The Brazil-U.S. Cotton Dispute: Brazil Should Think Twice About Intellectual Property-Focused Retaliation

On August 31, 2009, a World Trade Organization (WTO) arbitration panel issued two awards in the long-running dispute between Brazil and the United States over U.S. subsidies to cotton growers. The awards authorize Brazil to seek to retaliate against the United States for failing to come into compliance with WTO rules within a reasonable period of time. Ordinarily, retaliation for a breach of WTO rules on trade in goods would consist of a countermeasure also involving trade in goods. However, in this case, the arbitrator found that, depending on the level of U.S. subsidies and the level of Brazil's imports from the United States in a given year, this ordinary form of retaliation might not be practicable. Granting the Brazilian request in part, the arbitrator opened the door to other forms of retaliation, including the possibility of Brazil suspending obligations it owes the United States under the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPs Agreement.) This possibility has prompted expressions of deep concern from owners and producers of intellectual property.

The harm that could come to innocent bystanders in the Cotton dispute if Brazil were to weaken protections of IP rights is serious indeed. However, the likelihood of Brazil exercising this option is low for several reasons, not the least of which is the stake Brazil now has in the protection of intellectual property associated with the 2016 Olympic Games.

First, Brazil's right to impose retaliatory measures outside the area of trade in goods is not automatic. It is triggered by certain thresholds being crossed under formulae prescribed by the arbitration panel (i.e., thresholds with respect to the level of subsidies and the level of Brazil's trade with the United States). For 2007, the base year used by the panel, the thresholds would not have been met. It is not yet known definitively whether the thresholds will be met for 2009.

Second, Brazil is making a concerted effort to consolidate its reputation as an international player in the oil and biofuels industries. The federal government has a majority ownership interest in Petrobras, which holds patents on deep-sea drilling in many countries. The Brazilian government is planning to establish a new state-owned company specifically for drilling in the Petro-Salt area, in light of oil discoveries in that area. The company most likely will develop and apply Brazilian technologies. Nationally discovered biofuel and ethanol technical processes have been widely promoted for potential international licensees. Thus, Brazil has a major stake in adherence to and vigorous enforcement of the TRIPs Agreement. That stake should make Brazil loath to take action that would be seen as undermining that treaty's effectiveness.

Third, Brazilian awareness of the importance of protection of intellectual property has grown significantly in recent years. Earlier this month, immediately after winning its bid to host the 2016 Olympic Games, Brazil enacted a law (Law No. 12.035, of October 1st 2009) strongly emphasizing the enforcement of IP rights relating to the symbols, trademarks, songs and mascot for the event. Moreover, in numerous cases in Brazilian courts, lawyers have had occasion to make arguments about the consistency of Brazilian measures with the TRIPs Agreement. This experience reinforces an appreciation within the legal community of the importance of intellectual property protection.

Having said this, there are interests that will urge the government to exercise to the fullest extent possible Brazil's right to retaliate for U.S. non-compliance in the Cotton case. For example, a bill introduced in the Brazilian Congress in 2007 would allow temporary countermeasures of "suspension, dilution or extinction" of IP rights in Brazil in the case of "noncompliance of a foreign nation of multilateral obligations in the scope of WTO decisions." However, the WTO arbitration awards did not trigger any "fast track" approval of the bill.

In sum, Brazil's victory in its WTO dispute against the United States requires Brazil to strike a delicate balance. It has obtained the right to weaken the protection of U.S. intellectual property in specified circumstances. But, actually exercising that right may well be contrary to Brazil's own interests.