Adopted 11 April 2019
Complainant European Union
Respondent United States
Third Parties Australia, Brazil, Canada, China, Japan, Korea, Russia
Measures at Issue
This compliance proceeding under Article 21.5 of the Dispute Settlement Understanding (DSU) concerned measures adopted by the United States to comply with the Dispute Settlement Body (DSB) recommendations and rulings in US–Large Civil Aircraft (2nd Complaint). The types of measures at issue that were found to have caused adverse effects to the European Union (EU, formerly European Communities) in the original Panel and Appellate Body proceedings were NASA aeronautics R&D instruments; United States Department of Defence (DOD) military research instruments (‘assistance instruments’); the business and occupancy (B&O) tax rate reduction in the State of Washington in relation to Boeing's production of the 787; property and sales tax abatements related to Industrial Revenue Bonds issued by the City of Wichita, Kansas; and the FSC/ETI subsidies.Footnote 1
The EU requested the compliance Panel to find that the United States (US) had failed to comply with the recommendations and rulings of the DSB. In particular, the EU alleged that the US failed to withdraw the above subsidies and that subsequent to the end of the implementation period: (i) had continued to grant these subsidies in increased amounts; (ii) had continued to grant subsidies to Boeing that are of the same nature as the subsidies that were found to be actionable in the original proceeding which had not been found to have caused adverse effects; (iii) had also granted a number of new subsidies to Boeing.Footnote 2 For the EU, all of challenged measures are prohibited subsidies, inconsistent with Articles 3.1(a), 3.1(b), 3.2 of the SCM Agreement and Article III of the GATT, and all of them collectively cause adverse effects to the Large Civil Aircraft (LCA)-related interests of the EU, in violation of Article 5 of the SCM Agreement.Footnote 3
Main Adopted Findings of the Panel and Appellate Body
Article 6.2 of the DSU (The USDOD procurement contracts)
One of the major jurisdictional issues in the compliance proceeding was whether the military procurement contracts between DOD and Boeing, which the EU unsuccessfully challenged as subsidies in the original proceeding, and sought to challenge again in the compliance proceeding, were within the scope of the compliance proceeding. In a WTO dispute, an issue that arises frequently is whether a particular measure has been properly described in the request for the establishment of the Panel. If not, it is considered not to be within a Panel's terms of reference. A variation of this issue arises in compliance proceedings such as these. This is because a complainant may not raise, in a compliance proceeding, a measure that it could have, but did not, challenge in the original proceedings. Moreover, a complainant cannot use Article 21.5 proceedings as a second chance to re-litigate issues that were resolved adversely to them in the original proceeding. However, as the compliance Panel in this case explained, this principle does not apply where the failure to achieve a definitive resolution of a claim cannot reasonably be laid at the feet of the complaining party.Footnote 4 For example, in situations where the Appellate Body had reversed the Panel's findings in favor of the complaining party, but was unable to complete the analysis due to insufficient factual findings or undisputed facts on the record, it would be more accurate to resolve these claims as part of a compliance proceeding.Footnote 5
The compliance Panel observed that in the original proceedings, the Panel found that the work performed by Boeing for the USDOD under the USDOD procurement contracts was properly characterized as a ‘purchase of services’; transactions characterized as purchases of services are excluded from the scope of Article 1.1(a)(1)(i) of the SCM Agreement, and therefore the USDOD procurement contracts did not involve financial contributions within the meaning of that provision.Footnote 6 Because the Appellate Body took a different approach to the Panel's, it was not required to decide whether measures properly characterized as purchases of services are excluded from the scope of Article 1.1(1)(i). Consequently, the Appellate Body declared the Panel's interpretation that such measures are excluded from the scope of Article 1.1(a)(1)(i) to be moot and of no legal effect. However, the Appellate Body did not complete the analysis regarding the USDOD procurement contracts at issue in this dispute.Footnote 7
The compliance Panel concluded that because the original Panel had ended its analysis at the stage of financial contribution, it would have been impossible for the Appellate Body in the original proceedings to complete the legal analysis of benefit and specificity regarding the USDOD procurement contracts.Footnote 8 The compliance Panel also pointed to the time and resources that had been expended in this dispute, as well as to the aim of dispute settlement, as expressed in Article 3.7 of the DSU, to secure a positive resolution to a dispute.Footnote 9 On this basis, the Panel found that by reasserting claims with respect to the USDOD procurement contracts, the European Union would not be ‘”unfairly” getting a second chance’, and the Panel thus concluded that the European Union's claims relating to the USDOD procurement contracts fell within the compliance proceedings.Footnote 10
The compliance Panel then faced the issue of whether these contracts involved a financial contribution. It found that the DOD procurement contracts are most appropriately characterized as purchases of services; however, it did not complete the legal analysis as to whether purchases of services fall within the meaning of Article 1.1(a)(1) of the SCM Agreement. The Panel concluded that assuming arguendo that the DOD procurement contracts involve financial contributions, the EU has in any case failed to establish that they conferred a benefit within the meaning of Article 1.1(b) and therefore failed to demonstrate that the DOD procurement contracts involved a subsidy to Boeing.Footnote 11 The Appellate Body upheld the Panel's finding that the USDOD procurement contracts were within its term of reference.Footnote 12 However, the Appellate Body reversed the Panel's finding that assuming arguendo that USDOD procurement contracts were to involve financial contributions, the EU has not established that they confer a benefit on Boeing within the meaning of Article 1.1(b) of the SCM Agreement. The Appellate Body found that there are insufficient factual findings by the Panel or undisputed facts on the Panel record for it to complete the legal analysis regarding the USDOD procurement contracts.Footnote 13
Articles 3.1 and 3.2 of the SCM Agreement
The EU argued that the FSC/ETI measures and the South Carolina income tax apportionment method provided for in an agreement between South Carolina and Boeing are subsidies that are contingent in law upon export and all measures at issue in the proceeding are subsidies that are contingent in fact upon export.Footnote 14
The Panel rejected on the merits those of the EU's prohibited subsidy claims that it had determined to be within the scope of the proceedings because: (a) the FSC/ETI measures and the South Carolina income tax apportionment are not subsidies provided to Boeing after the end of the implementation period; and (b) for the measures at issue that are subsidies provided to Boeing after the end of the implementation period, the EU failed to establish that any of these subsidies is contingent in fact upon export performance.Footnote 15 In particular, the Panel found that the EU did not provide an adequate analysis of ‘the total configuration of the facts constituting and surrounding the granting of the subsidy,: including the design and structure of the measures, their modalities of operation and relevant factual circumstances that provide context for an understanding of the measures’ design, structure, and modalities of operation’. For the Panel, the general statements the EU submitted in support of its claims did not address any of the measures in sufficient detail to understand their design, structure, modalities, and de facto export contingency.Footnote 16
Article 7.8 of the SCM Agreement
The pre-2007 NASA and USDOD aeronautic R&D subsidies
One of the major issues in the compliance proceedings was whether, by modifying the pre-2007 NASA procurement contracts and DOD assistance instruments – which had been the subject of the DSB recommendations and rulings – the United States had failed to withdraw the subsidy. As per Article 7.8 of the SCM Agreement, an implementing Member has two options: it shall either withdraw the subsidy or take appropriate steps to remove the adverse effects.
The US argued that both NASA and USDOD had modified the rights accorded to Boeing under the agreements so as to make them consistent with commercial practice and with the DSB recommendations.Footnote 17 In contrast, for the EU, ‘the restrictions set forth in the two Agreements on NASA's or DOD's ability to sublicense to, or otherwise exercise the commercial use rights in connection with, third parties demonstrate that in reality, Boeing has given up nothing of value for itself through these Agreements, and NASA/DOD has obtained nothing of value for itself’.Footnote 18
The compliance Panel found that the amendments to the NASA and DOD contracts did not sufficiently alter the fundamental balance of intellectual property rights between NASA and DOD on the one hand, and Boeing, on the other, in a way that removed the benefit. While NASA and DOD lack the right to obtain an exclusive license to practice Boeing-owned patents, Boeing was able to commercially exploit its patents and retained the right to grant licenses to third parties to work the patents and to receive royalties therefrom.Footnote 19 On this basis, the Panel found that the amendments to the terms of the pre-2007 NASA procurement contracts and DOD assistance instruments did not constitute a withdrawal of the subsidy.Footnote 20
The compliance Panel then examined whether the US had taken appropriate steps to remove the adverse effects of the subsidy. The Panel found that the key counterfactual question was whether absent the R&D aeronautic subsidies, the 787 aircraft would still not have been developed by the end of the implementation period.Footnote 21 The EU argued that the aeronautic R&D subsidies under the NASA and DOD agreements had ‘technology effects’ that continue into the post-implementation period. For the EU, absent the subsidies, Boeing would have needed more than ten years to develop the new aeronautic technologies.Footnote 22 The US argued that absent the aeronautic R&D subsidies, Boeing would have launched 787 no later than 2006.Footnote 23 The Panel found that the EU had not provided a clear statement or supporting evidence that the 787 would not have launched until after the end of the implementation period.Footnote 24 According to the Panel, while the aeronautics R&D subsidies gave Boeing a head-start in the development of the 787 technologies, the EU failed to establish that such effects continued in the post-implementation period.Footnote 25
On appeal, the EU argued that although the Panel correctly identified the relevant counterfactual question, it failed to take into account the post-implementation impact of the R&D subsidies, not just on the launch of the aircraft, but also the timing of first delivery of the 787 aircraft.Footnote 26 The Appellate Body explained that the counterfactual analysis in the compliance proceeding was part of a broader inquiry seeking to determine whether the pre-2007 aeronautic R&D subsidies, subject to DSB recommendations, continue to cause serious prejudice within the meaning Articles 5 and 6.3 in the post-implementation period. Consequently, assessing whether any of the forms of serious prejudice under Article 6.3 at issue was the effect of the subsidies in question may involve evaluating evidence related to events occurring after an aircraft's launch.Footnote 27 The Appellate Body therefore faulted the Panel for failing to assess in its counterfactual analysis whether the acceleration effects of the aeronautic R&D subsidies had also an impact on the timing of first delivery of the 787. Consequently, the Appellate Body reversed the Panel's rejection of the EU's claim, but it was unable to complete the legal analysis due to the lack of sufficient factual findings by the Panel or uncontested facts on the Panel record.Footnote 28
The Washington State B&O tax rate reduction subsidy
The Panel found that the US, by continuing to grant or maintain the Washington State B&O tax rate reduction subsidy (which had been found to be specific subsidy in the original proceeding), it failed to withdraw the subsidy within the meaning of Article 7.8 of the SCM Agreement.Footnote 29 The Panel found the B&O tax rate reduction, which amounted to USD 325 million between 2013 and 2015 was used by Boeing to lower prices in particularly price-sensitive sales campaigns in the singe-aisle LCA market in the post-implementation period. On this basis, the Panel found that the B&O tax rate reduction was genuine and substantial cause of (i) significant lost sales of Airbus LCA in the post implementation period for three sales campaigns (Fly Dubai 2014, Air Canada 2013, and Icelandair 2013);Footnote 30 and (ii) threat of impedance of imports of Airbus LCA to the US market and threat of impedance of exports to the United Arab Emirates market, in each case, in the post-implementation period.Footnote 31 Consequently, the Panel found that the US failed to withdraw the adverse effect of the B&O tax rate reduction subsidy. The Panel rejected the EU's allegation that the B&O tax rate reduction is a genuine and substantial cause of significant price suppression in respect of Airbus LCA in the post-implementation period.Footnote 32 The Appellate Body upheld the Panel's findings with respect to the price effect of the B&O tax rate reduction subsidy.Footnote 33
