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	Murdoch University Electronic Journal of Law

Exceptions to Intellectual Property Rights: Lessons from WTO-Trips Panels

Authors:	Bruno de Vuyst Lic R (UIA), LLM (Columbia) Associate Professor, Vesalius College, Vrije Universiteit Brussel and Metropolitan College, Boston University
	Alea M Fairchild PhD Assistant Professor in Business and Technology, Vesalius College, Vrije Universiteit Brussel
	Gunther Meyer Lic R (KULeuven), DES (ULB), MIPR Adjunct Assistant Professor in Business Law, Vesalius College, Vrije Universiteit Brussel
Issue:	Volume 10, Number 4 (December 2003)

Contents:

• Introduction
• The "Three-step test" applied to Patent Law (Article 30 of TRIPS) - A First WTO-Panel Decision
• The "Three-step test" appiled to Copyright Law (Article 13 of TRIPS) - A Second WTO-Panel Decision
• The "Three-step test" and Other IPR'S - A Short Overview
• Economical Aspects of The "Three-step test" and the WTO-Panel Decisions
• Policy Considerations
• Notes

Introduction

1. Ever since intellectual property rights (hereinafter: "IPR's") were introduced in the legal system, it has been the objective of both national and international law to grant its beneficiaries a monopoly by means of exclusive rights (i.e. the right of authorizing or prohibiting - eventually under certain conditions - each other person to exploit or utilize everything falling under the scope of protection one has obtained).[1]

2. However, it has always been remembered that limits to absolute protection are justified by the public interest. In other words, national law might provide that the public interest should prevail against the private interests of the author. Therefore, international IPR conventions mostly contain a number of provisions authorizing member states, in certain circumstances, to limit the rights of the beneficiaries of IPR's. This balancing process is most explicit - and most actual[2] - under national and international copyright law. Typical examples are uses of copyrighted works for educational and administrative purposes, for the reporting of news, private copy and private uses of copyright protected works.[3] In some cases, it has been accepted that the exclusive right holder is, given the limitation of his rights, entitled to compensation (usually described as "compulsory licenses" or "obligatory licenses") (e.g. compulsory licenses in respect of the broadcasting of works, see article 11bis of the Berne Convention for the Protection of Literary and Artistic Works (1971) ("Berne Convention").

3. As a result of the above described idea of balancing interests, a general exception concerning reproduction rights of authors was introduced in the Berne Convention during revision at the Stockholm Conference in 1967. During that conference, it was decided to adopt a new Article 9.2. According to this new Article 9.2. of the Berne Convention, three distinct and cumulative conditions must be complied with before an exception relating to author's reproduction rights can be justified. First, the reproduction must be for a specific purpose: it is only allowed "in certain special cases". Secondly, the reproduction must "not conflict with a normal exploitation of the work". Thirdly, the reproduction should "not unreasonably prejudice the legitimate interests of the author". This provision is the so-called "three-step test".[4]

4. Similarly, Article 13 of TRIPS[5] provides about copyrights and related rights that "[m]embers shall confine limitations or exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder". In substance the three conditions provided for in Article 13 of TRIPS are thus identical to the three conditions under Article 9.2. of the Berne Convention. The real substantive difference is that Article 9.2. of the Berne Convention only covers the right of reproduction, while article 13 of TRIPS sustains possible limitations and exceptions 'to exclusive rights' in general (i.e. the right of reproduction, the right of communication to the public, the right of rental, ...).[6]

5. Relating to other IPR's, and more specifically as to trademarks, TRIPS provides in Article 17:

   "[m]embers may provide limited exceptions to the rights conferred by a trademark, such as fair use of descriptive terms, provided that such exceptions take account of the legitimate interests of the owner of the trademark and of third parties". As to industrial designs, Article 26.2. of TRIPS stipulates "[m]embers may provide limited exceptions to the protection of industrial designs, provided that such exceptions do not unreasonably conflict with the normal exploitation of protected industrial designs and do not unreasonably prejudice the legitimate interests of the owner of the protected design, taking account of the legitimate interests of third parties." Finally, in the wordings of Article 30 of TRIPS, "[m]embers may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties".

6. As one might notice, all above cited TRIPS provisions do not contain exactly the same wordings and conditions. However, they all have the same objective: balancing public interests and private interests of IPR beneficiaries.

   The "Three-step test" applied to Patent Law (Article 30 of TRIPS) - A First WTO-Panel Decision

7. In a first case (case No WT/DS114), a patent case, a Dispute Settlement Body (hereinafter: "DSB") had to interpret the "three-step test" as provided under Article 30 of TRIPS.[7] The case was brought before a WTO-Panel by means of a complaint by the EC against Canada, according to the procedure as provided under the WTO Agreement. The EC argued that there was a lack of protection of patents in Canada in the area of pharmaceuticals, and, that the Canadian legislation was not compatible with the obligations under TRIPS. According to the EC, the Canadian legislation did not provide for the full protection of patented pharmaceutical inventions for the entire duration of the term of protection as provided by TRIPS. The EC mainly challenged two Canadian measures. The first measure was the Canadian provision that allowed competing generic manufacturers to test patented products before the required period of protection expired.[8]

8. The second and companion measure at issue was the so-called "stockpiling exception" (i.e. the fact that competitors are allowed to manufacture and stockpile patented goods during a certain period before the patent expires, but the goods cannot be sold until after the patent expires).[9] Both Canadian measures were aimed at achieving Canada's longstanding policy goal of providing relatively low cost medications to consumers as soon as possible, consistent with the basic obligation under TIPS to provide a 20 year patent protection period.[10]

9. Comparing the "three-step test" as provided in Article 30 of TRIPS to the same test under Article 9.2. of the Berne Convention and Article 13 of TRIPS, it has to be observed that, the "first condition" of Article 30 of TRIPS is that exceptions provided under national law must be "limited exceptions". Obviously this is different than de wordings from Article 9.2 of the Berne Convention and Article 13 of TRIPS, covering only "special cases": the requirement of specialty is missing. As regards the "second step", i.e. exceptions may "not unreasonably conflict with a normal exploitation of the patent", it might be held that, in substance, this condition does not differ from the corresponding condition under Article 9.2 of the Berne Convention and Article 30 of TRIPS. The "third step" under Article 30 of TRIPS, also seems to be a similar version of the third condition as it has been worded under Article 9.2. of the Berne Convention and Article 13 of TRIPS.[11] .

10. On April 7, 2000, the DSB adopted a WTO-Panel Report and considered that only the "stockpiling exception" constituted a substantial curtailment of the exclusive rights granted to patent owners to such an extend that it could not be considered to be a limited exception within the meaning of Article 30 of TRIPS.[12]

11. In its decision, the DSB considered the meaning of the expression "limited" solely form the perspective of rights holder and did not take into account the policy goals or purposes of the exception. Therefore one might question whether the DSB did not fail to interpret Article 30 of TRIPS in the light of the context and purpose of TRIPS, and more specifically of Article 7 of TRIPS, referring to the mutual advantage of producers and users, and a balance of rights and obliagtions.[13]

12. Moreover the DSB decided that the term "exploitation" refers to "the commercial activity by which patent owners employ their exclusive patent rights to extract economic value form their patent". The term "normal" should, according to the DSB, be defined as it is found in the dictionary (i.e. "regular, usual, ordinary, conventional"). Still according to the DSB, the term should have two connotations: an "empirical" content (i.e. what is common within a relevant community) and a "normative" content. The DSB concluded that "[t]he normal practice of exploitation by patent owners, as with owners by any other intellectual property right, is to exclude all forms of competition that could detract significantly from the economic return anticipated from a patent's grant of market exclusivity". In addition, the DSB specifies: "[t]he specific forms of patent exploitation are not statistic, of course, for to be effective exploitation must adapt to changing forms of competition due to technological development and the evolution of marketing practices. Protection of all normal practices is a key element of the policy reflected in all patent laws.[14]

    The "Three-step test" appiled to Copyright Law (Article 13 of TRIPS) - A Second WTO-Panel Decision

13. For a long time there was considerable dispute about the scope of application of the above mentioned provisions.[15] It was certainly the case for the "three-step test" under Article 13 of TRIPS. On July 27, 2000 a WTO-Panel Report interpreting this provision was adopted by a DSB (case No WT/DS160).[16] The ruling resulted from a complaint by the EC against the USA relating to the, under Article 110 (5) (B) of the US Copyright Act, extended version of the so-called "homestyle" exemption to the right of music played from radio and television. According to Article 110 (5) (B) of the US Copyright Act, are exempted: eating, drinking and retail establishments that do not exceed a certain size or exceed specified audio or audiovisual equipment requirements, from liability for the public performance of music played from radio and television (i.e. the so-called "business exemption").[17]

14. The DSB was asked to examine whether the provisions under article 110 (5) (B) of the US Copyright Act were in compliance with the "three-step test" under Article 13 of TRIPS. For this, the DSB turned basically to the documents prepared for the 1967 Stockholm Revision Conference that drafted Article 9.2. of the Berne Convention.[18]

15. As to the "first step", i.e. the condition of "certain special cases", the DSB decided that "certain" means that "an exception or limitation must be clearly defined. However, there is no need to identify explicitly each and every possible situation to which the exemption could apply, provided that the scope of the exemption is known and particularized". The term "special" connotes, still according to the DSB, being "narrow in quantitative as well as qualitative sense. This suggest a narrow scope as well as an exceptional or distinctive objective". The last term of this first step, i.e. the term "case", refers to an 'occurrence', 'circumstance' or 'event' or 'fact'. The DSB has applied this "statistical approach" to the "business exemption" and basically stated that this exemption, since it covered a high percentage of the commercial establishments[19] could not be considered as a "special case".[20]

16. By interpreting the "second step", i.e. the condition that there might be no "conflict with a normal exploitation of the work", the DSB decided to adopt the same kind of approach and determined that the term "normal" used in Article 13 of TRIPS had both an "empirical" and a "normative" connotation. In other words, when determining whether an exploitation qualifies as "normal", one must examine the way in which the work is in fact exploited (i.e. the "empirical" approach) and whether the nature of the exploitation was potential, permissible or desirable (i.e. the "normative" connotation).[21]

17. On the "empirical" side the DSB decided not to follow the argumentation held by the USA that not individual rights in isolation should be addressed, but the package of rights as a whole. Thus, a "normal exploitation" of exclusive rights means, according to the DSB, that all these rights may "normally" be exercised separately.[22]

18. About the "normative" connotation of the words "normal exploitation", the DSB indicated that the disputed exception "should not enter into economic competition" with the right holder. According to the DSB's decision "all forms of exploiting a work, which have, or are likely to acquire, considerable economic or practical importance, must be reserved to authors".[23]

19. Finally, the DSB examined the "third step", i.e. limitations may "not unreasonable prejudice the legitimate interests of the right holder". Here, three terms (i.e. "interests", "legitimate" and "unreasonable") had to be defined.[24]

20. The term "interests", needs, according to the DSB, not to be limited to "actual or potential economic advantage or detriment". It seems that these wordings do not exclude non economic considerations.[25]

21. As for the term "legitimate", the DSB applied both a "legal positivist" perspective and "a more normative perspective, in the context of calling for protection of interests that are justifiable in the light of objectives that underlie the protection of exclusive rights". The DBS did, however, not further elaborate on the normative content of the right holder's legitimate interests. However, one might suppose that, for example, censorship is does not qualify under the concept of "legitimate interest". Moreover, it has to be mentioned that the DBS decision does not give any guidance toward analyzing the "legitimacy" of right holders interest when they are confronted with the creative.[26]

22. Regarding the wordings "not unreasonably prejudice", the DSB determined that the prejudice would reach an "unreasonable" level "if an exception or limitation causes or has the potential to cause an unreasonable loss of income to the copyright owner". As a result, the prejudice might be brought back to tolerable levels. In that respect, the DSB decided that "in cases where there would be a serious loss of profit for the copyright owner, the law should provide him with some compensation (a system of compulsory licensing with equitable remuneration)".[27]

    The "Three-step test" and Other IPR'S - A Short Overview

23. The question of interpreting the exceptions and limitations to trade marks and industrial designs, as provided under Articles 17 (trademarks) and 26.2. (industrial designs) TRIPS has not yet been addressed to a WTO-Panel. However, one might already observe that both provisions do not contain a real "three-step test", and that they are not so strict as what TRIPS provides for exceptions and limitations to copyright and patent rights.

24. In relation to trademarks, Article 17 of TRIPS does not provide that exceptions or limitations must be limited to "certain special cases". It only states that Member States may provide "limited exceptions" to the rights conferred by trademarks. Question remains how these terms will and should be interpreted. Moreover, Article 17 of TRIPS does not provide that the exceptions may "not conflict with the normal exploitation" of the trademarked product or service. On the other hand, Article 17 of TRIPS does not limit its scope to the rights of trademark holders, buts also takes into account the "interests of third parties" (e.g. licensees), while Article 13 of TRIPS only mentions right holders.

25. For industrial designs, the "second step" (i.e. the condition that there might be no "conflict with a normal exploitation of the design"), and "third step" (i.e. the limitations may "not unreasonable prejudice the legitimate interests of the owner of the protected design") of the "three-step test" have been introduced in Article 26.2. of TRIPS. Regarding the "first step", the same remark as for patents and trademarks has to be made: Article 26.2. does not mention the words "certain special cases". Instead, it stipulates that only "limited exceptions" may be provided under national law. Here, the question also remains how these terms will and should be interpreted.

    Economical Aspects of The "Three-step test" and the WTO-Panel Decisions

26. Article 10 (2) of the WCT[28] - similarly to Article 13 of TRIPS - extends the application of the "three-step test" to all economic rights provided in the Berne Convention, while Article 16 (1) of the WPPT[29] provides that Contracting States may introduce "the same kinds of limitations and exceptions with regard to the protection of performers and producers of phonograms as they provide for, in their national legislation, in connection with the protection of copyright in literary and artistic works."

27. To date, only one case (before a WTO dispute settlement panel, involving U.S. copyright exemptions allowing restaurants, bars and shops to play radio and TV broadcasts without paying licensing fees, passed in 1998 as a rider to the Sonny Bono Copyright Term Extension Act) has actually required an interpretation of the test.

28. The three-step test may prove to be extremely important if any nations attempt to reduce the scope of copyright law, because unless the WTO decides that their modifications comply with the test, such states are likely to face trade sanctions.

    Policy Considerations

29. Is there a case for extension of the three-step test to trademarks and industrial designs? Compulsory licensing of trademarks or designs is not envisaged and, frankly, not envisageable. There appear is, therefore, no case for "certain special cases", hence no need for the three-step test.

30. The exceptions to the monopoly position of the patent or copyright holder are economically or socially necessary: copyrighted or patented material may be so important, e.g. as regards AIDS or in other disease control cases, that the exception to the monopoly is to be allowed.

31. One notes, however, the case law which this research is based on.

32. WTO-TRIPS panels are restrictively interpreting the restriction to IPR's. They thereby confirm the monopolist strength of the IPR holder, whose powers remains absolute in most respects. Given the stance of WTO-TRIPS panels reinforcing the IPR holder/owner's position, WTO contributes to stifling innovation in the digital economy by limiting the exception for the public good ever further.

Notes

[1] See, for example, http://www.wipo.org/about-ip/en/iprm/pdf/ch1.pdf, last consulted on May 3, 2003.

[2] See Music on internet and the free downloading issue. For example, the US NAPSTER case in which the 9th Circuit Court of Appeals decided that free downloading of music qualified as an infringement on copyrights [See A&M Records v. Napster, Inc., 239 F.3d 1004 (9th Cir.2001), http://www.ca9.uscourts.gov/, last consulted on May 3, 2003] and the decision of the US Central District of California of April 25, 2003 in the GROKSTER case, authorizing free downloading of music [See Metro-Goldwyn-Mayer Studios Inc. v. Grokster Ltd., http://www.cacd.uscourts.gov/CACD/RecentPubOp.nsf/Recently Issued Opinions and Orders?OpenView&Start=1&Count=100&Expand=1#1, last consulted on May 2, 2003].

[3] Sam RICKETSON, The Berne Convention for Protection of Literary and Artistic works: 1886-1986, London, Kluwer, 1987, p. 477 ff.

[4] Ibid., p. 482.

[5] The Agreement on Trade-Related Aspects of International Property, Annex 1C of the Marrakesh Agreement of April 15, 1994 establishing the World Trade Organization ('WTO').

[6] Mihály FICSOR, The Law of Copyright and the Internet, Oxford, University Press, 2002, p. 301-302.

[7] See http://www.wto.org/english/tratop_e/dispu_e/distab_e.htm, last consulted on May 3, 2003.

[8] Robert HOWSE, "The Canadian Generic Medicines Panel - A Dangerous Precedent in Dangerous Times", Journal of World Intellectual Property, July 2000, N° 4, Vol. 3, 493.

[9] Mihály FICSOR, "How much of What? The "Three-step Test" and Its Application in Two Recent WTO Dispute Settlement Cases", RIDA, 2002, issue 192, 173-175.

[10] Robert HOWSE, "The Canadian Generic Medicines Panel ...", 493.

[11] Mihály FICSOR, "How much of What? ...", 179-181.

[12] Ibid., p. 175.

[13] Robert HOWSE, "The Canadian Generic Medicines Panel ...", 493.

[14] Ibid., p. 181-185.

[15] See Sam RICKETSON, The Berne Convention ..., p. 482.

[16] See http://www.wto.org/english/tratop_e/dispu_e/distab_e.htm, last consulted on May 3, 2003.

[17] Richard OWENS, "Trips and the Fairness in Music Arbitration: The Repercussions", E.I.P.R., 2003, issue 2, p. 49.

[18] Mihály FICSOR, "How much of What? ...", 155.

[19] According to a study used as a basis by the DSB, 70% of all eating establishments, 70% of all drinking establishments and 45% of all retail establishments. See Mihály FICSOR, "How much of What?...", p. 249 [note 249].

[20] Ibid., p. 229.

[21] Jane C. GINSBURG, Toward Supranational Copyright Law? The WTO Panel Decision and the "Three-step Test" for Copyright Exceptions, RIDA, 2001, issue 187, p. 17-19.

[22] Ibid., p. 19.

[23] Ibid., p. 21.

[24] Ibid., p. 27.

[25] Ibid., p. 27-29.

[26] Ibid., p. 27-29.

[27] Ibid., p. 29-31.

[28] WIPO Copyright Treaty of December 20, 1996

[29] WIPO Performances and Phonograms Treaty of December 20, 1996.