One of the diverse sources from which the international intellectual property regime emanates is an annual unilateral adjudication of foreign government trade policies by the United States under the so-called “Special 301” program and report. For over two decades the report has functioned as one of the primary sticks for the U.S.’s “carrot and stick” approach to international intellectual property policy. The report weighs countries’ compliance with intellectual property standards and enforcement efforts—both those embedded in existing treaties and those the U.S. would like to see adopted. It threatens and rewards countries via inclusion on or delisting from its annual ‘Watch List’ (“WL”) and ‘Priority Watch List’ (“PWL”), and has the power to implement unilateral trade sanctions when U.S. demands are not met. The construction of the report requires the administration to take decisions on which countries it views as having “adequate” intellectual property protection. The report is thus a key expression of the trade policy of the U.S. in intellectual property matters.
The Special 301 program takes its name from, and builds upon the administrative structure of, Section 301 of the Trade Act of 1974. That Act was passed at a time of large and growing trade deficits, increasing flight of manufacturing activities abroad, the rise of Japan as an industrial giant, skyrocketing foreign debt and economic crises caused by dependency on foreign oil imports, all of which fueled a mood in U.S. policy circles that was “decidedly protectionist.” U.S. export industries attached considerable blame for the U.S. economic woes on the weak enforcement regimes in the General Agreement on Tariffs and Trade (GATT), and the accompanying inability of the U.S. to enforce free trade commitments abroad. Section 301 of the Trade Act of 1974 was a key element of the response. The program authorized the President to impose economic sanctions on countries that “burden or restrict United States commerce.” Notably, the law did not require that the alleged foreign conduct violate any trade agreement with the United States to be subject to sanction under the Act.
At the urging of the pharmaceutical and copyright industries, Section 301 was amended in 1984 and 1988 to expand the policy into intellectual property. The 1984 amendment established “adequate and effective protection of intellectual property rights” as grounds for 301 investigation and sanctions. In 1988, the statute was amended again to create the new intellectual property-focused “Special 301” program.
Under Special 301, the USTR is required to annually publish in the Federal Register a list of countries that deny “adequate and effective protection of intellectual property” or “deny fair and equitable market access for U.S. firms that rely on intellectual property,” and then designate among those countries the subset of worst actors to be designated “priority foreign countries.” These requirements resulted in the well-known ‘Watch List’ and ‘Priority Watch List,’ which serve as warning mechanisms to countries perceived as out of compliance with USTR’s preferences on IP policy. Designation as a ‘Priority Foreign Country,’ triggers a 30-day countdown during which targeted countries must “(enter) into good faith negotiations” or “(make) significant progress in bilateral or multilateral negotiations” or face sanctions determinations under the Section 301 process. Priority foreign country determinations are reserved for countries “that have the most onerous or egregious acts, policies, or practices,” that “have the greatest adverse impact (actual or potential) on the relevant United States products,” and for which “there is a factual basis for the denial of fair and equitable market access as a result.”
Special 301 findings are, by intent and definition, unilateral findings by the U.S. and subject to U.S. standards. As in the original Section 301, foreign practices and policies do not have to contravene any trade agreement with the United States to be found “unreasonable.” Nor must the U.S. take into account a country’s level of economic development in determining what is fair or unfair—a sharp departure from GATT rules promoting differential treatment for developing countries.
The first use of Section 301 unilateral sanction authority in an intellectual property case followed the 1984 amendments listing a lack of adequate intellectual property protection as a potential ground for a 301 action. The Reagan Administration made quick use of the new powers by launching investigations of two industrializing nations with histories of infant-industry protection: Korea and Brazil. Each case ultimately led to new intellectual property laws being passed in the targeted countries, marking the strategy as a huge success in industry perception.
A 1985 action against Brazil pressed for changes in Brazil’s informatics policy. The U.S. alleged that Brazil failed to adequately protect copyrights in computer software, as part of a broader attack on Brazil’s national import substitution policy favoring domestically produced computers and software. At the time, there was no bilateral or multilateral agreement binding Brazil to grant copyrights on software. But the U.S. threats were successful in pressuring Brazil to alter its policy in 1988, when Brazil amended its copyright law to include computer software protection and pledged to phase out its local purchasing preferences.
A second complaint in 1987 concerned Brazil’s lack of pharmaceutical product patent protection. At least 50 other countries denied patents for pharmaceuticals at the same time period, and Brazil was not required to grant pharmaceutical patents by any bilateral or multilateral commitment binding it. Nevertheless, the U.S. carried forward its 301 complaint and used its unilateral authority to impose trade sanctions on Brazil until it changed its law. Brazil responded with a GATT suit challenging the legality of the unilateral retaliation. The GATT complaint was never adjudicated, however, because the U.S. blocked the formation of a dispute settlement panel. Sanctions were ultimately lifted in 1990 when a new Brazilian president promised to revise its law to provide pharmaceutical patents.
A 1985 301 case against Korea also included complaints about Korea’s lack of patent protection for pharmaceuticals. That complaint ultimately ended with a bilateral agreement with the US on intellectual property. The agreement required Korea to amend its copyright and patent laws, creating what one negotiator described as a “blueprint for other agreements,” including TRIPS.
The Special 301 program creating watch lists for intellectual property was created in 1988, during the Uruguay Round of GATT negotiations that ultimately produced the TRIPS agreement. During those early years, the US government used Special 301 to pressure countries to accept TRIPS and to punish dissenters. The US placed many of the leading countries opposing TRIPS in the first Special 301 Report in 1989, including Brazil, India, Argentina, and Egypt. Two years later, India, China and Thailand became the first countries to grace the Priority Foreign Countries listing, triggering section 301 investigations. Brazil was sanctioned with a loss of GSP benefits in 1988; Thailand lost them in 1989; and India in 1992—all on matters related to pharmaceutical patents. None of the countries were in derogation of any multilateral or bilateral commitment with the U.S.
Through these years, the credible threat of sanction appeared to be the driving policy choice motivating the program. Foreign countries had a great deal to lose from US sanctions that limited access to the broad US market. And because 301 sanctions were determined unilaterally, there was little countries could do to influence the process and resist its negative determination. Accepting the regime shift of intellectual property matters into the multilateral World Trade Organization (WTO) became one strategy of developing countries to get rid of Special 301’s unilateral threats and sanctions. But that strategy failed.
The passage of the WTO’s agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) secured most of the substantive goals on intellectual property policy that the USTR had pursued in the 1980s. Through TRIPS, the WTO included a broad array of minimum intellectual property standards for every member, including product and process patents in every field of technology. And perhaps most importantly, it resolved longstanding U.S. complaints about the lack of enforcement procedures in GATT by establishing a formal and binding dispute resolution process which could authorize trade sanctions for violations. The dispute settlement provision came with a prohibition on the kind of unilateral adjudication previously effected under Section 301 and Special 301. Article 23.2 of the WTO agreement provides: “Members shall not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired or that the attainment of any objective of the covered agreements has been impeded, except through recourse to dispute settlement in accordance with the rules and procedures of this understanding.” It was thus thought by many developing countries that the enactment of TRIPS would spell the demise of Special 301.
The creation of the WTO did not end Special 301. Instead, Congress amended the Trade Act to specify that “[a] foreign country may be determined to deny adequate and effective protection of intellectual property rights, notwithstanding the fact that the foreign country may be in compliance with the specific obligations” of TRIPS.
Although the legality of the continuation of Special 301 under the WTO is open to question, as described below, continue it did. The number of countries identified on Special 301 watch lists steadily increased in the post-WTO years while the number of countries designated as PFCs, and therefore under the most immediate threat of economic sanctions, dropped off dramatically. Only three countries were designated as PFCs after 1994: China in 1996, Paraguay in 1998, and Ukraine in 2001-05. Of these, only Paraguay was a member of the WTO in the year it was listed as a PFC.
The increasing use of watch lists and decreasing use of PFC designations reflect a shift in the primary mechanism of coercion under Special 301. Whereas in the pre-1994 period the US appeared to be relying on a credible threat of sanctions as its main tool to promote compliance with its wishes, after the WTO the main tool of persuasion was “to give countries the feeling that their behavior on intellectual property was the subject of constant surveillance.” For this purpose, it was more important to list many countries as subject to the watchful gaze of USTR than it was to actually impose sanctions.
3. Does Special 301 Violate the WTO?
The reduction of PFC determinations likely reflected concerns about the legality of unilaterally imposing economic sanctions on foreign countries within the WTO framework. Indeed, in 1999, a WTO Dispute Settlement Panel reviewed the use of Section 301 in non-IP cases and held that the U.S. could not use 301 to impose unilateral trade sanctions without going through the WTO dispute settlement process. Similarly, unilateral sanctions imposed under Special 301 would appear to be a clear violation of the WTO agreement.
The continued use of Special 301 watch lists after the establishment of the WTO, absent implementation of actual sanctions, evidences a conclusion by the U.S. that watch lists alone do not implicate the multilateral dispute resolution mandate. This conclusion is far from clear, however.
By its plain terms, the dispute settlement understanding is not limited to a ban on unilateral imposition of economic sanctions, but rather extends to a prohibition of any member making “a determination to the effect that a violation has occurred.” Under U.S. law, the Special 301 process is an administrative adjudication – it is a rule bound procedure for determining whether other country laws are consistent with a statutory standard. The statutory standard includes determinations as to whether foreign country laws “violate provisions of international law or international agreements to which both the United States and the foreign country are parties.” In the results of Special 301 adjudications, USTR frequently determines that countries are in violation of U.S. interpretations of the TRIPS agreement, for example in failing to adopt “data exclusivity” regulations as the means for implementation of TRIPS Article 39.3. As such, the process appears to violate the WTO dispute settlement understand both facially and as applied.
There is also basis in WTO jurisprudence for seeing the Watch Lists themselves as trade barriers. In the 1999 dispute settlement decision on Section 301, the WTO panel explained that the “threat alone” of unilateral sanctions outside the dispute settlement process risks undermining the basic principle of WTO legitimacy:
“Members faced with a threat of unilateral action, especially when it emanates from an economically powerful Member, may in effect be forced to give in to the demands imposed by the Member exerting the threat… To put it differently, merely carrying a big stick is, in many cases, as effective a means to having one’s way as actually using the stick. The threat alone of conduct prohibited by the WTO would enable the Member concerned to exert undue leverage on other Members. It would disrupt the very stability and equilibrium which multilateral dispute resolution was meant to foster and consequently establish, namely equal protection of both large and small, powerful and less powerful Members through the consistent application of a set of rules and procedures.”
This language in the panel decision appears to be a shot across the bow of the Special 301 Watch Lists, but no member has brought a challenge against the program in the WTO yet.