certain.”69 In other words, governments promulgate patent law for allegedly moral purposes, but legal scholars might feel more comfortable practicing law that is justified economically. However, without any legislative standards or guidelines to review or evaluate the effect of the patent law, there is no way to economically justify the law.

If international patent conventions fail to acknowledge the major theoretical justifications for patent law and to articulate them clearly as official purposes for the patent law they promulgate, then there is no accurate standard by which we can empirically study the positive or negative effects of that law. On the other hand, if international conventions acknowledge, however vaguely, the theoretical justifications for patent law that are so adamantly argued by the majority of legal scholars and economists, through the Strasbourg Agreement and TRIPs,

66 OECD Compendium, supra note 20 at 41. 67 Josh Lerner, “Patent Policy Innovations: A Clinical Examination” (2000) 53 Vand. L. Rev. 1841 at 1843. 68 Ibid. 69 Ibid.

168 ASPER REVIEW [Vol. VII for example, then there is at least some standard by which empirical studies may prove patent law effective or ineffective in satisfying such purposes and justifications. By any standards, however, there remain few empirical studies on the effects of patent law.70

In this Section, this paper examines and evaluates a broad but hopefully representative sample of empirical studies, which I will label (A) hypotheses and primitive studies, (B) misinterpreted studies, and (C) limited studies. These studies have attempted to determine whether the relationship between patent law, innovation, and economic growth and development, if one exists, is a positive correlation, a negative one, or a causation. If these studies empirically prove what they theoretically claim with respect to the justifications for patent law, that is, that patents encourage scientific innovation and economic progress, then the studies are valid, and current patent law can be said to be effective in satisfying its purpose, to the extent that the purpose embodies the major theoretical justifications for patent law. If, on the other hand, these studies fail to empirically prove their conclusions with respect to the relationship between patent law and the theoretical justifications for that law, then their conclusions are possibly misguided, and the current existence, structure, and operation of patent law should be re-evaluated.

A. Hypotheses and Primitive Studies

In the early twentieth-century, Austrian-American economist

Joseph Schumpeter became the first person to formally theorize that innovation causes technological and economic progress and to imply that patent law, by providing exclusive property rights to inventions, encourages innovation and therefore progress. He explained that the insertion of new technology is the driving economic force behind the displacement of mature industries by newer ones; in turn, this displacement spurs economic development.71 Schumpeter theorized further that while widespread competition benefits short-term social welfare, regulated and controlled competition benefits technological innovation and economic progress72:

[C]apitalist economies are characterized by a continuous process of “creative destruction,” in which innovative technologies and organizational structures constantly threaten the status quo […]. [T]echnological innovation provides the opportunity for temporary monopoly profits

70 See Sherwood, supra note 15 at 355. 71 Ibid. at 356. 72 Robert P. Merges, “Commercial Success and Patent Standards: Economic Perspectives on Innovation” (1988) 76 Calif. L. Rev. 805 at 843.


[derived under patent law], and the pursuit of these profits has spurred the tremendous growth of the Western economies […].73

The argument is thus made that if patent law existed to protect and to regulate innovation, then, provided it was designed appropriately, patent law could thereby be an effective tool in controlling the competition of innovation and contributing to long-term economic development, progress, and social welfare.

In 1957, Robert Solow reviewed the productivity of the U.S. economy from 1909 to 1949 and “found that the three classic factors of production, that is, money, labor, and natural resources, accounted for barely half of the nation’s economy over that period.”74 Future economists and legal scholars, such as Robert M. Sherwood, theorized that the unexpectedly sizeable “residual” was the introduction of new, patented technology into the economy.75

In 1987, Edwin Mansfield empirically tested this theory by investigating the social welfare gains from new technology:

In a series of studies, he and colleagues measured welfare benefits gained from the introduction of new technology into the American economy. He showed high rates of public return to investment in scientific and technical research […]. [Therefore, Mansfield] theorized that by increasing the private rate of return to investment in research through strengthened [patent] protection, the public welfare benefit would rise as well. [However, h]e was shy about predicting the effect in developing countries […].76 The weakness of Schumpeter’s, Solow’s, Sherwood’s, and

Mansfield’s theoretical explanations of the anomalies in their empirical studies is that they lack effective empirical backing. While they may have empirically studied the relationship between innovation and economic growth and development, their studies only proved a theoretical positive correlation between innovation and economic growth and development. They did not empirically prove any actual relationship or correlation, much less causation, between patent law, innovation, and economic growth and development.

73 Ibid. 74 Sherwood, supra note 15 at 355. 75 See ibid at 356. 76 Ibid.


The weakness of these theories may be explained by the lack of empirical information available on patent law, as well as the lack of sophistication of patent law, at the time. In recent years, however, patent statistics have become more accessible77; therefore, empirical studies on the effects of patent law and the relationship between patent law, innovation, and economic growth and development should be more feasible.

B. Misinterpreted Studies

A common mistake found in empirical studies on the effects of

patent law on innovation and economic growth and development is that, without proving any direct causation, these studies conclude that patent statistics indicate a nation’s level of innovation and rate of technological progress.78 In reality, however, they cannot decisively conclude that patent laws positively encourage innovation and economic growth and development; rather, they can conclude only that patent laws are simply followed. Empirical information that is, for the most part, merely accounting information (i.e. patent applications, patent grants themselves, patent litigation financial figures), only proves that the institutions and procedures that patent laws establish are used.

For example, empirical studies of patent litigation reveal “the power of applicants to affect the value of a patent through their efforts to refine their applications.”79 Patent litigation is extremely expensive, “often involving millions of dollars in attorneys’ fees and other costs.”80 Do litigation expenses prove that patent law encourages innovation and ensures public disclosure of new technology and scientific information? No. It simply proves that using the procedures provided by patent law is expensive, and such expense is transferred to the cost and value of the patented invention. Patent litigation is not an inherent proportion of the value of the invention itself, but instead an artificial and arbitrary increase to the overall value of the invention, much as a patent is an artificial and arbitrary right granted by a government to an individual or organization to control the production and use of the invention. As such, patent litigation should not be interpreted empirically as an inherent value of the invention, but rather as an artificial and arbitrary factor of the invention’s value that varies depending on the specific procedures of the patent law of the jurisdiction in which the invention resides.

77 See OECD Compendium, supra note 20 at 41. 78 See WIPO Patent Report, supra note 54 at 4; see also Chisum et al., supra note 19 at 59. 79 James Bessen & Michael J. Meurer, “Lessons for Patent Policy from Empirical Research on Patent Litigation” (2005) 9 Lewis & Clark L. Rev. 1 at 2. 80 Jaffe & Lerner, supra note 11 at 4.


Many empirical studies make this mistake. The Organization for Economic Cooperation and Development’s Compendium of Patent Statistics, published in 2005 (“the OECD Compendium”), “provides the latest available internationally comparable data on patents. Patent indicators presented in this publication are specifically designed to reflect recent trends in innovative activities across a wide range of […] countries.”81 Echoing the assumption that patent statistics “reflect the inventive performance of countries, regions, firms, as well as other aspects of the dynamics of the innovation process,”82 the OECD Compendium attempts to prove this assumption with empirical information. However, the OECD Compendium simply studies the number of patent applications examined, the number of patents granted by different patent offices, the amount of foreign and domestic ownership of patented inventions, and other statistical data.83 This empirical information only proves that patent law is used, based upon statistics from the institutions and procedures that patent law establishes.

Similarly, the WIPO Patent Report: Statistics on Worldwide Patent Activities (“the WIPO Report”) provides an overview of the trends in worldwide patent filings for the past twenty years.84 Its most important findings include: first, that the total number of patent applications filed around the world increased steadily since 199585; and second, that this increase was due to an increase in non-resident patent filings in a small number of countries—primarily Japan, the United States, the large industrialized European states (joined together by the European Patent Office), the Republic of Korea, and China.86 While these nations’ patent offices accounted for seventy-five percent of all patents filed in 2004,87 the United States granted the largest number of patents.88

However, the WIPO Report’s conclusions are arguably misguided and contradictory. The WIPO Report claims that the increase in the number of patent applications filed around the world is “not unexpected, given the general increase in economic activity in the same period”89 and that the “increases in patent applications closely follow global increases in research and development spending.”90 However, it later admits that there may be other reasons:

81 OECD Compendium, supra note 20 at 3. 82 Ibid. 83 See ibid. at 4. 84 WIPO Patent Report, supra note 54 at 6. 85 See ibid. 86 See ibid. 87 See ibid. 88 See ibid. at 32. 89 Ibid. at 6. 90 Ibid. at 17.


[The] differences in the use of the patent system across countries may account for some of the differences in numbers of patent filings. Therefore, differences in patent filings per population, [gross domestic product,] or research and development expenditure do not necessarily mean that one country is more inventive than another or more efficient in its allocation of expenditure [and productivity].91 The WIPO Report further admits its weaknesses, recognizing that

the increasing number of patents granted represents only the number of patent rights established each year […]. [C]hanges in the number of patents granted can be due to the changing capacity of patent offices to examine and grant patents, or to changes in time limits or examination practices, rather than an underlying trend in inventive activity.92 Some legal scholars also recognize these alternative reasons for

increases in the number of patent applications filed and the number of patents granted. For instance, “[t]he weakening of examination standards and the increase in patent applications have led to a dramatic increase in the number of patents granted in the United States.”93 This increase does not reflect an increase in innovation, but rather an increase in patents “of dubious merit[:]”94

This […] is confirmed by international comparisons, which show that the number of inventions of U.S.-origin with confirmed worldwide significance grew in the 1990s at a rate less than half that of domestic U.S. patent office grants. It is also confirmed by reference to particular patents granted by the PTO for “inventions” that are not new or are trivially obvious.95 In a private study, economist Keith E. Maskus and political

scientist Mohan Penubarti also attempt to prove that patent law spurs innovation and therefore economic progress, but they make the same mistake as the OECD Compendium and the WIPO Report. Specifically,

91 Ibid. at 14. 92 Ibid. at 31 (emphasis added). 93 Jaffe & Lerner, supra note 11 at 11-12. 94 Ibid. 95 Ibid.

2007] Evaluating Empirical Studies of Patents 173 they attempt to prove that patent law influences international trade96 and, consequently, that “patent protection directly affects growth through inducements to innovation.”97 Upon analyzing empirical information and patent statistics, Maskus and Penubarti conclude that “exporting firms discriminate in their sales decisions across export markets, taking account of local patent laws.”98 In other words, businesses and industries will invest more in foreign nations where stronger patent law exists to protect their inventions and to regulate competition. However, this conclusion is weak; rather, Maskus and Penubarti’s study only proves that businesses and industries feel more confident to conduct business in areas where there will be less competition, as limited, or even eliminated, by protective patent law. Even Maskus and Penubarti have themselves expressed doubt:

[W]e cannot conclude that [our study] means that stronger and more harmonized global levels of patents [and patent law] would generate more innovation without considering also other determinants of profits and international technology diffusion.99 Returning to the narrow aisle of a grocery store, where we find a

lone jar of Skippy peanut butter on a shelf amidst the jams and jellies, we again ask, if it is the only jar on the shelf, does this mean that it is the best brand of peanut butter, or does it mean that it is simply the only one currently available? Common sense concludes that the answer is the latter. Simply because we find a lone jar of Skippy peanut butter does not mean that Skippy peanut butter is the best and only brand of peanut butter to buy. Rather, it means that Skippy peanut butter is the only brand to buy at that store at that particular time; there are other peanut butter brands available at other stores around the world, and at various times, depending upon distribution schedules and local tastes. If we want to prove that Skippy peanut butter is the best brand of peanut butter and the only one we should buy, then we cannot prove it simply by counting one jar. We must find other, more accurate empirical means to prove this.

96 See Keith E. Maskus & Mohan Penubarti, “How Trade-Related Are Intellectual Property Rights?” in Keith E. Maskus, ed., The WTO, Intellectual Property Rights and the Knowledge Economy (Northampton: Edward Elgar Publishing Ltd., 2004) at 494. 97 Ibid. 98 Ibid. at 510. 99 Ibid.

174 ASPER REVIEW [Vol. VII C. Limited Studies

Fortunately, other recent empirical studies recognize that

innovation and economic growth and development may not depend upon patent law. These studies recognize the limits of the hard empirical evidence currently available on patents and patent law. For instance, David M. Gould and William C. Gruben emphasize that the relationship, if any exists, between patent law, innovation, and economic growth and development is only a correlation; one element does not cause another:

Although the role of intellectual property rights in economic growth is not clear in recent theory, empirically, we find that stronger intellectual property rights protection corresponds to higher economic growth rates in a cross-country sample […]. [However, a]lthough the statistical difference between trade regimes is small, and the results do not capture all market structure subtleties, the findings suggest that the linkage between innovation and intellectual property rights protection may play a weaker role in less competitive, highly protected markets. That is what one would expect if innovation adds less to a firms market share and profits in less competitive markets.100 Sadao Nagaoka also recognizes that the relationship between

patent law, innovation, and economic growth and development is only a correlation, not a relationship of causation. While patent statistics may provide empirical information research, development and technology trade, Nagaoka suggests that patents and patent law, while important to innovation, are not essential for it. Based upon his study, which was limited to Japanese patents and patent law, Nagaoka found first, that businesses and industries often do not use many of their patented innovations, nor does licensing significantly increase the proportion of patented innovations used101; therefore, the number of patent applications examined or the number of patents granted by patent offices can be misleading and misinterpreted.102

100 David M. Gould & William C. Gruben, “The Role of Intellectual Property Rights in Economic Growth” in Keith E. Maskus, ed., The WTO, Intellectual Property Rights and the Knowledge Economy (Northampton: Edward Elgar Publishing Ltd., 2004) at 616-617. 101 Sadao Nagaoka, “Patents and the other IPRs in use” Institute of Innovation Research, Hitotsubashi University (2003), online: WIPO <http://www.wipo.int/patent/meetings/2003/statistics_workshop/en/presentation/statistics_workshop_nagaoka.pdf>. 102 Ibid. at 2.


Determining the effect of patent law and the relationship between patents, innovation, and economic growth and development is difficult, if not impossible, but “even slight improvements leading beyond the simple patent counts frequently used nowadays should be considered a success.”103 Some legal scholars argue that:

[…] patent policy should be tailored to reflect [… the different effects it has on different industries]. Certain strategic uses of patents are socially harmful; [for instance,] more empirical research is needed to quantify the social loss from anti-competitive and opportunistic patent litigation, and guide policies that will discourage anti-social litigation. Finally, more research is needed to identify when patent disputes will degenerate into lawsuits. This research is needed to guide reforms designed to contain the apparently high and growing social cost from patent litigation.104 Given the introduction of new technologies and changing

economic conditions, such as the Internet and e-commerce, there is a need for a new form of patent law,105 but we cannot know what kind of new form of patent law is needed unless we conduct, and more importantly, interpret accurately, empirical research to indicate and articulate the actual relationship between patent law, innovation, and economic progress. Even if we cannot do so, there may be ways, other than promulgating current patent law, to protect and to promote scientific innovation and human productivity. While most legal scholars as well as economists interested in the subject of patents have devoted their efforts to studying and debating current patent law, perhaps more effort in the future will be devoted to developing, articulating, studying, and debating alternatives. The overall point is, we should not take current patent law for granted by interpreting and manipulating the available but limited empirical evidence to support what we want to believe. We must take the evidence for what it is, not for what we want it to be.

103 Harhoff, Scherer & Vopel, supra note 55 at 18. 104 Bessen & Meurer, supra note 79 at 27. 105 Lerner, supra note 67 at 1842.

176 ASPER REVIEW [Vol. VII CONCLUSION

N THIS ARTICLE, WE SURVEYED AND EVALUATED both the major theoretical justifications for patent law and various empirical studies on the effects of patent law and the relationships between patents, scientific

innovation, and economic progress. Finding that only a few international patent conventions acknowledge vaguely the major theoretical justifications for patent law, and that no international patent convention gives specific language adequately articulating those justifications as official purposes for patent law, we opened a Pandora’s box of questions: Do absolutely no purposes exist for patent law, or do none exist on which the signatories to the conventions could agree? If it is the case that the signatories could not agree on acknowledging or articulating the two major theoretical justifications for patent law, which many legal scholars and economists argue and support, why is this so? Are those theories in practice insufficient to justify current patent law? Is the empirical evidence too weak to support the theories, and if so, does that mean the justifications are invalid? What does all this say about the purpose and effectiveness of current patent law, that law is allegedly being based on those unsupported, unacknowledged, and unarticulated theoretical justifications?

There are hints to the answers to these questions, but without hard facts and conclusive empirical studies, nothing is certain. The best we can do is keep to the guideline that has been repeated twice before in this article and will be repeated again: In the future, if empirical studies prove what they theoretically conclude with respect to the justifications for patent law, that is, that patents encourage scientific innovation and economic progress, then the studies are valid, and current patent law is effective in satisfying its purpose, to the extent that the purpose embodies the major theoretical justifications for patent law. If, on the other hand, these studies fail to empirically support their conclusions with respect to the relationship between patent law and the theoretical justifications for that law, then their conclusions are possibly misguided, and the current existence, structure, and operation of patent law should not be taken for granted, but rather, given a close examination.

If it is so difficult to empirically study the effects of patent law, then perhaps we should not govern ourselves by it. On the other hand, there may be no perfect empirical measure of patent law; therefore, current studies may be sufficient. Arguably, however, it is unwise to promulgate law, the effect of which is unknown and the purpose of which is not stated. In sum, I hope to see in the future the development and unambiguous articulation of a purpose in formal legal forums, such as international patent conventions, resulting in better justifications and empirical standards for the current existence and structure of patent law, or amendments to existing laws to better reflect known practices

I

2007] Evaluating Empirical Studies of Patents 177 and patterns of innovative and economic activity. In other words, I hope that we can see a lone jar of Skippy peanut butter found in a Florentine grocery store simply for what it is, not for what we think it is or for what we might like it to be.

SLOPING IN THE RIGHT DIRECTION: A FIRST LOOK AT THE UCP 600 AND THE NEW STANDARDS AS APPLIED TO VOEST-

ALPINE

Lisa Pietrzak*

INTRODUCTION

NTERNATIONAL BUSINESS HAS GROWN SUBSTANTIALLY in the past decade and continues to grow in importance globally.1 As a business engaged in an international transaction must consider translation risks,

political turmoil, exchange rate fluctuations, and buyer or seller insolvency,2 the financial strength of a company affects its ability to buy and sell products in the global marketplace. The capacity of businesses to engage in such transactions is of great importance, as the majority of global business transactions involve the export and import of goods. In these transactions, it is usually the case that the buyer locates a product that it wishes to purchase from a foreign country and the seller arranges to ship the goods requested.3 Although the transaction itself may seem simplistic, different mercantile laws, payment structures, and changes in currency evaluation play a major role in the execution of the sale.4

For example, a seller in Germany may want to sell automobile parts to a buyer in the U.S. The parties have never transacted before and both have concerns regarding the sale. The buyer is concerned with the quality of the parts, whether they conform to contract specifications, and, if advance payment is required, that the seller will even ship the goods.5 If the German seller pays for the packaging and shipment of the

* M.B.A. (University of Conneticut); J.D. (American University College of Law, 2008). The author would like to thank Pradeep Taneja, Member of the ICC Banking Commission and the UCP 600 Consulting Group, for his guidance in the development of this paper. 1 See generally Ewell E. Murphy, Jr., “Coming to Grips with Globalization” (Winter, 2002) 11 Currents: Int’l Trade L.J. 3. 2 See generally Charles E. Meacham, “Foreign Law in Transactions Between the United States and Latin America” (2001) 36 Tex. Int’l L.J. 507 at 509-512. 3 See generally Murphy, Jr., supra note 1 at 3. 4 See generally Marcia A. Wiss & Robert H. Lantz, “Issues in Negotiating and Structuring International Project Finance Transactions,” reprinted in (2006) 2 Int’l Bus. Trans. Latin Amer. 234 at 319 (on file with author). 5 See generally Gao Xiang & Ross P. Buckley, “The Unique Jurisprudence of Letters of Credit: Its Origin and Sources” (2003) 4 San Diego Int’l L.J. 91 at 96.

I

180 ASPER REVIEW [Vol. VII goods and the buyer becomes insolvent, or refuses to pay for the goods, he risks the further expense of litigation in an unfamiliar jurisdiction or the expense of finding another American buyer.6 Therefore, the seller wants assurances that the buyer is financially secure and is able to make payment once the parts ship.7 To minimize the concerns of both parties, they may agree to use a financial instrument known as a letter of credit,8 a common and accepted method of guaranteeing and obtaining payment in international sales contracts.9

This Comment focuses on the new changes to the compliance principal presented within the Uniform Customs and Practice for Documentary Credits (“UCP”) 600 that take effect in July 2007.10 Part I of this comment introduces the letter of credit, and provides background on the types of letters of credit available, the parties and transactions involved, and the key principles of the letter of credit. Part I also concentrates on the domestic and international laws that govern a letter of credit and considers two letter of credit cases decided in the U.S. Part II analyzes these cases in the context of the UCP 600 and illustrates how the UCP 600 will affect the case law. Part III provides recommendations for the judicial standard of review in light of the UCP 600 and banks’ overarching fears.

6 See generally ibid. 7 See Kyle Roane, “Note: Hanil Bank v. PT. Bank Negara Indonesia (persero): Continuing The Quandary Of Documentary Compliance Under International Letters Of Credit” (2004) 41 Hous. L. Rev. 1053 at 1056. 8 See generally Gao Xiang & Buckley, supra note 5 at 96. See generally Voest-Alpine Trading USA Corp. v. Bank of China, 167 F. Supp. 2d 940 (S.D. Tex. 2000), aff’d, 288 F.3d 262 (5th Cir. 2002) [Voest-Alpine I]. The letter ensures the seller payment upon presentation of stipulated documents showing compliant delivery, and provides assurances to the buyer that the bank will not pay the seller until the goods are delivered and comply with the letter of credit. See Roane, supra note 7 at 1056-1057. Letters of credit are defined by the Uniform Commercial Code (“UCC”) and the Uniform Customs and Practice for Commercial Documentary Credits (“UCP”). See Uniform Commercial Code, § 5-102 at § 5 (2002) [U.C.C.]; International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits, § 2 (1993) [UCP 500]. 9 See Peter Linzer, “Non-[‘Un-’?] American Law and the Core Curriculum” (1998) 72 Tul. L. Rev. 2031 at 2040; Katherine A. Barski, “Letters of Credit: A Comparison of Article 5 of the Uniform Commercial Code and the Uniform Customs and Practice for Documentary Credits” (1996) 41 Loy. L. Rev. 735. 10 International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits, Pub. No. 600 (rev. 2006) [UCP 600].

2007] First Look at the UCP 600 181

I. BACKGROUND

HE LETTER OF CREDIT IS A CREATION of the business and finance industries whereby a neutral party, such as a bank, substitutes its creditworthiness for that of the buyer and simultaneously assures

timely payment of any amount owed under the contract for the seller.11 The standard letter of credit contains the party names, payment

amount, expiration date, and description of the merchandise, and specifies the documents, special conditions, and instructions that it requires for payment.12 A letter of credit is either a commercial letter of credit or standby letter of credit,13 and typically involves at least three parties and three independent contracts.14 This comment focuses on the commercial letter of credit, which is a payment mechanism, rather than the standby letter of credit, which serves as a guarantee.15 Presently, the two major sources of law governing commercial letters of credit are Article 5 of the Uniform Commercial Code (“UCC”) and the Uniform Customs and Practice for Documentary Credits (“UCP”).16

A. The Basics of the Commercial Letter of Credit

Today, commercial letters of credit play an important role in

international commerce.17 The commercial letter of credit is a payment instrument used for international sales of goods, and has a high degree

11 See Voest-Alpine Int’l Corp. v. Chase Manhattan Bank, N.A., 707 F.2d 680 at 682 (2d Cir. 1983); see also Voest-Alpine I, 167 F. Supp. 2d 940 at 943 (citing Alaska Textile Co., Inc. v. Chase Manhattan Bank, N.A., 892 F.2d 813 at 815 (2d Cir. 1992)). See generally Dorothea W. Regal, “What Lawyers Need to Know About U.C.C. Article 5 2003: Letters of Credit” (2003) 847 Prac. L. Inst. 13 at 19. 12 See Beat U. Steiner, “An Updated Primer on Letters of Credit” (April, 1999) 28 Colo. Law. 5 at 8. 13 See Gao Xiang & Buckley, supra note 5 at 100, for a discussion of how standby letters of credit operate differently than commercial letters of credit. See also Leslie King O’Neal, “They’re Back: Letters of Credit Provided in Lieu of Surety Bonds” (1993) 13 Construction Law. 3. 14 See Part I.A, below. 15 Compare Part I.A-B discussion, below, and David J. Barru, “How to Guarantee Contractor Performance on International Construction Projects: Comparing Surety Bonds and Standby Letters of Credit” (2005) 37 Geo. Wash. Int'l L. Rev. 51 at 67 with Joshua E. Luber, “Letters of Credit and 11 U.S.C. § 502(B)(6): The Full Analysis—Why the Fifth Circuit’s Decision in Re Stonebridge is Only Part of the Answer” (2006) 22 Emory Bankr. Dev. J. 679 at 680. 16 See Part I.C, below. 17 See Tom Pifer, “The ICC Publication of the International Standard Banking Practice (ISBP) and the Probable Effect on United States Letter of Credit Law” (2006) 12 Tex. Wesleyan L. Rev. 631 at 634 (citing “ICC Approves ISBP” Trade Finance: The Global Magazine for Export and Commodity Finance (Nov. 2002) at 4.

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182 ASPER REVIEW [Vol. VII of commercial utility because it benefits all parties concerned.18 There are typically three parties involved in the formation of a letter of credit.19 Using the example above, the German seller is the “beneficiary,”20 the American buyer is the “applicant” or the “customer,”21 and the bank issuing the letter of credit on behalf of the buyer is the “issuer” or “issuing bank.”22

There are also three separate transactions that create a letter of credit: (1) the underlying contract between the buyer and seller for the purchase and sale of goods; (2) the agreement between the issuer and its customer; and (3) the bank’s obligation to pay the seller under the letter of credit itself.23 These transactions are independent of each other and do not occur simultaneously.24

1. The First Transaction: The Buyer and the Seller

The underlying transaction is the contract between the buyer and the seller.25 Traditional contract law governs this transaction.26 The contract must stipulate that the buyer will make payment using a letter of credit27 and must indicate the law to govern the letter of credit transactions, which in most instances is the UCP.28

2. The Second Transaction: The Buyer and the Bank

The buyer and the bank form the second transaction, whereby the bank issues the letter of credit in favor of the seller, and the buyer

18 See Gao Xiang & Buckley, supra note 5 at 97. 19 See generally ibid.; Peter H. Weil, “Asset Based Financing 2006 Letters of Credit” (2006) 886 Pract. L. Inst. 407 at 409. 20 See U.C.C., supra note 8, § 5-102; UCP 500, supra note 8, § 2. 21 See U.C.C., ibid.; UCP 600, supra note 10, § 2 (using the term “applicant” rather than customer and defining applicant as “the party on whose request the credit is issued”). 22 See U.C.C., ibid.; Compare with UCP 600, supra note 10, § 2 (making no mention of the “other person” described in the UCC and defining an issuing bank as “the bank that issues a credit at the request of an applicant or on its own behalf”). 23 See George P. Graham, “Note: International Commercial Letters of Credit and Choice of Law: So Whose Law Should Apply Anyway?” (2001) 47 Wayne L. Rev. 201 at 210; see generally Gao Xiang & Buckley, supra note 5 at 96-97; Blonder & Co. Inc., v. Citibank, N.A., 28 A.D.3d 180; 808 N.Y.S.2d 214 (2006). 24 See Part I.B, below. 25 See Gao Xiang & Buckley, supra note 5 at 97. 26 See Regal, supra note 11. 27 See UCP 600, supra note 10, art. 1. 28 See Part I.C.2, below; Peter Mendell, “Managing International Transactions”, online: Mondaq <http://www.mondaq.com/article.asp?articleid=32143>.

2007] First Look at the UCP 600 183 reimburses the bank when payment is made.29 Typically, the bank has a relationship with the buyer and secures a partial payment and a commission before drafting the letter of credit.30 A copy of the letter of credit document is sent to the beneficiary directly or to the beneficiary’s bank—the “intermediary bank”31 or the “advising bank.”32

3. The Third Transaction: The Bank and the Seller

The third transaction occurs between the bank and the seller, and involves the letter of credit itself.33 Commentators believe that document presentation is the most important stage of the letter of credit transaction because current jurisprudence requires banks to adhere to a strict compliance standard when checking documents.34 Additionally, if a bank determines that documentary discrepancies exist, the bank may elect to dishonour the letter of credit or ask the applicant for a waiver of the documentary requirements.35

B. The Fundamental Principles of Letters of Credit

At the core of the letter of credit are the principles of

independence and strict compliance.36 First, the principle of independence establishes that each contract is completely independent of the next.37 Therefore, a letter of credit is independent of the underlying sales contract, and both the banks and the parties must construe and perform the letter of credit in accordance with their own terms, without

29 See Gao Xiang & Buckley, supra note 5 at 97. See generally Voest-Alpine I, 167 F. Supp. 2d 940 (S.D. Tex. 2000), aff’d, 288 F.3d 262 (5th Cir. 2002). 30 See Gao Xiang & Buckley, ibid. at 98; see generally Boris Kozolchyk, Commercial Letters of Credit In The Americas (Matthew Bender & Company Inc. ed., 1966) at 141. 31 See U.C.C., supra note 8, § 5-102. 32 See ibid.; see also UCP 600, supra note 10, art. 2. See generally Kozolchyk, supra note 30 at 143. 33 See Gao Xiang & Buckley, supra note 5 at 97. 34 See infra notes 81-105 and accompanying text (analyzing the compliance principle in further depth); see also Roberto Bergami, “Discrepant Documents and Letters of Credit -- The Banks’ Obligations Under UCP 500” (2003) 7 Vindobona J. Int’l Com. L. & Arb. 105 at 118; see also Boris Kozolchyk, “Strict Compliance and the Reasonable Document Checker” (1990) 56 Brook. L. Rev. 45 at 47. 35 See infra note 111 and accompanying text. 36 See Gao Xiang & Buckley, supra note 5 at 119-124. 37 See ibid. at 120; Joseph J. Ortego & Evan H. Krinick, “Letters of Credit, Benefits and Drawbacks of the Independence Principle” (1998) 115 Banking L.J. 487 at 488.

184 ASPER REVIEW [Vol. VII reference to any other agreement or transaction.38 The independence principle is codified in Article 5 of the UCC39 and has been acknowledged in American courts.40

Second, the principal of compliance dictates that documents presented to the bank must comply with the letter of credit requirements.41 Document examination and rejection is therefore one of the most important topics concerning letters of credit, especially as empirical studies have shown that document discrepancies are the rule and perfect tenders are the exception.42

C. The Laws Governing the Commercial Letter of Credit

By codifying the commercial letter of credit, businessmen and

counsel can ensure that parties to transactions are operating under the same assumptions.43 This increases the likelihood of delivery and payment in a sales transaction.44 As mentioned, the two major sources of law presently governing commercial letters of credit are Article 5 of the UCC and the UCP 500 generally.45

1. Domestic Law: UCC Article 5

The U.S. is the only country with an extensive specific regulation for letters of credit.46 Article 5 of the UCC is a uniform statutory scheme governing letters of credit.47 International practice, as reflected in the UCP, heavily influenced the 1995 revision of UCC Article 5.48

38 See UCP 600, supra note 10, art. 4. (directing that an issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, performance invoice and the like); see also Ortego & Krinick, ibid. 39 See U.C.C., supra note 8, § 5-103(d). 40 For an example, see Banco Nacional De Mexico S.A. v. Societe Generale, 820 N.Y.S.2d 588 (2006). 41 See Gao Xiang & Buckley, supra note 5 at 122; see also Elizabeth O. I. Adodo, “Conformity of Presentation Documents and a Rejection Notice in Letters of Credit Litigation: A Tale of Two Doctrines” (2006) 36 H.K.L.J. 309. 42 See Kozolchyk, supra note 34 at 47. 43 See Pifer, supra note 17 at 642. 44 See ibid. at 634 (citing ICC, “To Take Crucial Vote on LC Documents” Trade Finance: The Global Magazine for Export and Commodity Finance (Oct. 2002) at 8). 45 See Part I.C.1-2, below. 46 See Paolo S. Grassi, “Letter of Credit Transactions: The Banks’ Position in Determining Documentary Compliance: A Comparative Evaluation Under U.S., Swiss, and German Law” (1995) 7 Pace Int'l L. Rev. 81 at 103. 47 See U.C.C., supra note 8, § 5. 48 See James C. Barnes, “Internationalization of Revised UCC Article 5 (Letters of Credit)” (1995) 16 NW. J. Int’l L. & Bus. 215.

2007] First Look at the UCP 600 185

2. International Law: UCP

The UCP, created by the International Chamber of Commerce (“ICC”), is a set of rules based on internationally accepted banking practices regulating the issuance and use of letters of credit.49 The ICC published the current set of rules in January 1994. However, the ICC approved a new, sixth version of the rules, known as the UCP 600, in October 2006. These rules are to take effect in July 2007.50 Although the UCP is neither an international convention nor the law of any one country, U.S. courts and arbitration tribunals recognize and enforce the UCP where it is specifically incorporated into the letter of credit.51 When incorporated, the UCP is binding on all parties unless expressly modified or excluded by the credit.52 Despite the existence of Article 5 of the UCC, the UCP has great authority in the U.S., especially because Article 5 of the UCC governs only a limited part of the letter of credit transaction.53

D. Commercial Letter of Credit Jurisprudence

Most letter of credit transactions are international transactions

governed by the UCP.54 When documents contain discrepancies, disputing parties have called upon U.S. courts to interpret the UCP and provide relief.55 Consequently, courts have struggled to evaluate a bank’s refusal to honour documents under a letter of credit incorporating the UCP against the principle of compliance.56

49 See Gao Xiang & Buckley, supra note 5 at 112; International Chamber of Commerce, online: ICC <http://www.iccwbo.org/id93/index.html>. 50 See UCP 600, supra note 10. See generally Donald R. Smith, “The Rules for Letters of Credit are Changing!” Cash-to-Credit Advisor (25 August 2006), online: Cash-to-Credit Advisor <http://www.credit-to-cash-advisor.com/news_325.html>. 51 See Alaska Textile Co. Inc., v. Chase Manhattan Bank, N.A., 982 F.2d 813 at 816 (2d Cir.1992) (citing Lazar Sarna, Letters of Credit, 2d ed. (Canada: Thomson Professional Publishers, 1986) at 54-55); MSF Holding Ltd. v. Fiduciary Trust Co. Intern, 435 F.Supp.2d 285 (S.D.N.Y. 2006). See generally Henry Harfield, “Code Treatment of Letters of Credit” (1962) 48 Cornell L.Q. 92 at 96; Regal, supra note 11 at 24. 52 See UCP 500, supra note 8, art. 1. 53 Gao Xiang & Buckley, supra note 5 at 118; see also Roane, supra note 7 at 1058-59. 54 See Gao Xiang & Buckley, ibid. (citing James J. White & Robert S. Summers, Uniform Commercial Code, 4th ed. (West Publishing Co., 1995)). 55 See Part I.D.1-2, II, below. 56 See infra notes 97-108 and accompanying text (describing the various judicial interpretations of the correct compliance standard).


1. Voest-Alpine Trading USA Corp. v. Bank of China

Voest-Alpine Trading USA Corp. v. Bank of China was first heard by the District Court for the Southern District of Texas and later appealed to the U.S. Court of Appeals for the Fifth Circuit. Since each court dealt with different issues, this Comment refers to the District Court case as Voest-Alpine I and the appeals case as Voest-Alpine II for ease of distinction between the courts and the issues decided.

In the Voest-Alpine dispute, Jianyin Foreign Trade Corporation (“JFTC”) requested that the Bank of China (“BOC”) issue a letter of credit for $1.2 million in favour of Voest-Alpine Trading USA Corp. (“Voest-Alpine”).57 After shipment, Voest-Alpine presented the documents required by the letter of credit to BOC.58 Although the intermediary bank noted several discrepancies in the documents, Voest-Alpine instructed it to present the documents to BOC, expecting a waiver from the applicant.59 BOC telexed seven discrepancies and the following statement: “We are contacting that applicant for acceptance of the relative discrepancy. Holding documents at your risk and disposal.”60 Four days later, Voest-Alpine demanded payment from BOC, arguing that the discrepancies did not amount to adequate grounds for rejection.61 BOC replied, “Now the discrepant documents may have us refuse to take up the documents according to Article 14(B) of UCP 500.”62 Alleging that the discrepancies were not an adequate basis for refusal, Voest-Alpine sued BOC for payment.63 The question before the District Court for the Southern District of Texas was whether the typographical errors warranted rejection.64

The District Court for the Southern District of Texas analyzed three interpretations of the compliance standard as applied to document examination.65 The court rejected the first standard, known as the mirror image rule, as “problematic” because banks can reject documents that common sense would otherwise find compliant.66 The court also

57 See Voest-Alpine Trading USA Corp. v. Bank of China, 288 F.3d 262 at 264 (5th Cir. 2002) [Voest-Alpine II]. 58 See ibid.; infra notes 63-68 and accompanying text (detailing the facts of the case). 59 See Voest-Alpine I, 167 F. Supp. 2d 940 at 942 (S.D. Tex. 2000), aff’d, 288 F.3d 262 (5th Cir. 2002) [Voest-Alpine I]. 60 See ibid. at 943. 61 See Voest-Alpine II, supra note 57. 62 Ibid. 63 See ibid. 64 See Voest-Alpine I, supra note 59 at 945-46. 65 See ibid. at 946. 66 See ibid. at 947; see also Kozolchyk, supra note 34 at 50.

2007] First Look at the UCP 600 187 dismissed the second standard known as flexible strict compliance.67 Finding that the third standard requiring banks to analyze documents for risk to the applicant had little case law support and would undermine the independence rule, the District Court also rejected it.68 The District Court announced that it would apply a common sense, case-by-case approach, where the actual calculus used by the issuing bank is whether the documents bear a rational link to one another.69 Using this standard, the District Court held that the discrepancies in the documents were insufficient to warrant the dishonour of the credit.70

On appeal, the U.S. Court of Appeals for the Fifth Circuit held that BOC’s refusal notice was insufficient where it merely stated that BOC would contact JFTC for a waiver, and thereby held open the possibility of acceptance upon waiver.71 The Court based this decision on expert testimony given at the district court level indicating that BOC’s actions were ambiguous and inadequate.72 The expert noted that the Bank’s telex would have given adequate notice had it not contained the waiver clause.73 Furthermore, the expert testified that the UCP 500 contemplates a three-step procedure for dishonouring letters of credit where the bank first examines the documents presented for discrepancies, then if it finds discrepancies, it contacts the applicant for waiver, and finally, after conferring with the applicant, the bank issues its notice of refusal.74 In this case, because the notice of refusal came after the refusal deadline, the Court held that BOC had forfeited its right to refuse the documents and was obligated to pay Voest-Alpine.75

2. DBJJJ, Inc. v. Nat’l City Bank

The DBJJJ case presents a small but important issue in letter of credit law, and its analysis compliments an understanding of a bank’s obligation to pay or reject a letter of credit when read in connection with Voest-Alpine. Once a bank determines that discrepancies exist in presentation documents, the bank may elect to reject the documents and refuse to pay the letter of credit, or the bank may elect to ask the applicant for a waiver of the discrepancies. UCP 500 expressly grants a bank a maximum of seven banking days to make the decision to accept

67 See Voest-Alpine I, supra note 59 at 946-947. 68 See ibid. at 942. 69 See ibid. at 947. 70 See ibid. at 942. 71 See Voest-Alpine II, supra note 57. 72 See ibid. at 266. 73 See ibid. 74 See ibid. 75 See ibid.

188 ASPER REVIEW [Vol. VII or reject.76 Therefore, like Voest-Alpine, DBJJJ, Inc. is another recent example of how the UCP 600 clarifies ambiguities raised by UCP 500 and will restore confidence in letters of credit transactions. In this case, DBJJJ, Inc. contracted with Pennsylvania Fashions Inc. for the sale of clothing to be paid by a letter of credit governed by the UCP 500.77 The issue facing the Court of Appeals for the Second District of California was whether the phrase “reasonable time not to exceed seven banking days” in the UCP allows banks to use all seven days when seeking a waiver from the applicant before issuing a decision to the beneficiary.78 The facts of the case indicated that the bank sent a letter to the buyer identifying the discrepancies in the documents presented and sought waiver before 11 December 2001, the seventh, and last, day that the bank needed to respond to the beneficiary regarding approval or rejection. The Court of Appeals held that where the bank, in seeking a waiver, permitted the applicant to accept or decline on or before the last day of the full seven days, it failed to give timely and reasonable notice of refusal to the beneficiary.79 The Court reasoned that although the seven banking days is the maximum time permitted, it is not automatically reasonable to use the full seven days where the bank seeks waiver from an applicant that it could have otherwise been granted in less time. The Court of Appeals further concluded that the bank did not provide “timely notice” of its refusal and was thereby precluded from refusing to honour the credit.80

II. ANALYSIS

LTHOUGH LETTERS OF CREDIT FUEL INTERNATIONAL SALES by reducing the risks of unknown creditworthiness and offering secure payment for buyers and sellers, standards for determining

compliance remain inconsistent among courts and this can eliminate many benefits that letters of credit can provide.81 The second principal of letter of credit law is compliance, where the documents presented to the bank by the beneficiary must comply with the documents required in the 76 See UCP 600, supra note 10, art. 13(b) 77 See DBJJJ, Inc. v. Nat’l City Bank, 123 Cal. App. 4th 530 at 534 (2004). 78 See ibid. at 535-36. 79 See ibid. at 535. 80 See ibid.; see also UCP 500, supra note 8, art. 14(e). 81 See supra text accompanying notes 1-9; infra text accompanying notes 89-93; Pifer, supra note 17 at 631; Roane, supra note 7 at 1083-84; Michael Imeson, “Getting Ready For The UCP 600 Roll-out—A New Set Of Rules For Documentary Credits Is Expected To Restore The Reputation Of This Much-maligned Method Of Trade Finance. But Will Bankers Be Able To Meet The July Deadline?” The Banker (5 February 2007) at 88.

A

2007] First Look at the UCP 600 189 letter of credit.82 Therefore, document examination and rejection is one of the most important topics concerning letters of credit.83 In the absence of a clear standard by which to accept or reject documents, banks have not only failed to honour letters of credit for the wrong reasons, but have also been unclear about how to effectively notify the seller of the decision to reject payment.84

Fortunately for buyers, sellers, and banks, the UCP 600 coupled with the recent U.S. court decision in Voest-Alpine, has made significant strides to end the uncertainty and has clarified many unresolved issues stemming from the UCP 500.85 Under the UCP 600, the standard of compliance is not “strict” compliance.86 This approach is consistent with recent court decisions such as Voest-Alpine, which reject the strict compliance standard.87 Finally, the UCP 600 also clarifies effective refusal both in terms of waiver and notice.88

The UCP 600 Rejects the Strict Compliance Test and Supports Compliance under a Rational Link Test as Applied in Voest-Alpine I

Because the UCP 500 does not provide guidance on what the

standard of compliance should be, courts in the U.S. and courts abroad began to create new standards of compliance that varied across districts.89 At least four standards of compliance have developed among courts: (1) strict compliance; (2) flexible strict compliance; (3) substantial compliance; and (4) reasonable compliance.90 Recognizing that courts have failed to agree on a uniform approach to compliance, the writers of

82 See supra text accompanying notes 41-46. 83 See supra text accompanying note 42. 84 See Part II.B1-2, below. 85 See Imeson, supra note 81 at 88. 86 See Part II.A, below. 87 Ibid. 88 See Part II.B, below. 89 Compare Voest-Alpine I, 167 F. Supp. 2d 940 at 946 (S.D. Tex. 2000), aff’d, 288 F.3d 262 (5th Cir. 2002), with Tosco Corp. v. Federal Deposit Ins. Corp., 723 F.2d 1242 (6th Cir. 1983). But see Equitable Trust Co. v. Dawson Partners, [1927] Ll. L. Rep. 49 at 52 (H.L.) (“There is no room for documents which are almost the same, or which will do just as well.”); Banco General Runinahui, S.A. v. Citibank Int'l, 97 F.3d 480 at 483 (11th Cir. 1996) (“This Court has recognized and applied the strict compliance standard to requests for payment under commercial letters of credit [...] [t]he fact that a defect is a mere technicality does not matter.” (quoting Kerr-McGee Chem. Corp. v. FDIC, 872 F.2d 971 (11th Cir. 1989)). 90 See Pifer, supra note 17 at 636-37, for a historical overview of the development of the conflicting standards of compliance. Also see Roane, supra note 7 at 1064-1068 for a history of strict compliance cases.

190 ASPER REVIEW [Vol. VII the UCP 600 sought to relieve uncertainty by revamping the law.91 Consequently, the UCP 600 provides the much needed guidance to find the optimum standard.92 The UCP 600 rejects the strict compliance test and supports compliance under a rational link test as applied by the District Court for the Southern District of Texas in Voest-Alpine I.93

The UCP 600 embraces the case-by-case approach, permitting minor deviations and adopting the position taken by the court in Voest-Alpine I, as the UCP 600 states that banks can read data in a document in context with the letter of credit.94 Furthermore, the UCP 600 expressly refutes any claim that a document needs to be identical to all other information in that document, any other stipulated document, or the credit.95 Therefore, the District Court in Voest-Alpine I was correct to examine “whether the whole of the documents obviously relate to the transaction on their face” and whether the documents “bore obvious links,” and their decision would be upheld under the UCP 600.96

The holding of Voest-Alpine I and the UCP 600 effectively prohibit the courts from utilizing the standard of strict compliance in future letter of credit cases.97 Letter of credit industry experts have gone as far as to define the practice-oriented approach taken in Voest-Alpine I as “refreshing.”98 Arguably, however, the adoption of the common-sense 91 See Pradeep Taneja, “UCP 600: ‘A document restoring the credibility of L/Cs’”, online: ICC Books <http://www.iccbooks.com/Home/CredibilityofLCs.aspx>. 92 See ibid. 93 In addition to Voest-Alpine, courts in other districts have moved away from strict compliance. See e.g. Cont’l Cas. Co. v. Southtrust Bank, N.A., 933 So. 2d 337 at 342 (2006), where the Supreme Court of Alabama held that the letter of credit did not, as a matter of law and as governed by UCP 500, art. 14(e), require the inclusion of an address for the beneficiary on the draft presented. Another recent example where courts granted deference to financial institutions that regularly issue letters of credit is in Blonder & Co. Inc. v. Citibank N.A., 28 A.D.3d 180 at 181, 808 N.Y.S.2d 214 at 216 (2006), where the New York Supreme Court, Appellate Division, held that (1) the UCP specifically governed the transaction, (2) the plaintiff’s expert’s opinion about what standard international banking practice does or does not require was irrelevant, and (3) Citibank was justified to honor a demand for payment relying on the submitted documents even where documents contained numerous deficiencies such as (a) the bill of lading did not designate a consignee, (b) conflicting dates, and (c) conflicting ports of loading because such documents appeared on their face to substantially comply with the terms set forth in the letter. 94 See UCP 600, supra note 10, art. 14(d). 95 See ibid. 96 Voest-Alpine I, supra note 59 at 946 (S.D. Tex. 2000), aff’d, 288 F.3d 262 (5th Cir. 2002). 97 See supra notes 65-70, 94-95 and accompanying text (rejecting the strict compliance test). 98 See James G. Barnes & James E. Byrne, “Letters of Credit: 2000 Cases” (2001) 56 Bus. Law. 1805 at 1807.

2007] First Look at the UCP 600 191 approach taken in Voest-Alpine I will require courts to distinguish between obvious typographical errors and documents that are distinctly different from those required by the letter of credit.99 Some commentators suggest that this judicial scrutiny does not satisfy the needs of bankers.100

The view that judicial scrutiny is contrary to the needs of the letter of credit community is valid and does not contradict the holding of Voest-Alpine I.101 Prior courts interpreted strict compliance to mean unwavering adherence and thereby failed to consider parties’ motives, expectations, and reasoning for accepting or rejecting a document that merely had a typographical error.102 It is true that courts applying strict compliance did not judicially interpret the actions of the banks. However, they also did not give deference to reasonable banking practices.103 By nullifying the strict compliance standard, the UCP 600 and Voest-Alpine I are not asking courts to impose their own judicial interpretations of what constitutes a material discrepancy; rather courts are to apply a reasonable document checker standard.104 Under this standard, if a bank determines that a discrepancy is material, a court will uphold that decision if international banking standards imply that the same is true. Likewise, a court will reject that decision if it is not supported by international banking standards.105 Commentators have made various recommendations on how to establish such a standard, and this comment advances a banking judgment standard.106

The UCP 600 Clarifies the Rules Governing Dishonour and Thereby Rejects DBJJJ vs. National City Bank but Supports Voest-Alpine II

In addition to their concerns regarding the proper standard of compliance, bankers are also unsure as to how much time they have to notify a beneficiary of a decision to dishonour a letter of credit, whether they must always seek an applicant waiver when faced with document discrepancies, and how to effectuate proper notice of rejection. The holding in DBJJJ was erroneous and accordingly, presents an example of why UCP writers needed to make the law more clear. The DBJJJ case presents a small but important issue in letter of credit law, and its

99 See Voest-Alpine I, supra note 59 at 947 (holding that minor typographical deviations are permissible under the case-by-case approach). 100 See generally Kozolchyk, supra note 30 at 46-47. 101 See infra notes 105-108 and accompanying text. 102 See supra notes 81-83, 89-91 and accompanying text. 103 See supra notes 89-90 and accompanying text. 104 See infra notes 133-134 and accompanying text. 105 See ibid. 106 See Part III.A, below.

192 ASPER REVIEW [Vol. VII analysis complements an understanding of a bank’s obligation to pay or reject a letter of credit when read in connection with Voest-Alpine.107

1. The UCP 600 Rejects DBJJJ’s Reasonable Time Argument

Once a bank determines that discrepancies exist in presentation

documents, the bank may elect to reject the documents and refuse to pay the letter of credit, or the bank may elect to ask the applicant for a waiver of the discrepancies.108 The UCP 500 expressly grants a bank a maximum of seven banking days to make the decision to accept or reject.109 The Court of Appeals in DBJJJ incorrectly held that where a bank seeks waiver from an applicant, using the maximum time permitted is unreasonable where the bank could have granted or rejected the credit in less time.110 Holding that the time was unreasonable, the Court further concluded that the bank did not provide “timely notice” of its refusal and was thereby precluded from refusing to honour the credit.111 This conclusion would have been correct if notice was not ultimately timely. However, since this was not the case, future courts should reject this holding in full.112

The Court of Appeals reasoned that the bank did not use the full seven banking days allowed “reasonably” because none of the factors generally relevant in assessing reasonableness of the time period were present.113 However, the Court of Appeals confused these factors, which relate only to the reasonableness of the time taken to examine documents, and misapplied them for use in situations where the bank reviewed the documents, concluded that they contain discrepancies, and sought waiver from the applicant.114 The new provisions in the UCP 600 clearly reject the Court’s holding in the case and will cure any confusion arising out of this decision.

The UCP 600 provides clarity in a number of ways. Firstly, UCP 600 Article 14(b) will permit a bank a maximum of five, rather than seven, banking days following the day of presentation to determine if a presentation is complying.115 Secondly, and very important in the context

107 See Part II.B.1-2, below. 108 See Part I.A.3, above. 109 See UCP 500, supra note 8, art. 13(b). 110 See infra notes 116-122 and accompanying text. 111 See supra notes 77-80 and accompanying text. 112 See DBJJJ, Inc., supra note 77 and Barnes & Byrne, infra note 114. 113 See DBJJJ, Inc., ibid. at 542. 114 See James G. Barnes & James E. Byrne, “Letters of Credit: 2004 Cases” (2005) 60 Bus. Law. 1699 at 1700. 115 See UCP 600, supra note 10, art. 14(b); see also Email from Pradeep Taneja, Member, ICC Banking Commission and the UCP 600 Consulting Group, to Lisa Pietrzak, Law Student, Washington College of Law, American University (21

2007] First Look at the UCP 600 193 of the DBJJJ case, the words “reasonable time” and “not to exceed” have been entirely eliminated from the UCP 600 article.116 Finally, UCP 600 Article 16(b) makes it clear that when a bank determines that a presentation does not comply and requests a waiver from the applicant, this does not extend the period mentioned in Article 14(b).117 Therefore, UCP 600 put an end to courts determining what qualifies as “reasonable time” and will succeed in providing a bright line rule to banks and businessmen where the UCP 500 failed.118

2. Waiver and Notice of Dishonour Rules are Clear and

Unambiguous under UCP 600

Understanding that banks have a full five days to review documents, seek waiver, and inform the beneficiary of acceptance or rejection is just the beginning. They must also understand how and when to seek waiver and how to properly dishonour the credit in order to avoid future liabilities.119 The Court of Appeals decision in Voest-Alpine II is helpful in providing those answers and is aligned with the law as set forth in UCP 600.120

Although the UCP 500 supports the Court of Appeals decision, and even where the outcome would not change if analyzed under the UCP 600, the Court’s reasoning is flawed because a bank may reject documents where it finds discrepancies without contacting the applicant for a waiver.121 Additionally, the Voest-Alpine II case sheds light on the fact that the UCP 500 provides inadequate instruction to banks and courts regarding the actual language necessary to reject documents.122

January 2007, 05:37:55 AM) [Taneja Email] (providing, for example, that under UCP 600, art. 14(b), once documents are presented on the day of expiry to a Nominated Bank, that bank could take five banking days “following” the date of expiry to examine and forward to the Confirming Bank). The writer further provides that the bank could take four days before giving the documents to the Confirming Bank (courier period plus Saturday and Sunday off), then the Confirming Bank can take another five days before forwarding to the Issuing Bank who in turn could take another five days. Ibid. (concluding that the whole process could take more than twenty days before the Issuing Bank eventually honours the documents, but that it is acceptable in the given context). 116 Compare UCP 500, supra note 8, art. 13(B) with UCP 600, supra note 10, art. 14(b). See also Taneja, supra note 91. See also Taneja Email, ibid. 117 See UCP 600, supra note 10, art. 16(b). 118 Supra note 116. 119 See DBJJJ, Inc. v. Nat’l City Bank, supra note 77. 120 See infra notes 121-128 and accompanying text. 121 See UCP 500, supra note 8, art. 14(C); see also UCP 600, supra note 10, art. 16(b). 122 Compare UCP 500, supra note 8, art. 14(B) with UCP 600, supra note 10, art. 16(c) (contradicting the rationale of the expert testimony in Voest-Alpine II, that

194 ASPER REVIEW [Vol. VII Acknowledging that the UCP 500 lacked clarity with regard to the rejection of documents, the writers of the UCP 600 rewrote UCP 500 Article 14(B) in UCP 600 Article 16(c) and provided the much needed instruction.123

The new article states that when a bank decides to refuse to honour or negotiate, it must give a single notice to the presenter.124 The UCP 600 is clearer than the UCP 500 because it provides that the notice must expressly state that the bank is refusing to honour or negotiate and must include each discrepancy upon which the bank made its decision to refuse payment. 125 The UCP 600 goes even further and directs that the notice must also state either: (a) that the bank is holding the documents pending instructions from the applicant, (b) that the bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, (c) that the bank is returning the documents, or (d) that the bank is acting in accordance with instructions previously received from the applicant.126

Regardless of which option the bank chooses, it is clear that banks are required to expressly state their rejection of the documents.127 Accordingly, whether or not the beneficiary fully understands the refusal notice becomes a non-issue, as the UCP 600 clearly mandates a requirement of an express rejection of documents.128 This is just one example of how the UCP 600 will alleviate potential litigation on the issue of refusal language in the aftermath of Voest-Alpine II.

III. RECOMMENDATIONS

ASED ON THE HOLDING IN VOEST-ALPINE and the language in the UCP 600, the standard of compliance is shifting from one of strict compliance to semi-flexible compliance, based on banking

standards.129 Thus, the degree of flexibility allowed to a reviewing bank in accepting documents is less than absolute compliance, but much

the bank had otherwise given valid notice where there was no express statement of refusal to honour the credit). 123 Compare UCP 500, supra note 8, art. 14(d)(i)-(ii) with UCP 600, supra note 10, art. 16(c). 124 See UCP 600, supra note 10, art. 16(c). 125 See ibid., art. 16(c)(i) and 16(c)(ii). 126 See ibid., art. 16(c)(iii). 127 See ibid., art. 16(c)(i). 128 See generally James G. Barnes & James E. Byrne, “Letters of Credit: 2002 Cases” (2003) 58 Bus. Law. 1605 at 1606. But see UCP 600, supra note 10, art. 16(c). 129 See cases cited at supra note 93.

B

2007] First Look at the UCP 600 195 greater than non-compliance.130 The publication of the UCP 600 is a major achievement in this area and is certain to be a highly persuasive source for U.S. courts in determining standard practice.131

A. The Reasonable Document Checker and Banking

Judgment: A New Standard for Future Courts

Judges are not bankers or document checkers and are thus ill-qualified to make banking decisions regarding the standard practice for which a document checker will accept or reject the documents presented against a letter of credit.132 Therefore, courts should establish a banking judgment rule, applicable to letter of credit transactions, where the court presumes that in making a decision to honour or reject documents, the document checker has acted on an informed basis, in good faith, and under the belief that the documents were in compliance with the letter of credit.133 Absent an abuse of discretion, the courts should respect the judgment used by the bank in its decision to honour or dishonour payment under the letter of credit.134

To decide whether or not an abuse of discretion has occurred, banks should be required to satisfy a negligence standard predicated on standard banking practice.135 That is, where a judge is considering the matter after the fact, and believes that the bank made the wrong decision, so long as the court determines that the process employed was rational and completed with care and good faith, banks should be free of liability.136 The burden should be on the party challenging the decision to establish facts that rebut the presumption that the document checker acted under such a banking judgment rule.137 Shifting the burden from the bank to the challenging party will resolve banks’ fear of litigation and curtail the high rate of initial rejection amongst banks today.138

130 See Part II.A, above and ibid. 131 See Imeson, supra note 81. 132 See Kozolchyk, supra note 34 at 46. 133 See ibid. See also Cf. Aronson v. Lewis, 473 A.2d 805 at 812 (Del. 1984). 134 See Kozolchyk, supra note 34 at 46-7. 135 For an example of how comparable types of standards are used in judicial practice, see Aronson v. Lewis, supra note 133 at 812. The author of this comment has posited a stricter standard for the banking judgment rule than the gross negligence standard advanced by the business judgment rule because banks do not need the same flexibility given to directors who take risks to earn capital. See also Kozolchyk, supra note 34 at 75. 136 Cf. In re Caremark Int’l Inc., 698 A.2d 959 at 967 (Del. Ch. 1996). 137 See Kozolchyk, supra note 34 at 47. 138 See ibid. at 49.

196 ASPER REVIEW [Vol. VII Employing a judicial standard, such as the one advanced, will provide the much needed uniformity to letter of credit laws and transactions.139

B. Considerations for Counsel Assisting in Letter of Credit

Transactions

Based on the advantages of using a commercial letter of credit as discussed above, it appears that the use of the commercial letter of credit in international business transactions presents a viable option for payment.140 Although the following considerations are not conclusive, they provide counsel with guidance to ensure that basic requirements are met in the transaction. Moreover, counsel assisting a client in a letter of credit transaction should advise their clients to make an effective underlying contract in order to avoid unwanted litigation in a foreign jurisdiction.141

First, counsel must determine what type of letter of credit the client needs and must decide if the letter of credit should be revocable or irrevocable.142 Before drafting or accepting a letter of credit, counsel must choose the law to govern the letter of credit.143 Counsel should give special attention to whether the letter of credit is governed by the UCP or by an alternative law chosen by the parties.144 Counsel must then determine if the importing country has a consulate in the exporting country in the event that legalization of documents is required. Another determination that counsel must make is what conflict of law rules govern in the jurisdiction chosen.145 Finally, counsel should include an arbitration clause if it is beneficial to the client.146

Once counsel has evaluated the above described factors and chooses to use a letter of credit, counsel must ensure that the letter of credit conforms to the underlying contract.147 At this stage, counsel

139 See supra notes 89-90 and accompanying text (discussing the various standard of compliance used by courts today); see also Roane, supra note 7 at 1085. 140 See Graham, supra note 23 at 204. 141 See Part I.B, above and supra notes 23 & 25-28. 142 See supra note 15. Also see Keith A. Rowley, “Anticipatory Repudiation of Letters of Credit” (2003) 56 SMU L. Rev. 2235 at 2246-47 for a discussion of the key differences and legal treatment of revocable and irrevocable letters of credit. 143 See Mendell, supra note 28. 144 See ibid.; see also Part I.B, above and supra notes 23 & 25-28. 145 See Ayelet Ben-Ezer & Ariel Bendor, “The Constitution and Conflict of Law Treaties: Upgrading the International Comity” (2003) 29 N.C.J. Int’l L. & Com. Reg. 1 at 3. 146 See Stefano E. Cirielli, “Arbitration, Financial Markets and Banking Disputes” (2003) 14 Am. Rev. Int'l Arb. 243 at 265. 147 See supra notes 33-35.

2007] First Look at the UCP 600 197 should verify that the letter of credit provides the correct (a) beneficiary, (b) amount of payment, (c) payment due date, (d) place where payment will be made, (e) description and unit price of the goods, (f) names and addresses of the applicant, beneficiary, and bank, (g) shipping date, (h) point of arrival and point of departure, and (i) due date of document presentation.148 Finally, counsel must establish that the beneficiary has enough time to prepare for and comply with the terms and conditions of the letter of credit before its expiration date.149 Keep in mind that the beneficiary must produce specific documents to receive payment.150

IV. CONCLUSION

OURTS MISAPPLYING THE UCP erode the letter of credit marketplace where non-material discrepancies permit banks to evade payment and thereby negate the benefits to the seller derived from the

substitution of the bank’s creditworthiness for that of the buyer’s.151 The UCP 600 and the holding of Voest-Alpine reduce the confusion regarding the proper standard of compliance.152 They also eradicate and replace the standard of strict compliance with a practical approach to letter of credit compliance.153 Therefore, the UCP 600 and Voest-Alpine are huge steps towards uniformity and harmonization that will rebuild confidence in the letter of credit marketplace.154 However, the judiciary should go one step further and create a bright line standard of review, such as a banking judgment rule, in order to effectively apply the new practice oriented compliance test set forth in Voest-Alpine.155 By doing so, the new guidelines will be best able to fulfill their purpose and make the commercial letter of credit an especially attractive method for conducting international business transactions.

148 See Steiner, supra note 12 at 8-14. 149 See Regal, supra note 11 at 36. 150 See ibid. 151 See supra notes 137-138 and accompanying text. 152 See Part II.A, above. 153 See supra notes 97-100. 154 See Gao Xiang & Buckley, supra note 5 at 112; see also Roane, supra note 7 at 1085. 155 See Part III.A, above.

C

SEC RULE 144A AND THE GLOBAL MARKET

Bo James Howell*

I. INTRODUCTION

HE RISE OF GLOBALIZATION has created interdependency between domestic and foreign securities markets that require states to evaluate their regulation of foreign investment. The number of

international security transactions and the expansion of markets have increased at exponential rates.1 One unique area of growth is the U.S.-based 144A market. This “resale” market is, and has been for over a decade, the fastest growing securities market in the United States. Rule 144A2 allows foreign and domestic issuers and resellers to avoid registration and disclosure standards required in a public security transaction. Through 144A, many corporations, particularly foreign corporations, have been able to raise substantial amounts of capital by initiating private placement transactions which benefit from the efficient 144A resale market. The market allows corporations to reach large financial institutions and, eventually, the retail U.S. investor.

The relaxation of disclosure and registration requirements promotes this modern method of capital formation and the resulting growth should be continued under limited circumstances.3 As established in the final version of Rule 144A, the United States’ Securities Exchange Commission (“SEC”) agreed to monitor the 144A market and to periodically reevaluate it. After seventeen years of phenomenal success, it is time that the SEC revisited Rule 144A to determine if the rule should be opened to small- or medium-sized institutions.

The SEC has recognized that greater flexibility with disclosure and registration requirements is necessary to promote foreign capital formation.4 In order to facilitate this goal, the SEC relaxed certain

* B.A. (Washington State University); J.D. (Gonzaga University, 2008) 1 Teo Guan Siew, “Regulatory Challenges in the Development of a Global Securities Market—Harmonization of Mandatory Disclosure Rules” (2004) Sing. J. Legal Stud. 173. 2 Rule 144A entered into force on 30 April 1990, although it had been considered previously. See J. Williams Hicks, Resales of Restricted Securities, § 7:1, f.n.1 (2007). 3 Siew, supra note 1 at 173. 4 Emmanuel U. Obi, “Foreign Issuer Access to U.S. Capital Markets—An Illustration of the Regulatory Dilemma and an Examination of the Securities and

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200 ASPER REVIEW [Vol. VII registration and disclosure requirements when it adopted Rule 144A in 1990.5 Rule 144A modifies the “U.S. regulatory framework in a manner that renders it more welcoming to foreign participation and investment.”6 In short, Rule 144A provides a non-exclusive safe harbor—from s.5 of the Securities Act—for non-issuer private resales of restricted securities. Together with s.4, Regulation D, and Regulation S, Rule 144A creates a safe harbor that allows foreign issuers to easily raise capital within the United States.

Once enacted, Rule 144A quickly became a “stepping stone” for foreign issuers looking to enter the United States securities markets.7 The promulgation of Rule 144A began a “golden age”8 for foreign issuers. For almost two decades, the 144A market has grown exponentially. Today, the 144A market is the second largest securities market in the United States; the public market is still the largest.

This paper focuses on the creation, success, and future of Rule 144A. In Part II, this paper briefly presents the Securities Act of 1933 and discusses the various sections which created Rule 144A. Part III introduces Rule 144A, including its history, purpose, requirements, and practical application. Part III presents the numbers of the 144A market, which illustrate its exponential growth and success. Part IV discusses the global impact of Rule 144A and its interaction with the Sarbanes-Oxley Act. Finally, Part V looks to current global issues affecting Rule 144A and calls for the SEC to follow through with its initial commitment to periodically re-evaluate the rule.

II. THE SECURITIES ACT OF 1933

N 1933, THE UNITED STATES CONGRESS passed the Securities Act, which was primarily intended to “protect unsophisticated […] investors […] from fraud.”9 Since the passage of the Securities Act, private

Exchange Commission’s Response” (2006) 12-SUM L. & Bus. Rev. Am. 399 at 406. 5 Ibid. at 407. 6 Ibid. at 407-408. 7 Robert G. DeLaMater, “Recent Trends in SEC Regulation of Foreign Issuers: How the U.S. Regulatory Regime is Affecting The United States’ Historic Position as the World’s Principal Capital Market” (2006) 39 Cornell Int’l L.J. 109 at 113. Foreign issuers could enter the 144A market, which has relaxed registration and disclosure requirements, and then jump to the public market once they could satisfy the heightened requirements. Ibid. 8 Ibid. 9 Miles Livingston & Lei Zhou, “The Impact of Rule 144A Debt Offerings Upon Bond Yields and Underwriter Fees” Financial Management Association (Winter,

I

2007] SEC Rule 144A 201 placements have been the primary means for avoiding SEC registration and disclosure requirements.10 Sections 4(1) and 4(2) are two methods of private placement that were created by the SEC. These rules, however, inhibited the liquidity and resale of private placement securities.11 Eventually, the restrictions on resales of private placements led to the creation of Rule 144A, which is grounded in the court-created “Section 4(1-1/2).”12 A. Section 4(1): Private Placements and Public Resale of

Unrestricted Securities

Section 4(1) of the Securities Act exempts from registration any reseller of securities who is not an issuer, underwriter, or dealer.13 Under s.4(1) and SEC Rule 144, a party with a private placement holding may sell an unrestricted security on the public market after a set holding period.14 Initially, the scope of s.4(1) and Rule 144 did not include private resales of restricted securities.15 A seller wishing to resell a restricted security, therefore, would have to sell it in a “private” transaction in order to satisfy s.4(1).16

2002) at 2, online: Looksmart <www.findarticles.com/p/articles/mi_m4130/is_4_31/ai_96904308>. 10 Susan Chaplinsky & Latha Ramchand, “The Impact of SEC Rule 144A on Corporate Debt Issuance by International Firms” (2004) 77:4 J. of Business 1073 at 1077. 11 Ibid. 12 See Hicks, supra note 2, § 7:43 (citing Release No. 6806 at 89, 538-89 & 539). 13 Section 2(a)(4) defines an issuer as “every person who issues or proposes to issue any security” and includes a natural person as well as corporations. U.S. v. Rachal, 473 F. 2d 1338 at 1341 (5th Cir. 1973), certiorari denied 412 U.S. 927. An underwriter is defined as any person who has purchased a security from an issuer with intent to distribute or resell the security. 15 U.S.C. §77b(2)(a)(11). Finally, a dealer is any person that is a full- or part-time broker who deals in securities trading. 15 U.S.C. §77b(2)(a)(12). 14 Robert B. Robbins, “Offers, Sales and Resales of Securities under Section 4(1-1/2) and Rule 144A” (2006) SM050 ALI-ABA 177 at 179. Rule 144 allows anyone who satisfies its conditions to resell because they will not be considered an underwriter. Ibid. 15 Ibid. A restricted security is one that has not satisfied the required holding period. 16 Ibid.

202 ASPER REVIEW [Vol. VII B. Section 4(2): Private Placement, but Restricted Resale

Section 4(2) of the Securities Act exempts from registration issuers

of securities disbursed in private placements.17 Unlike s.4(1) and Rule 144, however, s.4(2) applies only to issuers and not resellers of private placement securities.18 The s.4(2) exemption only applies to private offerings that are intended for investment, as opposed to resale.19 The restriction on resale is reflected in the required two-year holding period.20 The result of s.4(2) is an illiquid market that “requires users to pay a premium to investors that generally can be avoided by issuing in markets other than the U.S.”21

C. Section 4(1-1/2): Limited Resale of Restricted

Securities

Section 4(1-1/2) is a reaction to the limitation on the resale of securities under s.4(1). In fact, the section is a “case-law derived exemption” and is not located within s.4 of the Securities Act.22 Essentially, s.4(1-1/2) is a means of reselling restricted securities while maintaining compliance with s.4(1).23 In order to maintain compliance with s.4(1), a restricted security had to be sold privately.24 A transaction was considered private, for the purposes of s.4(1-1/2), if six conditions were satisfied: (1) there were less than 25 purchasers; (2) the seller did not engage in public advertising or general solicitation; (3) the seller provided as much information as he or she had about the issuer; (4) if the seller was affiliated with the issuer, then the buyer needed to be sophisticated enough to “fend for themselves”; (5) the seller did not purchase the securities with an intent to resell25; and (6) the purchaser represented that he or she was not acquiring the securities for resale.26

17 Ibid. 18 Ibid. 19 Hal S. Scott, International Finance: Transactions, Policy, and Regulation, 12th ed. (New York: Foundation Press, 2005) at 72. 20 Ibid. 21 Ibid. 22 Cynthia M. Krus & Harry S. Pangas, “FAQs: Rule 144A” Part A, online: RR Donnelley Real Corporate Lawyer <http://www.realcorporatelawyer.com/faqs/faq144a.html>. 23 Robbins, supra note 14 at 179. 24 Ibid. 25 It is generally held that a holding period of six months or more satisfies the intent requirement. Ibid. at 180. 26 Ibid. at 179-80.

2007] SEC Rule 144A 203 D. Section 4(3): The Broker-Dealers Door to Rule 144A

Eventually, s.4(3) of the Securities Act allowed dealers to utilize

the exemption and safe-harbor under Rule 144A. The section allows dealers who are not participating in a distribution to resell the security.27 Since transactions under Rule 144A are not distributions, dealers can utilize the rule to resell restricted 144A securities.28 As a result, dealers utilizing Rule 144A are not underwriters to the transaction.29 III. SEC RULE 144A A. A Reaction to Resale Limitations

ULE 144A IS A REVOLUTIONARY rule that significantly impacts the U.S. securities markets.30 The influence of Rule 144A stems from the fact that private placements can now be resold by an initial

purchaser who acts as a financial intermediary between the issuer and “qualified institutional buyers” (“QIBs”).31 The rule was meant to address the gaps between ss.4(1), 4(2), and 4(1-1/2). As stated earlier, the s.4(1) exemption is not available for resales of restricted securities. In addition, the s.4(2) exemption is only available for issuers and does not include resales. Although s.4(1-1/2) attempted to bridge the gap between the s.4(1) and 4(2) exemptions, the bridge was too narrow. Under Rule 144A, non-issuers can resell restricted securities to QIBs without holding them for two years or complying with the general SEC registration and disclosure requirements.32 Essentially, this rule creates a new resale market for restricted securities, which allows a bypass of the registration requirements of publicly traded securities.

Rule 144A was a reaction to the limitations under ss.4(1) and 4(2). By creating a liquid market for restricted securities, the SEC created an innovative means for international issuers looking to gain access to U.S. capital markets.33 Rule 144A creates a market with increased liquidity and decreased premiums.34 The result is a complete success, as

27 14 Guy P. Lander, U.S. Securities Law for International Financial Transactions and Capital Markets, 2d ed. (2005), § 5.20, 5-25. 28 Ibid. 29 Ibid. 30 Charles J. Johnson, Jr. & Joseph McLaughlin, Corporate Finance and the Securities Laws, 3d ed. (2004) at 501. 31 Ibid. at 502. 32 Chaplinsky & Ramchand, supra note 10 at 1073. 33 Ibid. at 1073-74. 34 Scott, supra note 19 at 72.

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204 ASPER REVIEW [Vol. VII more international issuers move from the heavily regulated public market to the deregulated 144A market.35

B. An Institutional Rule

Rule 144A was developed for institutional investors who wanted

to quickly and easily resell their purchases.36 This was particularly true for foreign issuers who, because of their limited access to U.S. markets and limitations on resales, were often unable to obtain a favorable price for their securities.37 Rule 144A was promulgated as a codification of s.4(1-1/2).38 The result was “increased liquidity and efficiency in international capital markets” and increased access to U.S. private placement markets for foreign issuers.39 Today, “[h]undreds of billions of dollars are sold in 144A transactions each year.”40

Initially, the proposed SEC rule “provided a safe harbor for three tiers of transactions.”41 The three tiers were various sizes of institutional investors.42 During the comment phase, it was recommended to the SEC that they take a multi-stage approach.43 As a result, the SEC re-proposed Rule 144A and narrowed its application to large institutional investors.44 Since its adoption in 1990, the SEC has not revisited the definition of “qualified institutional buyer” nor has it extended the safe harbor to small or medium institutions.

C. Purpose of Rule 144A

Rule 144A is intended to: (a) facilitate “a more liquid and efficient

institutional resale market for unregistered securities”; (b) remove uncertainties about the legitimacy of resales to institutional buyers; and (c) make the U.S. market more attractive to foreign issuers, thus enhancing the U.S. market’s competitiveness internationally.45

35 See Chaplinsky & Ramchand, supra note 10 at 1074 (illustrating that the 144A market has grown in both total value and proportion of total debt issued by foreign firms). 36 Robbins, supra note 14 at 180. 37 Ibid. 38 Ibid. 39 Ibid. at 181. 40 Ibid. 41 “Resale of Restricted Securities: Changes to Method of Determining Holding Period of Restricted Securities under Rules 144 and 145” 1990 SEC LEXIS 739 at 2 [“Resale of Restricted Securities”]. 42 Ibid. 43 Ibid. at 2-3. 44 Ibid. at 3. 45 Hicks, supra note 2, § 7:1

2007] SEC Rule 144A 205 The general purpose of Rule 144A serves to create a private market that will benefit institutional investors by creating a safe harbor for anyone who satisfies the required conditions.46 The rule also benefits issuers, despite the fact that they do not qualify for the safe harbor. Essentially, the 144A market will allow the issuer to provide private placements at lower costs.47 These lower costs arise from the fact that QIBs can avoid the paper, money, and time-intensive Regulation D procedures. Foreign issuers also benefit because the rule facilitates easier access to investment funds and a more stable alternative to foreign markets.48

The practical purpose of Rule 144A was to allow sophisticated investors—financial institutions who could fend for themselves—to resell restricted securities while avoiding “underwriter” status within the meaning of ss. 2(11) and 4(1). Because Rule 144A only applies to large institutional investors, many parties are prevented from utilizing the rule. Retail investors and small or medium institutions, no matter how experienced or knowledgeable, are not considered “sophisticated” enough for 144A purposes. This distinction reflects the SEC’s failure to revisit Rule 144A since its implementation in the early 1990s.

Consistent with the purpose of the Securities Act, Rule 144A allows an exemption for resales of restricted securities because the purchasers of the restricted securities are able to “fend for themselves.”49 Thus, there is less concern that buyers will be defrauded or misled. Rule 144A creates a nonexclusive safe harbor50 from registration requirements if the restricted securities are resold to QIBs.51 According to the SEC,

46 Ibid., § 7:3. 47 Ibid. 48 Ibid. 49 Chaplinsky & Ramchand, supra note 10 at 1078. Hicks, supra note 2, § 7:1. 50 Nonexclusive safe harbor means “the failure to fully comply with the particular rule […] does not preclude reliance on another exemption that may be applicable.” Hicks, supra note 2, § 7:1, f.n. 3. 51 Ibid., § 7:1. Rule 144A(a)(1)(i) contains a list of eight categories of buyers that are considered “qualified institutional buyers” if all other conditions are satisfied. These eight categories include:

(A) Any insurance company as defined in section 2(13) of the Act; Note: A purchase by an insurance company for one or more of its separate accounts, as defined by section 2(a)(37) of the Investment Company Act of 1940 (the “Investment Company Act”), which are neither registered under section 8 of the Investment Company Act nor required to be so registered, shall be deemed to be a purchase for the account of such insurance company. (B) Any investment company registered under the Investment Company Act or any business development company as defined in section 2(a)(48) of that Act;

206 ASPER REVIEW [Vol. VII Rule 144A is “the first step toward achieving a more liquid and efficient institutional resale market for unregistered securities.”52 In addition to providing registration and disclosure exemptions, Rule 144A is much faster than a standard public offering.53 The amount of time necessary to complete a Rule 144A transaction is approximately half the time required for public offerings.54

Rule 144A impacts both the resale of restricted securities, which was the primary purpose of the rule, and initial private placements.55 The rule creates a ripple effect because “it clarifies and codifies the theory behind permissible resale of privately sold securities in a manner that both permits the simplification of procedures applicable to original

(C) Any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; (D) Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees; (E) Any employee benefit plan within the meaning of title I of the Employee Retirement Income Security Act of 1974; (F) Any trust fund whose trustee is a bank or trust company and whose participants are exclusively plans of the types identified in paragraph (a)(1)(i) (D) or (E) of this section, except trust funds that include as participants individual retirement accounts or H.R. 10 plans; (G) Any business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; (H) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation (other than a bank as defined in section 3(a)(2) of the Act or a savings and loan association or other institution referenced in section 3(a)(5)(A) of the Act or a foreign bank or savings and loan association or equivalent institution), partnership, or Massachusetts or similar business trust; and (I) Any investment adviser registered under the Investment Advisers Act.

17 C.F.R. § 230.144A(a)(1)(i). 52 Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Sec. Act Release No. 6862, File No. S7-23-88, 1990 WL 311657 at 3 (23 April 1990) [“Release No. 6862”]. The National Association of Securities Dealers (“NASD”) created PORTAL (Private Offering, Resale and Trading through Automated Linkages) as a market for the primary and secondary trading of Rule 144A transactions. Hicks, supra note 2, § 7:1. 53 Scott, supra note 19 at 73. 54 See ibid. (noting that a public offering takes 8-15 weeks to complete, while a Rule 144A offering requires only 6-8 weeks). 55 1 Edward F. Greene et al., U.S. Regulation of the International Securities and Derivatives Markets, 4th ed. (1997) at 4-16, § 4.03.

2007] SEC Rule 144A 207 private offerings and facilitates such resales.”56 Essentially, the 144A market promotes the issuance of private placements by creating a competitive means to resell the restricted securities. The end result is increased marketability for the original offering.57 Further, the lack of trading restrictions and the non-exclusive nature of the 144A transaction makes it much more attractive to both foreign and domestic corporations.

D. Requirements of Rule 144A

Rule 144A requires that six conditions be satisfied.58 First, the “[i]ssuer cannot be subject to Investment Company Act of 1940 (Investment Company Act) regulation.”59 Second, the restricted security must be eligible—this is known as the Non-fungibility requirement. Third, the buyer must be a QIB.60 Fourth, buyer notification requirements must be satisfied. Fifth, Rule 144A has certain information requirements.61 Finally, there is a general prohibition against solicitation.62

By its very terms, Rule 144A is a resale rule, and transactions conducted within its provision are not distributions.63 For 144A purposes, non-issuers are not considered underwriters under “sections

56 Ibid. 57 Ibid. 58 The language of the rule only lists four requirements, see 17 C.F.R. § 230.144A(d), but the first, fifth, and sixth requirements have developed as a result of practice and other conditions. Hicks, supra note 2, § 7:1. The fifth implied condition, a prohibition against general solicitation, has been held to “flow from the nature of the transaction.” Ibid., § 7:2. The rule, however, does not expressly prohibit general solicitation. Johnson & McLaughlin, supra note 30 at 502. 59 Lander, supra note 28 at 5-26, §5.20. “[T]he securities offered or sold cannot be securities of an open-end investment company, unit investment trust, or face-amount certificate company that is or is required to be registered under the Investment Company Act.” Ibid. at 5-27, § 5.22 (citing Securities Act Rule 144A(d)(3)(ii), 17 C.F.R. § 230.144A(d)(3)(ii)). 60 Chaplinsky & Ramchand, supra note 10 at 1078. 61 Ibid. at 1078-79. “Generally speaking, Rule 144A requires issuers to provide a brief statement of the issuer’s business, its products and services, and financial statements […] for the proceeding [two] years.” Ibid. at 1079. This condition is only required if the issuer is not “(1) a reporting company under the Exchange Act, (2) a foreign issuer exempt form the 1934 Act reporting pursuant to Rule 12g3-2(b), and (3) a foreign government eligible to register its securities in the United States.” Ibid.; Hicks, supra note 2, § 7:2. 62 Scott, supra note 19 at 74. 63 “Resale of Restricted Securities,” supra note 41 at 10.

208 ASPER REVIEW [Vol. VII 2(11) and 4(1) of the Securities Act.”64 Dealers are able to take advantage of Rule 144A by utilizing s.4(3). Although an issuer may not utilize Rule 144A, an affiliate of the issue may qualify for the rule.65 Further, the securities may eventually be resold to the public by an institution or dealer.66 The dealer, however, must still comply with broker-dealer registration requirements under s.15(a) of the Exchange Act.67

Despite its application, Rule 144A cannot be used as a means of avoiding the registration and disclosure requirements of the Securities Act.68 To prevent the abuse of Rule 144A, QIBs can only purchase securities for their own accounts or for other QIBs.69 Once a QIB has acquired securities through 144A, they may not distribute the purchased security through their managed accounts, such as mutual funds.70 As a result, a 144A transaction cannot be used to indirectly distribute securities to U.S. retail investors.71 A QIB may, however, utilize Rule 144 or Regulation S to reach the retail investor.72 In fact, a QIB may tack on the seller’s “holding period” for the purposes of qualifying for Rule 144, which allows a restricted security to be sold to a retail investor after a minimum one year holding period.73 A reseller can utilize Regulation S only for resale transactions outside the United States.74

In order to be an eligible security under the first requirement of Rule 144A, the security must not be one of two classes of securities.75

64 Ibid. 65 Krus & Pangas, supra note 22 at Part A. 66 Ibid. 67 “Resale of Restricted Securities”, supra note 41 at 11. 68 Ibid. at 12. 69 Krus & Pangas, supra note 22 at Part B. 70 Ibid. at Part G. 71 Ibid. at Part H. 72 Ibid. at Part A. 73 Ibid. at Part B. The seller, however, must be unaffiliated with the issuer. Ibid. 74 Ibid. at Part A. 75 Rule 144A expressly provides that:

The securities offered or sold:

(i) Were not, when issued, of the same class as securities listed on a national securities exchange registered under section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system; Provided, That securities that are convertible or exchangeable into securities so listed or quoted at the time of issuance and that had an effective conversion premium of less than 10 percent, shall be treated as securities of the class into which they are convertible or exchangeable; and that warrants that may be exercised for securities so listed or quoted at the time of issuance, for a period of less than 3 years from the date of issuance, or that had an effective exercise premium of less than 10

2007] SEC Rule 144A 209 Excluded classes of securities include securities that (1) when issued are publicly traded76 or (2) are “fungible” securities.77 A fungible security is similar to a publicly traded security within the same class.78 The purpose of these limitations is to prevent the development of competing public and private markets for the same class of securities.79 The SEC, however, has allowed securities issued under Rule 144A to be “exchangeable at the issuer’s election into securities of unrelated issuers.”80 Resales of the mandatory exchangeable securities must satisfy either s.4(1) or Rule 144.81 Finally, the eligibility requirement is determined at the time of resale and subsequent actions, such as listing on the public market, which will not affect the initial transaction.82

percent, shall be treated as securities of the class to be issued upon exercise; and Provided further, That the Commission may from time to time, taking into account then-existing market practices, designate additional securities and classes of securities that will not be deemed of the same class as securities listed on a national securities exchange or quoted in a U.S. automated inter-dealer quotation system; and (ii) Are not securities of an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under section 8 of the Investment Company Act.

17 C.F.R. § 230.144A(d)(3); Hicks, supra note 2, § 7:15. 76 This class of securities refers to those that are properly registered under section 6 of the Securities and Exchange Act and listed on a national exchange or quoted on NASDAQ. Hicks, supra note 2, § 7:17. These securities are excluded because they are already available on the public market. Ibid. 77 Ibid., § 7:15. 78 Scott, supra note 19 at 73; Hicks, supra note 2, § 7:16. The test for “same class” depends on the type of security. For American Depository Receipts (“ADRs”), “where ADRs are publicly traded ‘the deposited securities underlying the ADRs also would be considered publicly traded’” and of the same class. Hicks, supra note 2, § 7:19 (citing Release No. 6862 at 08,640) (internal quotations omitted). For common stock a “substantially similar” test is applied. Ibid. For preferred equity securities the test is whether the “terms relating to dividend rate, cumulation, participation, liquidation preference, voting rights, convertibility, call, redemption and other similar material matters are substantially identical.” Ibid. (citing Release No. 6862 at 80,640). For debt securities the test is whether the “terms relating to interest rate, maturity, subordination, security, convertibility, call, redemption and similar matters are substantially identical.” Ibid. (citing Release No. 6862 at 80,640). 79 Ibid., § 7:15 (citing SEC Press Release No. 6839 at 80,222-80,223). 80 Mandatorily Exchangeable Issuer Securities, 1999 SEC No-Act. LEXIS 854 (25 October 1999). 81 Ibid. 82 Ibid.; Shearman & Sterling, 1998 SEC No-Act. LEXIS 1104 (21 December 1998).


The second requirement under Rule 144A is that the buyer must be a QIB.83 The burden of determining whether an entity is a QIB is placed upon the seller. Generally, the seller or any agent of the seller must reasonably believe that a potential buyer is a QIB.84 The list of qualifying QIBs is rather broad. Most financial institutions are eligible so long as they can satisfy a securities ownership test. This test requires that the entity own and invest a minimum of $100 million in non-affiliated securities.85 The only exceptions to the securities ownership test apply to registered broker-dealers, whose minimum threshold is ownership or an investment of $10 million in non-affiliated securities, or in cases where the registered broker-dealer is acting as an agent for a QIB and the transaction will be instantaneous.86 Domestic banks87 must satisfy the minimum $100 million threshold and have an audited net worth of $25 million or more within the preceding 16 months.88 Foreign banks are allowed 18 months.89 There are number of ways to determine if an institution is a QIB, including: (1) the published financial statements of the institution; (2) other publicly available information filed with any regulatory authority; (3) information published in a recognized securities manual;90 (4) certification from the institution’s chief financial officer or

83 See 17 C.F.R. § 230.144A(a)(i)-(vi) for the complete definition of a qualified institutional buyer. 84 Hicks, supra note 2, § 7:21. The SEC has held that the QIB list from CommScan and Communicator Inc. are satisfactory sources of reasonableness, so long as the entities have been listed for the past 16 months for U.S. purchasers and 18 months for foreign purchasers. Ibid. Further, the seller must not know or have reason to know that the information submitted by the buyer is fraudulent or a misrepresentation. Ibid. 85 Ibid., § 7:21. The $100 million threshold ensures that the entity is sophisticated enough to “fend for itself.” Ibid. The purpose of these limitations is to prevent indirect distributions of restricted securities. Ibid., § 7:24. 86 Ibid., § 7:21. 87 According to Section 3(a)(2) of the Securities Act of 1933:

[T]he term “bank” means any national bank, or banking institution organized under the laws of any State, Territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the State or territorial banking commission or similar official; except that in the case of a common trust fund or similar fund, or a collective trust fund, the term “bank” has the same meaning as in the Investment Company Act of 1940 [15 U.S.C.A. § 80a-1 et seq.].

15 U.S.C. § 77c(a)(2). 88 Hicks, supra note 2, § 7:21 (citing 17 C.F.R. § 230.144A(a)(vi)). 89 Ibid. 90 Standard & Poor’s, 1991 SEC No-Act. LEXIS 847 (8 July 1991).

2007] SEC Rule 144A 211 similar senior officer that the institution owns or invests a specified actual amount of securities.91

The third requirement, buyer notification, imposes a duty on the seller “to ensure that the purchaser is aware that the seller may rely on the exemption from the provisions of Section 5 of the [Securities] Act.”92 Although there is no resale restriction, the seller must still inform the buyer that the seller is exempt from registration requirements.93

Finally, the information requirement ensures that the buyer is aware of the chain of transactions and the one-year holding period.94 In addition, “certain basic financial information” about the issuer must be provided at the request of the prospective purchaser.95 If the issuer provides the SEC with periodic financial reports under the Exchange Act, then no additional information needs to be provided.96 An exemption from the information requirement is granted to “foreign government[s] eligible to register securities under the Securities Act on Schedule B.”97 Further, if an entity unconditionally guarantees the securities of its wholly-owned subsidiary, then such entity may provide its own information, in lieu of the subsidiary, so long as the guarantor (1) is subject to s.13 or 15(d) of the Exchange Act or (2) is exempt from reporting pursuant to Rule 12g3-2(b).98

E. Rule 144A in Practice

Rule 144A is an exemption from the registration requirements of

the Securities Act.99 The rule provides protection from violations of the registration and disclosure requirements of s.5, by stating that anyone—other than an issuer or a dealer—who satisfies the requirements of Rule

91 This includes lists created by institutions who have established a reasonable belief that other institutions are QIBs. CommScan LLC, 1999 SEC No-Act. LEXIS 116 (3 February 1999); Communicator Inc., 2002 SEC No-Act. LEXIS 783 (20 September 2002). 92 17 C.F.R. § 230.144A(d)(2). Section 5 is a prohibition against the sale of unregistered securities. The initial seller is protected even if the QIB violates Section 5. Hicks, supra note 2, § 7:39. 93 “Resale of Restricted Securities”, supra note 41 at 6-7. 94 Hicks, supra note 2, § 7:47. 95 “Resale of Restricted Securities”, supra note 41 at 35. 96 Ibid. 97 Ibid. The exemption includes agencies or instrumentalities of the foreign government. Rule 144A, 1990 SEC No-Act. LEXIS 840 (30 May 1990). 98 British Aerospace Holdings, Inc., 1990 SEC No-Act. Lexis 793 (9 May 1990); Schering-Plough Corporation, 1991 SEC No-Act. Lexis 1307 (21 November 1991). 99 Hicks, supra note 2, § 7:2.

212 ASPER REVIEW [Vol. VII 144A will not be an underwriter to a distribution transaction.100 The rationale behind the rule is that a distribution requires a public offering, and resales to QIBs are not public offerings.101 Since 144A transactions are not distributions, the seller does not have to register the security.102

Although non-issuers are exempt from the registration requirements under Rule 144A, the rule does not exempt resellers from U.S. antifraud and civil liability provisions.103 According to Scott, “[u]nlike registered offerings where liability for failure to disclose or misstatements is quite strict—under Sections 11 and 12(a)(2) of the [Securities Act]—Rule 144A disclosure standards are only subject to Rule 10b-5 where the plaintiff must prove intent or recklessness.”104 The rule does, however, exempt foreign issuers “from the anti-manipulation rules, Rules 10b-6, 10b-7, and 10b-8, which are designed to prevent issuers, underwriters, and other participants in a securities offering […] from supporting the price of the securities.”105

Rule 144A is a resale rule. In reality, however, it is a means of distributing securities. Although the rule was intended to increase the efficiency and liquidity of the secondary market for restricted securities, it has developed into the primary distribution method for private security transactions. Foreign issuers wanting to avoid the reporting requirements of the SEC can do so by utilizing the 144A market. Standardization in the market has led most 144A transactions to be “conducted on an underwritten basis with terms and conditions substantially identical to those applicable to public offerings.”106 The QIB negotiates with the foreign issuer much like a “traditional” private placement, but the process is more efficient.107

Although practically speaking, Rule 144A limits transactions to debt securities, the rule has been used for other types of securities. In an SEC No-Action Letter regarding the Institutional Real Estate

100 17 C.F.R. § 230.144A; Hicks, supra note 2, § 7:1. A dealer may, however, use Rule 144A to rely on Section 4(3) and will not be a participant in a distribution or an underwriter if they satisfy the necessary conditions. Hicks, supra note 2, § 7:1. Issuers, however, do not benefit from Rule 144A. Ibid. 101 Lander, supra note 27 at 5-25, §5.20. 102 Ibid. 103 See Hicks, supra note 2, § 7:2 (discussing the preliminary notes to Rule 144A). 104 Scott, supra note 19 at 73. The minimal level of financial information required under Rule 144A, however, is waived if the issuer is already registered in the public market or is a foreign issuer who is registered in their home country, pursuant to 12g3-2(b) of the Securities Exchange Act. Ibid. 105 Ibid. at 75. 106 Greene et al., supra note 55 at 4-5, § 4.01. 107 Ibid.

2007] SEC Rule 144A 213 Clearinghouse System,108 the Division of Market Regulation allowed two brokerage firms to establish an unregistered real estate securities system, without registering as an exchange or clearing agent, so long as the system met four conditions. The first condition required that any system participant with access to eligible Rule 144A securities must be a QIB.109

The National Association of Securities Dealers (“NASD”) created a system “for both primary distributions and secondary trading of unregistered securities as well as clearance and settlement of those securities.”110 The 144A market is actually “the NASDAQ’s screen-based automated trading system known as PORTAL, ‘Private Offerings, Resale and Trading through Automated Linkages.’”111 PORTAL was initially designed to facilitate the “the clearance and settlement of both domestic and foreign securities” through a closed trading system.112 The system serves a dual purpose. First, PORTAL allows “primary offerings under Section 4(2) or Regulation D […] to be resold under Rule 144A.”113 In addition, the system allows “secondary trading under Rule 144A.”114 Although the purpose of PORTAL is to create a medium of exchange for restricted securities, “few securities are actually traded through it.”115

A general 144A transaction has three steps: (1) an issuer provides a notice, under Form 8-K, that it will, is, or has made a Rule 144A private placement offering; (2) an issuer sells restricted securities to a broker-dealer in a private placement offering under s.4(2), Regulation D, or Regulation S; (3) the restricted security is then resold to a QIB under Rule 144A.116 Because Rule 144A has no holding requirement, the broker-dealer can resell to a QIB at anytime.117 Rule 144A can also be combined with American depository receipts (“ADRs”). By using ADRs, the issuer can avoid filing a registration statement with the SEC.118

108 1996 WL 279164 [“S.E.C. No-Action Letter”]. 109 Ibid. 110 Lander, supra note 27, § 5.43, 5-42. 111 Krus & Pangas, supra note 22 at Part F (citing SEC Release No. 34-27956 (27 April 1990)). 112 Greene et al., supra note 55, § 4.05, 4-45. 113 Lander, supra note 27, § 5:43, 5-68. 114 Ibid. 115 Krus & Pangas, supra note 22 at Part F. 116 Ibid. at Part G (citing Preliminary Note No. 7 to Rule 144A and Rule 144A(e) of the 1933 Act). 117 Ibid. 118 Lander, supra note 27, § 5:33, 5-45. “It is common for foreign issuers to privately place their equity securities under Rule 144A in the form of ADRs or to give the purchaser the option of purchasing ADRs or ordinary shares.” Ibid.

214 ASPER REVIEW [Vol. VII Private placement securities are placed in a “restricted” ADR through Rule 144A.119

Regulation S provides a unique method of post-144A resale. A QIB who purchases a restricted security via 144A can then resell the security to investors outside the United States. The two nominal requirements are that (1) the transaction takes place offshore and (2) there is a prohibition against directed selling techniques.120 The benefit of an offshore transaction under Regulation S is that the security becomes unrestricted and it can be sold freely in the U.S., once certain minimum holding periods are satisfied.121 Further, a security that is sold under Regulation S and would otherwise be eligible for Rule 144A can still be utilized in a 144A transaction.122 A broker-dealer who purchases the Regulation S security may, within the Regulation S safe harbor period, resell the security to a QIB.123 The underlying rationale is the same as the rationale for Rule 144A: the sale is not a distribution.124 Further, the resale is “deemed to occur outside the United States […] and [… is] not subject to registration under the Securities Act.”125 IV. IMPACT OF RULE 144A

N 1991, CONGRESS BEGAN ASKING QUESTIONS about the impact of Rule 144A on securities transactions.126 In response, the SEC submitted a report discussing the rule’s impact.127 Additional reports would follow

in 1993 and 1994.128 In general, the SEC reports stated that the rule was fulfilling its purpose of attracting foreign issuers to the United States capital markets and no congressional legislation was needed.129 The

119 Lander, supra note 27, § 5.32, 5-41. 120 Greene et al., supra note 55 at 4-26. 121 Ibid. at 4-26 – 4-27. 122 Ibid. at 4-27. 123 Ibid. 124 Ibid. 125 Lander, supra note 27, § 5.32, 5-41. 126 Hicks, supra note 2, § 7:48. 127 Ibid. 128 Ibid. 129 Ibid.

I

2007] SEC Rule 144A 215 1993 Report130 showed that from April 1990 until December 1993, the 144A market had sold $91.449 billion in securities.131

In sum, Congress has not tampered with Rule 144A because of the immediate and continued success of the 144A market. Rule 144A is fulfilling its purpose of deregulating securities transactions between sophisticated entities that do not need the enhanced protection of the Securities Act. Further, the 144A market is attracting foreign issuers to the United States. Although Rule 144A limits the participants and types of securities transactions, it is clearly broad enough to be a substantial source of capital formation.

The 144A market encompasses many types of domestic and international securities.132 The market includes “bonds, medium-term notes, and collateralized instruments.”133 The 144A market was created in 1991 and posted 319 issues worth $16.4 billion. By 2002, the market had exploded into 2,585 issues worth $253.7 billion.134 Between the private, public, and 144A markets, the 144A market is second in size (behind the public market) and “international issuers represent a much larger proportion […] than in the other two markets.”135 From 1991 to 2002, the public market increased 593 percent and the private market decreased 64 percent.136 The 144A market, on the other hand, increased 1,549 percent.137

There is also a significant difference between domestic 144A issues and international 144A issues.138 Almost every domestic issuer contemporaneously issues a registration application for the public market; while fewer international issuers apply for registration because of the increased costs.139 From a foreign issuer’s perspective, the 144A

130 U.S., Securities and Exchange Commission, Staff Report on Rule 144A (18 August 1994) (1994-1995 Transfer Binder) Fed. Sec. L. Rep. (CCH) [“1993 Report”]. The 1993 Report analyzed information from the adopting of Rule 144A in April 1990 through December 1993. Hicks, supra note 2, § 7:48. 131 Ibid., § 7:49. This amount was approximately 28.03% of the total U.S. securities market. Ibid. In addition, almost half of the companies represented by the transactions were foreign. Ibid. 132 Lucy F. Ackert & Gabriel G. Ramirez, “The Evolving Market for Debt under Rule 144A: The Increasing Importance of Collateralized Obligations” (21 September 2005) at 14, online: Financial Management Association <www.fma.org/Chicago/Papers/SEC144A-AckertRamirez.pdf>. (cited with author’s permission) 133 Ibid. at 3. 134 Ibid. at 5. 135 Ibid. at 6. 136 Ibid. at 12. 137 Ibid. 138 Chaplinsky & Ramchand, supra note 10 at 1079. 139 Ibid.

216 ASPER REVIEW [Vol. VII market is now the “market of choice for U.S. equity issues.”140 In fact, “[i]n 2005, foreign companies raised $83 billion in 186 equity issues in the Rule 144A market compared to $5.3 billion in 34 public offerings—that is, 90% of the volume of international equity issues in the United States were done in the private market.”141 Further, the 144A market has increased its share of international equity volume by 40 percent since 1995.142

A. Domestic 144A Market

Rule 144A was primarily intended to benefit both small and

institutional investors by creating an easy, more efficient method of accessing U.S. capital markets. Although the primary purpose of Rule 144A was to attract foreign issuers, the 144A market is open to and has been utilized by domestic issuers. While the foreign segment of the 144A market has unique differences from the public and private markets, the domestic market mirrors the public and private markets in composition. Despite the difference in internal market structure between the foreign and domestic segments, the requirements for transacting within the 144A market is the same regardless of whether an issuer is foreign or domestic.

As mentioned earlier, the eligibility requirement is determined at the time of issue.143 As a result, there is the potential that two separate markets will develop for some 144A securities. Initially, the private placement of eligible securities will create a market in which such securities can continue to be resold so long as Rule 144A is satisfied.144 The issuer may, however, decide to list the same class of securities on one of the national exchanges, creating a second market.145 Despite the development of a national public market, the initial 144A market can still be maintained, so long as the requirements under Rule 144A are followed.

The 144A market has grown exponentially since the SEC promulgated the rule in 1990. In 1991, the 144A market was $16 million and by 2001 it had grown to $417 billion.146 Just like the public and private markets, the majority of the proceeds from the domestic 144A market come from bonds (62.2%).147 Medium-term Notes (“MTNs”) 140 Practising Law Institute, Foreign Issuers & the U.S. Securities Laws 2007: Strategies for the Changing Regulatory Environment (2007) at 74. 141 Ibid. 142 Ibid. 143 Shearman & Sterling, supra note 82 and accompanying text. 144 Hicks, supra note 2, § 7:15. 145 Ibid. 146 Ackert & Ramirez, supra note 132 at 3. 147 Ibid. at 9.

2007] SEC Rule 144A 217 comprise the second largest segment of the 144A market (27.9%), while Collateralized Obligations148 (“COs”) comprise the third largest segment (24.7%).149

In sum, the domestic segment of the 144A market is clearly thriving and reflects the general success of the entire market. For most domestic issuers who choose to utilize the 144A market, the market is a profitable alternative to listing in the public market. While many domestic issuers will choose to participate in the public and 144A market, the 144A market does offer business an alternative to listing in the more expensive and heavily regulated public market.

B. International 144A Markets

Globalization has encouraged the expansion of transnational securities markets.150 Today, capital formation is an international process.151 Rule 144A has its greatest impact on foreign issuers because it allows them to “ease into the U.S. market.”152 By 1997, six years after the 144A market opened, the 144A market contained 30 percent of all foreign transactions and 74 percent of total private placements.153 For international issuers, the 144A Market segments are considerably different from the domestic market. Unlike the public and private markets, the international 144A Market has no cash deposits (“CDs”), which make up the second largest sector for both the public and private markets.154 For international issuers, Medium Term Notes (“MTNs”) comprise the second largest sector (27.9%).155 The remaining portion of the international 144A Market consists of Collateralized Obligations (“COs”) and other securities.156

The exponential growth of the 144A market is consistent with global trends, which reflect “ […] an unprecedented period of change and growth.”157 Issuers are looking to expand their investor base, while contemporaneously seeking continued capital formation. Rule 144A provides a more efficient and cost-effective means for foreign investors

148 “COs are derivative debt securities that are backed by a portfolio of loans, including mortgage, credit card, and automobile debt, among others.” Ibid. at 10. 149 See ibid. at T4 (tabulating the total proceeds of the various markets). 150 Stephen J. Choi, “Promoting Issuer Choice in Securities Regulation” (2001) 41 Va. J. Int’l L. 815 at 816. 151 Obi, supra note 4 at 399. 152 Scott, supra note 19 at 74. 153 Ibid. 154 Ackert & Ramirez, supra note 132 at T4 (tabulating the total proceeds of the various markets). 155 Ibid. 156 Ibid. 157 Siew, supra note 1 at 190.

218 ASPER REVIEW [Vol. VII looking to tap into U.S. capital. Issuers and investors, in the United States and abroad, will gain access to a wider pool of investors and securities, which will result in lower costs.158 In essence, Rule 144A relaxes the regulatory requirements for sophisticated entities that need less protection. This limited deregulation is an innovative method of increasing both capital investment and investor pools.

Since 1990, Rule 144A has created an alternative market for foreign corporations wanting access to U.S. capital markets.159 This alternative private market allows foreign corporations to avoid SEC accounting and registration requirements.160 Further, Rule 144A recognizes that institutional investors do not need high levels of protection and such investors recognize “the importance of an internationally diversified portfolio.”161

When the 144A market opened in 1991, the number of international issues in the public, 144A, and private markets, respectively, were 692, 1,057, and 132, with values of $25.2, $8.3, and $18.9 billion.162 Between 1992 and 1993, the volume of foreign 144A placements increased 244%, from $4.3 billion to $14.8 billion.163 Further, from 1991 to 1997, most foreign issuers raised capital in the Rule 144A market.164 By 2002, the value of the 144A market had increased tenfold and was second in value behind the public market.165 The rise of the 144A market mirrors the decline of the private market and the 144A market increased at a rate of more than twice the public market.166

In sum, the 144A Market has surpassed the public market in the number of issues and in value.167 In comparison to the public market, the 144A is slightly less in value, but has a greater number of issues.168 The data illustrates that the small number of international issuers in the public market are large firms, which accounts for the larger average

158 See Edward F. Greene, “Beyond Borders: Time to Tear Down the Barriers to Global Investing” (2007) 48(1) Harv. Int’l L.J. 85 at 88 (discussing the benefits of deregulating U.S. financial markets). 159 Johnson & McLaughlin, supra note 30 at 529. 160 Ibid. 161 Siew, supra note 1 at 173. 162 Ackert & Ramirez, supra note 132 at 7. 163 Hicks, supra note 2, § 7:49. This increase, however, was only 12 percent more than the overall increase for Rule 144A placements. Ibid. 164 Ackert & Ramirez, supra note 132 at 2. 165 Ibid. at 7. The value in the public, 144A, and private markets were $192.5, $85.8, and $11.7 billion, respectively. Ibid. 166 Ibid. 167 Ibid. at 7 & 26. 168 Ibid. at 26.

2007] SEC Rule 144A 219 value (about twice the size of the 144A market).169 The data reflects the great success that Rule 144A, a limited deregulation rule, has had on restricted securities. In fact, the success of the 144A market has stirred interest in other areas of the world, such as Europe and China, who are looking for both models to implement in their respective markets or alternatives markets for capital formation.

1. Rule 144A and China

The economic growth and development of China over the past few

decades have made the country a major player in global securities markets. The acquisition of Hong Kong and its substantial securities market has made the U.S. public market less appealing and necessary. The Hong Kong market possesses “the liquidity to support most of the large IPOs [initial placement offerings] coming out of China.”170 Chinese issuers can now reach a larger pool of investors and capital formation, without going to the U.S. public market, by utilizing the Hong Kong or London exchanges.171 While increased regulatory requirements have made the U.S. public market less attractive and efficient, the 144A market is still a cost-effective means of tapping U.S. capital.172 Today, the 144A market is “an attractive alternative for Chinese issuers who want to avoid the costs and delay of the SEC regulatory regime.”173

The importance of the Chinese market cannot be ignored. The amount of capital raised by Chinese firms grew 225 percent between 2003 and 2005.174 In fact, only U.S. firms raised more capital through IPOs in 2005.175 Today, China boasts the fourth largest economy in the world, but its reliance on U.S. capital formation has decreased.176 “[B]etween 1993 and 2001, China-based companies raised approximately $24 billion in [IPOs] in U.S. capital markets, and between 2001 and 2003, raised approximately $5 billion overall in U.S. capital markets.” Over any three-year period from 1993 to 2001, Chinese firms raised on average $8 billion in U.S. capital markets, as opposed to just $5 billion in the three-year period from 2001 to 2003.

The Chinese have four general alternatives to raising capital, including “(1) China’s domestic markets, (2) U.S. markets, (3) the Hong 169 Ibid. at 7. 170 Erica Fung, “Regulatory Competition in International Capital Markets: Evidence from China in 2004-2005” (2006) 3 N.Y.U. J. L. & Bus. 243 at 245. 171 Ibid. 172 Ibid. 173 Ibid. 174 Chinese companies raised $8 billion in 2003 and over $20 billion in 2005. Ibid. at 247. 175 Ibid. 176 Ibid.

220 ASPER REVIEW [Vol. VII Kong market, and (4) markets in the rest of the world.”177 In regards to the U.S. markets, Chinese companies are beginning to shift their emphasis from the public markets to the 144A market. Rule 144A is an increasingly popular alternative to the public markets, particularly in light of the heightened requirements of the Sarbanes-Oxley Act.178 Rule 144A allows Chinese issuers to utilize the greater liquidity, depth, and efficiency of the U.S. capital markets—which are the largest in the world—while avoiding the inefficient public market requirements.179 The SEC disclosure requirements make up the major barrier to U.S. public markets, because they substantially raise the cost of registration and disclosure.180 Rule 144A, on the other hand, relaxes these requirements and, consequently, provides cost-effective access to U.S. capital markets.

The 144A market is necessary to keep the United States competitive in global securities. In fact, the modern trend for Chinese issuers is to move away from the U.S. public listings toward the Hong Kong listings.181 In the past, Chinese firms would have concurrent listings in both the Hong Kong markets and the U.S. market, but 2005 marked a change of course as more Chinese firms became listed solely on the Hong Kong exchange.182 The amount of capital raised by Chinese firms in the Hong Kong exchange grew more than 300 percent between 2003 and 2005.183 In addition, the average IPO on the Hong Kong exchange is quickly closing in on the average IPO in the U.S. public markets.184

The establishment of the 144A market has encouraged foreign issuers and QIBs to continue raising capital in the United States. Domestic QIBs are now more likely to get involved in foreign markets, which have created a steady supply of U.S. capital to China.185 Rule 144A allows Chinese issuers to turn to U.S. private placement markets and avoid greater liability under the Sarbanes-Oxley Act.186

177 Ibid. at 249. 178 Ibid. at 258. 179 See ibid. at 260 (noting that deeper liquidity, lower volatility, and tighter spreads than alternative markets make U.S. markets more cost-effective). 180 Ibid. at 262. 181 Ibid. at 273. 182 Ibid. 183 Ibid. at 274. In 2003, Chinese firms raised $7.5 billion, but by 2005, they were raising $24.7 billion. Ibid. 184 Ibid. 185 Ibid. at 297. 186 Ibid. at 299.

2007] SEC Rule 144A 221 V. GLOBAL ISSUES AND REVALUATION OF RULE 144A

S GLOBAL MARKETS CONTINUE TO EXPAND and 144A transactions increase, tensions arise between 144A and other issues, such as optimality, convergence, substituted compliance, and increased

market competition. Finally, the success of Rule 144A suggests that it is time for the SEC to consider expanding the market to include more QIBs. When the rule was adopted in 1990, the SEC clearly stated that Rule 144A and its subsequent market would be monitored and periodically evaluated. In addition, the 1990 rule was the first step in a multi-tier approach that was meant to consider whether or not the definition of a QIB should be extended to small- or medium-sized institutions. After seventeen years, it is time for the SEC to reconsider Rule 144A and decide whether any changes are appropriate.

Arguably, Rule 144A brings the U.S. security market closer to optimality by allowing foreign issuers, resellers, and large sophisticated institutions to perform highly efficient transactions. Unfortunately, this movement towards optimality does not directly incorporate all investors, particularly retail investors and small or medium institutions.

Markets and market regulation can no longer be supported by an isolationist viewpoint.187 Recently, the SEC has opened a dialogue regarding “a new framework to apply to foreign financial service providers accessing the U.S. capital market […].”188 Essentially, the new framework would create a system of “substituted compliance” that allows foreign exchanges and broker-dealers to avoid direct SEC supervision.189 In order to qualify, however, the foreign entity would need to be regulated by a system that is “substantially comparable” to the U.S. regime.190 Although the details of this system are beyond the scope of this paper, the proposed system does come into tension with Rule 144A.

Under the proposed system, select U.S. investors would be able to directly transact with foreign exchanges or broker-dealers who were not registered with the SEC.191 Further, the system would “promot[e] high-quality [international] regulatory standards […] increase competitions in financial services […] and lower cross-border transaction costs, to the

187 Ethiopis Tafara & Robert J. Peterson, “A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework” (2007) 48 Harv. Int’l L. J. 31 at 32. 188 Ibid. 189 Ibid. Generally, foreign exchanges and broker-dealers must register and comply with SEC supervision. Ibid. 190 Ibid. 191 Ibid. at 47-48; Greene, supra note 158 at 87. Currently, in order for U.S. investors to purchase foreign securities, they must go through two-layers of broker-dealers; a domestic and a foreign layer. Ibid. at 48.

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222 ASPER REVIEW [Vol. VII benefit of investors around the world.”192 The impact of such a system, however, would primarily be on retail and small or medium institutional investors. Large institutional investors, generally referred to as sophisticated investors, would not benefit as much, if at all, from such a system. Large institutional investors, who would qualify for QIB status under Rule 144A, have already established global outlooks and operations.193

Because large institutional investors, or QIBs, already have efficient access to foreign securities through 144A and other rules, a system of substituted compliance would do little to increase investor access to foreign stocks. QIBs will have a substantial portion of security offerings, generally at the expense of smaller players. The increase in demand by retail investors will likely be nominal. Although the impact of small or medium institutions will be much larger, such institutions could be granted access by adjusting the definition of QIBs under Rule 144A. As a result, the existence of Rule 144A undermines the SEC proposal of a substantial compliance system.

The SEC is clearly interested in the convergence of certain elements of security regulatory systems.194 The current progression of International Financial Reporting Standards (“IFRS”)/International Accounting Standards under the International Accounting Standards Board (“IASB”) is creating a real possibility that the U.S. may join with other jurisdictions, particularly Europe, to adopt a single set of accounting standards. The SEC has historically supported “‘convergence’ of national regulatory standards,” including enforcement.195 The SEC Office of International Affairs, the International Organization of Securities Commission (“IOSCO”), and other foreign jurisdictions continue to work together to establish and maintain high standards of security regulation and enforcement.

Unlike a system of substantial compliance, however, QIBs under Rule 144A are likely to benefit from continued regulatory convergence. Generally, non-U.S. issuers have been hesitant to enter U.S. markets because of heightened disclosure, accounting, and other regulatory standards, but such standards do not apply in a private placement transaction. Although the convergence of accounting standards will not change whether a QIB enters into a 144A transaction, it may streamline the process. Because QIBs have global operations, they must deal with the multitude of local accounting standards.196 If the U.S. and other 192 Tafara & Peterson, ibid. at 33-34. 193 Ibid. at 34. 194 Ibid. at 49. 195 Ibid. at 50. SEC promotion of convergence was traditionally done through “multilateral mechanism[s].” Ibid. at 55. 196 It should be noted, however, that the European Union is now requiring public companies to adopt IFRS and other international accounting standards.

2007] SEC Rule 144A 223 developed security markets adopt a single set of accounting standards, the transaction costs for QIBs will likely decrease by a significant amount. In addition, interaction between various branches of a global QIB will become faster and more efficient. Regional offices will be able to quickly understand the same set of data and interpret that data in a consistent manner. Further, convergence is likely to result in increased competition between markets, which could also lower transaction costs and raise the quality of financial services. Finally, increased convergence would also “eliminat[e] overlapping and duplicative requirements imposed by multiple regulators and discourag[e] regulatory arbitrage.”197

As noted earlier, many commentators to the initial 144A proposal suggested that the SEC use a multi-stage approach that would first open the safe harbor to large institutional buyers and monitor the program to determine whether the rule should be extended to small or medium institutions.198 When the SEC adopted the final version of Rule 144A, it stated that it “intends to monitor the evolution of this market and to revisit the Rule with a view to making any appropriate changes.”199 According to its own release adopting Rule 144A, the SEC would periodically evaluate the 144A market and consider “the nature and number of regular participants in the market, the types of securities traded, the liquidity of the market, the extent of foreign issuer participation in the private market, and the effect of the Rule 144A market on the public market, and any perceived abuses of the safe harbor.”200

Re-evaluating Rule 144A does not mean the rule has to be rewritten or significantly altered. In fact, the SEC can fulfill its initial intentions by merely altering the definition of a QIB. Currently, an institution qualifies for 144A-QIB status only if it can pass the securities ownership test, which requires that financial institutions own $100 million in non-affiliated securities. Banks must also have $25 million in audited net worth. Broker-dealers have a separate standard. They must have an investment of $10 million in non-affiliated securities.

By altering the securities ownership test, the SEC can take the next step in expanding the 144A market. The author proposes that the SEC consider lowering the security ownership test to $75 million for financial institutions and banks. In addition, the required audited net worth of a bank could be reduced to $22.5 million. For broker-dealers, the threshold amount could be lowered to $7.5 million. By lowering each

197 Susan Wolburgh Jenah, “Commentary on A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework” (2007) 48 Harv. Int’l L.J. 69 at 77. 198 Supra notes 41-44 and accompanying text. 199 “Resale of Restricted Securities”, supra note 41 at 8. 200 Ibid.

224 ASPER REVIEW [Vol. VII threshold amount by approximately 25%, the SEC can slowly open the 144A market to more institutions. Over time, the SEC can review the market and determine whether the current standards are sufficient, whether the rule should return to the previous thresholds, or whether more institutions should qualify for QIB status.

Regardless of the SEC final outcome, it is time that the SEC begins to reconsider extending Rule 144A to medium-sized institutions. The 144A market has experienced seventeen years of stable but exponential growth, suggesting that it is an appropriate step to optimality. In addition, the SEC should establish a medium-term plan to re-evaluate the 144A market in another five to ten years and determine whether the exemption should be further extended to small institutions and experienced retail investors.

VI. CONCLUSION

ONSISTENT WITH THE PRIMARY PURPOSE of the 1933 Securities Act, which was to protect unsophisticated investors from fraud, Rule 144A has relaxed some of the registration requirements in

transactions between sophisticated buyers and sellers. The Rule 144A market is a complete success, especially for foreign issuers looking to gain faster and easier access to U.S. capital. Today, the 144A market is a liquid market for restricted securities that is second only to the public market. Both small and institutional investors have benefited from the market, but the real winners are foreign issuers.

Rule 144A is a “response to the unprecedented globalization of the world’s commercial securities markets [… and] has proved popular among foreign companies who did not want to deal with the registration and reporting requirements associated with both making a public offering via the 1933 [Securities] Act and listing on a U.S. exchange.”201 The Sarbanes-Oxley Act broke the SEC trend, which had been accommodating foreign issuers by granting exemptions.202 The international business community reacted in a hostile manner—as predicted—but the Sarbanes-Oxley Act has made the 144A market an increasingly attractive alternative.

As liberal globalization203 continues, the Rule 144A market will continue to grow. In fact, recent changes in securities regulation—in

201 Kenji Taneda, “Sarbanes-Oxley, Foreign Issuers and United States Securities Regulation” (2003) Colum. Bus. L. Rev. 715 at 726-27. 202 Ibid. at 716. 203 Rule 144A liberalizes private placement rules in the United States and makes “it easier for foreign companies to issue securities in U.S. markets.” Scott, supra note 19 at 72.

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2007] SEC Rule 144A 225 particular those imposed by the Sarbanes-Oxley Act, which does not apply to the 144A market—are likely to cause the 144A market to grow exponentially. With the heightened registration and reporting requirements of Sarbanes-Oxley, the 144A market will become more efficient and profitable to foreign issuers. More and more foreign issuers will find that “when billon-dollar securities offerings can be completed without SEC registration to U.S. institutional investors who are willing to accept the issuer’s home market as the trading venue, foreign issuers are [going to be] less willing to incur the costs of SEC registration and U.S. listing.”204 In addition, the number of domestic issuers who contemporaneously seek to enter the public market—while conducting business in the 144A market—is likely to decrease. The result will be continued growth of the 144A market.

This growth, however, should not be limited to the current list of QIBs. The SEC should re-evaluate Rule 144A and its market to determine if the institutions qualifying for QIB status should be increased. The SEC could do so by lowering the threshold amounts necessary to qualify for QIB status. Regardless, it is time to begin a dialogue between the SEC and other market participants regarding the future of Rule 144A.

204 DeLaMater, supra note 7 at 117-18.

A CALL FOR ACTION: THE NEED FOR CANADIAN

SPAM LEGISLATION

Perry Cheung*

INTRODUCTION What is Spam?

PAM CAN BE DEFINED as unsolicited commercial e-mail sent to a large number of recipients.1 Spam e-mails fill the inboxes of e-mail accounts all around the world, often attempting to entice sales for

various products or services. It is a growing nuisance, which makes up for the majority of e-mail activity on the web today.

Why has spam become so popular? The development of the Internet and the emergence of e-mail have revolutionized the way individuals communicate and the way people do business. This revolution has created the opportunity for a new low-cost method of advertisement. Telemarketing and mailbox flyers were previously the popular methods of “cold calling,” in which unsolicited advertisements were made to everybody, with no prior indications of potential interest in a product or service being necessary. This type of advertising still continues today, albeit at lesser volumes than in the past. Applying the cold calling methodology to e-mail accounts, however, has created a cheaper, faster, and ultimately more effective means of advertising. Not surprisingly, the practice of sending mass unsolicited commercial e-mails has become commonplace.

While success rates of spam as a method of advertising are lower than those of telemarketing and mailbox flyers, spam is a viable advertisement option because the marginal cost per recipient is negligible.2 Spam is based on the idea that massive amounts of e-mail can be sent at a time at low cost and thus, sheer volume can make up for low success rates.

* LL.B. (UM, 2008) 1 Meriam-Webster Online, s.v. “spam”, online: Merriam-Webster Online <http://www.m-w.com/dictionary/spam>. 2 John Magee, “The Law Regulating Unsolicited Commercial E-Mail: An International Perspective” (2003) 19 Santa Clara Computer & High Tech. L.J. 333 at 338.

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228 ASPER REVIEW [Vol. VII Why is spam a problem?

Consider the fact that in 2000, spam made up approximately 10 percent of global e-mail traffic,3 whereas by 2006, spam made up for 86.2 percent of e-mails.4 Thus, the number of advertisement e-mails in circulation today greatly exceeds the number of legitimate e-mails. In 2003, America Online (“AOL”) reported blocking two billion e-mails daily for their 26 million customers. This means that an average of approximately 75 spam e-mails was sent to every AOL customer on a daily basis.5 Spam activities result in significant wasted time and energy spent on filtering out junk e-mails. Sometimes legitimate e-mails are accidentally deleted. Not surprisingly, this waste of human resources and these impediments to communication have had a highly negative impact on the business community.

Internet Service Providers (“ISPs”) expend considerable effort on filtering out spam, which increases the costs of Internet service, as ISPs and e-mail servers spread fixed anti-spam software development costs to the consumer and are forced to increase their bandwidth capacity in anticipation of having spammers tie up large portions of bandwidth. While the additional per-user cost is likely negligible, access fees spent on time used filtering through e-mails from remote locations or from portable devices can have a significant cost to users.6

Spam also raises issues of security and privacy. Spam e-mails may contain spy-ware software that tracks activity or attempts to attain personal data. Sometimes software imbedded in spam e-mails will harvest e-mail addresses from contact lists of spam recipients, resulting in an abundant supply of additional e-mail addresses to which more spam can be sent. Furthermore, some spam e-mails contain viruses, Trojans, worms, and other forms of malicious software.7

Spam is also problematic because it creates opportunities for fraud. Spam e-mails are often the starting point for “phishing” schemes,

3 Canada, Task Force on Spam, Stopping Spam: Creating a Stronger, Safer Internet (Ottawa: Information Distribution Centre, 2005) at 7, online: Industry Canada <http://www.e-com.ic.gc.ca/epic/site/ecic-ceac.nsf/vwapj/stopping_spam_May2005.pdf/$file/stopping_spam_May2005.pdf> [Task Force on Spam]. 4 MessageLabs Intelligence, “A Year of Spamming Dangerously: The Personal Approach to Attacking (2006 Annual Security Report)” (December 2006), online: MessageLabs <http://www.messagelabs.com/resources/mlireports>. 5 All Party Parliamentary Internet Group, “Spam”: Report of an Inquiry by the All Party Internet Group (UK: October 2003) at 7, online: APIG <http://www.apcomms.org.uk/apig/archive/activities-2003/spam-public-enquiry/spam_report.pdf> [APPIG]. 6 Ibid. 7 Task Force on Spam, supra note 3 at 1.

2007] The Need for Canadian Spam Legislation 229 in which perpetrators fraudulently attempt to obtain sensitive personal information. In the current Internet era, perpetrators find it easy to hide behind false identities, as public e-mail services allow users to create numerous accounts without requiring any authentication of identity.8 Technology also allows spammers to “spoof” e-mails, making them appear to originate from a false source in the header or in the IP address.9 Accordingly, spammers are able to mislead consumers and hide from the authorities.

In the end, spam hurts everybody (save the spammers themselves), as it drains resources from all ends. Business efficacy and consumer confidence in the Internet is weakened, the growth of e-commerce is impeded, and negative economic consequences result. For large corporations, there are significant losses in productivity. In 2003, the Radicati Group, a research firm, estimated that spam cost corporations in the United States over $20.5 billion.10 Thus, it seems that it is in the best interests of governments to take seriously the fight against spam. Spam Legislation in Canada

Currently, there is no spam legislation in Canada. Initially, Canada’s position on spam was one of passivity, as Industry Canada thought it would be best to allow market forces to deal with the problem.11 In a 1997 discussion paper released by Industry Canada, it was said that spam legislation would not be necessary.12 Spam was considered to be only a minor inconvenience at the time. It was said that in order to remain competitive, ISPs and e-mail service providers would learn to filter such activities. Furthermore, it was suggested that good business practices, privacy laws in the Personal Information Protection and Electronic Documents Act (“PIPEDA”), and remedies under the civil

8 See U.S., Federal Trade Commission, National Do Not E-mail Registry: A Report to Congress (Federal Trade Commission, 2004) at 12, online: FTC <www.ftc.gov/reports/dneregistry/report.pdf> [FTC]. 9 Ibid. 10 Industry Canada, The Digital Economy in Canada: What is Spam?, online: Industry Canada <http://e-com.ic.gc.ca/epic/site/ecic-ceac.nsf/en/h_gv00170e.html#spam>. 11 Industry Canada, The Digital Economy in Canada: Spam Discussion Paper: Internet and Bulk Unsolicited Electronic Mail (Ottawa: July 1997) at 1, online: Industry Canada <http://strategis.ic.gc.ca/epic/internet/inecic-ceac.nsf/vwapj/SPAM_1997En.pdf/$FILE/SPAM_1997En.pdf> [1997 Spam Paper]. 12 Ibid. at 4.

230 ASPER REVIEW [Vol. VII and criminal law could effectively combat spam. Unfortunately, spam has continued to grow.13

As foreign jurisdictions began implementing legislation to combat this problem in 2002,14 the argument in favour of legislative action in Canada gained strength. In 2003, Industry Canada announced a change in its position, re-opening the debate about issues relating to spam.15 Specifically, Industry Canada considered the need to implement legislation directed specifically towards spam. A “Task Force” was created to advise the government about an appropriate response to spam.16

In 2005, a report was released by the Task Force,17 which discussed the growing problem of spam and made recommendations for its resolution. The report recognizes a need for legislative action in fighting spam, but it also suggests that this alone is insufficient. It recommends a multifaceted approach, drawing on all stakeholders to do their part in the fight. The report identifies sound business practices, consumer awareness, public education, and international cooperation as other tools necessary to combat spam.

Two years after the release of this report, there remains no spam legislation in Canada. More pressing issues, like healthcare, foreign policies, and the environment, seem to attract the attention of Canadian legislators. Thus, it appears that such legislation may not be enacted any time in the near future. This paper discusses why spam legislation is necessary in Canada nonetheless, and how such legislation should look. DO WE NEED SPAM LEGISLATION IN CANADA?

PAM LEGISLATION IS NECESSARY IN CANADA for two main reasons. Firstly, statistics show a relentless increase in spam,18 which suggests that existing methods of spam control—criminal law, civil

remedies, PIPEDA, and market forces—are not effective. Meanwhile, legislation targeted at spam in foreign jurisdictions seems to be showing some positive results. Secondly, as the Internet is a global resource, regulation and enforcement requires international cooperation. Canada is not pulling its weight in terms of combating spam. According to a study in the UK, Canada was the world’s second leading source of spam

13 See Spam Growth Timeline, below. 14 See ibid. 15 Karen Ng, “Spam Legislation in Canada: Federalism, Freedom of Expression and the Regulation of the Internet” (2005) 2 U. Ottawa L. & Tech. J. 447 at 464. 16 Ibid. 17 Task Force on Spam, supra note 3. 18 See Spam Growth Timeline, below.

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2007] The Need for Canadian Spam Legislation 231 in 2004.19 The implementation of spam legislation would send a much-needed message to the world that Canada is on board in the global fight against spam.

Spam Growth Timeline

1997 • Global spam volume represents less than 10 percent of total e-mail volume20

• Industry Canada releases a discussion paper, saying spam legislation is unnecessary

2000 • Global spam volume reaches 10 percent of total e-mail volume21 2002 • Global spam volume climbs to 30 percent by the end of the

year22 • The EU implements its E-Commerce Directive, which includes a

clause dealing with spam23 2003 • Global spam volume surpasses 50 percent24

• In January, Industry Canada reopens dialogue to discuss issues relating to spam—the Task Force on Spam is created

• Two high-profile legal actions in the United States are launched, reducing global spam rates to near 40 percent25

• In December, the UK Privacy and Electronic Communications Regulations26 take effect

• Global spam rates at the end of the year exceed 50 percent27

19 Michael Geist, “A recipe for battling spam in Canada” Toronto Star (3 May 2004) D.02. 20 Task Force on Spam, supra note 3. 21 Ibid. 22 Ibid. 23 EC, Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications), [2002] O.J. L 201/37, art. 13, s.4. 24 Task Force on Spam, supra note 3. 25 Ibid. 26 The Privacy and Electronic Communications (EC Directive) Regulations 2003, S.I. 2003/2426. 27 Task Force on Spam, supra note 3.

232 ASPER REVIEW [Vol. VII 2004 • In January, the American CAN-SPAM Act28 takes effect

• In April, the Australian Spam Act 200329 takes effect • In July, global spam volume peaks at 94.5 percent of total e-

mail volume30 • Two high-profile legal actions in the United States are

subsequently launched, reducing global spam rates to just below 75 percent31

• Global spam volume makes up 80 percent of total e-mail volume by the end of the year32

2005 • In May, the Canadian Task Force on Spam releases a report recommending various actions to combat spam, including legislative action33

2006 • MessageLabs Annual Intelligence Report shows an average annual global spam rate of 86.2 percent34

The Statistics

The statistics clearly show that spam is on the rise globally. This

explains the evolution of Industry Canada’s position on spam and the implementation of spam legislation in other jurisdictions.

In a MessageLabs study conducted for the Task Force on Spam,35 it was shown that certain events have made big dents in the amount of global spam sent out. Spam rates appear to have dropped following the implementation of the E-Commerce Directive and the CAN-SPAM Act.36 The most significant drops, however, seemed to follow high-profile legal actions in the United States.37

Yet global spam rates are still climbing and are now at an all-time high. Some might argue that this means legislation is ineffective. However, the fact that spam rates are still climbing may simply suggest that there are flaws in existing legislation in foreign jurisdictions, which Canada now has the opportunity to avoid.

28 Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, Pub. L. No. 108-187, 117 Stat. 2699 (2003) [CAN-SPAM Act]. 29 Spam Act 2003 (Cth.). 30 Task Force on Spam, supra note 3. 31 Ibid. 32 Ibid. 33 Task Force on Spam, supra note 3. 34 MessageLabs, supra note 4. 35 Task Force on Spam, supra note 3. 36 Ibid. 37 Ibid.

2007] The Need for Canadian Spam Legislation 233 Market Forces and Existing Methods of Combating Spam

As illustrated by increasing spam rates and Industry Canada’s

evolving position on spam legislation, it can be said that market forces, privacy legislation, good business practices, and existing civil and criminal penalties are simply not effective in fighting spam.

It was originally thought that Internet service providers and e-mail servers would invest in filtering technology in order to stay competitive. It was thought that this investment would be sufficient to stop spam.38 Yet now, despite significant sums of money being spent on filtering, spam continues to be a problem.39

Private actions targeted towards spam could include trademark dilution and unfair competition, nuisance, interference with contractual or business relations, trespass to chattels, or breach of contract (regarding terms of use for ISPs).40 There are many difficulties associated with these private actions, however. It is difficult to attain remedies for Internet torts, firstly because the defendants are not easy to identify. When they are identified, there may be issues of jurisdiction and conflict of laws.41 Furthermore, for the private complainant, it would be impractical to spend the time and money necessary to attain a civil remedy, as the damages would be minimal and an injunction stopping one spammer would make no visible impact on the amount of spam received.42

Spammers who intend to injure by sending false messages or deceitful, fraudulent messages may be subject to penalty under ss. 372(1) and 380 of the Criminal Code.43 However, like private actions, 38 Ng, supra note 15 at 458. 39 Task Force on Spam, supra note 3 at 8. 40 Ng, supra note 15 at 462. 41 Ibid. 42 In a private small claims action between business owner Nigel Roberts and spammer Media Logistics Ltd., Roberts was awarded a mere £300 and an apology. See Chris Hunter, “UK Spam Landmark Case” Spamfo (29 December 2005), online: Spamfo <http://www.spamfo.co.uk/component/option,com_content/task,view/id,370/Itemid,2/>. An example of a private action through non-legal means is the case of Vardan Kushnir of Russia. Kushnir was Russia’s largest known spammer. Defiant about his right to spam, he sent millions of unsolicited e-mails daily, advertising his English Learning Centers. In July 2005, Kushnir was murdered and police believed that an anti-spam gang may have been responsible. See Hardware Geeks, “Russia’s Biggest Spammer Murdered by Anti-Spam Group?”, online: Hardware Geeks <http://www.hardwaregeeks.com/comments.php?shownews=3399>. 43 Criminal Code, R.S.C. 1985, c. C-46, ss. 372(1) & 380.

234 ASPER REVIEW [Vol. VII criminal law enforcement is difficult because of issues with identification, jurisdiction, and the futility, from the individual e-mail recipient’s standpoint, of reporting these illegal activities to the authorities, as one less spammer would not make a noticeable difference in the amount of spam received. Additionally, injurious, false, and deceitful messages make up only a portion of spam, leaving a significant amount of unsolicited commercial e-mails free from criminal sanctions.

In 2000, PIPEDA44 was enacted in Canada in response to the concerns of the international business community about privacy. Legislative action became necessary in order for Canadian businesses engaged in certain activities to continue to do business abroad.

PIPEDA regulates the use, collection, and disclosure of personal information in the course of commercial activity. The Act protects information such as names, social insurance numbers, credit cards, or any other information that might be gathered in a business transaction. “Personal information” protected by PIPEDA is defined very broadly as “information about an identifiable individual.”45 Therefore, it can be said that a person’s e-mail address also falls under the scope of protected personal information. This was the finding of the Office of the Privacy Commissioner (“OPC”) in PIPEDA Case #297.46

PIPEDA also restricts the harvesting and sale of e-mail addresses and protects users from being added to spam lists without their consent,47 as the collection, use, and disclosure of personal information is restricted under the Act.48 PIPEDA requires that organizations identify and disclose the purpose for which they are collecting information, and acquire consent before using or disclosing the information. Thus, the Act seems to require that e-mail recipients opt-in to a mailing list before spammers may attempt to solicit sales to them by e-mail.

There is one major shortfall of PIPEDA in its ability to combat spam, however. PIPEDA does nothing to impede the activities of those who spam accounts by randomly generating combinations of names, numbers, and words, as no personal information is used in this type of spam activity. Therefore, under Canadian law, in the absence of fraud or malicious conduct, spammers who send advertisements to e-mail accounts derived from random combinations of names, numbers, and words are free from prosecution.

44 Personal Information Protection and Electronic Documents Act, R.S.C. 2000, c.5 [PIPEDA]. 45 Ibid., s.2(1). 46 Canada, Office of the Privacy Commissioner of Canada, “Commissioner’s Findings: PIPEDA Case Summary #297” (28 April 2005), online: OPCC <http://www.privcom.gc.ca/cf-dc/2005/297_050331_01_e.asp> [PIPEDA Case Summary #297]. 47 See Ng, supra note 15 at 459. 48 See PIPEDA, supra note 44, s.7.

2007] The Need for Canadian Spam Legislation 235

Ultimately, while PIPEDA does impede the efforts of certain spammers, it alone is inadequate to stop spam. ISPs and e-mail servers now have advanced junk e-mail filters, but spam e-mails still find their way into inboxes. It is evident that the position that Industry Canada set out in their 1997 report was flawed. Market forces, existing privacy laws, and existing criminal and civil penalties are still insufficient to solve the problem of spam. The Need for International Cooperation

The Task Force on Spam recognizes that international

cooperation is required in order to effectively fight spam.49 Spammers target e-mail accounts all over the world, not just those based in their home country. Especially where potential e-mail recipients are randomly generated, spammers outside of Canada are just as likely to target Canadians as they are to target non-Canadians. Thus, the fight against spam requires international cooperation,50 with every country taking action within its own borders. Currently, Canada is not pulling its weight.

The European Union has led the way with its 2002 E-Commerce Directive, which includes a provision that member countries prohibit spammers from disguising their identities, and requires them to make available and respect opt-out registers.51 This creation of uniform minimum standards across numerous member nations may be seen as a big first step.

A more critical analysis, however, shows that the spam provisions in the E-Commerce Directive52 are still nothing revolutionary. The restrictions on spammers are very mild and thus, little ground is gained in the fight against spam. For example, the mandatory opt-out options required by the EC Directive are arguably useless when it comes to fighting spam, as the act of opting out can sometimes increase the amount of spam received by confirming for spammers: a) the validity of a user’s e-mail address and b) that spam e-mails are in fact read by that user.53

More problematic is the fact that countries participating in the EC Directive54 have no obligations with regards to putting resources into 49 Task Force in Spam, supra note 3 at 5. 50 See Industry Canada, An Anti-Spam Action Plan for Canada (2004) at 9, online: Industry Canada <http://e-com.ic.gc.ca/epic/site/ecic-ceac.nsf/vwapj/Anti-Spam_Action_Plan.pdf/$file/Anti-Spam_Action_Plan.pdf>. 51 Directive 2002/58/EC of the European Parliament, supra note 23. 52 Ibid. 53 Karla Dane, “Controlling Spam: The Prospect of Legislative Success” (2006) 6 Asper Rev. Int’l Bus. & Trade L. 241 at 248. 54 Ibid.

236 ASPER REVIEW [Vol. VII enforcement. It is one thing for an act to be made illegal, but it is another to actually monitor and sanction the illegal acts. In order to be effective, any attempt to regulate the Internet requires a devotion of resources towards its monitoring. If this is not done, spammers will never be caught, as the nature of the Internet allows identities to easily be disguised. Thus, without adequate resources being put into monitoring and investigative activities, the E-Commerce Directive restrictions on spam activities will have little impact on spam rates.

As spam enforcement may not find itself as a top priority for many countries, the negotiation of large-scale multilateral spam treaties to push this agenda is necessary. Unfortunately, such a scheme is likely to be feasible only within the European Union at this point in time. The EU involves a sufficiently small number of countries with sufficiently similar interests such that areas like electronic commerce have already become internationally regulated.55 Conversely, other international bodies currently lack the organizational capacity and united priorities of member states to achieve this goal. While it might be suggested that the United Nations (“UN”), the World Trade Organization (“WTO”), or the Organisation for Economic Co-operation and Development (“OECD”) should push the agenda of anti-spam provisions,56 an attempt to attain an agreement with too large a number of countries on an issue not seen as a priority to numerous member nations would be doomed to failure. For this reason, the OECD has created a Task Force on Spam with a purely educational mandate.57

The notion of spam treaties is not far-fetched, however, as combating spam is generally in the interests of all nations. Treaties regarding spamming restrictions are not like environmental treaties (e.g. Kyoto), in that participating countries should suffer no adverse economic consequences. Spam treaties would likely result in economic benefits, as productivity impediments in the workplace would be removed, resulting in productivity gains across the globe. Thus, with pressure being placed on the international community to act, there is potential for progress by means of small-scale international agreements.

The United Kingdom has made a start with its London Action Plan (“LAP”).58 In October 2004, government and public agencies from 27 countries met in London to discuss international cooperation regarding spam enforcement. Out of this meeting emerged a plan that ultimately facilitates communication and cooperation between various spam 55 See Directive 2002/58/EC of the European Parliament, supra note 23. 56 See APPIG, supra note 5 at 24. 57 OECD Task Force on Spam, “About” (January 2006), online: OECD Task Force on Spam <http://www.oecd-antispam.org/article.php3?id_article=41>. 58 Federal Trade Commission, “The London Action Plan On International Spam Enforcement Cooperation”, online: FTC <http://www.ftc.gov/os/2004/10/041012londonactionplan.pdf>.

2007] The Need for Canadian Spam Legislation 237 enforcement agencies around the world. The LAP now makes up an international spam enforcement network involving membership from various enforcement agencies across the globe. Participating agencies from Canada include Industry Canada and the Office of the Privacy Commissioner of Canada.

The LAP is a big step in the fight against spam, as it has generated international recognition of spam by various countries, including developing ones.59 Cooperation amongst international agencies has also shown results fairly quickly. In February 2005, operation “Spam Sweep” brought agencies from over 30 countries together to analyze 300,000 spam e-mails, which has triggered over 300 in-depth cross-border investigations.

Despite its positive impact on the fight against spam, the shortfall of the LAP, however, is that it still does not require legislative action from participating countries. It makes investigations of spam activities easier through information sharing where combating spam is already on a nation’s agenda, but does nothing to require that anti-spam provisions be implemented or enforced for countries not currently involved in the fight against spam. Membership consists of enforcement agencies within countries, various anti-spam organizations, and observing members from around the world. Governments themselves however, do not directly participate as members.60 Unfortunately, without encouraging legislative standards through treaties, spammers in jurisdictions without anti-spam laws remain untouchable. No level of cooperation between anti-spam agencies can solve the jurisdictional boundaries that prevent extra-territorial enforcement in a place where spam activities are legal. Perhaps this is why in July 2007, the United States Federal Trade Commission hosted a two day “Spam Summit,” bringing businesses, government, technology experts, and consumer advocates together to discuss the problem of spam and its potential solutions.61 Unfortunately, this meeting turned out to be more of a discussion about the state of things

59 When the LAP was put into place, China was seen as the second largest source of spam. Their adoption of the LAP is significant because it indicates that spam is not just a problem for the developed world. See Chris Hunter, “Beijing signs up to global anti spam accord” (July 2005), online: Spamfo <http://www.spamfo.co.uk/component/option,com_content/task,view/id,346/Itemid,2/>. 60 London Action Plan, “LAP Member Organizations,” online: LAP <http://londonactionplan.org/?q=node/5>. 61 OECD Task Force on Spam, “Federal Trade Commission Spam Summit 2007” (28 May 2007), online: OECD Task Force on Spam <http://www.oecd-antispam.org/article.php3?id_article=277>.

238 ASPER REVIEW [Vol. VII and the effectiveness of certain tools, rather than a venue to discuss political anti-spam treaties.62

With no spam legislation of its own at the moment, however, Canada is in no position to press the issue of international spam agreements. Canada must first fight spam within its own borders before it can pressure other countries to take action. It seems that the first logical step in doing this is legislative action. WHAT SHOULD CANADA’S SPAM LEGISLATION LOOK LIKE?

S DISCUSSED, THERE ARE STRONG ARGUMENTS favouring the notion that Canada should implement spam legislation. The next question then, is how should Canada’s spam legislation look? In

considering this question, the spam legislation in foreign jurisdictions provides examples for potential Canadian legislation to model itself after. The United States, Australia, and the UK have been global leaders in implementing spam legislation in 2003 and 2004,63 and by doing so, have provided examples from which Canada may draw ideas. The recommendations by the Task Force on Spam64 are also available for further guidance. Finally, this paper considers the legal framework in which any Canadian legislation must fit, i.e. compliance with the Canadian Charter of Rights and Freedoms.65 Elements of Spam Legislation

This paper breaks down the contents of spam legislation into

three main elements. Accordingly, three issues must be resolved. What activities should be prohibited? Who should be protected by the legislation and who should be held responsible? That is, what nexus to the spam activity should be necessary to result in liability? And finally, what should the penalties be and who should enforce them?

62 Barry Leiba, “Staring At Empty Pages” (13 July 2007), online: BlogSpot <http://staringatemptypages.blogspot.com/2007/07/ftc-spam-summit-day-2.html>. 63 See Spam Growth Timeline, above. 64 Task Force on Spam, supra note 3 at 3. 65 Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, c. 11.

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2007] The Need for Canadian Spam Legislation 239 1. What activities should be prohibited? Foreign jurisdictions have presented a variety of legislative options, most importantly with regards to deciding what is to be prohibited by such legislation. For example, as will be discussed in the following sections, legislation could include either an opt-in or an opt-out scheme, it might provide exemptions for business-to-business communications, and it might exempt certain parties, such as charities.

a. Other Jurisdictions i. The United States

The CAN-SPAM Act66 in the United States places restrictions on e-

mails that promote goods or services. The Act bans false or misleading header information, prohibits deceptive subject lines, requires that e-mail recipients be given an opt-out method, requires that commercial e-mails are labeled as advertisements, and requires that senders include their valid physical addresses in their e-mails.67 This approach appears to address the opportunities for fraud that spam presents by requiring the sender to provide accurate information about him- or herself. While these provisions do not reduce the amount of spam received, they make the spam received more identifiable; thus, easier to filter, addressing the problem of wasted time due to spam. However, the American legislation pre-empts stricter state laws and essentially creates a guideline on how to spam legally.68 In doing so, the CAN-SPAM Act in fact reduces the risk of legal liability involved in spamming, while only partially negating its effects. Also, as discussed above, opt-out provisions arguably provide no protection to Internet users, as the act of opting out can potentially lead to an increase in the amount of spam received. For these reasons, the American anti-spam legislation has been harshly criticized.69

However, despite criticisms of the American legislation being too permissive, in 2004, a Virginia spammer was sentenced to nine years in

66 CAN-SPAM Act, supra note 28. 67 U.S., Federal Trade Commission, “The CAN-SPAM Act: Requirements for Commercial Emailers” (April 2004), online: FTC <http://www.ftc.gov/bcp/conline/pubs/buspubs/canspam.shtm>. 68 Lily Zhang, “The CAN-SPAM Act: An Insufficient Response to the Growing Spam Problem” (2005) 20 Berkeley Tech. L.J. 301. 69 See Spamhaus News, “United States set to Legalize Spamming on January 1, 2004” (22 November 2003), online: Spamhaus <http://www.spamhaus.org/news.lasso?article=150>. See also APPIG, supra note 5 at 22.

240 ASPER REVIEW [Vol. VII prison for violating state laws on spam.70 These laws mimicked the federal CAN-SPAM law, merely limiting the number of spam e-mails sent in a given time frame and prohibiting the use of fake e-mail addresses.

More recently, a Nevada-based spamming company was ordered to pay Earthlink, an ISP, 5.8 million pounds in a law suit based on CAN-SPAM prohibitions.71 It would appear that the CAN-SPAM Act is thus able to provide recourse for some complainants and in due course, it might prove its critics wrong.

Another interesting concept in the United States stems from the Do Not Call Registry,72 which was enacted in March 2003 to protect consumers (but not businesses) from telemarketers. Under this program, residents of the United States are able to put their phone number in the registry free of charge. Telemarketers are then required to check the Do Not Call Registry every month and exclude registered phone numbers from their telemarketing activities. A 2005 Report to Congress by the Federal Trade Commission found that the Do Not Call Registry was highly effective in combating telemarketing.73 Accordingly, an analogous “Do Not Spam Registry” might be an effective means of combating spam. This concept was suggested to Canadian Parliament through Bill S-2 in February 2004, but was ultimately rejected.74

One problem is that the use of such a registry would not prevent the outsourcing of spam activities to spammers outside of the Canadian jurisdiction, as a Do Not Spam Registry would be unenforceable in jurisdictions outside of Canada. Furthermore, the registry only protects those who are aware of it and actively participate in it. This is a problem, because the goal is to provide protection internationally, but for obvious financial and logistical reasons, such a registry would only be advertised in Canada. In addition, enforcement of such a registry would be difficult, as no authentication is required for the creation of new e-mail accounts and thus, spammers can disguise their identity. Furthermore, the potential for a database of registered e-mails to get into the hands of

70 Spamhaus News, “September brings four powerful legal setbacks to the world’s spammers” (October 2006), online: Spamhaus <http://www.spamhaus.org/news.lasso?article=610>. 71 Spamhaus News, “Summer Spam Suits Show Some Success” (October 2006), online: Spamhaus <http://www.spamhaus.org/news.lasso?article=165>. 72 “National Do Not Call Registry”, online: National Do Not Call Registry <www.donotcall.gov>. 73 U.S., Federal Trade Commission, Annual Report to Congress for FY 2006: Pursuant to the Do Not Call Implementation Act of the Do Not Call Registry (Federal Trade Commission, April 2007) at 11, online: FTC <http://www.ftc.gov/os/2007/04/P034305FY2006RptOnDNC.pdf>. 74 Dane, supra note 53 at 260.

2007] The Need for Canadian Spam Legislation 241 spammers presents a significant risk of counter-productivity.75 For these reasons, the FTC, in a Report to Congress,76 recommended against the implementation of a Do Not E-mail Registry.

An international Do Not E-mail Registry might be more effective than a domestic one in protecting Internet users from global sources of spam, as participating nations would only need to take responsibility for advertising and enforcing provisions of the registry within their own jurisdiction. However, the security concerns raised by the FTC in their Report to Congress77 regarding the value of such a database to spammers would remain, and international efforts towards an e-mail identity authentication scheme would still be a necessary prerequisite in making the identification of deceptive spammers feasible. Furthermore, expecting negotiations for such an international design would not be realistic at present, as more pressing issues (i.e. war, the environment) currently take the international stage.

ii. Australia

Australian legislation takes the strictest position against spam, as it aims to reduce the actual amount of spam sent out by prohibiting all commercial e-mails from being sent without the consent of the receiver. Defining consent is of great importance with this approach.

In Australia, under the Spam Act 2003, consent may be express or inferred, with inferred consent arising through specific relationships and conduct between the parties. Essentially, a pre-existing two-way relationship is required, such that it can be inferred that the recipient would more likely than not be happy to receive a given e-mail.78 While in the United States, spam e-mails must include an option to opt out of receiving spam e-mails, no spam e-mails may be sent in Australia unless recipients have signed up for a mailing list.

However, a business function rule applies to allow businesses to send e-mails that are conspicuously published to a wide audience such that consent is clear, where the e-mail relates to a business function relevant to the commercial e-mail, or where parties fall under a specific set of enumerated relationships. Also, the receiver must not have expressed a desire not to receive the commercial messages. Within this legislation, an exception is set out that exempts charities, government bodies, registered political parties, and religious organizations from anti-

75 See U.S., Federal Trade Commission, National Do Not E-mail Registry: A Report to Congress (Federal Trade Commission, 2004) at 15-24, online: FTC <www.ftc.gov/reports/dneregistry/report.pdf> [FTC]. 76 Ibid. at 37. 77 Ibid. at 16. 78 Spam Act 2003, supra note 29 at Schedule 2.

242 ASPER REVIEW [Vol. VII spam provisions.79 Interestingly, this exception has been criticized in the UK as being too broad.80

Ultimately, the Spam Act 2003 severely curtails the ability to send spam e-mails, but the carefully designed consent provisions attempt to prevent legitimate business from being impeded. Relative to spam legislation in other jurisdictions, the Spam Act 2003 appears to provide the greatest amount of protection to the various stakeholders affected by spam. Critics have hailed this Act as being the most effective spam legislation currently in place.81 According to a 2007 report by Sophos, Australia is now responsible for a mere 0.6% of the spam relayed globally.82

Recently, the Australian spam legislation has been the subject of a high profile case. In 2006, a $4.5 million penalty was delivered to Clarity1 Pty Ltd. and $1 million was awarded against its managing director for the company’s acts of sending spam and using harvested e-mail address lists.83 The Australian Communications & Media Authority (“ACMA”), the enforcers of the Spam Act 2003, have boasted about the effectiveness of the legislation, claiming to have required over 200 Australian businesses to amend their practices in order to comply with the Act and to have fined five of these businesses for substantial breaches.84 iii. The United Kingdom

On the opposing end of the legislative restrictiveness spectrum

are the United Kingdom Privacy and E-Commerce Regulations,85 where only unsolicited commercial e-mails sent to individual e-mail network subscribers are prohibited. In other words, spam directed towards 79 Ibid. at Schedule 1, s.3. 80 See APPIG, supra note 5 at 23. 81 Spamhaus executives note seeing a decrease in Australian spam activities since the implementation of the Spam Act 2003, with spammers keeping a low profile, ceasing spam activities, or leaving the country. See Spamhaus, “Follow Australia!” (19 July 2004), online: Spamhaus <http://www.spamhaus.org/news.lasso?article=154>. 82 Sophos, “Sophos research reveals dirty dozen spam-relaying nations” (April 2007), online: Sophos <http://www.sophos.com/pressoffice/news/articles/2007/04/dirtydozapr07.html>. 83 Australian Communications and Media Authority v. Clarity1 Pty Ltd, [2006] FCA 410. For a brief summary of the Spam Act 2003 in action, see Caslon Analytics, “Caslon Analytics profile: Australia & NZ spam regulation” (October 2006), online: Caslon Analytics <http://www.caslon.com.au/anzspamprofile3.htm#cases>. 84 Ibid. 85 Privacy and Electronic Communications Regulations, supra note 26, s.22.

2007] The Need for Canadian Spam Legislation 243 business e-mail addresses is legal, given that there is no deception regarding its source. This exception exists because it is recognized that there is some value in allowing advertising between businesses, and the privacy interest is not as important for businesses as it is for the individual. A study of the business generated from spam was conducted and found that in the UK, 44 percent of Internet users had purchased something as a result of receiving an unsolicited e-mail.86 The criticism of the approach in the UK, however, is that the economic damage caused by spam in terms of slowing down businesses is not adequately addressed.

Clearly, nobody wants to have their e-mail accounts flooded with uninvited advertisements for products or services that they have no interest in. However, the fact that actual sales sometimes occur as a result of spam e-mails suggests that there is some economic value creation from these advertisements. Thus, determining how much to restrict e-mail advertisements becomes the key question. The approaches in foreign jurisdictions differ, providing distinct balances between preventing e-mail account flooding and preserving legitimate business.

It is clear that there is no value in deceptive e-mails where the sender’s identity is disguised, however. There is no countervailing interest to be considered in restricting such activities. Thus, it is appropriate for Canadian legislation to, at minimum, implement provisions prohibiting deceptive e-mails.

A dispute between a UK spammer and a small-business owner in the Channel Islands demonstrates the arguable ineffectiveness of the UK approach to finding the appropriate balance between minimizing the problems caused by spam while preserving the business it generates. Nigel Roberts, an Internet business owner who received spam from Media Logistics UK, received an apology letter and compensation of £270 plus an indemnification of his £30 filing fee.87 This dispute illustrates and perhaps contributes to, through an anchoring effect, the futility of personal claims against spammers through the UK Privacy and Electronic Communications Regulations. In attempting to create a legislative solution with actual teeth, a Canadian approach should thus be more restrictive of spam activities and impose harsher penalties than those in the UK.

b. Task Force on Spam Recommendations

The report prepared by the Canadian Task Force on Spam

provides some insight as to where Canadian values might lie. The report offers a list of recommendations as to what legislative action is required.

86 See Business Software Alliance, “Consumer Attitudes Toward Spam in Six Countries” (December 2004) at 11, online: Coalition Against Unsolicited Commercial Email <http://cauce.ca/system/files/BSAConsumerAttitudes.pdf>. 87 See Hunter, supra note 42.


The report suggested fairly restrictive measures, similar to those in Australia. The Task Force recommended that the following practices be made illegal:

• failing to abide by an opt-in regime for sending unsolicited

commercial e-mail; • the use of false or misleading headers or subject lines designed to

disguise origins, purpose, or contents; • the construction of false or misleading URLs for the purpose of

collecting personal information or engaging in criminal conduct; • the harvest of, use of, or supply of e-mail address lists without

consent; and dictionary attacks.88

Clearly, preventing fraud is advantageous. Thus, provisions prohibiting misleading headers, subject lines, and URLs are necessary elements of any spam legislation that might be passed.

Restrictions on e-mail harvesting and supplying are already in place through PIPEDA; thus, such restrictions in new spam legislation would be redundant. However, the inclusion of such provisions, if consistent with PIPEDA provisions, would do no harm.

The area of debate is whether or not requiring an opt-in scheme is the best method of addressing spam. Requiring an opt-in scheme means that spammers can only e-mail those who have signed up for mailing lists. In other words, consent is required. This position recognizes that spam is a growing problem and that stronger measures are required to combat it. However, such a strict scheme could result in lost economic activity, as sales from spam e-mails would be significantly reduced. The UK has recognized economic value in some spam e-mails and has therefore drawn a line between business recipients and personal recipients.

The same 2004 survey conducted by Forrester Data that found 44 percent of UK Internet users to have made a purchase in response to a spam e-mail also found that 32 percent of Canadians have made purchases or have taken advantage of offers received by way of spam.89 Thus, it can be said that there is economic value to spam in Canada, as well as in the UK. At 32 percent, however, Canadians were the least likely of countries surveyed to purchase products or services advertised through spam.90 Accordingly, it can be said that Canadians place less

88 Task Force on Spam, supra note 3 at 15. A dictionary attack consists of trying “every word in the dictionary” as a possible password for an encrypted message. See Tech Faq, “What is a dictionary attack?”, online: Tech Faq <www.tech-faq.com/dictionary-attack.shtml>. 89 See Business Software Alliance, supra note 86. 90 See ibid.

2007] The Need for Canadian Spam Legislation 245 value on the potential economic stimulation that spam provides than citizens in foreign jurisdictions. This conclusion suggests that an approach placing greater value on protecting individuals and businesses from spam, thus, an approach that severely restricts spamming activities, with few exceptions, is consistent with Canadian values. c. Fitting into the Canadian Legal Framework

As recognized by Industry Canada in their comparison of

international spam legislation, each country has a unique legal framework that must be studied in considering imitating legislation abroad.91

It is likely that restrictions on spam violate s.2(b) of the Charter, as it limits a form of expression.92 However, such restrictions could most likely be saved under s.1. Protecting consumers and businesses from the problems caused by spam is arguably a pressing and substantial objective. Legislative prohibitions on spam activities would clearly help address these problems.

The problem is the concept of minimal impairment. Does minimal impairment require that legislation not restrict all unsolicited commercial e-mails, but rather restrict only the elements of deception and fraud? Does it require that the United States approach be adopted, and spam merely be identified as advertising?

While it should be accepted that protecting businesses and individuals from time consuming spam e-mails is a pressing and substantial purpose, it could be said that merely requiring the identification of spam e-mails as advertisements would adequately fulfill this purpose. However, if the objective of the legislation is to reduce the influx of unwanted e-mails, a mere identification requirement would not fulfill the legislative purpose, as provisions requiring proper identification would probably not contribute to any reduction in spam volume; rather it would only result in a slight change in the content of spam e-mails. Thus, if the objective of spam legislation is to reduce spam volume, it can be said that making consent a requirement does minimally impair a s.2(b) infringement. Ultimately, considering the extent to which the spam problem has risen, proportionality should not be a problem and the restriction on freedom of expression should be justifiable under s.1.93

91 Industry Canada, “International Spam Measures Compared” (May 2005), online: Industry Canada <http://e-com.ic.gc.ca/epic/site/ecic-ceac.nsf/en/gv00345e.html>. 92 See R. v. Keegstra, [1990] 3 S.C.R. 697 at para. 34. 93 Ng, supra note 15 at 485.

246 ASPER REVIEW [Vol. VII Accordingly, the Charter is unlikely to become an issue in the passing of spam legislation.94

Canadian federalism also presents an interesting question. Is combating spam the responsibility of the provinces or the federal government? Just as international cooperation is important, Internet regulation is something that must also be enforced consistently across the country if it is to be effective. Because of the borderless nature of the Internet, an Internet regulator must face as few jurisdictional problems as possible to be effective. In Canada, failure to enforce spam regulations in one province would create a safe haven situation, where spammers could continue to target recipients outside the safe haven province. Thus, it can be said that spam is a matter that is indivisible in nature. Accordingly, spam is a matter of national concern, bringing it under the s.1 Charter POGG power of the federal government.95

The desire for consistency with other legislation is also a factor to be taken into account. Currently, Canadian legislation dealing with spam is limited to PIPEDA and the Criminal Code. Provisions in PIPEDA and the Criminal Code require consent for the use of personal information, including e-mail addresses, and prohibit unauthorized use or abuse of computers. It could thus be argued that Canada currently has in place an opt-in scheme,96 albeit practically ineffective, and it would be appropriate to continue this approach for consistency purposes.

In addition, a recent Canadian Radio-television and Telecommunications Commission (“CRTC”) decision regarding a Do Not Call List (“DNCL”) that is in the works provides further guidance.97 While it seems that a Do Not Spam registry is not the best approach at this time,98 the exemptions set out in the Do Not Call List framework created by the CRTC might be appropriate exemptions for anti-spam legislation as well. Examples of entities exempt from the DNCL are registered charities, political parties, surveyors, and telemarketers that have existing business relationships with consumers.99 d. The Final Product

The position of the Task Force on Spam suggests that Canadians

would find the economic activity generated by spam to be insignificant

94 See ibid. at 489. 95 See generally R. v. Crown Zellerbach Canada Ltd., [1988] 1 S.C.R. 401. See also ibid. at 478. 96 See Industry Canada, supra note 91. 97 See Canadian Radio-Television and Telecommunications Commission, “Telecom Decision CRTC 2007-48” (3 July 2007), online: CRTC <http://www.crtc.gc.ca/archive/eng/decisions/2007/dt2007-48.htm> [CRTC]. 98 See FTC, supra note 75. 99 CRTC, supra note 97.

2007] The Need for Canadian Spam Legislation 247 compared to the nuisance imposed on individuals and the economic harm caused to businesses, as discussed above. As spam continues to grow relentlessly and spam rates now approach the 90 percent mark, strict methods of combating spam are justified.

Accordingly, Parliament should pass legislation that prohibits unsolicited commercial e-mails. To comply with the law, mass commercial e-mails should require consent, which could be obtained either through users signing up for mailing lists or by having existing business relationships, as is the case in Australia.100 In other words, an opt-in scheme is the best approach. The Australian legislation sets out a schedule in which consent is defined in great detail with regards to particular relationships and the communications that occur between the two parties. A similar approach in Canadian legislation would be effective.

In order to prevent the loss of legitimate economic activity arising from commercial e-mails, consent should specifically be inferable from existing relationships with customers, both individuals and businesses. This approach would be similar to those taken in Australia and the UK. With regards to other exceptions for charitable institutions or political parties, however, the propensity for fraud on the Internet should make the notion of spam-based marketing for charities and political parties unappealing, as it would seemingly take away from the credibility of the charity or party being promoted. Accordingly, no exceptions for special groups should be set out beyond the existing relationship exception. In addition, as mentioned earlier, Canadian spam legislation should prohibit the disguising of the sender’s identity and any deception in commercial e-mails. Such deceptive activities create no economic benefit. They merely create opportunities for fraud. With regards to surveys, it seems that the dangers of fraud would not be as pressing in survey-based spam e-mails as they would be in spam soliciting sales or donations. It seems that optional surveys sent via e-mail would be no more intrusive than those conducted over the phone. Thus, in light of the CRTC exempting telephone surveys from their Do Not Call List that is in the works,101 it seems that an exemption for surveys in Canadian spam legislation might be appropriate as well. 2. Who is protected and who is to be held responsible?

If spam legislation is intended to protect Canadian businesses

and individuals, it might be appropriate to hold liable any person or corporation that sends spam to Canadians. However, the provisions of

100 Spam Act 2003, supra note 29 at Schedule 2. 101 CRTC, supra note 97.

248 ASPER REVIEW [Vol. VII the Australian Spam Act 2003 requiring an Australian connection102 raise interesting hypothetical situations that should be addressed. Is a Canadian who is on vacation overseas protected? Should this Canadian be held liable for acts committed outside of Canada? Should a multinational company with a head office in Canada be liable if it sends spam to another country through an offshore office? Should Canadians in general be prevented from sending spam to recipients outside of Canada? Generally speaking, what degree of involvement should attract liability?

The Australian Spam Act 2003103 covers all e-mail messages with links to Australia. This includes situations where senders are physically present in Australia, the physical devices used to send messages are in Australia, businesses have central management in Australia, e-mail messages are received by computers in Australia, or messages are read in Australia.104 It is also stated that the Act applies to jurisdictions outside of Australia.105 While this provision would present enforcement difficulties in most instances, if somebody in violation of the Act were to subsequently go to Australia, they could then be prosecuted. Furthermore, this Act prevents Australians from engaging in spamming activities when outside of Australia. In other jurisdictions, details regarding a necessary link to the jurisdiction are not specified.

The Task Force on Spam recognized the need for international cooperation in the fight against spam. In implementing any new legislation, Canada can become a leader in international anti-spam efforts by following Australia’s method of restricting all spamming activities with any Canadian connection. By providing protection to foreign recipients, Canada would be placed in a position where it could expect to receive reciprocal protection from foreign jurisdictions.

The next major issue to be determined is the connection to the spam activity necessary for one to be held liable. For example, in Australia, the Spam Act 2003 holds any businesses associated with the spam activities liable106 in order to prevent outsourcing to foreign jurisdictions. In other jurisdictions, only the senders are liable.

In Australia, the Spam Act 2003 holds liable not only the senders, but those who aid, abet, counsel, procure, conspire to, or induce others to breach the Act.107 Furthermore, a broad all-encompassing provision makes anybody knowingly involved in a violation, whether directly or indirectly, liable.108 Thus, senders, those instructing senders, and even 102 Spam Act 2003, supra note 29, ss. 7 & 16. 103 Ibid. 104 Ibid., s.7. 105 Ibid., s.14. 106 Ibid., s.16(9). 107 Ibid. 108 Ibid.

2007] The Need for Canadian Spam Legislation 249 those providing support facilities, knowing that their facilities will be used to breach the Act (this particularly applies to Internet Service Providers), are liable. Broad reaching provisions ensure that offshore operations are unable to shield spammers from liability, as the Act allows a large number of people connected to the spamming activity to be held liable.

While legislation in the United States exempts ISPs from liability,109 it is the opinion of the author that holding ISPs to a certain standard of responsibility is absolutely necessary in order to ensure cooperation in the fight against spam. As the CAN-SPAM Act allows ISPs a special right of action,110 it seems to characterize ISPs as victims. While this is true to an extent, ISP services are used in the sending of spam e-mails as well.111 Thus, they are in the best position to conduct investigations based on patterns of use regarding their services. Accordingly, they should bear a portion of the responsibility in stopping spam.

Effective legislation should deter anybody within the Canadian jurisdiction from engaging in, encouraging, or supporting spam activities. The Task Force on Spam recognized this in their recommendation that third-party beneficiaries of spam be held liable.112 Thus, an approach similar to that in Australia, with a broad reaching provision to hold anybody knowingly involved liable, is the correct one. Such an approach would deter businesses from outsourcing advertising activities to spammers, it would make the business of spamming more difficult, as Canadian support facilities would become unavailable, and it would encourage ISPs to be more aggressive in sanctioning known abuses (i.e. spamming) of their Internet service agreements.

While it could be argued that a “knowingly involved” approach might encourage ignorance, prominent educational campaigns could rebut any such claims. The knowingly involved approach should, in fact, encourage independent investigations by stakeholders who face potential liability, where they have any suspicions of being involved in spam activities.

A supplementary clause providing certain investigative requirements, perhaps arising from certain bandwidth usage patterns, would be helpful in increasing the actual knowledge that ISPs have about spam activities. In the report of the Task Force on Spam, it was suggested that a multifaceted approach requiring cooperation from various parties was needed.113 By holding ISPs accountable for activities

109 Industry Canada, supra note 91. 110 Ibid. 111 FTC, supra note 8 at 4. 112 Task Force on Spam, supra note 3 at 15. 113 Ibid. at 3.

250 ASPER REVIEW [Vol. VII that they know occur through their service, this multifaceted approach is fostered.

3. What should the penalties be and who will enforce them? a. Penalties

The obvious penalty for a breach of spamming restrictions is a

fine, as businesses generally spam in an attempt to increase profits. The risk of fines neutralizes the potential profit that can be made by spamming and thus, fines should act as an adequate deterrent. Furthermore, statutory powers to fine can easily be given to administrative agencies, whereas most other penalties are reserved for the courts to apply.

In the United States, the CAN-SPAM Act imposes fines of up to $250 per e-mail received in breach of the Act, to a maximum of $2,000,000.114 The difficulty with such a per-recipient scheme may be determining the number of e-mail recipients, however. Requiring proof of each receipt would be onerous on the enforcing body. Thus, a better approach would be a more contextual one, considering the number of recipients where ascertainable.

In determining the amount of the fines, policy dictates that harsher fines are superior, as large pecuniary penalties act as better deterrents than smaller penalties. Furthermore, with heavier fines, greater revenue from spam fines can be generated and ultimately used to finance anti-spam enforcement.

An injunction is another remedy that can be used to fight spam. However, an injunction alone is insufficient as a remedy, as the injunction of one spammer’s activities does little to protect spam recipients. Without pecuniary penalties, spammers would face no real adverse consequences resulting from their spam activities.

Imprisonment, while an option under Australian and American legislation, is an inappropriate penalty in Canada. The prison system is generally intended for public safety and rehabilitation—deterrence has recently taken a back seat to these other purposes of incarceration.115 Incarceration is seen as a last resort, where adequate, less restrictive measures are unavailable.116 Accordingly, incarceration is an inappropriate punishment in the case of spam law violations, where

114 CAN-SPAM Act, supra note 28, s.7(f)(3). 115 See Department of Justice, “Fair and Effective Sentencing—A Canadian Approach to Sentencing Policy” (October 2005), online: Department of Justice Canada <http://www.justice.gc.ca/en/news/nr/2005/doc_31690.html>. 116 Ibid.

2007] The Need for Canadian Spam Legislation 251 fraud and malice are lacking. Furthermore, as this paper recommends keeping the enforcement of anti-spam legislation out of the courts as much as possible, incarceration becomes an even less attractive option for jurisdictional reasons, as administrative bodies generally lack the power to incarcerate. b. Supervision and Enforcement

As stated earlier, legislation prohibiting spam is useless without a

proper mechanism to monitor certain Internet activities and catch spammers. Who then, should monitor spam activity and enforce spam restrictions? Should it be up to private individuals to complain? Should private rights of action even be available? Should spam legislation be fused with the criminal law, so that it is enforced through Crown prosecutors? Would it be most appropriate to use an existing regulatory body or perhaps to create a regulatory body to monitor the Internet including spam activity, with statutory powers to hold hearings and impose fines?

It seems that relying on individual complainants, the police, and the public courts to prosecute would not be an effective way of combating spam. Firstly, as evidenced by the UK small claims case of Roberts v. Media Logistics (UK) Ltd., the compensation available to private individuals is negligible, such that it is not worth going after spammers in civil suits, except for in principle.117 In using the criminal law system, the police, who usually compile evidence for the Crown and initiate most prosecutions, cannot be relied on to investigate spamming activities, as they lack the expertise, they face jurisdictional boundary problems making investigations practically unfeasible, and they have more pressing priorities regarding public safety. Without the police in the picture, an independent regulatory body would still be necessary just to conduct investigations for criminal prosecutors.

In the United States, spam laws are generally enforced by the Federal Trade Commission. However, when parties that are already regulated by various other agencies are involved, the existing regulating bodies take responsibility.118 For example, the Office of the Comptroller of the Currency monitors the activity of national banks and accordingly would be responsible for ensuring that national banks comply with spam provisions.119 The advantage of having these independent regulatory bodies deal with the problem of spam is that they are already engaged in supervisory roles.

117 Spamhaus News, supra note 71. 118 CAN-SPAM Act, supra note 28, ss. 7(b) & (f). 119 Ibid.


By assigning spam enforcement to numerous existing agencies with other mandates, however, spam monitoring takes a back seat to other tasks and, in many instances, resources necessary to be effective are unavailable. Recipients of spam would not know where to file complaints and most agencies would lack the expertise necessary to conduct thorough investigations. Furthermore, even if a spammer was caught and found by the regulatory body to have engaged in illegal spam activities, the available sanctions might not be appropriate. Removal or suspension of a license might be too strict a sanction and the proceeds of any fines would likely be directed towards something other than fighting spam.

In Australia and the United Kingdom, a single regulatory agency takes responsibility for enforcing spam legislation. In Australia, it is the Australian Communications Authority (“ACA”) that enforces spam laws. The ACA has powers to investigate, levy fines, and impose various other penalties. In the United Kingdom, it is the Information Commissioner’s Office that is responsible for enforcing spam laws.120

Utilizing independent regulatory agencies, with Crown prosecutors only taking part in serious violations and enforcing rulings made by the regulatory agencies, appears to be the common approach in other jurisdictions. It is also, in the author’s opinion, the best approach for Canada. Enforcement through an independent regulatory body is ideal because such a body is best able to accumulate expertise and thus, provide better investigatory functions while maintaining the statutory powers to impose fines. Such a body, unlike the courts, would have the freedom to work closely with ISPs, e-mail service providers, and foreign agencies responsible for combating spam. Joint international efforts would significantly increase the success of investigations, as the integration of known spammer databases and “spam boxes”121 would make locating and prosecuting spammers much easier. This is precisely the international effort that was envisioned by the Task Force on Spam and that is being pursued through the London Action Plan. Furthermore, an independent regulatory body could exercise functions beyond mere investigations, hearings, and punishments. It could engage in awareness and educational campaigns and it could assist businesses in setting up certain practices to help combat spam. Such a coordinating body was envisioned by the Task Force on Spam in their Stopping Spam report.122

120 Industry Canada, supra note 91. 121 In France, the National Data Processing and Liberties Commission is responsible for enforcing spam. In fulfilling its mandate, it compiles evidence against spammers in a national spam box in order to prepare for legal action. See ibid. 122 Task Force on Spam, supra note 3 at 13.

2007] The Need for Canadian Spam Legislation 253

While this paper does not focus on the technological logistics of catching spammers, it is clear that any tracing of e-mails or supervision of ISPs and e-mail service providers demands special technologies and expertise. A single regulatory body, as opposed to various Crown prosecutors across numerous jurisdictions, is best able to establish working relationships with e-mail service providers to implement a system whereby spamming activities can be reported with ease. Google Mail123 currently gives users a “Report Spam” option, in addition to the simple delete command. By integrating such “Report Spam” options with the proper anti-spam enforcement authorities, spammers are more likely to be located and brought to justice.

The next question, then, is whether there currently exists a Canadian regulatory body capable of enforcing spam provisions. In Canada, there are three agencies with mandates relevant to fighting spam: the Competition Bureau, the Office of the Privacy Commissioner of Canada, and Industry Canada.124

The Competition Bureau “promotes and maintains fair competition so that Canadians can benefit from competitive prices, product choice and quality services.”125 This mandate does not generally deal with the marketing practices of businesses and thus, is too far removed from the issue of spam regulation to have the Competition Bureau as an effective regulator.

The mandate of the Office of the Privacy Commissioner of Canada (“OPC”), on the other hand, is “to protect and promote the privacy rights of individuals.”126 The Privacy Commissioner is thus responsible for enforcing the Privacy Act and PIPEDA. As discussed above, PIPEDA is currently the best legislative protection against spam available and thus, it can be said that the Privacy Commissioner’s mandate is sufficiently related to the issues raised by spam. If protection against spam can be considered a privacy right, the expansion of this mandate to protect businesses as well as individuals would allow the OPC to deal with combating spam.

123 Gmail, “About Gmail”, online: Gmail <http://mail.google.com/mail/help/intl/en/about.html#spam>. 124 See Industry Canada, supra note 91. 125 Competition Bureau Canada, “Competition Bureau”, online: Competition Bureau Canada <http://www.competitionbureau.gc.ca/internet/index.cfm?lg=e>. 126 Office of the Privacy Commissioner of Canada, “About Us”, online: Office of the Privacy Commissioner of Canada <http://www.privcom.gc.ca/aboutUs/index_e.asp>.


Industry Canada’s Task Force on Spam proposed the creation of a Canadian Anti-Spam Action Centre.127 It was proposed that this agency could promote national and international anti-spam coordination, provide educational campaigns, receive complaints, maintain a spam database, acquire the expertise needed to investigate spam, and coordinate the sharing of information.128 The Task Force on Spam in its proposal also recognized the cost-savings that could be realized by utilizing an existing government agency to run its proposed Canadian Anti-Spam Action Centre. Their recommendation was that this agency be Industry Canada.129

Industry Canada’s mandate is “to help make Canadians more productive and competitive in the knowledge-based economy, thus improving the standard of living and quality of life in Canada.”130 This is a highly broad mandate, which could also encompass combating spam. However, the Office of the Privacy Commissioner is a more attractive option because with a minor adjustment, its mandate could be highly specific in combating spam. Additionally, the OPC has already had experience in addressing cases of spam where PIPEDA provisions applied.131 Like Industry Canada, the OPC has also been involved with the London Action Plan, and thus has the necessary relationships to keep Canada involved in international anti-spam efforts. With this existing experience, a more specific mandate, and fewer responsibilities elsewhere, administering an anti-spam operation would likely be easier in the OPC.

Accordingly, Parliament should extend the mandate of the OPC to include the enforcement of spam laws and, therefore, the protection of privacy of both individuals and businesses. The OPC should also be responsible for the educational component envisioned by the Task Force on Spam.132 Moreover, the OPC should be responsible for assigning fines and damage awards, based on private rights of action from individuals and businesses. While awards comparable to those granted in the United States may not be available, the availability of some private recourse and the presence of some individuals like Nigel Roberts who may continue to complain based on principle still could go further to reduce the appeal of

127 Task Force on Spam, “Proposal for the Canadian Anti-Spam Action Centre” (May 2005), online: Industry Canada <http://e-com.ic.gc.ca/epic/site/ecic-ceac.nsf/vwapj/Action%20Centre.pdf/$file/Action%20Centre.pdf>. 128 Industry Canada, “Proposal for the Canadian Anti-Spam Action Centre”, online: Industry Canada <http://e-com.ic.gc.ca/epic/site/ecic-ceac.nsf/en/h_gv00338e.html>. 129 Ibid. 130 Industry Canada, “Mandate”, online: Industry Canada <http://www.ic.gc.ca/cmb/welcomeic.nsf/ICPages/Mandate>. 131 See PIPEDA Case Summary #297, supra note 46. 132 Task Force on Spam, supra note 3 at 5.

2007] The Need for Canadian Spam Legislation 255 engaging in spam activities. Furthermore, as more individuals come forward and complain, the knowledge base regarding known spammers will increase and subsequent prosecutions and private actions may become easier. CONCLUSION

PAM RATES CONTINUE TO RISE and this presents a significant impediment to the growth of e-commerce. It is clear that existing methods of spam enforcement in Canada, such as market forces,

privacy laws, tort law, and the criminal law, are inadequate. While there are better solutions available at the international level, Canada must first take care of matters within its own borders before it can expect any cooperation from foreign jurisdictions.

There is some hope for international cooperation in combating spam, however, as jurisdictions such as the United Kingdom, the United States, and Australia, among others, have recognized spam as a problem and have responded by implementing legislation. Cross-border regulations in the EU have even gone so far as to include anti-spam provisions, while enforcement agencies around the globe have banded together through the London Action Plan. It seems that there is indeed a movement, albeit quiet and slow, towards an international effort in combating spam. As other nations have led the way in this fight, it is now time for Canada to demonstrate its commitment to this cause through legislative action, the necessary first step.

Unfortunately, spam still takes a back seat to hotter topics in today’s legislative agenda, while inboxes continue to be relentlessly flooded with unwanted, unsolicited commercial e-mails. As Canadian society becomes increasingly dependent on the Internet as a way of life, the appeal of spam as a marketing strategy increases, and spam rates continue to rise, creating many problems. Hopefully, this issue will attract the attention of Parliament soon and we will see legislation that will decrease productivity losses suffered by Canadian businesses, generate respect from the international community, and create a more enjoyable Internet experience for both Canadians and Internet users across the globe.

S

LET GO OF MY DOT-CA: USING THE CDRP IN THE FIGHT AGAINST CYBERSQUATTING

Melissa Beaumont*

INTRODUCTION1

T GOES WITHOUT SAYING that the Internet has transformed the way in which the world does business. With its speed, accessibility, and ease of use, the opportunities for using the Internet as a business tool

seem endless. The Internet has drastically reduced the time and expense needed to get around the many geographical barriers associated with doing business. Consumers today have come to rely on the Internet to research and purchase goods and services available from all corners of the globe. At the same time, businesses have come to rely on the Internet to convey their brands around the world and access new markets.

That being said, it must be kept in mind that the Internet, like any new technology that creates business opportunities, undoubtedly creates threats as well. It is therefore imperative that businesses not be blinded by the initial dazzle of the Internet and stay abreast of the new types of threats that arise as a result of its growing and evolving nature. Domain name abuse, or “cybersquatting,” is one such threat that all Internet users have likely experienced. For example, an Internet user might have once typed into an Internet address bar <www.blackanddecker.ca>, expecting to be taken to the website of a well-known manufacturer of power tools and appliances, but was instead directed to a webpage providing links to what appeared to be Black & Decker’s competitors.2 A similar result may have once occurred when an Internet user searching for the Canada Post website mistakenly omitted the second “a” in “Canada” and typed in <www.candapost.ca>.3 It was neither a coincidence nor an accident that those Internet users were redirected to unexpected webpages. Rather, these domain names were strategically chosen and registered by those known as cybersquatters. This paper identifies some of the legal issues surrounding cybersquatting and the different forums available for formal redress

* B.Comm. (Hons.) (UM); LL.B. (UM, 2008) 1 The author would like to acknowledge her classmates and Dr. Bryan Schwartz for their comments and any other influence they might have otherwise had on this paper. Any errors or omissions remain the sole responsibility of the author. 2 Based on The Black & Decker Corporation v. J. Chapnik Trust—(100%), CIRA Decision No. 00069 (15 November 2006). 3 Based on Canada Post Corporation v. Marco Ferro, CIRA Decision No. 00042 (22 October 2005).

I

258 ASPER REVIEW [Vol. VII against cybersquatters. Although the legal issues underlying cases of cybersquatting might resemble traditional trade-mark infringement principles and be actionable via the courts, several arbitration systems have now been put in place to deal uniquely with this issue.

This paper explores the scope and procedures of two such arbitration systems: the Uniform Domain Name Dispute Resolution Policy (“UDRP”) system and the Canadian Internet Registration Authority Domain Name Dispute Resolution Policy (“CDRP”) system; with a predominant focus on the latter. The UDRP system was the first established domain name dispute resolution system and is used to resolve disputes involving generic domain spaces (for example, the dot-com). The CDRP system is used to resolve disputes involving the dot-ca domain space. As the CDRP was established subsequent to the UDRP, this paper will highlight some of the differences between the two systems.

The purpose of this paper is four-fold. First, this paper serves to identify and analyze some of the specific criticisms against the CDRP. Second, this paper will identify both how the CDRP has improved on some aspects of the UDRP and what it can still learn from the UDRP. Third, this paper serves to recommend improvements that the CDRP uniquely might benefit from. Finally, this paper will touch on some of the deficiencies inherent in both the CDRP and UDRP systems and will discuss potential future improvements that might be beneficial to either system.

A QUICK BUSINESS LESSON: THE INTERNET’S IMPACT ON BRANDING

Any person or entity seeking to do business should be aware of

the importance of establishing and securing a brand. A key tool for brand maintenance is the focus on the brand’s “marketing mix,” or what is generally known in the marketing world as the “4Ps”: product, price, place, and promotion.4 It goes without saying that the emergence of the Internet has had a significant influence on the way those 4Ps interact, thus creating the need to re-consider business plans and branding strategies. For example, the “place” variable has been significantly expanded as the Internet has improved the convenience with which a consumer can access a greater selection of products and services.5 Similarly, the “promotion” variable has also increased in complexity as the Internet has created a new medium by which information can be

4 Philip Kotler, Gary Armstrong & Peggy H. Cunningham, Principles of Marketing, 6th Can. ed., (Toronto: Pearson Education Canada Inc., 2005) at 67. 5 Ibid. at 89.

2007] Using the CDRP to Fight Cybersquatting 259 communicated to businesses with their customers in highly useful and interactive forms.6

Considering the above examples, it is no wonder that businesses are seeking to establish themselves on the Internet. Major advantages of setting up online include enhancing a business’s ability to build customer relationships, improving the efficiency of business operations, and increasing the speed at which business can be conducted.7 In today’s business world, establishing a presence on the Internet is not only important, it is imperative. Gone are the days where an Internet presence is a unique strategic advantage; rather, an Internet presence has become a necessary business requirement which consumers have come to expect.

Despite the many business opportunities that the Internet creates, however, major caveats exist. For instance, it must be remembered that setting up online means competing in a global market.8 On one hand, global competition may seem lucrative, as brands gain exposure to global marketplaces, ultimately resulting in a substantially larger consumer base. On the other hand, global competition also requires brands to contend with competitors from around the globe. This presents a significant risk of brand dilution, as the Internet “[c]reates an environment in which a company’s brands are subject to extensive use by competitors, affiliates, partners, resellers and consumers.”9 The Internet not only presents the threat of brand dilution, but is also a magnet for many other forms of brand abuse, such as competitive trade-mark confusion, false brand affiliation, website traffic diversion, and domain name abuse.10 Trade-mark infringement often lies at the heart of these forms of abuse.

Domain name abuse, also known as cybersquatting, is the underlying issue of this paper. As a business’s website is often the first point of brand recognition for the e-consumer, a well-recognized domain name becomes a prime target for brand infringement. One’s domain name is certainly a critical element of a website, forming both the “real estate” and brand image of the business.11 In other words, a domain name is both a key business identifier and valuable intellectual property.12

6 Ibid. at 89-90. 7 Ibid. at 90-91. 8 Ibid. 9 Mark McGuire, “Comprehensive Internet brand protection strategy is a must in today’s world” The Lawyer’s Weekly, 22:29 (29 November 2002) (QL). 10 Ibid. 11 Richard Fletcher, Jim Bell & Rod McNaughton, International e-Business Marketing (England: Thomson Learning, 2004) at 155-6. 12 May M. Cheng & Ziad J. Katul, “Assessing the Merits of your Alternative to Litigation” 16 I.P.J. 485 at 486 (WL).

260 ASPER REVIEW [Vol. VII A QUICK INTERNET LESSON: WHAT IS A DOMAIN NAME? The Nuts and Bolts of Domain Names

A domain name, more commonly known as a website address or a

Uniform Resource Locator (“URL”), is the registered alpha-numeric designation which refers to an Internet Protocol (“IP”) address.13 An IP address specifies the location of a website’s host computer,14 and is comprised of four sets of numbers separated by periods.15 Domain names are used to locate websites more commonly than IP addresses, as they are easier to remember. Domain names have been compared to telephone numbers in that they must be unique, must be registered by one person only, and are registered on a first-come, first-served basis.16

The element of the domain name which appears after the last “dot” is the top-level domain (“TLD”);17 for example, the “.com” or “.ca” portion of a domain name. There are two main types of TLDs. The first is the generic TLD (“gTLD”), which encompasses the most common domain spaces (such as dot-com, dot-net, and dot-org).18 The second type is the country code TLD (“ccTLD”), which encompasses country-specific domain spaces (such as dot-ca for Canada or dot-uk for the United Kingdom).19 For all domain names with gTLDs and for certain ccTLDs, registration and governance is managed by the Internet Corporation for Assigned Names and Numbers (“ICANN”), an international organization responsible for managing and coordinating the domain name system.20 However, many countries have taken the management of their respective ccTLDs into their own hands. Canada is one such country. For all domain names with the dot-ca ccTLD, registration and governance is managed by the Canadian Internet Registration Authority (“CIRA”), as opposed to ICANN.

13 Sheldon Burshtein, Domain Names and Internet Trade-Mark Issues: Canadian Law and Practice (Toronto: Thomson Canada Limited, 2005) at 2-1. 14 Network Solutions, Inc. v. Umbro International, Inc., 529 S.E. 2d 80 (E.D. Va., 2000) cited in Burshtein, ibid. 15 Name.Space, Inc. v. Umbro International Inc., 202 F.3d 573 (C.A. 2, 2000), cited in Burshtein, ibid. Also see Bradley J. Freedman & Robert J.C. Deane, “Trade-Marks and the Internet: A Canadian Perspective” (2001) 34 U.B.C.L. Rev. 345-414 at paras. 40-41 (QL). 16 Burshtein, supra note 13 at 2-2. Also see Freedman & Deane, ibid. at paras. 45-46; Luke Walker, “Dispute Resolution: ICANN’s Uniform Domain Name Dispute Resolution Policy” (2000) 15 Berkeley Tech. L.J. 289 at 291-295; and Ida Madieha Azmi, “Domain Names and Cyberspace: the Application of Old Norms to New Problems” (2000) 8 I.J.L. & I.T. 193 at 194. 17 Burshtein, ibid. 18 Ibid. 19 Ibid. 20 “Fact Sheet”, online: ICANN <http://www.icann.org/general/fact-sheet.html>.

2007] Using the CDRP to Fight Cybersquatting 261 Registering a Domain Name

Registering a domain name is not a complex process. For

example, the process under CIRA for registering a dot-ca domain name requires just a few simple steps. First, the applicant must satisfy what is known as the “Canadian Presence Requirements”21 which ensure that the applicant has a connection to Canada (for example, is a Canadian citizen, permanent resident, corporation, association, etc.). Next, the applicant must conduct a “Whois” search to see if the domain name is available for registration.22 “Whois,” an online directory of domain name information, allows people to view the availability of a potential domain name and to look up contact or technical information about an existing domain name.23

If the domain name is available for registration, the applicant selects a certified registrar to whom it will send its registration application.24 The registrar then acts on behalf of the applicant in submitting the registration to CIRA.25 In other words, the registrar is the “middle man” who acts between the individual applicant and CIRA. Applicants should choose the registrar most suitable to their needs, as each registrar may have different contractual provisions, may offer different services, may have different geographical focuses, may function in different languages, and may have different terms and conditions regarding payment.26 Once the registrar is chosen and the applicant has submitted the relevant information, the registrar prepares and submits the domain name registration request to CIRA.27

It should be noted that the CIRA General Registration Rules provide that it is the applicant’s responsibility to ensure the legality of the domain name being registered:

It is the Applicant’s responsibility to ensure that the Applicant has the right to use the Domain Name which is the subject of the Registration Request and that the registration or use of the Domain Name to which the Registration Request relates does not violate any third party intellectual property rights or other rights, does not

21 CIRA Polices, Rules and Procedures, “General Registration Rules,” Version 3.9, online: CIRA <http://www.cira.ca/en/cat_Registrar.html> at para. 2.1 [CIRA General Registration Rules]. 22 Ibid. at para. 2.2. 23 “Whois Frequently Asked Questions”, online: CIRA <http://www.cira.ca/en/Whois/whois-faq.html>. 24 CIRA General Registration Rules, supra note 21 at para. 2.3. 25 Ibid. 26 Ibid. 27 Ibid. at para. 2.4.


defame any person and does not contravene any applicable laws including Canadian federal, provincial and territorial human rights legislation and the laws of the Criminal Code (Canada), R.S.C. 1985, c. C-46 as amended from time to time.28

The process for registering a dot-com is also fairly straight

forward, requiring steps similar to the dot-ca registration. Applicants must select an ICANN-accredited registrar, select a domain name to be registered, perform a search to see if the domain name is available, and then provide the registrar with the information necessary for the registrar to effectuate the registration.29 Domain Names versus Trade-marks

The issues underlying domain name abuse and trade-mark

infringement are closely related. Trade-marks often look like domain names, and domain names often look like trade-marks. However, a domain name, although registered, is not itself considered a trade-mark unless it is used as such.30 A trade-mark under Canadian legislation can be defined as:

(a) a mark that is used by a person for the purpose of distinguishing or so as to distinguish wares or services manufactured, sold, leased, hired or performed by him from those manufactured, sold, leased, hired or performed by others, (b) a certification mark, (c) a distinguishing guise, or (d) a proposed trade-mark.31 Domain names differ from trade-marks in that slightly different

and confusingly similar domain names can be registered.32 Trade-marks are generally registrable only if they are not confusing with an already registered mark.33 The registrability requirements of domain names, however, are less stringent. Apart from character and length requirements,34 the restrictions to registering a domain name under 28 Ibid. at para. 2.8. 29 Ryan Sewchuk, “The UDRP and the ACPA: What Are They, and Which Should be Used?” (2002) 2 Asper Rev. Int’l Bus. & Trade L. 85 at paras. 3 & 4 (QL). 30 Burshtein, supra note 13 at 3-56. 31 Trade-Marks Act, R.S.C. 1985, c. T-13, s. 2. 32 Freedman & Deane, supra note 15 at para. 51. 33 Trade-Marks Act, supra note 31, s. 12(1)(d). 34 See CIRA General Registration Rules, supra note 21 at paras. 3.1 & 3.2.

2007] Using the CDRP to Fight Cybersquatting 263 CIRA are that it not be a reserved name35 and that it not be a “conflicting name.”36 A conflicting name is one that is an exact match in all aspects of a domain name that has already been registered by CIRA.37 However, it should also be noted that the CIRA does ultimately maintain, in its sole discretion, the right to refuse to register any domain name.38

Further, domain names, unlike trade-marks, need not be distinctive of a good, service, or business and need not even be used once registered.39 A trade-mark on the other hand, referring back to the definition above, has “the purpose of distinguishing or so as to distinguish wares or services” of the trade-mark holder. Thus, a trade-mark in relation to wares must actually be marked on the wares or packaging of the wares themselves40 and a trade-mark in relation to services must be used or displayed in the performance or advertising of the services themselves.41

Although a domain name is not necessarily in and of itself a trade-mark, a trade-mark may, and often does, form all or part of a domain name.42 This is where there problem of domain name abuse arises.

THE PROBLEM OF CYBERSQUATTING

ENERALLY, CYBERSQUATTING OCCURS when a person registers a domain name that incorporates a well-known trade-mark and then offers it for sale to the “highest bidder”43; usually the trade-

mark holder. Cybersquatting has thus been characterized as “hijacking for ransom,” whereby cybersquatters intentionally register domain names comprised of trade-marks belonging to others.44 Trade-mark owners are then forced to pay money for access to these domain names.45 The

35 Ibid. at para. 3.3, which provides examples of “reserved” domain names such as “village.ca,” “town.ca,” “city.ca,” “ville.ca,” names and abbreviations of Canada, its provinces and territories, etc. 36 Ibid. at para. 3.4. 37 Ibid. 38 Ibid. at para. 3.5. 39 Freedman & Deane, supra note 15 at para. 51. 40 Trade-Marks Act, supra note 31, s. 4(1). 41 Ibid., s. 4(2). 42 Hasan A. Deveci, “Domain Names: Has Trade Mark Law Strayed From Its Path?” (2003) 11 I.J.L. & I.T. 203 at 205-206. 43 Freedman & Deane, supra note 15 at para. 53. 44 Burshtein, supra note 13 at 4-81. 45 Ibid. at 4-81.

G

264 ASPER REVIEW [Vol. VII problem stems from the first-come, first-served nature of the domain name registration system.46

In addition to collecting “ransom,” a cybersquatter might want to register a well-known trade-mark as a domain name in order to affect Internet traffic. For example, using a well-known domain name might help improve search results for the registrant’s own website or might help the cybersquatter attract Internet users initially seeking a legitimate brand to his or her site.47 An increasingly popular practice among cybersquatters has been to “park” domain names at websites “that offer revenue programs whereby domain name holders who redirect Internet traffic to these websites become eligible for a referral fee.”48 These “parking” websites usually contain links to other websites on a “pay-per-click” basis, and both the parking service and the registrant share in the revenue.49

The threats that cybersquatters pose are significant and impact businesses in numerous ways. First, cybersquatters interfere with consumer behaviour. Cybersquatters have the effect of diverting the consumer’s attention away from the intended brand. Thus, in the course of an electronic transaction, the potential consumer might either end up making an alternative purchase with a competitor or might forgo making a purchase altogether in frustration.50 Second, cybersquatters may create ongoing battles for businesses. For some companies, the problem may not readily go away. For example, Mattel is often in battles against cybersquatters (amongst other types of brand abusers) who use its “Barbie” brand in relation to pornography and escort service websites.51 Third, cybersquatters cause loss of revenue. Not only is revenue lost as a result of consumers changing their buying behaviour, but also when the ability of a business to engage in online transactions is compromised.

For example, consider the experience that the Organisation of Economic Co-operation and Development (“OECD”) had with domain name abuse. The OECD became victim to a cybersquatter when they accidentally allowed the registration of one of their domain names to lapse. A cybersquatter had taken advantage of this lapse in registration

46 Cheng & Katul, supra note 12 at 488. 47 Brian H. Murray, Defending the Brand: aggressive strategies for protecting your brand in the online arena (New York: AMACOM, 2004) at 45. 48 Alberta Alcohol and Drug Abuse Commission v. Akshay Khanna, CIRA Decision No. 00065 (12 October 2006) at para. 60. 49 “Cybersquatting Remains on the Rise With Further Risk to Trademarks From New Registration Practices” WIPO/PR/2007/479, online: WIPO <http://www.wipo.int/edocs/prdocs/en/2007/wipo_pr_2007_479.html>. 50 Murray, supra note 47 at 70. 51 Ibid. at 10-11. Also Sewchuk, supra note 29 at para. 33.

2007] Using the CDRP to Fight Cybersquatting 265 and took over the domain name for over a month.52 Although the OECD case was not about a loss of revenue, imagine the impact on revenue if this were to happen to a major online business!

Given that cybersquatting is a problem for business that is unlikely to resolve itself, businesses must have a way to judicially or administratively seek an enforceable remedy against cybersquatters. RESOLVING A DOMAIN NAME DISPUTE Traditional Litigation

Businesses that fall victim to dot-ca cybersquatters may be able

to take the matter to court. In the litigation context, the issue will likely be resolved according to Canadian trade-mark law.53 If successful, a variety of remedies are available from the courts, such as an injunction, the transfer of the domain name, damages (including punitive), accounting, and costs.54 Similarly, businesses that fall victim to dot-com cybersquatters also have the option of taking their case to court, where the matter will be resolved under American trade-mark law. In fact, the United States passed an amendment to their federal trade-mark legislation, under the Anti Cybersquatting Consumer Protection Act (“ACPA”),55 that deals specifically with the bad faith taking of domain names. The ACPA is not limited to cases involving American trade-marks56 and it provides for remedies such as cancellation or transfer of the domain name to the plaintiff, injunctions, and damages.57 Uniquely, the ACPA also provides for in rem proceedings against the domain name if the registrant cannot be located,58 giving the complainant the option of suing the domain name itself, as opposed to the domain owner.59 This is

52 “Cybersquatting: The OECD’s Experience and the Problem it Illustrates With Registrar Practices and the Whois System”, online: OECD <http://www.oecd.org/dataoecd/46/53/2074621.pdf> [OECD Report]. 53 For example, under the Trade-marks Act for registered marks, or under common law passing-off principles for unregistered marks. 54 Burshtein, supra note 13 at 5-48 – 5-99. 55 15 U.S.C. § 1125(d). 56 Cheng & Katul, supra note 12 at 519. 57 J.M. Osborn, “Effective And Complimentary Solutions to Domain Name Disputes: ICANN’s Uniform Domain Name Dispute Resolution Process and the Federal Anticybersquatting Consumer Protection Act of 1999” (2000) 76 Notre Dame L.R. 209 at 236 cited in Sewchuk, supra note 29 at para. 44. Also see the related discussion in Burshtein, supra note 13 at 6-28 – 6-30. 58 Sewchuk, supra note 29 at para. 45. 59 Freedman & Deane, supra note 15 at para. 126. However, note that under an in rem action, the only remedies available are cancellation or transfer of the

266 ASPER REVIEW [Vol. VII an important remedy, as the anonymity of the Internet can make it difficult, if not impossible, to track down the offending registrant. A limitation of the ACPA, however, is that it only seems to protect famous or distinctive trade-marks.60

An analysis of domain name dispute resolution via the courts is beyond the scope of this paper. However, it can be said generally that litigating this issue has its disadvantages. These include delay, high costs, and jurisdictional issues61; the latter being of great concern given the unregulated, global nature of the Internet. Time is also of the essence in cybersquatting disputes, as many complainants are businesses in need of resolving the dispute as quickly as possible in order to avoid large losses in revenue. One author suggests that this need to quickly restrain the use of domain names is a reason why few Canadian domain name cases have been resolved in court.62

As a response to the pitfalls of litigating domain name disputes, arbitration mechanisms have been put in place to more efficiently and cost-effectively resolve cybersquatting disputes.63 Arbitration of a dot-com dispute: the UDRP

As previously noted, ICANN manages and governs the gTLDs; a

role taken over from what was initially the responsibility of the United States government.64 On recommendation from the World Intellectual Property Organization (“WIPO”), ICANN implemented its Uniform Domain-Name Dispute-Resolution Policy (“UDRP”) on 1 December 1999.65 The UDRP is carried out by ICANN-appointed service providers, as ICANN itself does not participate in the UDRP proceedings.66 WIPO was the first service provider appointed to carry out the UDRP,67 and currently remains appointed along with the National Arbitration Forum (“NAF”)

domain name. See Sewchuk, supra note 29 at para. 45, citing (d)(2)(D)(I) of the ACPA. 60 Burshtein, supra note 13 at 6-14 and Freedman & Deane, supra note 15 at para. 132 61 Sewchuk, supra note 29 at para. 50. 62 R. Lynn Campbell, “Judicial Involvements in Domain Name Disputes in Canada” (2003-2004) 34 R.D.U.S. 373-421 at para. 3 (QL). 63 “ICANN Information”, online: ICANN <http://www.icann.org/general>. 64 Ibid. 65 “Frequently Asked Questions: Internet Domain Names”, online: WIPO <http://www.wipo.int/amc/en/center/faq/domains.html>. 66 “Uniform Domain Name Dispute Resolution Policy”, online: ICANN <http://icann.org/dndr/udrp/policy.htm> at paras. 4(h) & 6 [UDRP Policy]. 67 “Timeline for the Formulation and Implementation of the Uniform Domain-Name Dispute-Resolution Policy”, online: ICANN <http://www.icann.org/udrp/udrp-schedule.htm>.

2007] Using the CDRP to Fight Cybersquatting 267 and the Asian Domain Name Dispute Resolution Center.68 On receipt of a domain name complaint, the service provider appoints a panel from a publicly available list of panelists to ultimately decide the particular dispute.69 It is up to the panel to decide the proceeding in a manner in accordance with the UDRP Policy and Rules so as to ensure that all parties are treated fairly and given equal opportunity to present their cases, to ensure the expediency of the proceedings, and to determine the admissibility, relevance, materiality, and weight of evidence.70

Procedure under the UDRP A UDRP complaint is initiated when a complainant selects a service provider and submits a complaint in accordance with the UDRP Policy and Rules.71 Paragraph 3(b) of the UDRP Rules provides for the details which must be submitted by the complainant. Some of these details include the complainant’s preference towards a one- or three-person panel,72 the domain names which are the subject of the complaint,73 the registrars who registered the domain names,74 and the trade-marks or service marks upon which the complaint is based.75 The complainant must also describe the grounds on which the complaint is based76 and the remedy sought.77 The service provider then reviews the complaint for administrative compliance, and if it is in compliance, forwards the complaint to the respondent,78 who then has the opportunity to file a response. The service provider then appoints a panel to decide the case79 and submit its final decision back to the service provider.80 Panels decide a case under the UDRP on the basis of the statements and documents submitted.81 Generally, UDRP disputes are not held in person nor by teleconference, videoconference, or web

68 “Approved Providers for Uniform Domain-Name Dispute-Resolution Policy”, online: ICANN <http://www.icann.org/dndr/udrp/approved-providers.htm>. 69 “Rules for Uniform Domain Name Dispute Resolution Policy”, online: ICANN <http://www.icann.org/dndr/udrp/uniform-rules.htm> at para. 6 [UDRP Rules]. 70 Ibid. see paras. 10(a) through (d). 71 Ibid. at para. 3(a). 72 Ibid. at para. 3(b)(iv). 73 Ibid. at para. 3(b)(vi). 74 Ibid. at para. 3(b)(vii). 75 Ibid. at para. 3(b)(viii). 76 Ibid. at para. 3(b)(ix). 77 Ibid. at para. 3(b)(x). 78 Ibid. at para. 4(a). 79 Ibid. at para. 6. 80 Ibid. at para. 15(b). 81 Ibid. at para. 15(a).

268 ASPER REVIEW [Vol. VII conference, unless the panel decides in its sole discretion that the dispute involves an exceptional matter and such a hearing is deemed necessary.82 The Claim under the UDRP

To be successful in a UDRP dispute, a complainant must prove

three grounds on a balance of probabilities:

i. [the registrant’s] domain name is identical or confusingly similar to a trademark or service mark in which the complainant has rights; and

ii. [the registrant has] no rights or legitimate interests in respect of the domain name; and

iii. [the registrant’s] domain name has been registered and is being used in bad faith. 83

The UDRP provides guidance in terms of finding whether or not

the above grounds have been established. For example, the UDRP provides that the panel deciding the case may look at, but is not limited to, the following factors when determining whether or not there has been bad faith on the part of the registrant:

i. circumstances indicating that [the registrant has]

registered or [has] acquired the domain name primarily for the purpose of selling, renting, or otherwise transferring the domain name registration to the complainant who is the owner of the trademark or service mark or to a competitor of that complainant, for valuable consideration in excess of [the registrant’s] documented out-of-pocket costs directly related to the domain name; or

ii. [whether the registrant has] registered the domain name in order to prevent the owner of the trademark or service mark from reflecting the mark in a corresponding domain name, provided that [the registrant has] engaged in a pattern of such conduct; or

iii. [whether the registrant has] registered the domain name primarily for the purpose of disrupting the business of a competitor; or

82 Ibid. at para. 13. 83 UDRP Policy, supra note 66 at para. 4(a).

2007] Using the CDRP to Fight Cybersquatting 269

iv. by using the domain name, [whether the registrant has] intentionally attempted to attract, for commercial gain, Internet users to [the registrant’s] web site or other on-line location, by creating a likelihood of confusion with the complainant’s mark as to the source, sponsorship, affiliation, or endorsement of [the registrant’s] web site or location or of a product or service on [the registrant’s] web site or location. 84

The UDRP also provides guidelines as to whether or not the

registrant had a legitimate interest in the domain name. In order to determine whether the registrant had a legitimate interest in the domain name, the UDRP provides that the panelists may consider, but are not limited to, a variety of factors, including whether:

i. before any notice to [the registrant] of the dispute, [the

registrant’s] use of, or demonstrable preparations to use, the domain name or a name corresponding to the domain name in connection with a bona fide offering of goods or services; or

ii. [the registrant] (as an individual, business, or other organization) [has] been commonly known by the domain name, even if [the registrant has] acquired no trademark or service mark rights; or

iii. [the registrant is] making a legitimate noncommercial or fair use of the domain name, without intent for commercial gain to misleadingly divert consumers or to tarnish the trademark or service mark at issue. 85

Remedies under the UDRP

Remedies available to the complainant under the UDRP are either

the cancellation of the domain name or the transfer of the domain name to the complainant.86 A “cancellation” results in the domain name registration being cancelled altogether, denying both the registrant and the complainant of the domain name. A “transfer” shifts the access of the domain name away from the registrant to the complainant. However, should either party wish to initiate further proceedings after a panel hands down its decision, it should be noted that UDRP decisions are not binding on the courts.87

84 Ibid. at para. 4(b). 85 Ibid. at para. 4(c). 86 Ibid. at para. 4(i). 87 Sewchuk, supra note 29 at para. 47.


The UDRP can potentially resolve a claim within 45 days.88 Advantages of the UDRP system are that it is relatively fast, efficient, and cost effective, it does not impose a high evidentiary burden on parties, and it bypasses questions of jurisdiction.89 Further, a remedy awarded to a complainant can also be completely carried out by the registrar without the need to further involve the registrant.90

The main limit of the UDRP is its inability to award certain remedies. UDRP complainants cannot recover costs or damages from bad-faith registrants.91 This is especially detrimental where the complainants’ goodwill has been compromised as a result of the domain name abuse.92

Arbitration of a dot-ca dispute: the CDRP

As previously noted, Canada has assumed the governance of the

dot-ca domain space by establishing CIRA, a not-for-profit, non-governmental organization that sets policy for, manages, and operates the dot-ca domain database.93 CIRA became the official dot-ca registry as of 1 December 2000,94 and subsequently developed the CIRA Dispute Resolution Policy (“CDRP”) to decide claims of bad-faith registration of dot-ca TLDs.95 CIRA, which does not participate directly in CDRP proceedings,96 appointed two service providers in June 200297 to administer the CDRP: the British Columbia International Commercial Arbitration Centre (“BCICAC”) and Resolution Canada Inc.98 Each provider provides a list of qualified and available candidates who may serve as the panelists in deciding CDRP claims.99

88 Ibid. at para. 43. 89 Cheng & Katul, supra note 12 at 511-512. 90 Ibid. 91 Ibid. 92 Ibid. 93 “CIRA FAQ”, online: CIRA <http://www.cira.ca/en/faq-menu7.html>. 94 Ibid. 95 CIRA Polices, Rules and Procedures, “CIRA Domain Name Dispute Resolution Policy,” version 1.1, online: CIRA <http://www.cira.ca/en/documents/q4/CDRP_Policy_2003-12-04_en_final.pdf> at para. 1.1 [CDRP Policy]. 96 Ibid. at para. 1.6. 97 Cheng & Katul, supra note 12 at 487. 98 “Dispute Resolution Service Providers”, online: CIRA <http://cira.ca/en/cat_dpr_providers.html>. 99 “CIRA Domain Name Dispute Resolution Rules,” version 1.2, online: CIRA <http://www.cira.ca/en/documents/q4/CDRP_Rules_2003-12-04_en_final.pdf> at para. 6.1 [CDRP Rules].

2007] Using the CDRP to Fight Cybersquatting 271 Procedure under the CDRP

A complaint is initiated by a complainant first selecting a service provider and submitting the necessary information to establish a complaint under the CDRP.100 For example, the details that complainants must specify or identify include: each domain name registration which is the subject of the complaint,101 the basis on which the complainant satisfies the CPR,102 the registrar of the domain name(s),103 the marks on which the complaint is based,104 and the particulars of the basis of the complaint.105 The complainant must also specify the remedy sought,106 and provide a summary and references to any relevant Canadian law,107 CIRA, or other dispute resolution proceedings.108 The service provider then reviews the complaint,109 and once satisfied that the complaint complies with CDRP Policy and Rules, sends notice to the registrant.110 The registrant then has an opportunity to respond to the complaint.111 The requirements of what must be included in the response are similar to the requirements of what must be included in the complaint112; however, the registrant does have the option of claiming up to $5,000 in costs.113 Again, the service provider will review the response114 and promptly send notice to the complainant once satisfied that the response complies with the CDRP policy and rules.115 The panel is then appointed to decide the case and forward its ultimate decision to the service provider.116 A decision under the CDRP is based purely on submission; no in-person hearing, teleconference, videoconference, or web-conference is

100 Ibid. at para. 3.1 and CDRP Policy, supra note 95 at para. 2.1. 101 CDRP Rules, ibid. at para. 3.2(e). 102 Ibid. at para. 3.2(f). 103 Ibid. at para. 3.2(g). 104 Ibid. at para. 3.2(h). 105 Ibid. at para. 3.2(i). 106 Ibid. at para. 3.2(j). 107 Ibid. at para. 3.2(l). 108 Ibid. at para. 3.2(m). 109 Ibid. at para. 4.1. 110 Ibid. at para. 4.3. 111 Ibid. at para. 5.1. 112 Ibid. at para. 5.2 generally. 113 Ibid. at para. 5.2(h). 114 Ibid. at para. 5.5. 115 Ibid. at para. 5.7. 116 Ibid. at para. 12.2.

272 ASPER REVIEW [Vol. VII used.117 It is estimated that it takes a CDRP panel 60 to 90 days to decide a dispute.118 The Claim under the CDRP

Bringing a cybersquatting claim under the CDRP is similar to

bringing a claim under the UDRP; however, differences do exist. A key difference in initiating a claim under the CDRP is the complainant’s first step of satisfying the Canadian Presence Requirements (“CPR”). Like the CPR that an applicant must satisfy in order to register a domain name, a complainant must also first satisfy the CPR to bring a claim under the CDRP.119 The CPRs require that the complainant be a Canadian citizen, permanent resident, or corporation.120 Provisions are also made for Canadian trusts, partnerships, associations, government, and Aboriginal persons.121 A claimant not meeting the CPR but who has registered a trade-mark in Canada will also be eligible.122

A claimant satisfying the CPRs must then be able to establish the three main grounds which form the basis of a CDRP complaint:

a) the Registrant’s dot-ca domain name is Confusingly

Similar to a Mark in which the Complainant had Rights prior to the date of registration of the domain name and continues to have such Rights;

b) the Registrant has no legitimate interest in the domain name as described in paragraph 3.6 [of the CDRP Policy]; and

c) the Registrant has registered the domain name in bad faith as described in paragraph 3.7 [of the CDRP policy].123

The burden lies on the complainant to prove the “confusingly similar” and the “bad faith” requirements on a balance of probabilities. However, the complainant need only present some evidence of “no

117 Unless the panel in its sole discretion and as an exceptional matter determines otherwise. CDRP Rules, ibid. at para. 11.3. 118 “CIRA Dispute Resolution Policy (CDRP) FAQ”, online: CIRA <http://www.cira.ca/en/cat_dpr_faq.html#q103> [CDRP FAQ]. 119 CDRP Policy, supra note 95 at para. 1.4. 120 CIRA Policies, Rules and Procedures, “Canadian Presence Requirements for Registrants,” version 1.3, online: CIRA <http://www.cira.ca/en/documents/q3/CanadianPresenceRequirementsForRegistrants-EffectiveDateJune52003.pdf> at para. 2 [CPR]. 121 Ibid. 122 Ibid. at para. 2(q). 123 CDRP Policy, supra note 95 at para. 3.1.

2007] Using the CDRP to Fight Cybersquatting 273 legitimate interest.” The onus then shifts to the registrant to prove that he or she has a legitimate interest in the domain name on a balance of probabilities.124

The CDRP, like the UDRP, sets out what factors the panel must consider in determining whether or not the three required grounds have been proven. The CDRP has gone one step further than the UDRP, as it provides more than “guidelines” for the deciding panel. Rather, the CDRP provides exhaustive lists of grounds which limit the factors a panel can consider. First, the CDRP Policy provides six exhaustive factors for which a registrant’s legitimate interest in the domain name in question can be found. To prove a legitimate interest in the domain name, para. 3.6 of the CDRP Policy holds that the registrant has a legitimate interest in the domain name if and only if:

a) the domain name was a Mark, the Registrant used the

Mark in good faith and the Registrant had Rights in the Mark;

b) the Registrant used the domain name in Canada in good faith in association with any wares, services or business and the domain name was clearly descriptive in Canada in the French or English language of: (i) the character or quality of the wares, services or business; (ii) the conditions of, or the persons employed in, production of the wares, performance of the services or operation of the business; or (iii) the place of origin of the wares, services or business;

c) the Registrant used the domain name in Canada in good faith in association with any wares, services or business and the domain name was understood in Canada to be the generic name thereof in any language;

d) the Registrant used the domain name in Canada in good faith in association with a non-commercial activity including, without limitation, criticism, review or news reporting;

e) the domain name comprised the legal name of the Registrant or was a name, surname or other reference by which the Registrant was commonly identified; or

f) the domain name was the geographical name of the location of the Registrant’s non-commercial activity or place of business. Secondly, panels are also limited to considering the following

grounds when considering whether the registrant has acted in bad faith.

124 Ibid. at para. 4.1.

274 ASPER REVIEW [Vol. VII Looking to para. 3.7 of the CDRP Policy, bad faith can be found if and only if:

a) the Registrant registered the domain name, or acquired

the Registration, primarily for the purpose of selling, renting, licensing or otherwise transferring the Registration to the Complainant, or the Complainant’s licensor or licensee of the Mark, or to a competitor of the Complainant or the licensee or licensor for valuable consideration in excess of the Registrant’s actual costs in registering the domain name, or acquiring the Registration;

b) the Registrant registered the domain name or acquired the Registration in order to prevent the Complainant, or the Complainant’s licensor or licensee of the Mark, from registering the Mark as a domain name, provided that the Registrant, alone or in concert with one or more additional persons has engaged in a pattern of registering domain names in order to prevent persons who have Rights in Marks from registering the Marks as domain names; or

c) the Registrant registered the domain name or acquired the Registration primarily for the purpose of disrupting the business of the Complainant, or the Complainant’s licensor or licensee of the Mark, who is a competitor of the Registrant.

Remedies under the CDRP Like the UDRP, the remedies available to a successful

complainant under the CDRP are cancellation of a domain name or transfer of the domain name to the complainant.125 Also as under the UDRP, the panel’s decision under the CDRP is neither final nor binding on the courts.126 The advantages and disadvantages of the CDRP system are similar to those noted for the UDRP system above. However, a more detailed discussion of the efficiencies and deficiencies of the CDRP is to follow.

125 Ibid. at para. 4.3. 126 Campbell, supra note 62 at para. 51.

2007] Using the CDRP to Fight Cybersquatting 275 Differences between the CDRP and the UDRP

Although the CDRP and UDRP policies are similar, many

differences are apparent. For example:

• The CDRP is a “closed” system. CDRP complainants must satisfy the Canadian Presence Requirements (“CPR”), while UDRP complainants do not have a comparable obligation.127 Seemingly, anyone can initiate a claim under the UDRP, regardless of geographical ties.

• The CDRP defines key terms.128 The CDRP Policy defines terms such as “mark,” “rights,” and “use,” while the UDRP Policy leaves interpretation completely up to panelists.129

• The CDRP gives less deference to arbiters. The interpretation and scope of the CDRP Policy is less flexible, as its grounds for finding bad faith and legitimate interest are exhaustive. The UDRP does not seem to impose such limits on the number of grounds on which bad faith or legitimate interest can be proved.130

• The CDRP is harsh on bad complainants. Unlike the UDRP, a key departure of the CDRP is that it provides for a $5,000 fine for complainants who initiate proceedings in bad faith.131 A bad faith complainant is one who unfairly and without colour of right attempts to cancel or transfer a registration.132

• The CDRP requires the complainant to have prior rights to the mark. The CDRP requires that the complainant had rights to its mark prior to the registration of the offending domain name.133 The UDRP does not specifically provide for this.

• The CDRP uses mandatory three-adjudicator panels. The CDRP imposes mandatory three-person panelists to decide the complainant’s case, unless there is no response from the registrant.134 The UDRP on the other hand gives the complainant the choice of proceeding with either one or three panelists.135

127 CDRP FAQ, supra note 118. Also see Burshtein, supra note 13 at 7-126. 128 Ibid. 129 Burshtein, supra note 13 at 7-126. 130 CDRP FAQ, supra note 118. 131 Cheng & Katul, supra note 12 at 517. 132 CDRP Policy, supra note 95 at para. 4.6. 133 Ibid. at para. 3.1(a). 134 If the Registrant does not respond to the case, the Complainant may elect to have its case heard by a single panelist. See CDRP Rules, supra note 99 at para. 5.8. 135 UDRP Rules, supra note 69 at para. 3(b)(iv).

276 ASPER REVIEW [Vol. VII • The CDRP allows more time for appeal. Under the CDRP, the

decision of the panel is implemented by CIRA after 60 days.136 Under the UDRP, the panel’s decision is implemented by ICANN after 10 days.137

• The CDRP does not allow for supplemental rules. CDRP service providers are not entitled to implement their own supplemental rules,138 whereas UDRP service providers are.139 The term “Supplemental Rules,” as defined by the UDRP Rules, “means the rules adopted by the provider administering the proceeding to supplement these [UDRP] Rules,” and includes topics such as fees, word and page limits, and means of communication.140 Trends in the CDRP decisions141

As of 1 August 2007, 80 cases have been decided under the

CDRP.142 The majority have been decided by the BCICAC (57 cases) as opposed to Resolution Canada Inc. (21 cases).143 The complainants were successful in 63 (approximately 78.75%) of those cases. Transfers of the disputed domain names were granted in 62 of the successful cases, while only one case resulted in the cancellation of the domain name.144 It is also interesting to note that in 47 cases (approximately 58.75%), the registrant failed to file a response to the claim. However, even where the registrant did not file a response, the panel was nevertheless charged with the duty of assessing the integrity and credibility of the evidence as

136 CDRP Policy, supra note 95 at para. 4.5. 137 UDRP Policy, supra note 66 at para. 4(k). 138 CDRP Rules, supra note 99 at para. 1.7. 139 UDRP Rules, supra note 69, preamble. 140 Ibid. at para. 1, “Definitions.” 141 The figures presented are updated statistics from the study conducted in Antonio Turco, “Domain Name Dispute Resolution Under the CDRP—the First Five Years” (11 November 2006), online: Blakes, Cassels & Graydon LLP <http://www.blakes.com/english/view_disc.asp?ID=194>. 142 As posted on the CIRA website on 1 August 2007. Decisions are numbered 00001 through 00080. Note that decision 00050 seems to be missing. All CIRA decisions referred to were found at “Dispute Resolution Decisions”, online: CIRA <http://www.cira.ca/en/cat_dpr_decisions.html>. 143 Note that in the case of Air Products Canada Ltd./Prodair Canada Ltée v. Index Quebec Inc., CIRA Decision No. 00007 (15 April 2003), it was not specified with which service provider the claim was filed. 144 The Toronto-Dominion Bank v. TM WatchDog, CIRA Decision No. 00048 (15 December 2005). Cancellation, as opposed to a transfer of the domain name to the complainant, was ordered because the domain name in question was comprised of two marks, one of which, the panel found, the complainant itself did not have rights in. Also see the discussion in Turco, supra note 141.

2007] Using the CDRP to Fight Cybersquatting 277 disclosed by the complainant.145 To date, the panels have yet to find a “bad faith” complainant. CRITICISMS OF THE CDRP

Certain critics have argued that the CDRP is “stacked against”146

trade-mark holders and therefore is “frequently not helpful from a brand owner’s perspective.”147 Their claims might be based on the following grounds:

• Inconsistency: panels do not apply a consistent test to determine

whether a domain name is “confusingly similar” to the complainant’s mark, as some panels employ a traditional trade-marks “confusion” test, others adopt a “resemblance” test, and some panels consider both.148

• High thresholds: the test for bad faith under the CDRP is harder to satisfy than the test employed in traditional trade-mark cases, as the CDRP requires bad faith intention of the registrant to be proved, while trade-mark law looks not to intention, but only to the effect of the registration.149

• Exhaustiveness: for example, the grounds for finding bad faith grounds on which the complainant can prove its claim are limited.150

• Lack of availability: the Canadian Presence Requirements are restrictive, as they do not allow foreigners who have Canadian trade-mark rights, but who otherwise do not fulfill the requirements, to commence a proceeding.151 For example, this might include a foreigner who has not registered a trade-mark in Canada but who has trade-mark rights at common law.152

• Legitimate interest override: if a panel finds that the registrant had a legitimate interest in the disputed domain name, a complainant

145 Browne & Co. Ltd./Ltée v. Bluebird Industries, CIRA Decision No. 00002 (22 October 2002) at 7. 146 Robert H. Barrigar & Irene M. Waller, “COMMENTARY: litigation may work better than ADR for trade-mark owners” The Lawyer’s Weekly 25:12 (22 July 2005) (QL). 147 John McKeown, “Cases demonstrate importance of quickly securing domain names” The Lawyer’s Weekly 25:37 (10 February 2006) (QL). 148 See Turco, supra note 141. Also see the related discussion in Burshtein, supra note 13 at 7-37 – 7-38. 149 Barrigar & Waller, supra note 146. 150 Burshtein, supra note 13 at 7-127. 151 Ibid. at 7-10. 152 Ibid.


cannot succeed, despite the fact that it can prove confusing similarity and bad faith.153

While the above examples do indeed present hurdles to the functioning of the CDRP, recent decisions suggest that these problems are more theoretical than practical. Perhaps these criticisms are not quite the problems they are made out to be and thus, the CDRP may not be as stacked against the brand owner as sometimes alleged. Inconsistency

It is true that panels do not apply a consistent test in determining

whether a domain name is “confusingly similar” to the complainant’s mark. Although “confusingly similar” is defined in the CDRP Policy,154 it is ultimately up to the panels themselves to decide the standard by which confusing similarity should be found. For example, in Musician’s Friend, Inc. v. Robert Piperni,155 the panel decided the correct approach would be to apply all the factors used for determining “confusion” under s. 6(5) of the Trade-marks Act.156 This includes looking at:

(a) the inherent distinctiveness of the trade-marks or trade-names and the extent to which they have become known; (b) the length of time the trade-marks or trade-names have been in use; (c) the nature of the wares, services or business; (d) the nature of the trade; and (e) the degree of resemblance between the trade-marks or trade-names in appearance or sound or in the ideas suggested by them. However, the most consistently applied test is the “resemblance”

test articulated in Government of Canada, on behalf of Her Majesty the Queen in Right of Canada v. Bedford in his own name and doing business

153 Turco, supra note 141. Also see Burshtein, supra note 13 at 7-127. 154 “A domain name is ‘Confusingly Similar’ to a Mark if the domain name so nearly resembles the Mark in appearance, sound or the ideas suggested by the Mark as to be likely to be mistaken for the Mark.” CDRP Policy, supra note 95 at para. 3.4. 155 CIRA Decision No. 00075 (February 2007). 156 Ibid. at 3. The s. 6(5) test was also adopted in The Hartz Mountain Corporation v. Robert Harwin, Decision No. 00078 (June 2007) and Enterprise Rent-A-Car Company v. Ebenezer Thevasagayam, CIRA Decision No. 00043 (22 August 2005).

2007] Using the CDRP to Fight Cybersquatting 279 as Abundance Computer Consulting,157 which considers whether a person knowing of the complainant’s mark but having an imperfect recollection of it would, on a first impression, likely mistake the domain name for the complainant’s mark based on the appearance, sound, or idea suggested by the mark.158 Although panels are not bound to use this test, there is a prominent trend in panels applying it. Over the course of the CIRA decisions rendered, numerous panels have cited Government of Canada, or have otherwise set out the above test. Even early on in the line of CDRP decisions, the panel in Canadian Thermos Products Inc. v. Michael Fagundes159 noted that the resemblance test had been the test adopted in a clear majority of cases.160 To date, at least 22 CDRP cases have adopted the resemblance test.161 Therefore, in the future of CDRP decisions, it appears that the inconsistency in tests used to determine

157 CIRA Decision No. 00011 (27 May 2003). 158 Ibid. at para. 66. 159 CIRA Decision No. 00049 (18 January 2006). 160 Ibid. at para. 26. 161 For example, see McKee Homes Ltd. v. Gerlinde Honsek, CIRA Decision No. 00079 (25 June 2007); GoDaddy.com, Inc. v. Jan Ladwig, CIRA Decision No. 00077 (12 April 2007); Yellow Pages Group Co. v. Coolfred Co., CIRA Decision No. 00076 (13 March 2007); Musician’s Friend, Inc. v. L.A. Music, CIRA Decision No. 00074 (16 February 2007); Trailwest Online Inc. v. Talltech Systems Inc., CIRA Decision No. 00073 (9 February 2007); Craiglist, Inc. v. Daniel Cox, CIRA Decision No. 00072 (23 January 2007); The Black & Decker Corporation v. J. Chapnik Trust—(100%), CIRA Decision No. 00069 (15 November 2006); Sam Ash Music Corporation v. LAMUSIC, CIRA Decision No. 00067 (15 October 2006); Alberta Alcohol and Drug Abuse Commission v. Akshay Khanna, CIRA Decision No. 00065 (12 October 2006); Choice Hotels International, Inc. and Choice Hotels Canada Inc. v. Daniel Cox, CIRA Decision No. 00061 (18 September 2006); 911979 Alberta Inc. v. Hank Morin, CIRA Decision No. 00060 (25 August 2006); The Co-operators Group Ltd. v. Artbravo Inc., CIRA Decision No. 00055 (6 April 2006); Canadian Thermos Products Inc. v. Michael Fagundes, CIRA Decision No. 00049 (18 January 2006); Bell Canada v. Archer Enreprises, CIRA Decision No. 00038 (30 August 2005); Fresh Intellectual Properties Inc. v. Sweets and Treats, CIRA Decision No. 00033 (9 June 2006); DRN Commerce Inc. v. REPO DEMO (TM), Park and Sell of Canada Limited, CIRA Decision No. 00030 (29 April 2005); Glaxo Group Limited v. Defining Presence Marketing Group Inc. (Manitoba), CIRA Decision No. 00020 (26 August 2004); Amazon.com Inc. v. David Abraham, CIRA Decision No. 00018 (28 July 2004); Coca-Cola Ltd. v. Amos B. Hennan, CIRA Decision No. 00014 (28 October 2003); Acrobat Construction/Entreprise Management Inc. v. 1550507 Ontario Inc., CIRA Decision No. 00013; Government of Canada, on behalf of Her Majesty the Queen in Right of Canada v. David Bedford in his own name and doing business as Abundance Computer Consulting, CIRA Decision No. 00011 (27 May 2003); Canadian Broadcasting Corporation/Société Radio-Canada v. William Quon, CIRA Decision No. 00006 (8 April 2003). Also see the related discussion in Burshtein, supra note 13 at 7-41 – 7-45.

280 ASPER REVIEW [Vol. VII “confusing similarity” does not represent a significant hurdle, as the application of the resemblance test has proved to be the popular choice.

Although it has been stated that the narrower, “confusion” tests will favor respondents and the more liberal “resemblance” test will favour complainants,162 in many disputes, the outcome of the decision will be unaffected regardless of the test applied. The reasons for this are two-fold. First, a good number of domain name disputes involve domain names that are identical to the complainant’s mark. For example, in Viacom International Inc. v. Harvey Ross Enterprises, Ltd.,163 the domain name in question was <mtv.ca>, which was identical to the complainant’s “MTV” trade-mark. In such cases where the domain name is identical to the complaint’s mark, “confusing similarity” will automatically be found. As put by one panel, “[a] registrant cannot avoid confusion by appropriating another party’s entire mark in a domain name.”164

Secondly, many disputes involve domain names containing merely a slight difference from the complainant’s mark. In those cases, “confusing similarity” is automatically found as well. For example, in Choice Hotels International Inc. v. Mr. Daniel Montanbault,165 the complainant had rights in the mark “COMFORT INN” and the domain name in dispute was <comfort-inn.ca>. The panel in that case held that “[t]he presence or absence of a ‘dash’ is not such a difference as to differentiate the domain name from the marks in the mind of the average Internet user with imperfect recollection.”166 This principle was in fact established early on in the CDRP line of decisions in Canadian Broadcasting Corporation/Société Radio-Canada v. William Quon.167 The complainant in that case had rights to the mark “RADIO-CANADA” and the domain name in question was <radiocanada.ca>. The panel established that “the absence of punctuation marks, such as hyphens, does not alter the fact that a domain name is identical to a mark[.]”168 Other cases have also held that the absence of an apostrophe or addition of an “s” to a domain name is insufficient to distinguish the domain name from the mark.169

In sum, inconsistency may not be that big of a problem, both due to the popular adoption of the “resemblance” test and given that in a

162 Franchizit Corporation v. 984308 Ontario Inc., CIRA Decision No. 00021 (5 August 2004) at para. 19. 163 CIRA Decision No. 00015 (15 October 2003). 164 Alberta Alcohol and Drug Abuse Commission v. Akshay Khanna, CIRA Decision No. 00065 (12 October 2006) at para. 37. 165 CIRA Decision No. 00062 (20 September 2006). 166 Ibid. at para. 23. 167 CIRA Decision No. 00006 (8 April 2003). 168 Ibid. at 11. 169 For example, see Musician’s Friend, Inc. v. L.A. Music, supra note 161 at 7.

2007] Using the CDRP to Fight Cybersquatting 281 significant number of cases the selection of a test will be irrelevant, as confusing similarity will be found under any test. High Thresholds

As for the test of bad faith, it may be that the test under the

CDRP may be harder to satisfy than under traditional trade-mark law, and cases have indeed been dismissed for failing to fulfill the bad faith requirement.170 This high threshold was highlighted in Caseware International Inc., c/o Mr. Alan Charlton v. Mr. John Lee,171 where the panel expressly pointed out that the CDRP requires not just that the effect of the registrant’s registration and use of the domain name disrupt the business of its competitor, but that the primary purpose of the registration is to disrupt the business of its competitor.172

Although the test is stringent, one must keep in mind the purpose of the CDRP, which is not to remedy every domain name dispute, but rather is to provide for a speedy, low-cost way to remedy cases of blatant cybersquatting.173 Where more complicated issues concerning domain names are in dispute, the court remains the appropriate vehicle in which to settle the dispute.174 Exhaustiveness

Bad faith may indeed be a hurdle for complainants to overcome,

especially if it cannot be proven on one of the pre-determined grounds

170 See for example American Multi-Cinema Inc. v. Dan J. Kapuscinski, CIRA Decision No. 00025 (8 February 2005) at para. 35. 171 CIRA Decision No. 00057 (20 August 2006). 172 Ibid. at para. 24. 173 See for example Cheap Tickets & Travel Inc. v. Emall.ca Inc., CIRA Decision No. 00004 (31 January 2003) at para. 16, where the panel noted that the scope of the policy is narrow and applies only to cases of cybersquatting and not to other kinds of disputes between trade-mark owners and domain name registrants. 174 For example, in Clover Gifts, Inc. v. George Morrision, G M Consulting Services, CIRA Decision No. 00041 (4 October 2005), the panel noted that the CDRP was not the appropriate forum under which to examine issues of infringement or historical rights in a trade-mark [at para. 25]. It noted that it was not the appropriate forum to resolve what seemed to be an “ongoing dispute with many layers between the parties” [at para. 29]. However, note the recent decision of Vessel Assist Association of America, Inc. v. Michael MacKenzie, CIRA Decision No. 00080 (31 July 2007) at 9 & 10, in which the majority members entertain the possibility that in a narrow class of cases, such as cases where it is fairly obvious that CIPO may have erred in registering a trade-mark, the panel might have to consider the validity of a registered trade-mark in order to decide whether or not it will transfer or cancel a domain name. The decision in that case, however, did not turn on this discussion.

282 ASPER REVIEW [Vol. VII set out in the Policy. In Independent Order of Foresters v. Noredu Enterprises Canada Inc., operating as Forester College of Technology,175 the panel highlighted that the clear limiting language “if and only if” in the definition of bad faith makes it clear that the scope of the necessary bad faith is intended to be strictly construed.176

However, we may see that panels might be beginning to move away from such a strict application. Recently, in the decision of Alberta Alcohol and Drug Abuse Commission v. Akshay Khanna,177 the panel held that “paragraph 3.7(b) of the Policy should be given an expansive interpretation that is consistent with the intention of the Policy to provide redress from abusive domain name registrations.”178 In that case, it was speculated that a narrow interpretation of the CDRP Policy would not provide for redress from “typosquatting” (where cybersquatters register intentional misspellings of a mark) or where registrants register a domain name which would otherwise not appeal to the mark owner.179 The panel held that not providing for redress from the above could not have been the intention of the Policy.180

Therefore, although it cannot be denied that strict, exhaustive grounds are required by the policy, it seems possible that future panels might take the scope of bad faith into their own hands, especially in cases where not finding bad faith would seem to defeat the intention of the CDRP Policy. Lack of availability

The purpose of the Canadian Presence Requirements is to ensure

that the dot-ca domain space “be developed as a key public resource for the social and economic development of all Canadians.”181 To ensure this purpose, the CDRP does restrict who can initiate a claim under the system. However, a finding that a complainant does not satisfy the CPR might not be fatal to the case, as para. 4.3 of the CDRP Policy holds that where the complainant is successful but does not satisfy the CPR, the domain name may be transferred to a nominee of the complainant. In Best Western International, Inc. v. Daniel Montanbault, this more flexible application of the CPR was applied, as the panel deemed that the complainant was entitled to name a nominee to CIRA who did satisfy the requirements.182 175 CIRA Decision No. 00017 (25 May 2004). 176 Ibid. at para. 37. 177 CIRA Decision No. 00065 (12 October 2006). 178 Ibid. at para. 49. 179 Ibid. at para. 50. 180 Ibid. at para. 53. 181 CPR, supra note 120 at para.1. 182 CIRA Decision No. 00070 (23 January 2007) at 20.


While the application of para. 4.3 of the CDRP Policy does not by any means do away with the CPR, it does show some degree of leniency in terms of who may proceed under the CDRP.

One panel has taken an even more flexible interpretation of the CPR. In PPL Legal Care of Canada Corporation v. Curtis Patey,183 the mark in dispute was a trade name. The complainant was not the owner of the trade name; rather, it was the complainant’s parent corporation that owned the name. The panel held that this was not fatal to the claim, as the wording of the CPR provisions does not require that the mark be used in Canada by the complainant specifically, but just generally “by a person.” The use of the trade name in Canada by the parent corporation was thus sufficient to fulfill the CPR in that panel’s determination. Legitimate Interest Override

As currently defined in the CDRP Policy, a finding that a

registrant had a legitimate interest in registering a domain name will trump findings of confusing similarity and bad faith. However, the danger may be more theoretical than practical. One author has noted that as of November 2006, no CDRP panel yet has had to use a finding of legitimate interest to justify denying the claims of a complainant.184 Since this time, no panel has used a finding of legitimate interest to trump a finding of bad faith resulting in the dismissal of the claim. In fact, some panels, after having found that no bad faith could be established, did not even go on to consider whether or not the registrant had a legitimate interest in the domain name.185 DOT-CA PROTECTION: HOW DOES THE CDRP MEASURE UP?

HE CONCLUSIONS ABOVE are responses to some of the familiar criticisms of the CDRP. However, although these criticisms are not necessarily fatal to the operation of the CDRP, this by no means

183 CIRA Decision No. 00056 (24 April 2006). 184 Turco, supra note 141. 185 For example, see Canadian Thermos Products Inc. v. Michael Fagundes, CIRA Decision No. 00049 (18 January 2006); The Toro Company, Bloomington MN, USA v. Pierre Hannon, Laval QC, Canada, CIRA Decision No. 00039 (25 August 2005); American Multi-Cinema Inc. v. Dan J. Kapuscinski, CIRA Decision No. 00025 (8 February 2005); Independent Order of Foresters v. Noredu Enterprises Canada Inc., operating as Forester College of Technology, CIRA Decision No. 00017 (25 May 2004); Trans Union LLC v. 1491070 Ontario Inc., CIRA Decision No. 00008 (23 April 2003).

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284 ASPER REVIEW [Vol. VII eliminates the concerns raised above. Further, the conclusions above were drawn strictly from looking to the posted CIRA decisions; this paper does not attempt to analyze what types of parties are choosing to file, or not to file, a CDRP complaint. While from a practical standpoint the above concerns do not necessarily pose significant threats to brand holders, from a theoretical perspective, as long as CDRP decisions are not binding, many of the above criticisms will perpetually exist. The CDRP, as will be shown below, may have improved on the UDRP model in some respects, but could still stand to benefit from further improvements. How the CDRP has improved the UDRP model

CIRA had the benefit of almost a year’s worth of UDRP experience

before implementing the CDRP.186 It therefore had the ability to improve the UDRP model in numerous ways.

First, the UDRP has been criticized in that it allows complainants the choice of having their case decided by either a one-person or a three-person panel. One author conducted a study and found that the number of panelists affects the outcome of the case; in particular, that single-person panels are more complainant friendly.187 This may therefore cause complainants to choose single-person panels in order to increase their chances of success. Critics have therefore suggested that the UDRP make a three-person panel the mandatory default in order to increase the parties’ perception of fairness of the system.188 The CDRP seems to have addressed this concern by requiring that three-person panels decide all cases where the registrant files a response.189

It has also been suggested that a concern of “forum shopping” arises under the UDRP as the various ICANN-appointed service providers are allowed to implement their own set of supplemental rules.190 As mentioned previously, the CDRP does not allow its service providers to implement their own supplemental rules thereby mitigating the temptation for complainants to shop around.

Secondly, another author has suggested that to make the UDRP system complete, measures to forcibly combat reverse hijacking—or bad-faith complainants—should be employed.191 The CDRP also seems to have taken this deficiency into account by providing a major safeguard against complainants who initiate claims in bad faith. Under the CDRP, a 186 CDRP FAQ, supra note 118. 187 Michael Geist, “Fair.com?: An Examination of the Allegations of Systemic Unfairness in the ICANN UDRP” 27 Brook. J. Int’l. L. 903 at 922. 188 Patrick D. Kelley, “Emerging patterns in Arbitration Under the Uniform Domain-Name Dispute-Resolution Policy” 17 Berkeley Tech. L.J. 181 at 203-204. 189 CDRP FAQ, supra note 118. 190 Geist, supra note 187 at 905-910. 191 Walker, supra note 16 at 310.

2007] Using the CDRP to Fight Cybersquatting 285 finding of bad faith on the part of the complainant may result in a $5,000 fine and an inability to bring further proceedings until the fine is paid.192 This ensures that the CDRP itself is not used as a vehicle for fraud. What the CDRP can still learn from the UDRP model

One concern is that CIRA does not implement orders for transfer

or cancellation of domain names until 60 days after decisions are handed out, while ICANN implements its orders after 10 days. Although the 60 days provides a party with time to appeal a decision,193 a 60-day waiting period could be disastrous in certain situations. For example, consider the scenario previously alluded to, where loss of a domain name could result in a significant loss of revenue. One author, however, does suggest that the UDRP’s 10-day implementation period might be one of the reasons limiting the usefulness of appealing panel decisions to the courts.194 Therefore, CIRA might want to strike some middle ground between the 10- and 60-day implementation periods. This is perhaps what the authority that governs the dot-eu space has considered by allowing a 30-day implementation period.195

An additional concern is that the CDRP might not be as facilitative as the UDRP to corporate growth. Unlike the CDRP, the UDRP does not specifically require a complainant to have rights in its mark prior to the offending domain name registration. Although it may be difficult to find bad faith when a complainant has no prior rights, this may be a significant factor to consider in a case where a cybersquatter registers a domain name that is confusingly similar to an anticipated future trade-mark.196 This often occurs, for example, following the merger of two companies.197 The CDRP may thus be deficient in safeguarding the rights of highly anticipated marks. How the CDRP can further stand to improve

Further improvements need to be made to the CDRP as the dot-ca

continues to grow strong. Dot-ca’s may soon surpass the one million

192 Cheng & Katul, supra note 12 at 517. 193 CDRP FAQ, supra note 118. 194 Kelley, supra note 188 at 191. 195 “.eu Alternative Dispute Resolution Rules”, online: ADR.eu <http://www.adreu.eurid.eu/html/en/adr/adr_rules/eu%20adr%20rules.pdf> at para. 12(d). 196 “WIPO Overview of WIPO Panel Views on Selected UDRP Questions”, online: WIPO <http://www.wipo.int/amc/en/domains/search/overview/index.html> at 1.4. 197 Ibid. at 3.1.

286 ASPER REVIEW [Vol. VII mark, as there are currently over 800,000 dot-ca domain names registered with CIRA.198 Increasing the certainty and consistency of the CDRP should therefore be a priority. CIRA might thus consider defining more terms in the CDRP Policy in order to put some of the criticisms to rest. Although already defined in the CDRP, a prime candidate for reconsideration would be the definition of “confusingly similar.” Although a popular test has been adopted in determining the standard to which “confusing similarity” must be met, the test still has somewhat inconsistent application. Defining a test or standard, or establishing exhaustive grounds within the CDRP Policy itself, for which confusing similarity can be found, would help to inject more certainty and consistency into the system.

Another term that could stand to be defined is the term “competitor,” as the interpretation of the term is essential to a finding of bad faith under para. 3.7(c) of the CDRP Policy. Under that paragraph, the registrant must be a competitor of the complainant in order for bad faith to be found where the domain name was registered primarily for the purpose of disrupting the business of the complainant. The cases show that “competitor” can either be interpreted narrowly (i.e. the registrant is a business competitor of the complainant) or more liberally (i.e. the registrant is merely someone who acts in opposition to the complainant).199 Some decisions have highlighted that a consistent interpretation of “competitor” has yet to be adopted,200 while others have specifically suggested that the narrow interpretation should be adopted. For example, in Trans Union LLC v. 1491070 Ontario Inc.,201 the panel held that the term “competitor” should be given a narrow interpretation because otherwise registrants would be found to have disrupted the business of the complainant in too many cases.202 Other panels have held that “disrupting the business of a competitor” is simply satisfied where the domain name creates a likelihood of confusion for end users as to affiliation or sponsorship.203 As the interpretation selected could

198 As at 10 July 2007, online: CIRA <http://www.cira.ca/en/home.html>. 199 Sam Ash Music Corporation v. LAMUSIC, CIRA Decision No. 00067 (15 October 2006). Also see the related discussion in Burshtein, supra note 13 at 7-64 – 7-69. 200 See Canadian Thermos Products Inc. v. Michael Fagundes, CIRA Decision No. 00049 (18 January 2006), where the panel highlights the distinction between the narrow and liberal interpretations and the rationales for supporting one over the other. The case did not reach a decisive opinion on which is the appropriate interpretation to be used, as either way the complainant could not prove the ground, although the majority did prefer the more narrow interpretation. Also see the related discussion in Burshtein, supra note 13 at 7-67 – 7-69. 201 CIRA Decision No. 00008 (23 April 2003). 202 Ibid. at 6. 203 See 911979 Alberta Inc. v. Hank Morin, CIRA Decision No. 00060 (25 August 2006); Internet Movie Database. Inc v. 384128 Canada Inc, CIRA Decision No.

2007] Using the CDRP to Fight Cybersquatting 287 have a significant impact on the outcome of the panel’s decision, CIRA should define the term in the CDRP. This would be consistent with the CDRP’s theme of giving less deference to the individual arbiters. How both models generally could stand to improve

Although both the CDRP and the UDRP work to resolve

cybersquatting disputes, they by no means seem to be preventing them. Although the UDRP has been in place since December 1999, WIPO decided its 25,000th case in 2006.204 WIPO also saw a 25% increase in claims filed from 2005 to 2006.205 Canadians also seem to be getting more involved in cybersquatting. According to WIPO’s statistics, Canada formed the fourth highest domicile of registrants against whom complaints were filed with WIPO.206

A major concern that plagues the UDRP was identified by the OECD: in a domain name dispute, the entire loss falls on the victim, including both the cost of the proceeding and any other loss incurred until the domain name is recovered.207 This concern equally applies to the CDRP. To address this concern, ICANN and CIRA could perhaps impose an increase on the cost of registering a domain name. For example, a small price increase would not likely hamper the development of the dot-ca system (which currently charges only $8.50 per year to register a dot-ca name208). The additional funds could be used, for example, to subsidize the complainant’s costs associated with commencing a procedure, for example, the cost of hiring the panelists. From a business perspective, it is undesirable to hamper the growth of the Internet, “[f]or as consumer use on the Internet expands, retailers receive greater commercial value for their websites both online and

00047 (2 December 2005); Great Pacific Industries Inc. v. Ghalib Dhalla, CIRA Decision No. 00009 (21 April 2003). 204 “WIPO Handles its 25,000th Domain Name Case,” WIPO/PR/2006/464, online: WIPO <http://www.wipo.int/edocs/prdocs/en/2006/wipo_pr_2006_464.html>. 205 “Cybersquatting Remains on the Rise With Further Risk to Trademarks From New Registration Practices,” supra note 49. 206 “Respondent Country Filing (Ranking)”, online: WIPO <http://www.wipo.int/amc/en/domains/statistics/countries.jsp?party=R>. WIPO published statistics breaking down the geographical distribution of parties. In 541 cases, Canada was the domicile of the respondent. Only the United States, the United Kingdom, and China had more respondent representation, with 4753, 963, and 570 cases respectively (as of 17 July 2007). 207 OECD Report, supra note 52 at para. 23. 208 CIRA Policies, Rules and Procedures, “Fees Policy and Rules,” version 1.6 at 3, online: CIRA <http://www.cira.ca/en/documents/2005/q2/FeesPolicyAndRules-1.6.pdf>.

288 ASPER REVIEW [Vol. VII offline.”209 However, it does not seem that the commercial value of websites increases as cybersquatting expands. Thus, higher registration fees might be beneficial by making it less attractive and more expensive for cybersquatters to register domain names in bulk. Higher fees might help to attract registrants who truly do have a legitimate interest in a domain name while discouraging those who do not.

The OECD also pointed out: [t]here seems to be no risk to the cybersquatter in continuing to operate this scheme and no incentive to stop. If one victim doesn’t take the bait, the cybersquatter can simply stop actively supporting the name, ignore the UDRP proceeding and move on to the next victim for a very low filing fee.210

Therefore, similar to the $5,000 fine for bad faith complainants, ICANN and CIRA might think of introducing similar fines to cybersquatters for each offending domain name they register. This may help to discourage cybersquatters, as the authorities currently provide little more than a slap on the wrist.

Finally, it may be necessary to put some degree of accountability on the registrars themselves. Perhaps the registrar should bear some burden in checking to see if someone else has rights in a mark when a domain name application is received.211 While it is not desirable to hamper registrar operations, as more competitiveness between registrars means more choices available to those seeking to register domain names, registrar accountability could be beneficial in obvious cases and disputes could be avoided in cases where suspicions should clearly be aroused. For example, in the above-mentioned Government of Canada case, the registrant had registered the following names: <governmentofcanada.ca>, <gouvernementducanada.ca>, <statscanada.ca>, <theweatheroffice.ca>, and <transportcanada.ca>. The applications for registration of the above names should have clearly signaled to the registrar that the names were being registered in bad faith, and the registrar should not be allowed to turn a blind eye. The OECD, in its report to WIPO, noted that its experience with a cybersquatter, as described above, demonstrated how the registrar in effect protects cybersquatters from civil and criminal processes by sponsoring registrations which it knows, or should know, are a sham.212 The OECD report also pointed out how there is no incentive for a registrar to exercise any degree of due diligence; rather, it

209 Walker, supra note 16 at 304. 210 OECD Report, supra note 52 at para. 24. 211 Sewchuk, supra note 29 at para. 54. 212 OECD Report, supra note 52 at para. 24.

2007] Using the CDRP to Fight Cybersquatting 289 is in the registrar’s interest to keep cybersquatters as clients due to the large number of domain names they register!213 A further lesson from the UK?

Nominet, the authority that regulates the dot-uk domain space,

provides some significant departures from the UDRP and CDRP systems in its domain name dispute resolution system. Two key departures involve: (1) a preliminary mediation session between the complainant and the registrant; and (2) an appeal system from panel decisions. Mediation

A key difference found in the Nominet system is mandatory

informal mediation. After both parties to a domain name dispute have filed their submissions, Nominet requires both parties to participate in mandatory informal mediation before their case will be decided by the “experts” (i.e. the equivalent of panels under the UDRP or CDRP).214 Mediation is commenced within three days of the last submission.215 The case will only be sent to an expert should the parties fail to reach a solution within 10 days.216 Perhaps the most important aspect of the mediation intervention is that Nominet does not charge for mediation services.217

During the mediation, confidential negotiations are conducted between the parties to help them achieve settlement.218 A trained staff member communicates with both parties by telephone in order to discuss the possibility of settlement.219 As at 1 May 2007, Nominet estimates that 1468 cases had entered mediation and 809 of those cases were able to be settled during the mediation.220

213 Ibid. at para. 25. 214 Nominet, “Dispute Resolution Service Policy”, online: Nominet <http://www.nominet.org.uk/digitalAssets/10496_DRS_Policy_v2.pdf> at para. 5a [Nominet Policy]. Note that informal mediation can only take place if the respondent files a reply. See Nominet Procedure, infra note 215. 215 Nominet, “Dispute Resolution Service Procedure”, online: Nominet <http://www.nominet.org.uk/digitalAssets/10495_DRS_Procedure_-_Version_2.pdf> at para. 7a [Nominet Procedure]. 216 Ibid. at para. 7e. 217 Ibid. at para. 21a. 218 Ibid. at para. 7b. 219 Nominet, “The Dispute Resolution Service,” Booklet, online: Nominet <www.nominet.org.uk/digitalAssets/6296_A5_DRS_Booklet.pdf> at 4. 220 “Nominet DRS Statistics”, online: Nominet <http://www.nominet.org.uk/intelligence/statistics/drs/> [Nominet Statistics].


A free mediation system could be an effective way for the UDRP and CDRP to help relieve some of the costs that complainants must bear. Appeal process

An important criticism of both the UDRP and CDRP systems is that its decisions are not binding, either on subsequent panels or on the courts. Critics argue that the system is deficient in that it does not provide a mechanism by which to reconcile divergent decisions or give precedential value to prior decisions.221 A number of authors have recommended that an appellate process (for example, a review board) be put into place.222

An appellate process presents the following advantages: first, it creates an entity to reconcile divergent bodies of precedent; second, it also allows panelists a means of relying on prior decisions; and finally, an appellate process can serve to correct incorrect rulings, and, as compared with the courts, may be a more accessible forum to parties who feel their case was decided incorrectly.223 If the case ultimately winds up in the courts, “[c]lear and concise panel decisions based on consistent applications of the UDRP will make things easier for courts reviewing panel decisions.”224

This is precisely what Nominet seems to have done. The Nominet Dispute Resolution Service Policy holds that “either party will have the right to appeal a decision” and that the appeal panel, consisting of three experts,225 “will consider appeals on the basis of a full review of the matter and may review procedural matters.”226 As at 1 May 2007, Nominet had heard 17 appeals and had overturned nine of the initial expert decisions.227

The Nominet appellate process is a good start, but does not reconcile the problem of divergent precedents from non-binding cases.228 Author Patrick D. Kelley has suggested that a successful appeal process should provide, among others recommendations, the following:

221 Freedman & Deane, supra note 15 at para. 160. 222 See ibid. at para. 160 and Kelley, supra note 188 at 204. 223 Kelley, ibid. at 195. 224 Ibid. 225 Nominet Procedure, supra note 215 at para. 18g. 226 Nominet Policy, supra note 214 at para. 10a. 227 Nominet Statistics, supra note 220. 228 Kelley, supra note 188 at 198.


• A system for challenging decisions; • A system for harmonizing inconsistent precedent; • An appeal board that would be controlled by the Internet authority (e.g. ICANN or CIRA) as opposed to a service provider.229

CONCLUSION

HANGES IN THE CDRP can be anticipated for the future, as the CDRP was reported to have undergone a review of its policies in June 2006.230 Similarly, governmental intervention might not be far off,

as domain abuse came to the attention of Parliament when cybersquatters registered domain names using the names of Members of Parliament in 2005.231 However, while we await changes to the CDRP, businesses should be aware of the necessity to implement safeguards against cybersquatters. One author proposes the following risk management techniques:

• conduct trade-mark searches before registering and using domain names;

• register and use domain names as trade-marks. Note that trade-marks in Canada must be used as “source identifiers” and should therefore be marked directly on wares and services; and

• register and use trade-marks as domain names in all important gTLDs and ccTLDs. 232

Another author has also suggested that parties with competing

interests in a domain name work together to provide cross-linking sites.233 To illustrate what this entails, that author gives the example of the website <www.playtex.com>. Both Playtex Products and Playtex Apparel are two separate companies who undeniably have interest in the domain name. When consumers access the above website, they are given the option of entering either the site of Playtex Products or of Playtex Apparel. The page even explicitly states that both companies are two

229 Ibid. at 199-202. 230 Turco, supra note 141. 231 Michael Geist, “Domain Name Dispute Puts Dot-Ca In The Spotlight” Toronto Star (13 June 2005), online: TheStar.com <http://www.michaelgeist.ca/resc/html_bkup/june132005.html>. 232 Freedman & Deane, supra note 15 at para. 162. 233 Deveci, supra note 42 at 224-225.

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292 ASPER REVIEW [Vol. VII separate companies even though they share the same name.234 This cross-linking technique serves to “alley fears of confusion” of parties each having a legitimate interest in the name.235

The above are useful tips for safeguarding against domain name disputes, but they will not in themselves put cybersquatting at bay. Businesses must therefore be keenly aware of their rights when it comes to domain names. They must also be aware of the different forums available to resolve domain name disputes. While at first glance the CDRP may seem restrictive and “stacked against” trade-mark owners in theory, in practice, trade-mark owners should feel comfortable knowing that their dot-ca is protected from blatant attempts of cybersquatting. However, as long as domain name arbitration systems exist, Canadian or otherwise, further improvements will always be warranted as the Internet and accordingly, instances of cybersquatting, continue to grow.

234 As at 10 July 2007. 235 Deveci, supra note 42 at 225.

ESSAY: CHINA’S FUTURE LAWYERS: SOME DIFFERENCES IN EDUCATION AND OUTLOOK

Patricia Ross McCubbin

Malinda L. Seymore Andrea Curcio

Llewellyn Joseph Gibbons * _________________________________________________________

I. INTRODUCTION

HE NUMBER OF CHINESE LAWYERS and law schools is burgeoning1 as China’s legal system undergoes significant substantive changes.2 Whether in business transactions3 or in legal disputes about

* Professor McCubbin is an Associate Professor at Southern Illinois University School of Law, Professor Seymore is a Full Professor at Texas Wesleyan University School of Law, Professor Curcio is a Full Professor at Georgia State University College of Law, and Professor Gibbons is an Associate Professor at University of Toledo College of Law. We thank the Council for International Exchange of Scholars and the United States State Department for providing us with the grants under the U.S. Fulbright Program that allowed us to learn so much. We also thank Professor Deborah Young, a fellow Fulbright Lecturer in Law in China, for her comments on this essay. 1 Kara Abramson, “Paradigms in the Cultivation of China’s Future Legal Elite: A Case Study of Legal Education in Western China” (2006) 7 Asian-Pac. L. & Pol’y J. 302 (noting that in the past 25 years, China has gone from having a few thousand lawyers to over 100,000). See also Weifang He, “China’s Legal Profession: The Nascence and Growing Pains of A Professionalized Legal Class” (2005) 19 Colum. J. Asian L. 138 at 145 (noting that in 1978, China had five law schools and 600 law students, but by 1998, there were 85,000 law students in schools across the country, and in 2005 there were over 300 law schools in mainland China). 2 Even during the brief period that the authors were in China, the National People’s Congress enacted a controversial major overhaul of real property law. See “Governing China: Caught between right and left, town and country” The Economist (8 March 2007), online: economist.com <http://www.economist.com/world/displaystory.cfm?story_id=8815195>. 3 See Anne M. Wall, “Intellectual Property Protection in China: Enforcing Trademark Rights” (2006) 17 Marq. Sports L. Rev. 341 at 364 (noting that as China has “developed a more market-oriented economy and joined the WTO, local Chinese law firms and foreign law firms worked together on mergers, acquisitions, and other foreign investment deals that became popular.”)

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294 ASPER REVIEW [Vol. VII products liability,4 intellectual property,5 or any number of other issues,6

U.S. lawyers in this era of globalization will begin to have more frequent interactions with their Chinese counterparts.7 Additionally, more and more U.S. law students and professors are involved in international exchanges with Chinese law schools.8 These growing opportunities for interaction among U.S.- and China-trained legal professionals bring with them unique challenges and opportunities because of cultural, political, and legal system differences.

The authors of this essay are U.S. law professors who spent the spring 2007 semester as Fulbright Lecturers in Law, teaching U.S. law 4 See e.g. The Associated Press, “2 Chinese toy makers involved in US recalls banned from exporting” International Herald Tribune (9 August 2007), online: International Herald Tribune <http://www.iht.com/articles/ap/2007/08/09/asia/AS-GEN-China-Tainted-Products.php>. Concerns also exist about the quality of U.S. goods going to China. See e.g. Ariana Eunjung Cha & Renae Merle, “In Role Reversal, China Blocks Some U.S. Meat” Washington Post (15 July 2007) A01, online: washingtonpost.com <http://www.washingtonpost.com/wp-dyn/content/article/2007/07/14/AR2007071400264.html>. 5 There have been, and likely will continue to be, many intellectual property disputes between American and Chinese companies and individuals. See e.g. Wall, supra note 3 at 377. 6 See e.g. Peter M. Friedman, “Note: Risky Business: Can Faulty Country Risk Factors in the Prospectuses of U.S. Listed Chinese Companies Raise Violations of U.S. Securities Law?” (2005) 44 Colum. J. Transnat’l L. 241 (discussing a shareholders’ class action suit against a mainland Chinese company for the company’s alleged failure to disclose financial fraud). 7 Martindale-Hubbell now lists 175 law firms with offices in China. See “Search Results for China—Law Firms”, online: LexisNexis <http://www.martindale.com>; see also Wall, supra note 3 at 365 (noting that American lawyers can find it advantageous to work with Chinese law firms and lawyers, especially in dealing with intellectual property disputes). There are strict rules in China governing the practice of law by non-Chinese and even by Chinese who are admitted to practice law but are employed by foreign law firms. See generally Regulations on Administration of Foreign Law Firms’ Representative Offices in China (2002), art. 16, online: Chinese Government’s Official Web Portal <http://english.gov.cn/laws/2005-08/24/content_25816.htm> (“A [law firm] representative office shall not employ Chinese practitioner lawyers; its support staff employed shall not provide legal services to clients”). Henry R. Zheng, “The Evolving Role of Lawyers and Legal Practice in China” (1988) 36 Am. J. Comp. L. 473. Consequently, most U.S. lawyers will need to work with and through independent local counsel in China. 8 See generally Stanley Lubman, “The Study of Chinese Law in the United States: Reflections on the Past and Concerns About the Future” (2003) 2 Wash. U. Global Stud. L. Rev. 1; American Bar Association, “Section on Legal Education and Admissions to the Bar”, online: American Bar Association <http://www.abanet.org/legaled/studyabroad/foreign.html> (listing 17 ABA approved US law programs in China).

2007] China’s Future Lawyers 295

courses to Chinese law students.9 We taught widely different substantive subjects at schools that varied greatly in rank and reputation.10 Despite the many surface differences, we had some very similar experiences. From our time in China, we came away impressed by the intelligence and diligence of that country’s future lawyers. We also took away some observations about the Chinese legal education system and about our Chinese students’ limited knowledge of the U.S. legal system and the U.S. generally.

In this essay we share our observations in the hope that both U.S. lawyers who will interact with their Chinese counterparts and U.S. students and professors at Chinese law schools will benefit from our learning experiences. We begin with a discussion of the significant differences in the legal education systems of the two countries and our teaching methods for bridging that gap, not because we believe the U.S. legal education system is perfect,11 but because we believe that understanding these differences will help to ensure that U.S.-trained legal professionals interacting with Chinese-trained legal professionals do not have ethno-centric expectations about how their counterparts may view and analyze various legal issues. We then discuss our Chinese students’ limited information about the U.S. legal system and U.S. culture in general, since this too could have profound, unintended effects on cross-cultural interactions if it is not expressly recognized.12 We hope that this discussion is not filtered through the lens of American exceptionalism.13 Simply because the Chinese have differing perspectives does not mean that those views are ill-founded or misplaced. Rather, we 9 U.S. law courses taught included: administrative law, civil procedure, constitutional law, criminal procedure, environmental law, intellectual property, torts, and women and the law. 10 Professor Curcio taught at South China Normal University in Guangzhou; Professor Gibbons taught at Intellectual Property Rights School at Zhongnan University of Finance and Law in Wuhan; Professor McCubbin taught at Wuhan University in Wuhan; and Professor Seymore taught at Xiamen University in Xiamen. 11 For recent critiques of the U.S. legal education system, see e.g. Roy Stuckey et al., Best Practices for Legal Education: A Vision and a Road Map (Clinical Legal Association, 2007); William M. Sullivan et al., Educating Lawyers: Preparation for the Profession of Law (San Francisco: Jossey-Bass, 2007). 12 See generally Carola McGiffert, ed., Chinese Images of The United States (CSIS, 2005) (discussing Chinese misperceptions); Phillip C. Saunders, “China’s America Watchers: Changing Attitudes towards the United States” The China Quarterly 161 (March 2000) 41 (misperceptions by the expert “US watchers”). 13 American exceptionalism has been defined as “that bundle of self-satisfied and exclusionary conceits that [...] stress[es] American uniqueness.” Charles Bright & Michael Geyer, “Where in the World is America?” in Re-thinking American History in a Global Age (Thomas Bender ed. 2002) at 63-64 quoted in Deborah M. Weissman, “The Human Rights Dilemma: Re-thinking the Humanitarian Project” (2004) 35 Colum. Hmn. Rts. L. Rev. 259 at f.n. 387.

296 ASPER REVIEW [Vol. VII highlight those differences to help improve communications between members of the Chinese and U.S. legal communities. We do so in the same spirit of mutual respect that guided us and our students, as together we pursued the quest for knowledge to improve ourselves and ultimately our two legal systems.

II. A DIFFERENT APPROACH TO LEGAL EDUCATION

N CHINA, AS IN MANY OTHER COUNTRIES, law school is an undergraduate degree. Chinese law students begin a four-year law school program upon high school graduation.14 Many students also obtain a post-

graduate Masters degree, and a few even acquire PhDs in law. Our students were almost all either upper-level undergraduate law students, Masters students, or PhD students. We quickly realized, however, that though these students were quite talented,15 they had not been taught to engage in critical legal analysis, the skill so central to the U.S.’s legal system.16 Via lectures,17 Chinese law students passively receive vast 14 See Weifang He, supra note 1 at 146-47 (noting that similar to other countries adopting a Continental model of legal education, in China, law students attend law school right after high school graduation). 15 Admission to Chinese universities is highly competitive, and the process begins with exams that qualify only a fraction of students for college-preparatory high schools. In 2004, only 62.9% of students in junior secondary school (what we might call “junior high school” or “middle school”) entered into senior secondary school. “21-24 Proportion of students Entering into Schools of Higher Grade”, online: China Statistics 2005 <http://www.allcountries.org/china_statistics/21_24_proportion_of_students_entering_into.html>. Even with this considerable reduction of college-bound high school students, the number of students who sit for the national college entrance examination exceeds the number of seats at Chinese universities. Barry Sautman, “Affirmative Action, Ethnic Minorities and China’s Universities” (1998) 7 Pac. Rim L. & Pol'y J. 77 at 94. In 2007, 10 million Chinese high school students sat for the National College Entrance Exam, “vying for about half that number of university places.” Guo Shiping, “College entrance exams make or break in China” Reuters (6 June 2007), online: Reuters <http://www.reuters.com/article/inDepthNews/idUSPEK21805120070606>. 16 Critical thinking has been defined as “reasonable and reflective thinking that is focused upon deciding what to believe or do.” Stephen P. Norris, “Can We Test Validly for Critical Thinking?” Educ. Researcher (December 1989) at 21, quoted in Steven I. Friedland, “How We Teach: A Survey of Teaching Techniques in American Law Schools” (1996) 20 Seattle U. L. Rev. 1 at 7. It has been said that critical thinking is “a mode of thinking that will enable [people] on their own, to determine what is significant and what is not, to avoid being misled by personal biases and other distractions, and to get to the heart of a matter and to a satisfactory solution as often as possible.” J. David Reitzel, “Critical Thinking and the Business Law Curriculum” (1991) 9 J. Legal Stud. Educ. 471. As Suzanna

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amounts of information, which they are required to memorize and then apply to multiple choice or short answer questions.18 Even in students’ theses and major papers, the emphasis is on being descriptive and applying the law to a problem as if it has a single correct answer, rather than viewing the practice of law as a dynamic process in which there may be two (or more) “correct” answers, one of which is more favorable as a matter of public policy.19 Chinese students simply are not often asked or encouraged to examine the assumptions underlying legal rules or decisions; nor are they asked to think of arguments for both sides of an issue, which is one of the underpinnings of legal analytical training in the U.S.20

We suspect that there are many reasons for this difference in orientation between the U.S. and Chinese legal education systems. First of all in China, the emphasis is on “knowing” the law, rather than “finding” the law and applying it to practical problems or using it creatively.21 Also, Chinese law is voluminous; the Chinese law licensing examination requires students to have memorized even larger quantities

Sherry notes, “[a]n education that merely inculcated cultural norms might be suitable for a totalitarian state, where the citizen’s major responsibility is to conform.” Suzanna Sherry, “Responsible Republicanism: Educating for Citizenship” (1995) 62 U. Chi. L. Rev. 131 at 172. 17 Weifang He, supra note 1 at 147. 18 Mari J. Matsuda discusses the goal of American university education as follows: “We understand, now, in the modern university, that the landscape of human knowledge is so vast that the goal of cabining all knowledge into a list that students can memorize is absurd. We have said for a while that what we are teaching is critical thinking.” Mari J. Matsuda, “Who is Excellent?” (2002) 1 Seattle J. for Soc. Just. 29 at 36. Our experience suggests that this view of university education has not reached the mainstream in China. 19 Matthew Stephenson identifies this kind of formalism as central to the legal culture in China. Matthew C. Stephenson, “A Trojan Horse Behind Chinese Walls? Problems and Prospects of U.S.-Sponsored ‘Rule of Law’ Reform Projects in the People’s Republic of China” (2000) 18 UCLA Pac. Basin L.J. 64 at 85-86 (noting that “the consensus seems to be that the Chinese approach to law is too formalistic, and that Chinese students tend to approach law with the attitude of wanting to know ‘the right answer’ rather than thinking critically about the issues involved in legal questions.”). He cautions, however, that changing legal culture so that it embraces instrumentalism and critical thinking may not lead to broad legal reforms. “Social and political realities—especially the material interests of the legal elite and those members of society able to purchase their services—probably have more to do with how laws are interpreted and applied than the particular style of legal reasoning taught.” Ibid. at 88. 20 For a general discussion of the development of the current Chinese legal education system, see generally Zou Keyuan, “Professionalising Legal Education in the People’s Republic of China” (2003) 7 Sing. J. Int'l & Comp. L. 159. 21 See e.g. Mao Ling, “Clinical Legal Education and the Reform of Higher Legal Education System in China” (2007) 30 Fordham Int’l L.J. 421.

298 ASPER REVIEW [Vol. VII of information than that required by various U.S. state bar examinations.22 Thus, Chinese law professors feel compelled to impart “knowledge” via lectures.23 In addition, Chinese professors often teach more courses and larger classes than U.S. law professors. With enrollments well over 100 students on average, it is difficult to do much more than lecture. Moreover, China has a civil law system. Since teaching critical legal analysis is most easily done through case law analysis24 and a civil law system is less dependent upon case law,25 it is understandable that this critical analysis is not a formal part of Chinese legal education tradition and culture.26 In addition, in China, legal training remains connected to Communist Party politics27—a political system that does not encourage the questioning of authority.28 Finally, there is a strong cultural tradition of respect for teachers, judges, and authority figures,29 meaning that students will not skeptically question (at least publicly) what they are told. Together these factors have led to a

22 For a description (and critique) of current bar examinations given by each state, see generally Andrea A. Curcio, “A Better Bar: Why and How the Existing Bar Exam Should Change” (2002) 81 Neb. L. Rev. 363. 23 See generally Mao Ling, supra note 21. 24 See e.g. Carl E. Schneider, “On American Legal Education” (2001) 2 Asian-Pac L. & Pol’y J. 76 at 85. 25 See Weifang He, supra note 1 at 146; but see Mao Ling, supra note 21 at 427 (noting that more and more Chinese law professors are using cases to illustrate application of facts and theory). 26 That is not to say that one could not teach critical legal analysis in a civil law system. As Professor Schneider notes, even civil law systems have some cases, and even without them the civil law statutes can also be used to illustrate critical legal thinking, simply by the professor posing hypothetical problems based upon the statutory language. Schneider, supra note 24 at 85. 27 See Abramson, supra note 1 at f.n. 94 (noting that Sichuan University’s website describes its graduate level legal training as being designed to “‘cultivate high level legal workers and managers’ in line with the needs of the socialist legal structure and economic and social management. In addition, students should ‘insist on carrying out the Party’s basic itinerary, guiding principles and policies, and Chinese laws and regulations: ardently love the socialist mother land (zuguo) and possess good political qualities and professional morals.’”) 28 See e.g. Pitman B. Potter, “Legal Reform in China: Institutions, Culture, and Selective Adaptation” Law & Social Inquiry 29:2 (April 2004) 465 at 466 (noting that despite the movement toward legal reform in China, the “role of law in China remains conflicted” in part because “fealty to socialism unavoidably qualifies and in the view of many diminishes the capacity for law to serve as an independent source of restraint on government behavior.”) 29 See Clara Liang, “Note: Red Light, Green Light: Has China Achieved Its Goals Through 2000 Internet Regulations?” (2001) 34 Vand. J. Transnat’l L. 1417 at 1426 (noting that “[r]espect for authority is thus engrained in Chinese culture because it ensures stability”); see also Kam C. Wong, “Whose Life Is It Anyway” (2006) 5 Cardozo Pub. L. Pol’y & Ethics J. 233 at f.n. 156.


legal education system that focuses on imparting knowledge rather than teaching critical analysis.

Once we understood that our Chinese law students had not been exposed to the U.S. critical legal analytical approach, we all chose to use our U.S. law courses primarily as a vehicle to teach this type of analysis.30 In our study questions and our in-class discussions, we asked our Chinese students to question the accuracy of statements in the various materials they read, to identify the underlying assumptions, and to consider the logical implications that flow from a particular position. We worked with them to identify the policy justifications that supposedly support a particular legal rule, to question whether the rule actually furthers that policy, and to ask whether competing policies should be supported instead. Finally, we pushed our students to reach their own conclusions on a given issue and to explain why those conclusions made sense. We also encouraged them to engage in classroom discussions because we felt strongly that these discussions helped hone their analytical skills.31

Our students eventually became adept at classroom discussions, and we found that, even given the language barriers, our students were able to grasp and analyze key issues and quickly developed critical thinking skills. In fact, overall, our Chinese students’ examination answers and papers were as good as or better than those that we would get from their U.S. student counterparts. As one student wrote, “we had never looked at both sides of an issue before—it is very helpful to do that.”

In sum, we found that when taught, Chinese law students learned relatively quickly to analyze a legal issue. However, Chinese lawyers generally are not trained in the kind of critical legal analytical skills that serve as the basis for much of a U.S. legal education. Thus, it is important for members of the U.S. legal community to remember that their Chinese counterparts will likely approach problems from a different

30 We had originally thought our goal was to teach a fair amount of substantive U.S. law. When we realized that our students would be better served by learning critical legal analytical skills, we adapted our teaching plans. For example, some of us began downloading cases and substantially editing them to focus students’ reading on key issues. We also began assigning study questions and hypothetical problems prior to class. 31 Engaging students in classroom discussions is often difficult in the U.S., and it was even more difficult in China where, because of cultural differences and because of embarrassment about their oral English skills, the students were often very reluctant to speak in class. We found that asking a question in class and having them first discuss it with each other in Chinese and/or in English both challenged them to become active learners and led to a greater willingness to engage in class discussions in English. We also found that getting to know our students on an individual basis in non-classroom settings made them feel more comfortable about speaking in class.

300 ASPER REVIEW [Vol. VII perspective, which may be due, in significant part, to differences in legal education methodology.32

III. LIMITED UNDERSTANDING OF THE U.S. LEGAL SYSTEM AND U.S. CULTURE

HE OTHER REASON that Chinese lawyers and U.S. lawyers may each have their own approaches to issues is the differences in the legal structures and cultural heritages of the two countries. While that

may seem obvious, it is important to recognize just how little Chinese lawyers and law students may understand about the U.S. legal system or U.S. culture generally—an information gap that may create unproductive cross-cultural interactions unless it is expressly addressed. Of course, U.S. understanding of Chinese legal structures and culture is much more limited than their understanding of ours,33 but because American culture is one of the U.S.’s largest exports,34 we tend to assume a familiarity by others that may not be there.

We discovered that while our students might have some familiarity with the basic structure of our legal and political system, such as the three branches of government, they lacked knowledge of the more

32 Some differences may also be a result of the lack of precise equivalents for many terms of art, for example the seminal and often discussed term “rule of law.” “[T]he Chinese term for ‘rule of law’ is fa-zhi. Fa means ‘law,’ Zhi means ‘to rule’ or ‘to govern.’ By itself, fa-zhi can mean either the rule of law, or rule by law.” Michael Dardzinski, “Hong Kong in Transition: Convergence or Divergence in the Implementation of the Joint Declaration” (1997) 91 Am. Soc'y Int'l L. Proc. 176 at 177 (italics in original). “According to [a leading Chinese scholar], whereas rule by law is concerned only with how the government uses laws to impose its rule, rule of law emphasizes that the government must also be bound by law.” Chris X. Lin, “A Quiet Revolution: An Overview of China's Judicial Reform” (2003) 4 Asian-Pac. L. & Pol'y J. 255 at 264 (italics in original). These possible differing uses of the same term may lead to ambiguity and confusion in communications. 33 For example, few Americans understand that Chinese culture has shaped the Chinese view that a contract does not embody a final agreement, but rather is a document reflecting a desire to work together in a long-term fluid relationship where the terms may be changed as needed. Nor do most Americans understand the cultural perspective that informs the Chinese view that it is efficient and not illogical to have the same person be a mediator and an arbitrator. For a discussion of these cultural-legal differences, see William K. Slate II, “Paying Attention to ‘Culture’ in International Commercial Arbitration” Dispute Resolution Journal 59:3 (August/October 2004) 96 at 100-101. 34 See e.g. Martha Bayles, “Now Showing the Good, the Bad, and the Ugly Americans: Exporting the Wrong Picture” Washington Post (28 August 2005) B01; John Rockwell, “The New Colossus: American Culture as Power Export” The New York Times (30 January 1994) B1.

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specific aspects of our system, many of which we simply take for granted.35 For example, few students had an understanding of precisely how our statutes are made and how they bind the citizenry, much less the subtle nuances of the administrative law state or the broader ramifications of federalism. In addition, they were unfamiliar with the role of attorneys in questioning witnesses or more generally investigating the facts of a dispute, because in China, judges, rather than attorneys, undertake these tasks. Similarly, the concept of our jury system was foreign (but fascinating) to these students, since judges, rather than juries, decide cases in China. Indeed, one professor’s students asked a very fair question, but one we rarely stop to consider: why would a legal system want cases decided by people without any legal training?36 More generally, the students had little sense of the role of our judiciary (and, again, were fascinated by it), since it is vastly different from the role of judges in this civil law society. The students, for example, were not familiar with the responsibility of our courts to determine the constitutionality of statutes,37 interpret statutes, create common law doctrines or establish binding precedent. In sum, we found that our Chinese students were not familiar with the U.S.-style “rule of law” in both the large sense (a nation governed by fixed laws, not by the whims of individuals, at least in theory38) and in the small sense (how stare decisis and an independent judiciary lead to predictable outcomes that people can rely on in their everyday life).39 35 Much of this knowledge may have been gained informally by watching U.S. motion pictures and television shows or through media coverage, rather than through formal courses on U.S. law or courses in comparative law. Consequently, there are always concerns about the accuracy and depth of the students’ pre-existing knowledge. 36 There were other things about the U.S. justice system that surprised our students. For example, students found it interesting that a U.S. citizen may sue to enforce her constitutional rights, since the Chinese Constitution creates no private right of action. This is not to say that Chinese citizens have no statutory redress against arbitrary government action. See Mei Ying Gechlik, “Judicial Reform in China: Lessons from Shanghai” (2005) 19 Colum. J. Asian L. 97 at 102-03. Nor are all Chinese unaware of their rights; 27% of the individuals surveyed in Shanghai would sue an agency that denied them a license. Ibid. 37 Hal Blanchard, “Constitutional Revisionism in the PRC: ‘Seeking Truth from Facts’” (2005) 17 Fla. J. Int'l L. 365 at 400. (“Under China’s system of legislative supremacy, the [National People’s Congress], by the very act of passing laws, certifies their constitutionality thereby rendering all legislation immune to judicial review.”) 38 We did find it interesting that our Chinese students seem to believe that American judges are not political and strictly follow a “rule of law.” 39 The four essential characteristics of the rule of law are: “(1) fidelity to rules (2) of principled predictability (3) embodied in valid authority (4) that is external to individual government decision makers.” Ronald A. Cass, The Rule of Law in America (Johns Hopkins University Press, 2001) at 4. This is not to suggest that


Some of that can be attributed to differences between China’s civil law society and our common law one. But some of it also stems from the fact that China’s modern legal system is still in its infancy and so far lacks important elements—such as an independent judiciary resistant to corruption—that may help it become more effective in the future.40 The dialogue about legal reform in China continues apace, but in the meantime, U.S. lawyers, professors, and students need to be aware that what we take for granted—for example, the willingness and ability of a court to enforce its order41—will not be so plainly evident to the Chinese, and the differences in perspective may have significant implications for U.S.-Chinese interactions.

Members of the U.S. legal community also need to understand that just as Chinese lawyers and law students may not accurately understand our legal system, they also may have limited or incorrect information about U.S. culture generally. We found in talking with our students in the classroom and after class that many of them had ideas about the U.S. that were based upon myths, stereotypes, and the U.S. movies they see or music they hear. For example, after the massacre of 32 students at Virginia Tech in the Spring of 2007, we found ourselves correcting our students’ notion that all Americans owned guns. Students were sure that everyone in the U.S. believed in God, which explained for them the rise of the Religious Right in U.S. politics. In combining these two ideas, one student assured one of us that all Americans would like to shoot gay people if given the opportunity. Students were surprised to discover that women often take their husbands’ names upon marriage, since Chinese women always keep their own names. Similarly, the debate over abortion in the U.S. was inexplicable to students who viewed the

we saw ourselves as—in Judge Jack Weinstein’s words—proselytizers of the rule of law. See Jack B. Weinstein, “Proselytizers for Our Rule of Law” (2003) 28 Brooklyn J. Int’l L. 675. In fact, some of the earliest questions we received from students, and which we tried to address honestly, were about the apparent failings of the U.S. in following “the rule of law”—questions about whether the U.S. violated international law in invading Iraq, whether the Supreme Court’s decision in Bush v. Gore was an example of mere politics in judicial decisions, and whether the U.S. was abiding by its treaty obligations in detaining prisoners in Guantanamo Bay, just to name a few. We were also aware that trying to import “U.S.-style” rule of law can be seen as “legal imperialism.” Stephenson, supra note 19 at 65-66 & 85-86. 40 See e.g. Graig R. Avino, “China’s Judiciary: An Instrument of Democratic Change?” (2003) 22 Penn. St. Int’l L. Rev. 369 at 382-384 (discussing the current lack of independence and corruption within the Chinese judiciary). 41 Nathan Greene, “Note: Enforceability of The People’s Republic of China’s Trade Secret Law: Impact on Technology Transfer in the PRC and Preparing for Successful Licensing” (2004) 44 IDEA 437 at 452 (Chinese judges lack the political power to enforce judgments, must rely on local officials, and may not impose criminal contempt or similar sanctions to aid in their jurisdiction.).


fetus as the woman’s property. Students also took a very different view of the Watergate scandal and viewed Richard Nixon as heroic for being the first U.S. president to visit China. It is not surprising to find such views, when we too have our own myths and stereotypes of Chinese culture, and significant gaps in knowledge as well. One of us received immediate correction in making an unthinking reference to “the country of Taiwan.” In China, of course, that would be the province of Taiwan, which is in no way an independent country! The important thing to realize is simply that such misperceptions by either party may substantially affect any U.S.-Chinese interactions. IV. CONCLUSION

N THIS ESSAY, we share some of our insights about the different perspectives that Chinese lawyers and law students may bring to their interactions with their American counterparts. Our goal is to

help members of the U.S. legal community avoid “cultural encapsulation”—the “tendency to see the world through one set of assumptions based on [one’s] own self-referenced experience.”42 Culture is very powerful because of its invisibility. But if U.S. lawyers, law students, and professors stop to examine their assumptions and those of their counterparts, they may be better able to address those issues in their cross-cultural exchanges.43 Thus, to the extent that one hopes to have successful interactions with the Chinese, it is critical to be aware that each party may come to the table with different skill sets, based upon different legal education methodologies, as well as misperceptions of each other’s legal and political systems and general societal culture. Just as Chinese law and culture remain a mystery to many of us, the U.S. legal landscape and our culture remain a mystery to many of our Chinese colleagues. If we approach U.S.-China interchanges from this perspective, they will no doubt be more fruitful for all parties involved.

42 Nancy Arthur, Counseling International Students: Clients from Around the World (2004) at 68 cited in Teresa Kissane Brostoff, “Using Culture in the Classroom: Enhancing Learning for International Law Students” (2007) 15 Mich. St. J. Int’l L. 557 at 564. 43 As Clifford Geertz has noted, “[M]ost of what we need to comprehend—a particular event, ritual, custom, idea, or whatever—is insinuated as background information before the thing itself is directly examined.” Clifford Geertz, The Interpretation of Cultures (New York: Basic Books, 1973) at 9.

I

CONTRIBUTORS

ABOUT THE CONTRIBUTORS Dr. Bryan Schwartz Professor of International Business and Trade Law University of Manitoba Law School Education: LL.B (Queen’s); LL.M. (Yale); J.S.D. (Yale) Bryan Schwartz has been a professor of law at the University of Manitoba since 1981. He is the inaugural holder of the Asper Chair of International Business and Trade Law, which was created in 1999. He has produced eight books and over sixty academic articles on a wide range of topics that include constitutional law, international business and trade law, administrative law, labour law, and aboriginal law. In addition, he is the founder of two annual publications:

• The Asper Review of International Business and Trade Law; and • Underneath the Golden Boy: A Review of Manitoba Statutes

Perry Cheung Perry Cheung will receive his LL.B. in 2008 from the University of Manitoba. Prior to attending law school, he studied business at the University of Western Ontario. During his university career, Mr. Cheung has also been a distinguished student athlete. In addition, he has been involved with the Asper Review of International Business and Trade Law as an editor for Volumes 6 and 7. Upon graduation, Mr. Cheung will begin articling with Blake, Cassels, & Graydon LLP in Calgary, Alberta. Patrick J. Glen Patrick J. Glen graduated with honours in May 2006 with an LL.M. in international law from Georgetown University Law Center. In 2005, he graduated with honours with a J.D. from Ohio Northern University, Pettit College of Law. He previously graduated cum laude with a Bachelors degree in philosophy from Dickinson College and has previously been published in the Ohio Northern University Law Review and the Fordham Journal of Corporate and Financial Law. Mr. Glen currently resides in Washington, D.C. He is an attorney with the United States Department of Justice, Civil Division, where he works in the Office of Immigration Litigation. He is a member of the Pennsylvania State Bar and the bars of several federal courts of appeal. Tom Newnham Tom Newnham will receive his LL.B. in 2008. He is a graduate of the University of Manitoba’s Asper School of Business where he majored in Marketing and International Business. He previously worked at a


national advertising agency and has extensive experience in the financial services industry. Mr. Newnham is completing his final year of legal studies at the University of Victoria Faculty of Law. Upon graduation, Mr. Newnham will begin articling with Bull, Housser & Tupper LLP in Vancouver, British Columbia. Peter Ward Peter Ward is currently in the third year of the LL.B. program at the University of Manitoba. Prior to law school, Mr. Ward earned a B.A. (Honours) and an M.A. in Sociology and had a lengthy career in the printing/publishing industry. He will article at Taylor McCaffrey LLP in Winnipeg and hopes to pursue a career in tax and commercial law. Miron Mushkat Miron Mushkat is a Visiting Professor in the Department of Politics and Public Administration at the University of Hong Kong. He is also the Chairman and Chief Economist of QI Capital, an Asia-oriented investment management boutique, and previously served in a variety of senior research positions in the Asian and global investment banking and investment management industries. His principal research interests lie in political economy, applied public policy analysis, public financial management, and social science methodology. He has published extensively in these areas. Roda Mushkat Roda Mushkat is a Professor of Law and Director of the Center for International and Public Law at the Brunel University School of Law. She was previously a Professor of Law and Head of the Department of Law at the University of Hong Kong, where she had taught for 26 years. She continues to serve as an Honorary Professor of Law at that institution. She is also a member of the Israeli Bar and was a visiting professor/scholar at a number of North American (Harvard, Yale, Victoria) and British (Cambridge, London) universities. Her principal research interests include public international law, international environmental law, constitutional law, jurisprudence/legal theory, and law and society. She has published widely in these fields. Her current research projects focus largely on international environmental law in the Asian context, international legal compliance, international refugee law, autonomy under international law, incorporation of international legal norms into domestic law, and constitutional reform in divided societies. Her latest book, International Environmental Law and Asian Values: Legal Norms and Cultural Influences, has been published by the University of British Columbia Press.

2007] About the Contributors 309

Katie Lula Katie Lula has written several articles on various aspects of intellectual property law. In 2007, she graduated from the University of Kansas School of Law, focusing on media law and international trade and finance. In 2004, she obtained her Bachelor's Degree in English Creative Writing, with Honours. She studied art history in France, Switzerland, and Italy for three months, and has extensive dance experience as a performer, choreographer, teacher, and scholar. Lisa Pietrzak Lisa Pietrzak is studying law at the American University, Washington College of Law, and expects to receive her J.D. in 2008. Ms. Pietrzak has been involved in the law school community as the Associate Executive Editor of the International Law Review and a Senior Editor for the Business Law Brief. She has also been involved with the Business Law Society, the Latina/o Law Students Association, and the International Trade Law Society. Outside of the law school, Ms. Pietrzak worked as a Securities and Exchange Commission, Division of Enforcement intern and as a tax clerk for a large law firm in Washington, DC. Ms. Pietrzak also gained experience as a law clerk for the Small Business Administration, a commercial litigation clerk at a small law firm, and as a judicial extern for the Commodity Futures Trading Commission. Ms. Pietrzak is also fluent in Mallorcan, speaks Spanish, and holds an M.B.A. from the University of Connecticut. Additionally, she is completing coursework to sit for the CPA Exam in 2009. Bo James Howell Bo James Howell will receive his J.D. from the Gonzaga University School of Law in May 2008. Mr. Howell has been actively involved in the law school community as an Associate Editor of the Gonzaga Law Review, the Editor-in-Chief of the Gonzaga Journal of International Law, and as a researcher at the Gonzaga University School of Law. He has also been involved with the University Legal Assistance Program in its Low Income Taxpayer Clinic and Litigation Support Clinic and he was a 2007 Jessup Cup Appellate Law Competition participant, where his team placed third. Additionally, Mr. Howell’s team’s brief took third place in the Northwest Regional Competition. In the past, Mr. Howell has worked as a law clerk for the Amaro Law Office and the Spokane City Attorney Office and as a judicial extern for Judge Patricia C. Williams of the U.S. Bankrupcty Court for the Eastern District of Washington. Additionally, he has worked for the Securities and Exchange Commission and has served in the United States Navy. Upon graduation, Mr. Howell will begin clerking for Justice Mark Gibbons of the Nevada Supreme Court.


Melissa Beaumont Melissa Beaumont has just completed her second year of law school at the University of Manitoba and will be graduating in 2008. She also holds a Bachelor of Commerce (Honours, with Distinction) from the University of Manitoba, where she majored in marketing. At law school, Ms. Beaumont has been involved with the Manitoba Students Business Law Group Inc. and Pro Bono Students Canada for the 2006/2007 year. That same year, she earned a spot on the Faculty of Law Dean's List and won the D.A. Thompson, Q.C. award for highest standing in International Business Law. In the upcoming 2007/2008 year, Ms. Beaumont will be acting as the Vice-President of the Manitoba Students Business Law Group Inc. She has spent the summers of 2006 and 2007 working as a summer student for Thompson, Dorfman, Sweatman LLP and will be articling with the same firm in 2008. Patricia Ross McCubbin Professor Patricia Ross McCubbin is an Associate Professor at the Southern Illinois University School of Law in Carbondale, Illinois, where she teaches Environmental Law and Administrative Law. She received a Fulbright grant to teach law at the Wuhan University School of Law in Wuhan, People’s Republic of China in the Spring of 2007. An expert on various federal environmental statutes, Professor McCubbin is currently Vice-Chair for Public Service of the Constitutional Law Committee within the American Bar Association’s Section on Environment, Energy and Resources. She has also served as a moderator of several panels at the American Bar Association’s Annual Environmental Law Conferences. Her scholarship focuses on the regulation of environmental contaminants under the United States’ Clean Air Act and Clean Water Act. In the 2006-2007 academic year she received the School of Law’s Outstanding Scholar Award. Prior to entering academia, Professor McCubbin served as an accomplished attorney with the Environmental Defense Section of the U.S. Department of Justice in Washington, D.C. Malinda L. Seymore Malinda L. Seymore is Professor of Law at Texas Wesleyan University School of Law, where she teaches Adoption Law, Criminal Law & Procedure, Evidence, and Women & Law. Professor Seymore received a Fulbright grant to teach U.S. Constitutional Law, U.S. Criminal Procedure, and Women in U.S. Law at the Xiamen University School of Law in Xiamen, People's Republic of China in the Spring of 2007. Professor Seymore's diverse research interests include international adoption and the status of women and foreigners in U.S. law. She created and chaired a conference on international adoption at Texas Wesleyan University School of Law in 2003. Her most recent publication

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focused on the constitutional restriction of the U.S. presidency to “natural born citizens.” Llewellyn Joseph Gibbons Llewellyn Joseph Gibbons is an Associate Professor and Coordinator of the Intellectual Property Program at the University of Toledo College of Law in Toledo, Ohio. Professor Gibbons received a Fulbright grant to teach U.S. intellectual property law at the Zhongnan University of Economics and Law in Wuhan, People’s Republic of China in the Spring of 2007 and his grant was renewed for Spring 2008. Professor Gibbons is also a research fellow at the Intellectual Property Rights Center at Zhongnan University of Economics and Law, one of China's leading intellectual property research centers. Professor Gibbons’ principle areas of research are intellectual property rights, online dispute resolution, ecommerce, and intellectual property licensing and management. He has written extensively on all of these topics and several of his articles have been cited by courts as persuasive authority. Andrea Curcio Professor Andrea Curcio is a Full Professor at Georgia State University College of Law in Atlanta, Georgia. She teaches in the areas of Civil Procedure and Evidence. Professor Curcio received a Fulbright grant to teach law at South China Normal University in Guangzhou, People’s Republic of China in the Spring of 2007. She has done extensive research on learning theory and teaching methodologies and she is on the Advisory Board of Georgia State's Center for Teaching and Learning. Professor Curcio has published numerous articles on “the scholarship of teaching and learning,” and has also published articles on tort law, evidence law, rape laws, American Indian and federal litigation issues.