WORLD TRADE
ORGANIZATIONWT/DS160/ARB25/1
9 November 2001
(01-5417)
UNITED STATES – SECTION 110(5)
OF THE US COPYRIGHT ACT
RECOURSE TO ARBITRATION
UNDER ARTICLE 25 OF THE DSU
AWARD OF THE ARBITRATORS
The award of the Arbitrators in United States – Section 110(5) of the US Copyright Act  – Recourse to
Arbitration under Article 25 of the DSU  is being notified to the Dispute Settlement Body and the
TRIPS Council where any Member may raise any point relating thereto, pursuant to Article 25.3 of
the DSU.  The award is being circulated as an unrestricted document from 9 November 2001 pursuant
to the Procedures for the Circulation and Dere striction of WTO Documents (WT/L/160/Rev.1).WT/DS160/ARB25/1
Page i
TABLE OF CONTENTS
Page
I. INTRO DUCTION ................................................................................................................. ...1
A. PROCEEDINGS ..............................................................................................................................1
B. PROCEDURAL ISSUES WHICH AROSE IN THE COURSE OF THE PROCEEDINGS ...............................3
1. Treatment of replies to questions asked by the Arbitrators to some US collective
management organizations ......................................................................................................3
2. Admissibility of some pieces of evid ence submitted by the United States ...........................4
3. Treatment of business confidential in formation submitted by the parties..........................6
II. SCOPE OF THE MANDATE OF  THE ARBIT RATORS ...................................................6
A. JURISDICTION UNDER ARTICLE 25 OF THE DSU TO ADDRESS THE ISSUE REFERRED TO
THE ARBITRATORS BY THE PARTIES ............................................................................................6
III. CONCEPTUAL ISSUES.......................................................................................................... 8
A. NATURE AND LEVEL OF BENEFITS NULLIFIED OR IMPAIRED .......................................................8
B. ROYALTIES COLLECTED VERSUS  ROYALTIES DISTRIBUTED .......................................................16
IV. CALCUL ATION................................................................................................................. ....20
A. OUTLINE OF THE METHODOLOGY FOLLOWED BY THE ARBITRATOR .........................................20
1. "Bottom-up" versus  "top-down" approach .........................................................................20
2. Point in time at which benefits nullif ied or impaired should be assessed..........................23
3. Elements not considered  in the calculation ..........................................................................25
(a) Approach of th e Arbitrators................................................................................................. .....25
(b) Elements not considered  in the calc ulation...............................................................................26
(i) "Indirect" or "potential" harm to other rights of EC right holders ..........................................26
(ii) Activities  of SESAC........................................................................................................ ...........27
(iii) Music broadcast through Internet .......................................................................................... ..27
B. CALCULATION ...........................................................................................................................27
1. General observations ......................................................................................................... .....27
2. Total royalties paid to  EC right holders ...............................................................................28
3. Royalties from eating, drinking and retail establishments .................................................31
4. Royalties attributable to the playin g of radio and television music ...................................31
5. Royalties from establishments that meet the requirements of the statutory
exemption...................................................................................................................... ...........32
6. Further adjustments .......................................................................................................... .....33
V. AWARD OF THE ARBITRAT OR.......................................................................................34
ANNEX I........................................................................................................................ .......................35
ANNEX II ....................................................................................................................... ......................37WT/DS160/ARB25/1
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I. INTRODUCTION
A. PROCEEDINGS
1.1 On 23 July 2001, the European Communities (EC)1 and the United States (hereinafter also the
"parties") notified to the Dispute Settlement Body (DSB) their mutual agreement to resort to
arbitration pursuant to Article 25 of the Understanding on Rules and Procedures Governing theSettlement of Disputes (hereafter the "DSU").
2  The stated object of the arbitration was to determine
the level of nullification or impairment of benef its to the European Communities as a result of the
operation of Section 110(5)(B) of the US Copyright Act.
1.2 The parties have resorted to this arbitration further to the adoption by the DSB of the report of
the panel which, at the request of the European Communities, reviewed the compatibility of
Section 110(5) of the US Copyright Act,3 as amended by the Fairness in Music Licensing Act of
1998,4 with the Agreement on Trade-Related Aspects of Intellectual Property Rights.5  T h e
conclusions and recommendations of the panel 6 read as follows:
"7.1 In the light of the findings in paragraphs 6.92-6.95, 6.133, 6.159, 6.211,
6.219, 6.266 and 6.272 above, the Panel concludes that:
(a) Subparagraph (A) of Section 110(5) of the US Copyright Act meets the
requirements of Article 13 of the TRIPS Agreement and is thus consistentwith Articles 11 bis(1)(iii) and 11(1)(ii) of the Berne Convention (1971) as
incorporated into the TRIPS Agreement by Article 9.1 of that Agreement.
(b) Subparagraph (B) of Section 110(5) of the US Copyright Act does not meet
the requirements of Article 13 of the TRIPS Agreement and is thus
                                                     
1 For the purpose of these proceedings, references  to the "European Communities" shall be deemed,
wherever applicable, to refer to the European Communities and their Member States.
2 See WT/DS160/15.  Article 25 of the DSU reads as follows:
"1. Expeditious arbitration within the WTO as an alternative means of dispute settlement
can facilitate the solution of certain disputes that concern issues that are clearly defined byboth parties.
2. Except as otherwise provided in this Understanding, resort to arbitration shall be
subject to mutual agreement of the parties which shall agree on the procedures to be followed.Agreements to resort to arbitration shall be no tified to all Members sufficiently in advance of
the actual commencement of the arbitration process.
3. Other Members may become party to an  arbitration proceeding only upon the
agreement of the parties which have agreed to have  recourse to arbitration.  The parties to the
proceeding shall agree to abide by  the arbitration award.  Arbitr ation awards shall be notified
to the DSB and the Council or Committee of any relevant agreement where any Member mayraise any point relating thereto.
4. Articles 21 and 22 of this Understanding shall apply mutatis mutandis  to arbitration
awards."
3 United States Copyright Act of 1976, Act of 19 October 1976, Pub.L. 94-553, 90 Stat. 2541 (as
amended).
4 Fairness in Music Licensing Act of 27 October 1998, Pub.L. 105-298, 112 Stat. 2830, 105th Cong., 2nd
Session (1998), hereinafter the "1998 Amendment".
5 Hereafter the "TRIPS Agreement".
6 See the Panel Report on United States – Section 110(5) of the US Copyright Act (hereafter " US -
Section 110(5) Copyright Act "), WT/DS160/R, adopted 27 July 2000.  The original panel will be hereafter
referred to as the "Panel".WT/DS160/ARB25/1
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inconsistent with Articles 11 bis(1)(iii) and 11(1)(ii) of the Berne Convention
(1971) as incorporated into the TRIPS Agreement by Article 9.1 of that
Agreement.
7.2 The Panel recommends  that the Dispute Settlement Body request the
United States to bring subparagraph (B) of Section 110(5) into conformity with its
obligations under the TRIPS Agreement." 7
1.3 The parties requested the Chairman of the DSB to contact the original panelists in the dispute,
to determine their availability to serve as arbitrators.8  The Chairperson of the original panel,
Mrs. Carmen Luz Guarda and one Member, Mr. A.  V. Ganesan, were no longer available.  In
accordance with the agreed procedures for the selection of the arbitrators contained in document
WT/DS160/15, the Director-Gener al appointed two arbitrators9 to replace them.
1.4 On 13 August 2001, the Members were informed that the names of the Arbitrators were the
following10:
Chairman: Mr. Ian F. Sheppard
Members: Mrs. Margaret Liang
Mr. David Vivas-Eugui.
1.5 Following an organizational meeting with the parties on 13 August 2001, the Arbitrators
developed their Working Procedures and timetable on the basis of the agreed procedures and
timetable for Article 25 arbitration annexed to the parties' communication to the Chairman of the DSB
on their recourse to Article 25 of the DSU.11
1.6 The jurisdiction of the Arbitrators is contained in document WT/DS160/15 which reads, in
relevant parts, as follows:
"The United States and the European Communities (EC), having mutually agreed
pursuant to Article 25.2 of the Understanding on Rules and Procedures for the
Settlement of Disputes (DSU) to enter into arbitration to determine the level ofnullification or impairment of benefits to the EC as a result of Section 110(5)(B) of
the US Copyright Act, respectfully request that you contact the original panelists in
the dispute "United States – Section 110(5) of the US Copyright Act" (WT/DS160),
to determine their availability to serve as arbitrators in this proceeding.  […]
The parties agree that the award of the arbitrator shall be final, and they shall accept it
as the level of nullification or impairment for purposes of any future proceedings
under Article 22 of the DSU related to this dispute."
1.7 In accordance with the timetable, the European Communities submitted a methodology paper
on 14 August 2001. Both parties made concurrent written submissions on 21 August 2001.  They
submitted concurrent written rebuttals on 28 August 2001.  The Arbitrators met with the parties on
                                                     
7 Panel Report on US - Section 110(5) Copyright Act,  supra , paras. 7.1 and 7.2.
8 See WT/DS160/15.
9 The group of three arbitrators will be hereafter referred to as the "Arbitrators".
10 See WT/DS160/16.
11 See WT/DS160/15.WT/DS160/ARB25/1
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5 September 2001.  Replies to questions of the Arbitrators were received on 11 September.  Parties
were allowed to comment on each other's replies by 14 September 2001.12
1.8 The Arbitrators issued their award to the parties on 12 October 2001.  The award was notified
to the DSB and the TRIPS Council in application of Article 25.3 of the DSU on 9 November 2001.
B. PROCEDURAL ISSUES WHICH AROSE IN THE COURSE OF THE PROCEEDINGS
1. Treatment of replies to questions asked by the Arbitrators to some US collective
management organizations
1.9 On 5 September 2001, the Arbitrators  decided to seek additional information from two of
the US collective management organizations13:  the American Society of Authors, Composers and
Publishers (ASCAP) and Br oadcast Music Inc. (BMI).14  The Arbitrators consulted the parties on the
questions asked to those CMOs.  The parties did not object to the Arbitrators seeking such
information.15  The Arbitrators agreed that the parties might comment on any information submitted
by the US CMOs.  ASCAP and BMI were given until  14 September to reply.  However, no reply was
received on that date.
1.10 The Arbitrators were mindful of the particular circumstances which may have delayed any
reply and considered that, should ASCAP and/or BMI provide at a later stage any information likely
to influence significantly the calculations to be performed, the Arbitrators would seek comments fromthe parties on such information before finalizing their award.  BMI submitted some information on
25 September 2001.  However, BMI attached a number of conditions to the use of that information, in
particular the obligation for the Arbitrators to submit "any proposed public document" to BMI's
counsel in order for it to confirm that the confidentiality of the information submitted by BMI was
effectively protected.  The Arbitrators understood that the term "any proposed public document" couldapply to their award.  Having regard to their Working Procedures and to general practice under public
international law, they considered that such a co ndition was incompatible with the confidentiality of
their deliberations, which extends to the content of their report until it is made public.  The Arbitrators
also feared that such conditions, if they were accepted, could make access to evidence more difficult
in future cases under the DSU.  As a result, they decided not to use the information submitted by BMIon 25 September 2001.
1.11 ASCAP submitted its responses on 3 October 2001.  On 4 October, the Arbitrators sought the
views of the parties as to whether the information submitted should be taken into consideration.  The
European Communities  considered that the information received from ASCAP did no more than
repeat and confirm information already submitted by the parties to the Arbitrators and the Panel and
did not justify delaying the issue of the award.  The United States  said that it would not object if the
Arbitrators were to take into account the inform ation from ASCAP but also stated that the new
information merely confirmed the reasonableness of the US calculations.
                                                     
12 The United States submitted comments on that date.  The European Communities did not, but later
contested the admissibility of certain pieces of evidence submitted by the United States.  Regarding subsequent
procedural issues, see Section I.B.1. below.
13 Hereafter referred to as "CMOs".
14 A third CMO is involved in this sector: the Society of European Stage Authors and Composers
(SESAC).  However, for reasons explained infra , the parties did not include SESAC's activities in their
calculations.  SESAC itself did not cooperate in the proceedings before the Panel.  Having regard to the
explanations given by the parties, the Arbitrators did not find it necessary to request information from SESAC.
15 The request for information was conveyed in a letter addressed to the President and Chairman of the
Board of ASCAP and to the President and Chief Executive Officer of BMI.  For the text of the letter, see AnnexI to this award.WT/DS160/ARB25/1
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1.12 BMI informed the Arbitrators on 10 October 2001 that it would submit additional
information, without imposing the conditions which ha d lead the Arbitrators to disregard its previous
submission of information.16  The Arbitrators sought the views of the parties on the advisability of
taking BMI new information into account.  The European Communities  stated that this information
should not be taken into account if this further delayed the issue of the award.  The United States
considered that the Arbitrators possessed sufficient information to render a fair decision on the level
of nullification or impairment of benefits caused by Section 110(5)(B).  Nevertheless, if the
Arbitrators preferred to await the information that BMI may submit, the United States had no
objection.  The United States nonetheless recalled that the "reasonable period of time" for
implementation in this case expires on the earlier of the date on which the current session of the
US Congress adjourns or 31 December 2001.  In light of this time constraint and the parties' ongoing
efforts to reach a consensual resolution of the disput e, the United States was interested in obtaining a
fair decision expeditiously.
1.13 The Arbitrators recall that one of the main concerns expressed by the parties when this
matter was referred to arbitration was that we proceed expeditiously.  We note that, had we taken into
account the information supplied by ASCAP and BMI,  we would have had to delay considerably the
date of the issue of our award.  We emphasize in this regard that the European Communities hasexpressed the opinion that the information provided by ASCAP and BMI does not warrant any delay.
We also note that the United States has not specifically requested us to consider ASCAP or BMI
figures.  We are, therefore, reluctant to postpone the issue of our award.  We note in this respect that
any delay in issuing our report shortens the time-period available to both parties to reach a mutually
satisfactory solution before the end of the reasonable period of time agreed to by the DSB.
1.14 In the light of this procedural consideration, we conclude that we should not take account of
the information made available by ASCAP and BMI.
2. Admissibility of some pieces of evidence submitted by the United States
1.15 On 17 September 2001, the European Communities sent a letter to the Chairman of the
Arbitrators objecting to the submission of certain pieces of evidence by the United States in itscomments of 14 September 2001 on the replies of the parties to the questions of the Arbitrators.  On
19 September, the Chairman of the Arbitrators sent a letter to the parties, the relevant parts of which
read as follows:
"I refer to the letter of the European Communities (EC), dated 17 September 2001,
addressed to me as Chairman of the Arbitrators in the above-mentioned case.  In that
letter, the EC refers to paragraph (f) of our Working Procedures of 16 August 2001
and claims that exhibits US ARB-25 and US ARB-26, attached by the United States
to its comments of 14 September 2001, have been submitted belatedly and that "no
showing of good cause" for granting an exception has been made.  The
European Communities concludes that the exhibits in question should be disregarded
by the Arbitrators.  In addition, the EC offers some comments on the substance of
exhibit US ARB-26.
The Arbitrators recall that paragraph (f) provides as follows:
'(f) the parties shall submit all factual evidence to the Arbitrators
no later than the first written submissions to the Arbitrators, except
with respect to evidence necessary for purposes of rebuttal
submissions.  Exceptions to this procedure will be granted upon a
                                                     
16 The information was received on 11 October 2001.WT/DS160/ARB25/1
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showing of good cause.  In such cases, the other party shall be
accorded a period of time for comments, as appropriate;'
The Arbitrators note that the United States has submitted new materials in the form of
exhibits US ARB-25 and US ARB-26, as pa rt of the comments which the parties
were allowed to make on each other's replies to the questions of the Arbitrators.  TheArbitrators also note that the EC has submitted comments both on the admissibility
and on the substance of these exhibits.  The Arbitrators conclude that, without
prejudice to any ultimate decision they may take regarding the EC request, the EC has
not been deprived of the possibility to comment under paragraph (f) of our Working
Procedures.
Under those circumstances, the Arbitrators deem it appropriate to address the issues
raised by the EC claims contained in the letter of 17 September 2001 in the arbitrationaward."
1.16 On 20 September 2001, the United States commented on the EC letter of 17 September,
stating that it had good cause to submit the exhibits at issue, since they were intended to rebut
statements made by the European Communities in its response to the written questions of the
Arbitrators.  In the opinion of the United States, these EC statements introduced new factual issues.The United States also contested the right of the European Communities to submit new arguments
which did not respond to the rebuttals.
1.17 The Arbitrators note that the United States did not try to justify the submission of exhibits
US ARB-25 and US ARB-26 in terms of paragraph (f) requirements when it submitted them.  The
United States claimed that it had good cause to submit those exhibits only in a subsequent letter of20 September 2001.  The Arbitrators are of the view that paragraph (f) should normally be interpreted
to require the showing of good cause before or at the moment new evidence is presented, at the time
or after the rebuttal submission.  However, the circumstances of this case, the conditions under which
the exhibits were submitted and the European Communities' reaction are special and justify that
paragraph (f) be interpreted with some limited flexibility.
1.18 First, in a case where relevant information was scarce, and given the time-frame within which
the Arbitrators were supposed to complete their work, any additional information was welcome at any
time and a priori  important in the light of the Arbitrators' duty to provide an objective assessment of
the facts.
1.19 Second, the additional information was adduced by the United States as part of a rebuttal of
EC arguments contained in its reply to questions of the Arbitrators, as agreed with the Arbitrators at
the hearing.  The Arbitrators note that the EC did not claim that the exhibits were not related to therebuttal of EC arguments contained in its reply to questions from the Arbitrators.
1.20 Finally, whilst the US justification for its pr oduction of exhibits US ARB-25 and US ARB-26
was belated, in its response the European Communities did in fact deal with the substance of these
exhibits.  As the Chairman noted in his letter of 19 September 2001 to the parties, the EC has thus not
been deprived of the opportunity to comment on the US exhibits.
1.21 Given these special circumstances, the Arbitrators hold that exhibits US ARB-25 and
US ARB-26 are admitted in the procedure. As far as the substance of these pieces of evidence is
concerned, the Arbitrators will revert to it as necessary in the course of this award.WT/DS160/ARB25/1
Page 6
3. Treatment of business confidential information submitted by the parties
1.22 Both parties have submitted some information on a confidential basis which they requested
should not be communicated to private parties.17
1.23  The Arbitrators recall that the Panel agreed to treat some information from the
European Communities and the United States as confid ential, while also recalling that the designation
of information as confidential did not assist the Panel in its responsibility to make findings that will
best enable the DSB to perform its dispute settlement functions.18
1.24 In the absence of specific requests from the parties as to how confidentiality of business
confidential information should be preserved, the Arbitrators will rely generally on the practice of the
Appellate Body on this matter.19  To the extent that confidential information may appear as such in the
award in order to support the findings of the Arbitr ators, the Arbitrators decided that two versions of
the award would be prepared.  One, for the parties, would contain all the information used in supportof the determinations of the Arbitrators.  The othe r, which would be circulated to all Members, would
be edited so as not to include the information for which, after consultation with the parties, the
Arbitrators would conclude that confidentiality for business reasons was sufficiently warranted.  The
information which the Arbitrators would consider to be business confidential would be replaced by
"x".
20
II. SCOPE OF THE MANDATE OF THE ARBITRATORS
A. JURISDICTION UNDER ARTICLE 25 OF THE DSU TO ADDRESS THE ISSUE REFERRED TO THE
ARBITRATORS BY THE PARTIES
2.1 The Arbitrators note that this is the first time since the establishment of the WTO that
Members have had recourse to arbitration pursuant to Article 25 of the DSU.21  Whereas the DSB
establishes panels or refers matters to other arbitration bodies, Article 25 provides for a different
procedure.  The parties to this dispute only had to notify  the DSB of their recourse to arbitration.  No
decision is required from the DSB for a matter to be referred to arbitration under Article 25.  In the
absence of a multilateral control over recourse to that provision, it is incumbent on the Arbitrators
themselves to ensure that it is applied in accord ance with the rules and principles governing the WTO
system.22  As recalled by the Appellate Body in United States – Anti-Dumping Act of 191623, it is a
widely accepted rule that an international tribunal is entitled to consider the issue of its own
jurisdiction on its own initiative.  The Arbitrators believe that this principle applies also to arbitration
                                                     
17 US first and second written submissions, exhibits US ARB-5, 7, 8, 9, 10, 12.
18 See the Panel Report on US - Section 110(5) Copyright Act , supra , para. 6.208 and footnote 192, and
para. 6.233 and footnote 209.
19 See, in particular, the Appellate Body Report on  Canada – Measures Affecting the Export of Civilian
Aircraft , WT/DS70/AB/R, adopted 20 August 1999, paras. 141-147.
20 This approach was used in one Article 22.6 arbitration and does not seem to have met with
objections in the DSB.  See the Decision of the Arbitrators on Brazil – Export Financing Programme for
Aircraft – Recourse to Arbitration by Brazil under Article 22.6 of the DSU and Article 4.11 of the SCMAgreement  (hereafter " Brazil – Aircraft (22.6) "), WT/DS46/ARB, 28 August 2000, para. 2.14.
21 The Arbitrators recall th at arbitration was seldom used under GATT 1947.
22 In particular, the Arbitrators believe that this arbitr ation should not be applied so as to circumvent the
provisions of Article 22.6 of the DSU (See Article 23.2(c) of the DSU).
23 See the Appellate Body Report on United States - Anti-Dumping Act of 1916 , WT/DS136/AB/R and
WT/DS162/AB/R, adopted 26 September 2000, para. 54, footnote 30.WT/DS160/ARB25/1
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bodies.24  In case there be any question as to the jurisdiction of the Arbitrators to deal with this
dispute, we provide brief reasons for our conclusion that we do have the necessary jurisdiction.
2.2 The Arbitrators recall that this arbitration has been called upon to address a particular issue
resulting from the implementation of the DSB rulings and recommendations on the basis of the Panel
Report on US – Section 110(5) Copyright Act.   In that context, our mandate is to "determine the level
of nullification or impairment of benefits to the European Communities as a result of
Section 110(5)(B) of the US Copyright Act".25
2.3 The Arbitrators first note that, pursuant to the text of Article 25.1, arbitration under Article 25
is an " alternative  means of dispute settlement".26  The term "dispute settlement" is generally used in
the WTO Agreement to refer to the complete process of dispute27 resolution under the DSU, not to
one aspect of it, such as the determination of the level of benefits nullified or impaired as a result of a
violation.  It may be argued that the procedure provid ed for in Article 25 is actually an alternative to a
panel procedure.  This would seem to be confirmed by the terms of Article 25.4, which provides that
"Articles 21 and 22 of this Understanding shall apply mutatis mutandis  to arbitration awards."28
Article 22.2 itself, unlike Article 21.3(c), does not refer to arbitration as an alternative to the
negotiation of mutually acceptable compensation.  It could then be argued that arbitration under
Article 25 is not intended for "determin[ing] the level of nullification or impairment of benefits to the
European Communities as a result of Section 110(5)(B) of the US Copyright Act."
2.4 While being mindful of these elements of interpretation, the Arbitrators are of the view that
they are outweighed by other elements, based on the fact that none of the provisions concerned
expressly excludes recourse to arbitration under Article 25 in the particular context in which they
apply.  Article 25.2 itself provides that resort to arbitration shall be subject to mutual agreement of theparties which shall agree on the procedures to be followed "except as otherwise provided in this
Understanding".  Article 25 itself does not specify that recourse to Article 25 arbitration should be
excluded when determining the level of nullification or impairment suffered by a Member.  On the
contrary, the terms of Article 25.1 referring to "the solution of certain disputes that concern issues that
are clearly defined by the parties" may support the view that Article 25 should be understood as anarbitration mechanism to which Members may have recourse whenever necessary within the WTO
framework.  We also note that Article 22.2 refers to "negotiations […] with a view to developing
mutually acceptable compensation."  There is no language in that provision which would make it
impossible to consider arbitration as a means of reaching a mutually acceptable compensation.
2.5 Moreover, recourse to Article 25 arbitration in the present situation is fully consistent with the
object and purpose of the DSU.  Arbitration is lik ely to contribute to the prompt settlement of a
                                                     
24 This is evidenced by Article 21 of the Optional Rules of the Permanent Court of Arbitration for
arbitrations involving international organizations and St ates. See, Permanent Court of Arbitration:  Optional
Rules for Arbitration involving International Organizations and States, effective 1 July 1996, InternationalBureau of the Permanent Court of Arbitration, The Hague, The Netherlands.
25 WT/DS160/15.
26 Emphasis added.
27 In a note by the GATT Secretariat on Co ncept, Forms and Effects of Arbitration
(MTN.GNG/NG13/W/20, 22 February 1988), the term "d ispute" is defined as a specific disagreement
concerning a matter of fact, law or policy in which a claim or assertion by one party is met with refusal, counter-
claim or denial by another.
28 The text of Article 25 of the DSU is essentially identical to that of paragraphs 1, 2 and 3 of Section E
of the 1989 Decision on improvements to the GATT disput e settlement procedures (BISD 36S/63).  It is worth
noting that, in that Decision, Section E follows other sections on means of resolution of disputes, such as
consultations (Section C) and good offices, conciliation  and mediation (Section D).  Moreover, GATT 1947 did
not provide for the sophisticated means of enforcement found in the DSU.  The note MTN.GNG/NG13/W/20 of22 February 1988, referred to above,  also presents arbitration "as an alternative to the normal dispute settlementprocess" (para. 12) or "as an altern ative to panel proceedings" (para. 17).WT/DS160/ARB25/1
Page 8
dispute between Members, as commanded by Article 3.3 of the DSU.  Indeed, it may facilitate the
resolution of a divergence in the context of a negotiation of compensations, thus paving the way to
implementation without suspension of concessions or other obligations.
2.6 In general, recourse to arbitration under Article 25 strengthens the dispute resolution system
by complementing negotiation under Article 22.2.  The possibility for the parties to a dispute to seekarbitration in relation to the negotiation of compensation operates to increase the effectiveness of that
option under Article 22.2.  Incidentally, the Arbitrators note that compensation, in their opinion, is
always to be preferred to countermeasures of any sort, since it enhances trade instead of restricting or
diverting it.  Finally, such an application of Article 25 does not, at least in the case at hand, affect the
rights of other Members under the DSU.
29
2.7 Having regard to the object of the arbitration requested by the parties and the fact that the
rights of other Members under the DSU are not affected by the decision of the European Communitiesand the United States to seek arbitration under Article 25, the Arbitrators are of the view that, pending
further interpretation by the Members, they should declare that they have jurisdiction under Article 25
to determine the level of EC benefits which are being nullified or impaired in this case.
30
III. CONCEPTUAL ISSUES
3.1 Since the present arbitration proceedings are the first ones in which a WTO adjudicating body
is entrusted with the task of determining the level of benefits nullified or impaired as a consequence of
an infringement of obligations under the TRIPS Agreement, it is necessary to address at some length
two conceptual issues before undertaking any actua l calculations of the level of nullification or
impairment suffered by the European Communities in this case.
A. NATURE AND LEVEL OF BENEFITS NULLIFIED OR IMPAIRED
3.2 The first issue which the Arbitrators turn to examine concerns the nature and level of the
benefits which are being nullified or impaired in the present case.
3.3 The European Communities  submits that this case is special in that it involves the denial by
the United States of exclusive rights which the United States is required under the TRIPS Agreement
to grant to nationals of other WTO Members.  The European Communities notes that, in contrast, innone of the past arbitration proceedings under Article 22.6 of the DSU did any of the entities affected
by the relevant WTO-inconsistent measures enjoy any exclusive rights.  Instead, they only enjoyed
expectations as to the legal framework and factual conditions in which they could pursue their
economic activities.  The European Communities considers that, because the TRIPS Agreement
guarantees specific exclusive rights rather than merely expectations, the proper way of measuring
nullification or impairment of benefits in this case is by assessing the economic value of the denied
exclusive rights.
3.4 With reference to the present dispute, the European Communities argues that a correct
assessment of the value of the exclusive copyrights which are being denied to EC right holders as a
consequence of Section 110(5)(B) cannot be made, unless it is assumed that all those establishments
which use copyright works of EC right holders are licensed.  The European Communities notes that,
otherwise, those establishments would engage in acts of piracy.  The European Communities therefore
                                                     
29 As a matter of fact, it may affect them positively, given the erga omnes  character of compensation.
30 The Arbitrators' recognition of their jurisdiction in this case is not a unilateral extension of WTO
jurisdiction, since it is dependent on the agreement of the parties to a dispute to have recourse to Article 25 of
the DSU.  This decision is without prejudice to the DSU compatibility of the decision of the parties to accept
this award as the level of nullification or impairment for the purpose of any further proceedings under Article 22of the DSU in relation to this case.  It is also without prejudice to any interpretation of the provisions ofArticles 22 and 25 of the DSU by the Ministerial Conference or the General Council.WT/DS160/ARB25/1
Page 9
is of the view that the economic value of the copyrights at issue in the present dispute corresponds to
the licensing revenue potentially  foregone by EC right holders as a result of Section 110(5)(B).
3.5 The United States  considers that the level of nullification or impairment of benefits caused to
the European Communities is equal to the annual benefits lost by EC right holders as a result of
Section 110(5)(B).  Like the European Communities, the United States believes that the level ofnullification or impairment should be measured by reference to the licensing royalties lost by EC right
holders.  However, the United States disagrees with the European Communities' contention that it has
lost benefits equal to the total licensing royalties that hypothetically could be collected.  In the view of
the United States, the most accurate and factually grounded way to quantify the lost benefits is to
determine the benefits that EC right holders were receiving prior to the enactment of
Section 110(5)(B).
3.6 According to the United States, the European Communities' proposed methodology should be
rejected because it calculates foregone licensing royalties as though copyright holders would receive
royalties from every  user of radio or television music that is affected by Section 110(5)(B).  The
United States maintains that prior to the enactment of Section 110(5)(B) many bars, restaurants and
retail establishments in the United States that could have played radio or television music were not
licensed to do so.  The United States submits that this absence of 100% licensing is to be expected, asthe US CMOs which administer the rights of the copyright holders face substantial costs in licensing
bars, restaurants and retail establishments.  The United States argues that, given the geographically
dispersed user base in the United States, it is not economically rational for US CMOs to locate and
attempt to obtain and administer licenses for every establishment that plays radio or television music.
The United States is therefore of the view that, because it disregards the cost of collecting anddistributing royalties, the European Communities' proposed methodology produces a windfall for
itself, which would be contrary to WTO rules and would unfairly penalize the United States.
3.7 The European Communities  rejects the United States' argument that it would be "too costly"
to license certain categories of businesses or businesses in certain areas of the United States.  The
European Communities submits that this is tantamount to suggesting that a WTO Member in whichpiracy rates are very high or where the enforcement of intellectual property is particularly difficult or
costly is, for all practical purposes, released from its substantive obligations under the TRIPS
Agreement.
3.8 The Arbitrators  note that they are called on, in this case, to determine the level of
nullification or impairment of benefits accruing to the European Communities as a result of the
continued application of Section 110(5)(B).  In respect of Section 110(5)(B), the Panel reached the
conclusion that it was "[…] inconsistent with Articles 11 bis(1)(iii) and 11(1)(ii) of the
Berne Convention (1971) as incorporated into the TRIPS Agreement by Article 9.1 of that
Agreement."
31  Neither party to this dispute contests that Section 110(5)(B), as currently in force,
continues to be inconsistent with the provisions of the aforementioned articles.
3.9 It is clear, therefore, that the benefits which Section 110(5)(B) is impairing or nullifying are
those which should accrue to the European Communities and other Members under the provisions ofArticles 11 bis(1)(iii) and 11(1)(ii) of the Berne Convention (1971)
32 as incorporated into the TRIPS
Agreement by Article 9.1 of that Agreement.
3.10 It is apparent from the submissions of the parties that they do not so much differ regarding the
nature  of the benefits which should accrue to the European Communities under the provisions of
Articles 11 bis(1)(iii) and 11(1)(ii), but rather regarding the level  of benefits which the
                                                     
31 Panel Report on US - Section 110(5) Copyright Act , supra , para. 7.1(b).
32 Articles 11 bis(1)(iii) and 11(1)(ii) of the Berne Convention (1971) will hereafter be referred to as
"Articles 11 bis(1)(iii) and 11(1)(ii)".WT/DS160/ARB25/1
Page 10
European Communities could expect to accrue to it under those provisions.  The Arbitrators will
address these issues in turn.33
3.11 As concerns, first, the nature  of the benefits which would accrue to the
European Communities if Section 110(5)(B) were brought into conformity with Articles 11 bis(1)(iii)
and 11(1)(ii), it is well to recall at the outset what those Articles actually provide.
3.12 Article 11 bis(1)(iii) reads:
Authors of literary and artistic works shall enjoy the exclusive right of authorizing:
[…]
(iii) the public communication by loudspeaker or any other analogous instrument
transmitting, by signs, sounds or images, the broadcast of the work.
3.13 Article 11(1)(ii) states:
Authors of dramatic, dramatico-musical and musical works shall enjoy the exclusive
right of authorizing:
[…]
(ii) any communication to the public of the performance of their works.
3.14 By virtue of Article 9.1 of the TRIPS Agreement34, the provisions of Articles 11 bis(1)(iii)
and 11(1)(ii) "[…] have become part of the TRIPS Agreement and as provisions of that Agreementhave to be read as applying to WTO Members."
35
3.15 For purposes of the present dispute, this means that the United States is under an obligation to
make available to EC right holders the exclusive rights set forth in Articles 11 bis(1)(iii)
and 11(1)(ii).36  It is important to bear in mind, however, that, while it is for the United States  to
provide  EC right holders with the exclusive rights set forth in Articles 11 bis(1)(iii) and 11(1)(ii), it is
for EC right holders  to determine whether and how to exercise or exploit  those rights.
3.16 Although there may be a variety of ways in which EC right holders could exercise or exploit
the exclusive rights which the United States must make available to them, the parties are in agreement
                                                     
33 The Arbitrators note that, in those cases where users of copyright works are covered by
Section 110(5)(B), the European Communities does not currently derive any benefits from the provisions of
Articles 11 bis(1)(iii) and 11(1)(ii).  It is, therefore, of no account whether the question before the Arbitrators is
framed as "What is the level of EC benefits which are being nullified or impaired as a result ofSection 110(5)(B)?" or as "What is the level of bene fits which would accrue to the European Communities if
Section 110(5)(B) were brought into conformity with Articles 11 bis(1)(iii) and 11(1)(ii)?".
34 Article 9.1 of the TRIPS Agreement provides in pertinent part that "Members shall comply with
Articles 1 through 21 of the Berne Convention (1971) and the Appendix thereto."
35 Panel Report on US - Section 110(5) Copyright Act , supra , para. 6.18.
36 Article 1.1 of the TRIPS Agreement makes clear that "Members shall give effect to the provisions of
the [TRIPS] Agreement."  Members must, therefore, implement in their domestic law the protection required by
the TRIPS Agreement.  Moreover, Article 1.3 of the TRIPS Agreement provides in relevant part that "Members
shall accord the treatment provided for in this Agreement to the nationals of other Members." (footnote omitted)This confirms that the exclusive rights conferred by Articles 11 bis(1)(iii) and 11(1)(ii) must be granted to EC
right holders.WT/DS160/ARB25/1
Page 11
that, in practice, such exclusive rights are and would be exploited through licensing.  The Arbitrators
see no reason to differ from the parties in this regard.37
3.17 If it is assumed, then, that copyright holders exploit their exclusive rights by granting licences
for the use of their works, one of the benefits which arises from those rights consists of the licensing
royalties which right holders would receive.  Thus, exclusive rights such as those set forth inArticles 11 bis(1)(iii) and 11(1)(ii) will normally translate into economic benefits for copyright
holders.
3.18 In their submissions to the Arbitrators, the parties have focused on this type of benefit
accruing to copyright holders.  The Arbitrators concur with the parties that, for purposes of these
arbitration proceedings, the relevant benefits are those which are economic in nature.
38  This is
consistent with previous decisions of arbitrators acting under Article 22.6 of the DSU.39  Moreover,
like the parties to this dispute, the Arbitrators will proceed on the assumption that the licensingroyalties realizable by copyright holders constitute an adequate measure of the economic benefits
arising from Articles 11 bis(1)(iii) and 11(1)(ii).
3.19 Accordingly, the Arbitrators will, in this case, assess the level of EC benefits which
Section 110(5)(B) is nullifying or impairing in terms of the royalty income foregone by EC right
holders.  In making this observation, the Arbitrators are aware that their task in this case is todetermine the benefits which are denied to the European Communities  rather than determining the
benefits which are denied to EC right holders .  However, there can be no question that the benefits
which are denied to the European Communities include the benefits which are denied to EC right
                                                     
37 The assumption that the exclusive rights at issue in this dispute are exploited through licensing is, of
course, without prejudice to any assumptions that may appropriately be made in other cases involving other
exclusive rights guaranteed by the TRIPS Agreement.
38 This view is based on the object of the present proceedings, which is to quantify the economic harm
suffered by the European Communities as a consequence of the continued application of Section 110(5)(B).  Itdoes not necessarily follow that Members having recourse to Article 64 of the TRIPS Agreement need toestablish nullification or impairment of economic  benefits accruing to them under the TRIPS Agreement.  The
Arbitrators find support for their view in the following statement by the arbitrators in European Communities –
Regime for the Importation, Sale and Distribution of Bananas – Recourse to Arbitration by the
European Communities under Article 22.6 of the DSU : "[A] Member's potential interests in trade in goods or
services and its interest in a determination of rights and obligations under the WTO Agreements are each
sufficient to establish a right to pursue a WTO dispute settlement proceeding.  However, a Member's legalinterest in compliance by other Members does not, in our view, automatically imply that it is entitled to obtainauthorization to suspend concessions under Article 22 of  the DSU."  See the Decision of the Arbitrators on
European Communities – Regime for the Importation, Sale and Distribution of Bananas – Recourse to
Arbitration by the European Communities under Article 22.6 of the DSU  (hereafter " EC - Bananas III (22.6)
(US) ", WT/DS27/ARB, 9 April 1999, para. 6.10.
39 See, e.g., the Decisions of the Arbitrators on EC – Bananas III (22.6) (US) , supra , para. 6.12
(benefits nullified or impaired: losses in US exports of goods and losses by US service suppliers in servicessupply); European Communities – Regime for the Importation, Sale and Distribution of Bananas – Recourse to
Arbitration by the European Communities under Article 22.6 of the DSU , WT/DS27/ARB/ECU,
24 March 2000, footnote 52 (benefits nullified or impaired: losses by Ecuador of actual trade and of potential
trade opportunities in bananas and the loss of actual and potential distribution service supply); European
Communities - Measures Concerning Meat and Meat Products  (Hormones ) - Original Complaint by the United
States - Recourse to Arbitration by the European Communities under Article 22.6 of the DSU (hereafter " EC -
Hormones (22.6) (US) "), WT/DS26/ARB, 12 July 1999, para. 41 (benefits nullified or impaired: foregone US
exports of hormone-treated beef and beef products); European Communities - Measures Concerning Meat and
Meat Products  (Hormones ) - Original Complaint by Canada - Recourse to Arbitration by the European
Communities under Article 22.6 of the DSU (hereafter " EC - Hormones (22.6) (Canada) "), WT/DS48/ARB,
12 July 1999, para. 40 (benefits nullified or impaired: foregone Canadian exports of hormone-treated beef andbeef products).WT/DS160/ARB25/1
Page 12
holders.40  What is more, the European Communities has not made out a claim to the effect that
Section 110(5)(B) is nullifying or impairing benefits  additional to those which EC right holders could
otherwise derive from Articles 11 bis(1)(iii) and 11(1)(ii).  As a result, it is appropriate, for the
purposes of these proceedings, to determine the level of EC benefits which Section 110(5)(B) is
nullifying or impairing in terms of the benefits foregone by EC right holders.
3.20 Having addressed the nature of the benefits which should accrue to the
European Communities under Articles 11 bis(1)(iii) and 11(1)(ii), the Arbitrators next turn to the issue
of the level  of benefits which the European Communities could expect to accrue to it under those
Articles.  Put in another way, the next issue confro nting the Arbitrators relates to the level of royalty
income which EC right holders could expect to recei ve if the United States were to comply with its
obligations under Articles 11 bis(1)(iii) and 11(1)(ii).41
3.21 The European Communities considers that, because this dispute involves exclusive rights, the
level of benefits which EC right holders could expect to obtain should be assessed by reference to the
economic value of the exclusive rights conferred on them by Articles 11 bis(1)(iii) and 11(1)(ii).  The
European Communities argues that the economic va lue of those rights corresponds to the royalty
income potentially  realizable by EC right holders.  The European Communities recalls, in this regard,
that all US bars, restaurants and retail establishments which play radio or television music would haveto pay licensing fees and that any unauthorized use of copyrighted musical works by such
establishments would be illegal.
3.22 The Arbitrators are cognizant of the fact that the rights set forth in Articles 11 bis(1)(iii)
and 11(1)(ii) are in the nature of exclusive rights. If granted by the United States, those rights would
provide EC right holders with the assurance that any unauthorized use of those works would be illegalas a matter of US law.  It is also true, as the European Communities suggests, that any unauthorized
use of copyright works, quite apart from being illegal, would deprive EC right holders of royalty
income.  However, the question is whether the level of royalty income which EC right holders could
expect to receive includes  the royalty income of which they would be deprived by all unauthorized
users of their works.
3.23 The European Communities answers this question in the affirmative.  In essence, it argues
that because EC right holders should  receive licensing royalties from all users of their copyright
works - i.e., legal and illegal users - the benefits which the European Communities can expect to
accrue to it are equal to the royalty income which EC right holders should  receive.
42
3.24 The Arbitrators consider that the benefits which they should take into account in this case are
those which the European Communities could reasonably expect to accrue to it under
                                                     
40 Indeed, as already pointed out, the rights set forth in Articles 11 bis(1)(iii) and 11(1)(ii) must, in
conformity with the provisions of Article 1.3 of the TRIPS Agreement, be granted to EC right holders.
41 It should be noted that it is not in dispute that the level of benefits which EC right holders could
expect to accrue to them if Section 110(5)(B) were brou ght into conformity with the TRIPS Agreement  would
depend, first and foremost, on the competitive position of EC right holders in the US market.  As a matter offact, both parties have attempted to estimate what percentage of total royalty income generated in the United
States would accrue to EC right holders if Sec tion 110(5)(B) were made to conform to Articles 11 bis(1)(iii)
and 11(1)(ii).
42 In the European Communities' view, the royalty income which EC right holders should  receive - i.e.,
the royalty income potentially realizable by EC right holders - represents the economic value of the exclusiverights at issue in this dispute.  Even assuming that were correct (a question which the Arbitrators do not heredecide), the Arbitrators note that they are not called on, in this case, to assess the economic value of the rights
set forth in Articles 11 bis(1)(iii) and 11(1)(ii).  Rather, the mandate of the Arbitrators is to determine the
economic value of the benefits  which would arise from those rights on an annual basis.  See document
WT/DS160/15.  Therefore, the Arbitrators do not find it appropriate, in the context of the present proceedings,
to speak of the "economic value of the rights set forth in Articles 11 bis(1)(iii) and 11(1)(ii)".WT/DS160/ARB25/1
Page 13
Articles 11 bis(1)(iii) and 11(1)(ii).43  In this regard, the Arbitrators certainly appreciate the
European Communities' point that, as a matter of US law, all users of copyright works by EC right
holders should  be licensed and should  pay licensing fees.  But is it reasonable, in the circumstances of
the present dispute, for the European Communities to expect that all users of the works of EC right
holders would  be licensed and would  pay licensing fees?
3.25 In considering this issue, it is important to recall that the rights set forth in
Articles 11 bis(1)(iii) and 11(1)(ii) do not exercise or enforce themselves.  In this connection, the
Arbitrators note that neither party to this dispute has suggested that, in the event those rights were
available under US law, the United States would have any role to play in how those rights would be
exercised.  Nor has it been asserted that it would be the duty of the United States to enforce those
rights on behalf of EC right holders.  In the view of the Arbitrators, it is clear that the exercise and
enforcement of the rights conferred by Articles 11 bis(1)(iii) and 11(1)(ii) would not be the
responsibility of the United States but of EC right holders.44
3.26 Indeed, it is common ground that, in practice, copyright holders entrust CMOs with the
exercise and enforcement of the exclusive rights at issue in this dispute.45  Such CMOs are authorized
by copyright holders to identify users of their rights, grant licences for the use of those rights and take
legal action to enforce licences or pursue users who fail to seek licences.
3.27 The United States submits that, in performing the aforementioned tasks, US CMOs incur
substantial costs.  The United States recalls in this respect that, in the United States, the potential base
of users of copyrighted musical works - i.e., bars, restaurants and retail establishments - is wide,
geographically dispersed and in almost constant change, as users continually leave and enter the
market.  From these considerations, the United States infers that it is not economically rational forUS CMOs - which the United States says generally seek to maximize profits for the right holders they
represent
46 - to attempt to identify and obtain licences from every  user of copyright works.47
                                                     
43 It should be recalled, in this context, that the inquiry into the level of benefits which the European
Communities could expect to accrue to it if Section 110(5)(B) were brought into conformity with the TRIPS
Agreement is hypothetical in nature.  The Arbitrators consid er that, in such a situation, it is necessary to proceed
with caution, such that only those benefits which the European Communities could, in good faith and takingaccount of all relevant circumstances, expect to derive from Articles 11 bis(1)(iii) and 11(1)(ii) are found to be
nullified or impaired.
44 It should be mentioned, however, that the TRIPS Agreement does lay on the United States certain
obligations in respect of the enforcement of intellectual property rights in its territory.  Those obligations are
laid down in Articles 41 et seq . of the TRIPS Agreement.  The general obligation is set out in Article 41, which
provides in relevant part that "Members shall ensure that enforcement procedures […] are available under their
law so as to permit effective action against any act of infringement of intellectual property rights covered by this
Agreement […]".  Before the Panel, the European Communities did not raise a claim of violation in respect of
any of the enforcement provisions of the TRIPS Agreement.  See the Panel Report on US - Section 110(5)
Copyright Act , supra , para. 3.2.  The Arbitrators must therefore assume that the United States is acting
consistently with the enforcement obligations contained in the TRIPS Agreement.
45 See the Panel Report on US - Section 110(5) Copyright Act , supra , para. 2.17.  EC right holders
could theoretically attempt to license users of their copyright works directly, i.e., with no involvement of
US CMOs.  The Arbitrators consider, however, that it is justifiable, for purposes of the present proceedings, to
leave out of account the possibility of direct licensing by EC right holders.  From the evidence on record, itappears to the Arbitrators th at, because of the very high transaction co sts associated with direct licensing, it is
unlikely that EC right holders would license their rights directly to a significant extent.  At any rate, neitherparty has specifically requested that royalty income stemming from direct licensing be factored into theArbitrators' calculation.
46 The United States also points out, however, that US CMOs themselves may, in some cases, be
organised as non-profit organizations.  The United States notes that this is true, for example, of ASCAP.
47 The United States notes that US CMOs are, in practice, most interested in licensing users from which
expected revenue is greatest and expect ed cost of collection is least.  A ccording to the United States, US CMOsWT/DS160/ARB25/1
Page 14
According to the United States, estimates relating to the time before Section 110(5)(B) was enacted in
fact bear out its view that right holders do not license all of the potential users of their works.48
3.28 The European Communities does not deny that the exercise of the exclusive rights of right
holders entails costs.  Nor has the European Communities specifically contested the United States'
argument that it might not be economically rational for US CMOs to attempt to license each and everyuser of copyright works.  The European Communities nevertheless considers that the costs of the
administration and enforcement of exclusive rights should not be factored into the calculation of the
level of EC benefits which are being nullified or impaired as a result of Section 110(5)(B).  The
European Communities submits that to do so would mean that, notwithstanding the TRIPS
Agreement, EC right holders would have to accept a certain level of what the European Communities
terms as "piracy".
3.29 The Arbitrators see force in the United States' argument that the number of users whom
US CMOs will seek to license is a function of the expected cost and revenue per licence.  The
Arbitrators also find persuasive the suggestion that the cost and revenue per licence vary according to
the characteristics of the user base, including such factors as the number, size and location of the users
that play broadcast music as well as the extent to which users play such music.
49
3.30 Moreover, it is clear from the information supplied by the parties on the characteristics of the
US user base that US CMOs would incur very sign ificant costs if they were to attempt to achieve
licensing levels of 100%.  It is quite reasonable, therefore, that US CMOs could generate greater net
licensing revenues for themselves at lower levels of licensing.  Indeed, the evidence on record
supports the United States' claim that, in practice, US CMOs collect only a proportion of the royalty
                                                                                                                                                                    
would, for example, be more likely to incur the cost of licensing a large department store in New York City than
to incur the likely higher cost of identifying and licensing a small bar in rural Kansas.
48 The United States estimates that before Section 110(5)(B) was enacted, between xx% (estimate
for 1996) and 19% (estimate for 1997) of restaurants in the United States were licensed to play music.  On theother hand, the United States has indicated before the Panel that approximately 74% of all restaurants in the
United States play music.  See the Panel Report on US - Section 110(5) Copyright Act , supra , Attachment 2.3
(US response to question 11(b) by the Panel to United States).
49 Unlike the European Communities, the Arbitrators see nothing in paragraph 6.247 of the Panel report
which would suggest that it would be inappropriate, in the circumstances and for purposes of this dispute, to
take into consideration such factors as the transactio n costs associated with licensing and the characteristics of
the user base.  Nor is it clear to the Arbitrators how taking account of those factors could "undermine the scope
and binding effect" of the TRIPS Agreement.  Paragraph 6.247 addresses the issue of whether a Member could
justifiably limit the exclusive rights set forth in Articles 11 bis(1)(iii) and 11(1)(ii) on the basis that right holders
would, in terms of actual rather than potential losses, be no worse off after the introduction of the limitation thanbefore its introduction.  See the Panel Report on US - Section 110(5) Copyright Act , supra , para. 6.247.  This is
an issue which is quite different from the on es confronting the Arbitrators in this case.
Similarly, the Panel's statement in paragraph 6.196 of its report that the licensing practices of CMOs
cannot necessarily be fully indicative of "normal exploitation" of exclusive rights in no way runs counter to the
view of the Arbitrators that the level of licensing whic h US CMOs aim to achieve is a function of expected cost
and revenue per licence.  The issue considered by the Panel was whether the fact that the 1998 Amendment didnot generally change the licensing practices of US CMOs in relation to those establishments that were already
exempted under the original homestyle exemption was a reliable indicator of normal exploitation of exclusive
rights.  The Panel found that it was not, because it was evident that, due to the pre-existing homestyle
exemption, those establishments could not be licensed.  See the Panel Report on US - Section 110(5) Copyright
Act, supra , para. 6.196.  It does not follow from the Panel's finding that the costs associated with licensing have
no bearing on the level of licensing .  Indeed, the Panel acknowledged " […] that the extent of exercise or non-
exercise of exclusive rights by right holders at a given point in time is of great relevance for assessing what is
the normal exploitation with respect to a particular exclus ive right in a particular market."  See the Panel Report
on US - Section 110(5) Copyright Act , supra , para. 6.188.WT/DS160/ARB25/1
Page 15
income potentially realizable by right holders and that they do not license all users of copyright
works.50
3.31 Contrary to the European Communities' view, ta king account of the transaction costs incurred
by US CMOs and of the bearing those costs have on the level of licensing does not carry the
implication that right holders "have to" accept a cert ain level of "piracy".  Right holders, or the CMOs
representing them, are at liberty to seek to license all users of their works.  As should be clear from
the preceding paragraphs, however, were CMOs to do so, they would not necessarily maximize the
royalty income of the right holders they represent.
3.32 In response to the European Communities' "piracy" argument the Arbitrators further wish to
note that "piracy" is of course an emotive word when used in the context of the infringement of
copyright.  In areas of copyright use not covered by the exemptions provided for in Section 110(5), it
would be surprising if there were now 100% collection of royalties potentially due.  Before theenactment of the 1998 Amendment, it was most unlikel y that all the enterprises now entitled to the
benefit of the exemptions there provided for woul d either have been licensed or, if licensed, would
have actually paid all the licensing fees which were due.  But, as previously indicated, the
European Communities has not formally made a claim of violation in respect of any of the
enforcement provisions of the TRIPS Agreement.  If the 1998 Amendment had not been passed, itseems unlikely that there would ever have been an y complaint to the DSB about a failure on the part
of the United States to take steps to ensure full  compliance.  This suggests that, at that time, the
European Communities accepted the reality that there could never be 100% recovery.
3.33 In the light of the foregoing, the Arbitrator s consider that the European Communities could
not reasonably expect that, in the United States, all users of copyright works of EC right holderswould be licensed and would pay licensing royalties.  As a result, the level of royalty income which
the European Communities could reasonably expect EC right holders to receive is, in the view of the
Arbitrators, limited to licensing revenue from the numbers of users that would  be licensed.
3.34 The Arbitrators are thus unable to accept the European Communities' view that the level of
benefits which the European Communities could reasonably expect to accrue to it underArticles 11 bis(1)(iii) and 11(1)(ii) equals the royalty income potentially realizable by EC right
holders.  Indeed, were the Arbitrators to adopt the European Communities' view, the level of EC
benefits nullified or impaired  as a result of Section 110(5)(B) would be higher  than the level of
benefits which would actually  accrue  to the European Communities if Section 110(5)(B) were
brought into conformity with the TRIPS Agreement.
51  The Arbitrators consider that such an outcome
would be both inconsistent and unwarranted.  It w ould be quite inappropriate for the Arbitrators to
award the European Communities benefits which it is not actually losing as a result of the continuedapplication of Section 110(5)(B).
52
                                                     
50 The European Communities does not specifically question the accuracy of the United States'
estimates of the level of licensing which would likely prevail in the United States if Section 110(5)(B) werebrought into conformity with the TRIPS Agreement.  On the other hand, data provided by the EuropeanCommunities suggests that the level of licensing in some member States of the European Communities is
significantly higher than in the United States.  It should be recalled, however, that, before the Panel, the
European Communities did not formally claim that the United States was acting inconsistently with theenforcement obligations contained in the TRIPS Agreement.  See supra , footnote 44.
51 This is because the royalty income potentially r ealizable by EC right holders -- which the European
Communities suggests is what the Arbitrators should as sess in this dispute -- exceeds the actual royalty income
which EC right holders may reasonably be expected to realise once the United States makes available the rights
referred to in Articles 11 bis(1)(iii) and 11(1)(ii).
52 For the same reason, the Arbitrators cannot agree with the European Communities that it would be
absurd for the level of nullification or impairment to be lower in the case of Members with low levels oflicensing (due, e.g., to high licensing costs) than it would be in the case of Members with high levels ofWT/DS160/ARB25/1
Page 16
3.35 In conclusion, the Arbitrators will, in this case, determine the level of EC benefits nullified or
impaired as a result of Section 110(5)(B) by reference to the royalty income which EC right holders
could reasonably be expected to realize if the United States made available the rights set forth in
Articles 11 bis(1)(iii) and 11(1)(ii).  For the reasons indicated above, the Arbitrators consider that the
royalty income which EC right holders could reasonably be expected to realize does not include theroyalty income which EC right holders would forego by not exercising or enforcing their exclusive
rights.
B. 
ROYALTIES COLLECTED VERSUS  ROYALTIES DISTRIBUTED
3.36 As previously indicated, there is a further and separate conceptual issue which the Arbitrators
need to resolve prior to dealing with the details of how to calculate the level of EC benefits which are
being nullified or impaired as a result of Section 110(5)(B).  That issue goes to the question of
whether the royalty income which EC right holders could reasonably be expected to realize is equal tothe amount of licensing royalties which would be collected by US CMOs from users of works of
EC right holders or whether, instead, it is equal to the amount of royalties which would be distributed
by US CMOs to EC right holders.
3.37 The European Communities  considers that the Arbitrators should base their determination
on the amount of royalties to be paid by the users of copyright works and not on the amount ofroyalties which US CMOs would distribute to EC right holders.  The European Communities notes
that the services rendered by US CMOs to EC right holders entail costs for the latter and that these
costs reduce the net proceeds of EC right holders.  But the European Communities recalls its view that
what has to be assessed in the present case is the value of the exclusive rights which are being denied
to EC right holders.  The costs which US CMOs w ould incur in administering the rights of EC right
holders or the net proceeds accruing to EC right holders are, in the view of the
European Communities, irrelevant to the assessment of the economic value of the exclusive rights of
EC right holders.
3.38 The European Communities further notes that all economic operators incur expenses in
collecting receivables because they either need to employ staff for that purpose or else use theservices of specialized enterprises.  The European Communities argues that, notwithstanding that, the
costs related to the collection of receivables from transactions involving goods or services have never
been used, in past arbitration proceedings under Article 22.6 of the DSU, to reduce the level of
benefits found to be impaired or nullified as a result of an infringement of WTO obligations.
3.39 The United States  argues that the benefits lost to EC right holders as a result of
Section 110(5)(B) are the distributions they otherwise would receive from US CMOs.  The
United States submits that the benefits lost to EC right holders are not the gross licensing royalties theUS CMOs would otherwise collect from licensed users.  According to the United States, this is
because US CMOs would only distribute net licensing royalties to EC right holders.  The
United States defines net licensing royalties as "licensing royalties collected by the collecting
societies minus the costs incurred by the collecting societies".  Those costs include the costs resulting
from the collection and administration of the rights of copyright holders.
3.40 The United States adds that the European Communities, in focusing only on the payment of
fees from US licensees to US CMOs, overlooks the fact that the present case is a trade case.  For the
United States, what matters are the cross-border payments which EC right holders should be
receiving.  Thus, in the view of the United States, the level of nullification or impairment suffered by
the European Communities equals the foregone earnings in its current account transactions with the
                                                                                                                                                                    
licensing (due, e.g., to low licensing costs).  The level of benefits which would actually accrue to other Members
would, likewise, be smaller in the case of Members with low levels of licensing than it would be in the case ofMembers with high levels of licensing.WT/DS160/ARB25/1
Page 17
United States, resulting from the inconsistency found between US law and the TRIPS Agreement.
The United States recalls in this regard that the current account transaction is the distribution from a
US CMO to an EC right holder, and not the payment of a fee by a US licensee to a US CMO.
3.41 The Arbitrators  note that US CMOs do not distribute to copyright holders the total amount
of licensing royalties which they collect from licensed users.  This is because the CMOs have to coverthe costs which they incur in licensing the rights of copyright holders as well as general operating
costs.  It follows that the total amount of royalt ies which US CMOs would distribute to EC right
holders if the United States made available to them the rights set forth in Articles 11 bis(1)(iii)
and 11(1)(ii) would be smaller than the total amount of licensing royalties paid to US CMOs by
licensed users of works of EC right holders.
3.42 This raises the issue of whether the level of EC benefits which are being nullified or impaired
as a result of Section 110(5)(B) should be calculated on the basis of the amount of licensing royaltieswhich would otherwise be collected  by US CMOs from US licensees or on the basis of the amount of
royalties which would be distributed  by US CMOs to EC right holders.
3.43 In considering this issue, it is useful to take a closer look at the relationship between copyright
holders, US CMOs and users of copyright works.  As concerns, first, the right holders, they are linked
to US CMOs by membership or affiliation agreements.
53  Under such agreements, right holders grant
US CMOs the (nonexclusive) right to license users of their copyright works.54  In return, right holders
receive royalty payments from the CMOs in accordance with those societies' distribution policies and
methods.55  The CMOs, for their part, negotiate licensing agreements with the users of the works of
right holders they represent.  Those negotiations re late, in particular, to the licensing royalties to be
paid by licensed users to the CMOs.
3.44 It should be clear from the preceding paragraph that when EC right holders authorize
US CMOs to license their rights, they cannot reasonably expect to receive any benefits directly from
the licensed users of their works.56  The benefits which EC right holders, and thus the
European Communities, would derive from the exclusive rights set forth in Articles 11 bis(1)(iii)
and 11(1)(ii) would be those resulting from the agreements of EC right holders with US CMOs.
3.45 In order to answer the question of what benefi ts EC right holders would derive from their
agreements with US CMOs, it is necessary, as an initial matter, to be clear about the concept of
"benefits".  In this regard, the Arbitrators consider that useful guidance may be drawn from the
decision of the arbitrators in EC - Hormones (22.6) (US) .  In that case, the arbitrators determined the
level of US benefits nullified or impaired as a result of the European Communities' hormone ban by
reference to the total value of US beef or beef products which would have been exported in the
absence of the ban.57
                                                     
53 The Arbitrators note that this is true, at any rate, of the US CMOs which are relevant to this dispute,
i.e., ASCAP and BMI.
54 Thus, in cases where CMOs of the type at issue in this dispute are involved, there is no direct link,
legal or otherwise, between right holders and licensed users.
55 As already noted, US CMOs deduct the collection, administration and other costs from the licensing
royalties collected before making distributions to right holders.  Furthermore, it should be pointed out that USCMOs offer so-called blanket licences, which authorise licensed users to use the works of all right holders
represented by a particular CMO.  It is necessary, therefore, for the CMOs to devise distribution formulas inorder to asses the royalty payments to be made to individual right holders.
56 EC right holders could receive benefits directly fr om the users of their copyright works if they were
to license those users directly.  As previously noted, ho wever, the possibility of direct licensing by EC right
holders is left out of account for purposes of the present proceedings.  See supra , footnote 45.
57 See the Decision of the Arbitrators on EC - Hormones  (22.6) (US) , supra , para. 43.WT/DS160/ARB25/1
Page 18
3.46 With this definition in mind, the Arbitrators now turn to consider what benefits EC right
holders would derive from their agreements with US CMOs.  As already mentioned, in exchange for
granting US CMOs the right to license users, the CMOs would make royalty payments
("distributions") to right holders.  It is not in dispute that the payments right holders would receive
from US CMOs would be equal to the licensing royalties collected from licensed users of their works,minus the collection and other costs incurred by the US CMOs.
3.47 Like the United States, the Arbitrators are of the view that no particular significance attaches
to the fact that the distributions by US CMOs amount to the net licensing revenue of US CMOs.
Whatever those distributions may represent for US CMOs, for EC right holders, despite the fact that,
in a sense, those distributions are net payments because of the deduction of collection and other costs,
they would represent gross receipts and thus benefi ts resulting from the exclusive rights set forth in
Articles 11 bis(1)(iii) and 11(1)(ii).
3.48 The Arbitrators consider, therefore, that it is the total amount of royalty payments
("distributions") which US CMOs would make to EC right holders (or their representatives) that
constitutes the benefits which the European Communities could reasonably expect to accrue to it
under Articles 11 bis(1)(iii) and 11(1)(ii).  In more simple terms, it could be said that the benefits
which the European Communities could expect to realize are the payments which US CMOs would
make to EC right holders after the deduction of collection and administration costs.
3.49 It is true that the CMOs' distributions to EC right holders would be smaller in amount than the
licensing royalties collected by US CMOs from users licensed to use the works of EC right holders.
However, it does not follow from the fa ct that US CMOs would be able to collect  a certain amount of
licensing royalties from licensed users that EC right holders would, ipso facto , be entitled  to receive
that amount.  As previously pointed out, the paym ents to be made by US CMOs would depend on the
terms of the membership or affiliation agreements between the US CMOs and EC right holders.
Under the agreements typically concluded between copyright holders and the US CMOs in question,
right holders do not receive the full licensing fees collected by US CMOs.  The Arbitrators see no
reason to assume otherwise in this case.
3.50 The European Communities does not agree that the Arbitrators should determine the amount
of royalty payments which US CMOs would make to EC right holders.  According to the
European Communities, what should be determined is the amount of licensing royalties which would
have to be paid by users of the works of EC right holders because, in its view, that amount constitutes
the value of the exclusive rights which are being denied to EC right holders.  The Arbitrators are not
convinced by this argument.  To recall, the task of the Arbitrators in this case is to assess the level of
EC benefits nullified or impaired as a result of Section 110(5)(B), and not to establish the economicvalue of the exclusive rights which are being denied to EC right holders.
58
3.51 Even assuming, arguendo , the Arbitrators had to establish the economic value of the
exclusive rights in question, it is clear that the economic value of those rights would need to be
assessed at the level of EC right holders, given that the object of these proceedings is to assess the
economic impact of Section 110(5)(B) on the European Communities.  For the reasons set out in thepreceding paragraphs, the "potential licensing revenue"
59 which could be realized by EC right holders
licensing their rights through US CMOs would not correspond to the licensing royalties which
US licensees would pay to US CMOs.
3.52 The United States considers that the benefits lost to EC right holders as a result of
Section 110(5)(B) are the distributions they otherwise would receive from US CMOs.  The
                                                     
58 See also supra , footnote 42.
59 It will be recalled that the European Communities considers that the economic value of the exclusive
rights in question is equal to the potential licensing revenue realizable by EC right holders.WT/DS160/ARB25/1
Page 19
United States notes that the distributions from US CMOs to EC right holders are reflected on the
US current account of international payments.  The United States submits, therefore, that the level of
EC benefits nullified or impaired should be measured as foregone earnings in the European
Communities' current account transactions with the United States.
3.53 The Arbitrators are not persuaded that it is necessary, or even appropriate, in this case to link
the issue of the level of EC benefits which are being nullified or impaired to the US current account of
international payments.  To begin with, the Arbitrators do not see any legal reason why the calculation
of the level of payments from US CMOs to EC right holders should necessarily be based on figures
stemming from the US current account.  The fact that the current account may, in some cases, be
usefully relied on to measure the impact of WTO-inconsistent measures does not lead to the
conclusion that the current account should be determining in all cases or that it should be used to the
exclusion of other sources of relevant data.60  Indeed, the United States itself has not based its
argumentation before the Arbitrators on current account figures, nor has it provided such figures to
the Arbitrators.
3.54 Another reason for approaching current account figures with caution in this case lies in the
fact that they may not give sufficiently accurate  indications regarding the amount of payments which
US CMOs would make to EC right holders.  It is  the understanding of the Arbitrators that the
international transactions which are reflected on the US current account are transactions between
residents of the United States and foreign residents.  In other words, it is the residency of the parties
involved in a particular cross-border transaction rather than their nationality which determines
whether and, if so, where that transaction is reflected on the current account.  However, what the
Arbitrators are concerned with in the present proceedings are payments made by US CMOs toEC nationals, i.e., EC right holders.
61
3.55 Thus, payments made by US CMOs to EC right holders residing in the United States or to EC
right holders residing in, say, Switzerland should, in the view of the Arbitrators, be taken into account
in their determination of the level of EC benefits which are being nullified or impaired.  Yet those
transactions would not be reflected on the US current account as transactions between theUnited States and the European Communities because the EC nationals concerned would not be
EC residents.
3.56 A similar problem would arise in the event of indirect distributions from US CMOs to
EC right holders.  For instance, EC right holders might rely on US publisher affiliates to represent
them in the United States.  In such cases, the relevant payments would be those from US CMOs to
US publisher affiliates representing EC right holders.  These types of payments from US CMOs to
US publisher affiliates would not be reflected on the US current account.  Yet this does not alter thefact that such payments would be  payments to EC right holders.
62  As such, the Arbitrators must take
them into account.63
                                                     
60 In the view of the Arbitrators, the mere fact that this case is a "trade case" involving international
licensing payments which appear on the US current account does not, in itself, provide a sufficient rationale for
why current account figures have to be utilised.
61 Article 1.3 of the TRIPS Agreement requires Memb ers to accord the treatment  provided for in that
Agreement to the "nationals of other Members".
62 In the view of the Arbitrators, such royalty payments would be payments to EC right holders even if
EC right holders decided to use or reinvest their revenue in the United States rather than to have it transferred toa member State of the European Communities.
63 The Arbitrators note that the data they have b een provided with concerning distributions by the
US CMOs to EC right holders through their US publisher affiliates is somewhat incomplete in that it does not
specify the criteria which were applied in compiling it.  In the view of the Arbitrators, the data supplied mightinclude distributions to persons that could be considered  to be US right holders.  The Arbitrators explain at
para. 4.46 how they have taken account of this problem in determining the level of such indirect distributions.WT/DS160/ARB25/1
Page 20
3.57 As is evident from the aforementioned examples, were the Arbitrators to employ current
account figures, there would be a risk of underestimating the payments which US CMOs would make
to EC right holders.64  In view of that risk, the Arbitrators prefer not to base their determination of the
level of benefits lost by the European Communities on data taken from the US current account.65
3.58 In the light of the above considerations, the Arbitrators conclude that the level of EC benefits
which are being nullified or impaired as a result of Section 110(5)(B) should be assessed on the basis
of the amount of royalty payments ("distributions")  which would be made by US CMOs to EC right
holders or their representatives.
IV. CALCULATION
A. OUTLINE OF THE METHODOLOGY FOLLOWED BY THE ARBITRATOR
1. "Bottom-up" versus  "top-down" approach
4.1 The Arbitrators  recall that, during the proceedings before the Panel, each of the parties
suggested a different approach to the calculation of the level of EC benefits nullified or impaired as a
result of the operation of Section 110(5)(B).  One, referred to as the  "bottom-up" approach, was
advocated by the European Communities.66  The other one, called the "top-down" approach, was
supported by the United States.67  The Panel did not take position on which one was the most
appropriate to determine the level of nullification or impairment of EC benefits.68  B e f o r e  t h e
Arbitrators, the parties elaborated on their respective approaches, which are briefly summarized
below.
4.2 Under the "bottom-up" approach, the European Communities  takes as its starting-point the
number of establishments that may qualify for the exemption.  Second, the European Communities
makes a reduction from that number using the US hypothesis that xx% of all eating and drinkingestablishments with a surface area below 3,750 square feet actually play music from the radio.  Third,
it applies to the remaining establishments the appr opriate licensing fees selected from the licensing
schedules of ASCAP and BMI.  The European Communities reaches a level of nullification or
impairment of benefits of US$25,486,974.
4.3 Under the "top-down" approach, the United States  takes as its starting-point the three-year
average (1996-1998) of the total royalties paid to EC right holders by ASCAP and the total paid by
BMI to EC right holders in 1996.  Thereafter, it proceeds through successive deductions. It identifies
the amount attributable to general licensing.  Then it makes a deduction to account for licensing
revenue from general licensees that do not meet the statutory definition of an "establishment".
Thereafter, it deducts from the licensing revenue the portion that is due to music from sources other
than radio and television.  Finally, it reduces this amount to account for licensing revenue of eating,
drinking and retail establishments which play the radio but do not meet the size and equipmentlimitations of Section 110(5)(B) and thus do not qualify for that exemption.  The United States
reaches a level of nullification or impa irment of benefits of US$446,000 to US$733,000.
                                                     
64 Since the Arbitrators have not been provided wi th information concerning the number of EC right
holders residing outside the European Communities or concerning the portion of distributions by US CMOs toUS publisher affiliates which the latter would actually tr ansfer to EC right holders, they have no way of
knowing whether reliance on current account figures would lead to significantly inaccurate results.
65 The Arbitrators recall that, in any event, the United States has failed to provide US current account
figures which would allow the Arbitrators to m easure the European Communities' lost earnings.
66 See the Panel Report on US - Section 110(5) Copyright Act, supra , paras. 6.253 and 6.256.
67 Ibid.,  paras. 6.252 and 6.255.
68 Ibid., para. 6.254.WT/DS160/ARB25/1
Page 21
4.4 The Arbitrators  carefully examined the claims, arguments and evidence submitted by the
parties in light of the rules on burden of proof applicable in the context of arbitrations under
Article 22.6 of the DSU, as instructed by the parties.  The Arbitrators were mindful of the fact that, in
arbitration proceedings under Article 22.6, a party contests the level of countermeasures which the
other intends to take under paragraphs 2, 3 and 4 of Article 22.  It is therefore understandable that theburden be on the party that contests the level of countermeasures to make a prima facie  demonstration
that the methodology and the calculations submitted by the party intending to apply countermeasures
are inconsistent with the requirements of Ar ticle 22 of the DSU. For instance, in the
European Communities - Hormones  cases, the initial burden was on the European Communities.  The
present case, however, was referred to the Arbitrators by both parties "by mutual agreement".  It is
arguable whether or not there is a complainant and a defendant. This said, we note that the agreed
procedures submitted by the parties
69 expressly instruct us to follow the allocation of the burden of
proof applied in arbitrations under Article 22.6.  We also note that the parties agreed that the
European Communities would submit a methodology paper ahead of the first written submissions, as
in proceedings under Article 22.6.  As a result, the Arbitrators decided to allocate the burden of proof
accordingly, as in an Article 22.6 case.
4.5 Based upon the record before them, in particular arguments and evidence by the United States
demonstrating that the EC methodology was not always appropriate, the Arbitrators consider that the
United States established a prima facie case that the methodology and estimates proposed by the
European Communities did not result in an appropriate reflection of the level of EC benefits which
are being nullified or impaired.  In our view, the European Communities failed to rebut this
presumption.  Therefore, we were not able to accept the methodology proposed by theEuropean Communities.
70  We were more convinced by the US alternative.  However, we did not
accept all the adjustments and deductions made by the United States.  In some instances we found
them inappropriate and we generally attempted to make a more complete analysis.  We further note
that, at the request of the Arbitrators, the European Communities and the United States confirmed that
the Arbitrators were not bound to choose between the EC or the US methodology, but could developtheir own methodology and make their own estimate s, on the basis of all arguments and evidence
submitted by the parties.  Therefore, while using essentially the US methodology, we applied some
elements of the EC methodology and estimates in ou r calculations and made assessments of our own.
4.6 In that context, and having regard to our conclusions in Section III above, we applied the
"top-down" approach for the following reasons.
4.7 It is appropriate to start from the number of establishments actually licensed at the time of the
entry into force of the 1998 Amendment because this approach offers the advantage of providing uswith a starting point grounded on historical, verified facts, even if adjustments may have to be made
to assess the level of benefits nullified or impaired on the date of referral of the matter to the
Arbitrators.
4.8 This approach also has the advantage of limiting the number of assumptions necessary.  In
comparison, the European Communities approach would require, in our view, that we base ourcalculation on what has been described in some Article 22.6 arbitrations as a "counterfactual".
71  We
                                                     
69 See WT/DS160/15.
70 See supra , Section III.
71 I.e., the approach followed for instance in EC - Hormones (22.6) (US) and EC – Hormones (22.6)
(Canada) , where, in the absence of trade figures relating to  a period where the EC regime could be deemed to be
WTO-compatible, the arbitrators had to assess what th e amount of trade would have been if the European
Communities had brought its legislation into conformity at the end of the reasonable period of time it had been
granted to do so.  In its first submission, the European Communities also claims that the absence of properprotection, even before the 1998 Amendment, of the rights that Section 110(5)(B) denies makes it impossible tolook, for comparison purposes, at a historical TRIPS-compatible situation.  The European Communities addsWT/DS160/ARB25/1
Page 22
believe that recourse to a counterfactual would only be justified if it was established that the situation
predating the 1998 Amendment was itself TRIPS-incompatible.
4.9 The Arbitrators recall that, before the entry into force of the 1998 Amendment, some
categories of establishments were already exempted from copyright payments under Section 110(5) of
the 1976 Copyright Act.  To be exempted, these establishments had to use a single receivingapparatus of a kind commonly used in private homes, hence the term "homestyle exemption" used to
describe it.
72  Some size requirements also applied to the establishments, based on decisions of
courts.73  With the 1998 Amendment, a subparagraph (B) was added which extended the scope of
exemptions under Section 110(5).74
4.10 The Arbitrators note that their task is to determine the level of EC benefits nullified or
impaired, not to assess the TRIPS-compatibility of any piece of US legislation.  Within that
framework, they also consider that the most appropriate way to assess the level of EC benefitsnullified or impaired is to determine what EC right holders received before the enforcement of
the 1998 Amendment – because historical figures are available with respect to that period - and adjust
it as appropriate to take into account the evolution of the US market in the sector concerned.
4.11 The Arbitrators are mindful that they should base their calculation on a TRIPS-consistent
situation.  They recall that the European Communities has claimed that the situation pre-dating the1998 Amendment (i.e. the exemption of certain establishments under the original homestyle
exemption) was not TRIPS-compatible.  The European Communities bases its conclusion on the fact
that, in its view, the incompatibility of Sectio n 110(5)(B) implies that the original homestyle
exemption itself was TRIPS-incompatible.
4.12 The Panel did not make any finding on the original homestyle exemption which, in any event,
was no longer in force by the time it issued its report. However, in its analysis of the current
Section 110(5)(A) and (B), the Panel did make a number of statements relating to the original
homestyle exemption.  The Arbitrators recall that the Panel noted the limited percentage of
establishments covered by the original homestyle exemption, the restrictions imposed by
Section 110(5) and, more specifically, the fact that "playing music by the small establishmentscovered by the exemption by means of homestyle apparatus has never been a significant source of
revenue collection for CMOs."
75  We note in this respect that the European Communities did not,
either before the Panel or during these proceedings, sufficiently establish its claim that the economic
impact of the original homestyle exemption was considerable.
4.13 The Arbitrators, having regard to the reasons stated by the Panel, concluded that, even if  the
situation pre-dating the 1998 Amendment was TRIPS-inconsistent (a question the Arbitrators do not
decide), the impact on the level of EC benefits nullified or impaired of relying on figures excludingthose establishments which benefitted from the original homestyle exemption would be limited.
Comparatively, trying to take into account in our calculations those establishments which were
subject to the original exemption would require further estimates, and applying the EC methodology
would involve more assumptions and inferences.
                                                                                                                                                                    
that it "had to base its assessment on an 'as-if' basis drawing from other similar situations under US Copyright
law and its enforcement."
72 Section 110(5) of the 1976 US Copyright Act will hereafter be referred to as the "original homestyle
exemption".
73 For a description of the situation before the 1998 Amendment, see the Panel Report on US –
Section 110(5) Copyright Act, supra , paras. 2.5 to 2.7.
74 For a description of the situation after the 1998 Amendment, see the Panel Report on US –
Section 110(5) Copyright Act, supra , paras. 2.3, 2.8 to 2.17.
75 Panel Report on US - Section 110(5) Copyright Act,  supra , para. 6.271.WT/DS160/ARB25/1
Page 23
4.14 For these reasons, we considered it appropriat e not to attempt to include into the total fees
paid in relation to EC works the potential revenue from establishments covered by the original
homestyle exemption.
4.15 Finally, we note that determining the level of nullification or impairment suffered by a
Member requires detailed calculations.76  In this case, the Arbitrators have encountered particular
difficulties due to the lack of precise information available.  This problem originated either in the
actual absence of specific data for the type of transa ctions concerned (payment of royalties to EC right
holders) or in the lack of co-operation on the part of some of the private entities which may have had
the information.  The absence of sufficiently specif ic information played a major role in the choices
made by the Arbitrators with respect to the methodology and the calculations.  Indeed, since they
considered it more appropriate to use figures grounded on facts than deductions or inferences, the
Arbitrators generally gave preference to approaches which relied as much as possible on historicalfigures.
2. Point in time at which benefits nullified or impaired should be assessed
4.16 The European Communities  claims that it bases its assessment of nullification or
impairment on a static situation based on the most recent figures available.  In addition, the
European Communities claims that the Arbitrators should assess nullification or impairment at thedate the United States should have brought Section 110(5) into conformity with its obligations under
the TRIPS Agreement.
4.17 The United States  bases its calculation on the situation pre-dating the 1998 Amendment.
Moreover, it suggests that compensation be based on trade over the 1996-1998 period.  However, the
United States is of the opinion that the date on which the Panel should assess the level of nullificationor impairment of benefits should be the date on which the matter was referred to the Arbitrators.
4.18 In the light of the arguments of the parties, the Arbitrators  believe that they may have to set
a date on which the level of nullification or impairment of EC benefits should be assessed.  Indeed,
such a level may have varied over time.  We note, in this respect, that the circumstances of this
arbitration may justify that we adopt a different approach from that followed by arbitrators inarbitrations pursuant to Article 22.6 of the DSU.
4.19 The Arbitrators note that they have been appointed under Article 25 of the DSU.  As a result,
they do not feel constrained by a number of obligations imposed on arbitrators in Article 22.6
proceedings.  Unlike Article 22.6, which closely relates to compliance (or absence thereof) at the end
of the reasonable period of time, Article 25 is silent as to the date on which a matter referred to
arbitration should be assessed.  However, the Arbitrators are aware that they are not called upon to
consider the level of EC benefits which may still be nullified or impaired after the end of theimplementation period, but to consider the level of EC benefits which are being nullified or impaired
as a result of the current application of Section 110(5)(B).
77 General practice under the DSU has been
to consider the facts of a case as at the date of establishment of the panel.  In the absence of any
specification in our mandate, we believe that it should be assumed that the parties wanted us to assess
the level of benefits nullified or impaired on the date the matter was referred to us.  In other words, we
                                                     
76 See the Decision of the Arbitrators on Brazil – Aircraft (22.6) , supra.
77 This seems to imply that the level of nullification or impairment that the Arbitrators will assess in
this case may be different from that which may exist after the end of the reasonable period of time.  This impliesfurther that the amount which will be determined by the Arbitrators may not dispense the parties from anArticle 22.6 arbitration.WT/DS160/ARB25/1
Page 24
must determine the level of nullification or impairment of EC benefits over a one-year period ending
as closely as possible to 23 July 2001.78
4.20 The Arbitrators recall that the European Communities suggested that they follow the
approach in the EC -  Hormones  Article 22.6 arbitrations, which would consist of assessing the level
of nullification or impairment of benefits in this case on the date when the United States should havebrought its legislation into conformity with its WTO obligations.  We recall that, in EC - Hormones ,
the arbitrators used a counterfactual and considered that they should assess the level of nullification or
impairment of benefits as if the European Communities had brought its legislation into conformity at
the end of the reasonable period of time.
79  In the present case, the reasonable period of time was
supposed to lapse on 27 July 2001.80  However, on 24 July 2001, the DSB agreed to an extension until
31 December 2001 or the date on which the current session of the US Congress adjourns, whichever
is earlier.81  In those circumstances, the Arbitrators believe that using the date of the end of the
reasonable period of time as cut-off date is not feasible, lest they will add uncertainty to their estimate
by making additional assumptions as to the situation at the end of a period which, itself, is not known
for sure.
4.21 The Arbitrators also note that the United States claims that we should "make a finding of
nullification or impairment based on data from a recent period of time (1996-1998). The parties couldthen ensure equivalence of the future suspension (or mutually agreed compensation) by using the
same period of time in calculating the trade to be adjusted."  The United States adds that "by using
trade data from the same historical period used in the analysis of harm to compute what concessions
should be suspended (or granted as compensation), we can compare commensurate data and minimize
the need for speculation."
4.22 The Arbitrators are mindful that their approach may entail adjustments on the basis of
deductions or inferences.  However, we are of the view that the US approach would be incompatible
with what we believe is our mandate, i.e., to assess the level of EC benefits which were being
nullified or impaired at the time the matter was referred to arbitration .
4.23 With regard to adjustments, the Arbitrators are well aware that they should either use the most
recent data available or make appropriate adjustments to reflect the evolution of the market.  We note
that the United States cautioned us against such adjustments, suggesting that the increase in revenues
and distributions posted by ASCAP from 1998 to 2000 – the only figures available for this particular
sector - may not reflect accurately the increase in EC right holders' royalties.  We agree with the US
concern that ASCAP's figures may not reflect the real ity of the situation of EC right holders and that
other factors may have contributed to ASCAP's incr eased revenues and distributions.  As a result, we
will adjust the value of EC right holders' revenue determined on the basis of historical figures by apercentage representative of the annual rate of growth of the US gross domestic product between 1998
                                                     
78 The reason for the choice of a yearly basis is essentially because compensations or suspensions of
concessions or other obligations have been so far calculated on a twelve-month basis.
79 See the Decision of the Arbitrators on EC  – Hormones  (22.6) (Canada ), supra , where the arbitrators
stated, at para. 37, that:
"Upon careful consideration of the claims and arguments set forth by the parties, we consider
that our starting-point is as follows: what would annual prospective Canadian exports of
hormone-treated beef and beef products to the EC be if the EC had withdrawn the ban on 13
May 1999 ?  13 May 1999 is the date of expiration of the reasonable period of time granted to
the EC to implement the panel and Appellate Body reports." (Emphasis in the original).
The arbitrators made the same statement at paragraph 38 of the Decision of the Arbitrators on EC -
Hormones (22.6) (US) , supra .
80 See WT/DS160/13.
81 DSB meeting of 24 July 2001, WT/DSB/M/107, p. 13.WT/DS160/ARB25/1
Page 25
and 2001, in order to reflect the evolution in the valu e of EC rights until the date of referral of the
matter to arbitration.  We consider that this approach does not contradict our original intent to base
our estimate as much as possible on historical figures for two reasons:
(a) adjusting relevant figures regarding the period pre-dating the 1998 Amendment to
take into account the evolution of the US market is a necessity since that period hasbeen one of sustained economic growth for the United States.  In addition, we have
been given no valid reason why we should not make that adjustment;  and
(b) using the annual rate of growth of the US gross domestic product between 1998
and 2001 is, in our opinion, a very conservative approach if one compares those
figures with those supplied by ASCAP for the same period.
4.24 For these reasons, the Arbitrators deem it appropriate to calculate the level of EC benefits
nullified or impaired by the continuing operation of Section 110(5)(B) on a date as close as possible tothe date on which the matter was referred to them.  In this case, because of the statistical information
available, their estimate will be based on the situation on 30 June 2001.  For the first six months of the
year 2001, we have used the growth rate of 1.7%, which we have calculated from quarterly GDP at
current dollar value, seasonally adjusted at annual rates as published by the US bureau of census.
82
3. Elements not considered in the calculation
(a) Approach of the Arbitrators
4.25 In its submissions, the European Communities  suggested that a number of factors which, in
its view, could contribute to nullification or impairment of benefits, be disregarded by the Arbitrators
because precise data are lacking.  This is the case of the detrimental effects of the denial of protection
of specific rights in a given work for the exploitation of other rights in this work.  Moreover, theEuropean Communities only took into account in its calculations those establishments that use
broadcast music (i.e. radio or television musi c).  Despite the fact that, in its opinion,
Section 110(5)(B) is also applicable to music tr ansmitted via the Internet, the European Communities
did not include this aspect in its calculations.
4.26 In the opinion of the Arbitrators , this raises the question of how to reconcile these
suggestions with their attempt to reach an estimate which reflects as closely as possible the level of
EC benefits nullified or impaired.  The Arbitrators recall that in document WT/DS160/15, the parties
stated that "they shall accept [the award of the Arbitrators] as the level of nullification or impairment
for purposes of any future proceedings under Article 22 of the DSU in this dispute".  This seems to
imply that our award may not only condition the amount of compensation which the United States
may offer to the European Communities under Article 22.2 of the DSU, but also the work of potential
arbitrators under Article 22.6, since the latter are required under the DSU to determine whether thelevel of suspension of concessions or other obligations is equivalent
83 to the level of nullification or
impairment of benefits.
4.27 As a result, the Arbitrators shall ensure that their determination of the level of nullification or
impairment of benefits does not lead to a situation where potential EC suspensions of concessions or
                                                     
82 See infra , para. 4.72.
83 On the notion of "equivalence", see the Decision of the Arbitrators on EC – Bananas III  (22.6) (US) ,
supra , paras. 4.1-4.8.WT/DS160/ARB25/1
Page 26
other obligations under Article 22.7 would be in fact "punitive", because the level of EC benefits
nullified or impaired by the operation of Section 110(5)(B) would have been overestimated.84
4.28 More generally, as mentioned in paragraphs 4.15 supra  and 4.36 infra , the Arbitrators in this
case did not have sufficiently specific information and either had to adjust figures or draw inferences.
They believe that by trying to incorporate in th eir calculations elements for which information was
insufficient, they run the risk of erring on the side of pure speculation.  Therefore, the Arbitrators
considered appropriate to accept most of the "simplifications" suggested by the
European Communities, such as the exclusion of indirect harm to EC copyright holders or the
exclusion of music broadcast through the Internet, provided they were accepted by the United States
and to the extent that, in the opinion of the Arbitrators, they did not lead to a higher level of
nullification or impairment of benefits.  Likewise , when they proceeded to necessary adjustments or
deductions, in the absence of figures grounded on facts, the Arbitrators tried to use estimates whichwere accepted by the parties or otherwise seemed reasonable on the basis of the information available.
(b) Elements not considered in the calculation
(i) "Indirect" or "potential" harm to other rights of EC right holders
4.29 The European Communities  recalls that the Panel pointed out that the denial of protection of
specific rights in a given work can also have detr imental effects for the exploitation of other rights in
this work such as substitution between different uses of the work by a given establishment or a
possible erosion of licensing fees for other users. However, the European Communities, given the lack
of quantitative data and the uncertainty of causality relations, suggested that the Arbitrators'
assessment may not include this "potential" or "indirect" harm to other copyright sources.
4.30 The United States  did not comment.
4.31 The Arbitrators  are mindful of the remarks of the Panel that the denial of protection of
specific rights in a given work could also have an impact on the exercise of other rights.
85  However,
having regard to the arguments of the Europ ean Communities and in the light of their own
preliminary comments above, the Arbitrators agre ed not to incorporate into their calculation the
"indirect" or "potential" harm caused to right holders through the substitution of broadcast music byother forms of music, such as recorded music.  We consider that we have no reason not to
accommodate the request of the European Communities.  In particular, we believe that trying to assess
the level of benefits nullified or impaired as a result of "indirect" or "potential" harm would most
probably entail more assumptions, deductions or inferences, thus increasing the risk of reaching an
unreasonable estimate.
4.32 The Arbitrators would like to stress, however, that their position is based on the factual
circumstances of this case and the particular purpose of these proceedings, i.e., determining the levelof nullification or impairment of EC benefits, not identifying violation.  It is without prejudice to
whether this type of damage would be considered to nullify or impair benefits accruing directly or
indirectly to any Member in another case.
                                                     
84 The legal consequences of an overestimation in the case of compensation under Article 22.2 of the
DSU are less, since it is not specified that the compensation to be offered should be equivalent to the level of
nullification or impairment.  Article 22.2 of the DSU simply refer to compensation that is "mutually acceptable".
85 See the Panel Report on US - Section 110(5) Copyright Act,  supra , paras. 6.127, 6.198 and
6.239-6.240.WT/DS160/ARB25/1
Page 27
(ii) Activities of SESAC
4.33 The Arbitrators  recall that, in the United States, three collective management organizations
collect fees for copyright holders:  ASCAP, BMI, and SESAC.  They note that, in their submissions,
the parties did not include any data relating to the activities of SESAC.  The parties explained in the
course of the proceedings that this was essentially because SESAC does not represent any significantnumber of EC collecting society members and does not distribute significant amounts of royalties to
EC right holders.
4.34 We see no reason to put in doubt the information given by both parties about SESAC's
representation of EC right holders.  Furthermore, considering the difficulties which we would have
encountered in assessing the contribution of SESAC, we have decided not to seek to factor SESAC's
activities in our calculation.  In that case, the reason was nevertheless more related to the limited
impact that the exclusion of SESAC would, in th e opinion of both parties, have on our calculation.
(iii) Music broadcast through Internet
4.35 The Arbitrators  recall that the European Communities, while hinting at the impact of music
transmission via Internet in the nullification or impairment of EC benefits, did not include such
transmission in its calculation.  The Arbitrators are aware of the development of music transmission
via Internet.  They note, however, that the parties and the Panel essentially addressed the question oftransmission via radio or television.  For the Arbitrators to ascertain the application of
Section 110(5)(B) to broadcasts of music via Intern et would require additional findings which, in the
light of the position adopted by the European Communities, are not necessary.  As a result, the
Arbitrators did not consider music broadcast through Internet in their calculation.
B. 
CALCULATION
1. General observations
4.36 Before moving to the calculation of the level of EC benefits which are being nullified or
impaired, the Arbitrators  note that their ability to make an accurate calculation has been limited by
the fact that the data provided to them by the two parties were incomplete and included many
estimations and assumptions.  In their submissions, both parties have recognized this problem, notingthat some of the relevant data are in the possession of private parties.  As explained above, we sent
letters to the two main US CMOs, ASCAP and BMI, requesting actual data on their collections and
distributions that would have enabled us to base our calculations on specific information.  In response
to those letters, we obtained some information from BMI, but due to the conditions attached to its use,
we decided not to include it in the record of the case.
86  We also received information from ASCAP
and a second submission from BMI.  However, having noted that the parties favoured a prompt issue
of our award, we decided for the reasons stated supra  not to take this information into account.87
Hence, we have had to work on the basis of the incomplete data provided to us by the parties.88  In
order to discharge the mandate given to us by the parties, and in the absence of some important data,
we have had to make ourselves a number of estimations and, in some cases, make certain assumptions
based on what we perceived to be the most reasonable estimate in the light of the arguments of the
parties.  In doing so, we have attempted to arrive at a number that is in the right order of magnitude,but we recognize that it may not be entirely accurate.
                                                     
86 See supra , para. 1.10.
87 See supra , para. 1.13.
88 To the extent the parties have submitted data to us on a confidential basis, we have not included that
data into the following explanation of our calculation.  In those cases, only the results of the various steps in ourcalculation have been indicated.WT/DS160/ARB25/1
Page 28
4.37 We have discussed supra  the differences between the methodologies suggested by the
European Communities and the United States, and the implications that these differences have.  We
recall that the outcomes of the parties' calculations based on their respective methodologies are quite
far apart from each other.  The European Communities arrives at the figure of US$ 25,486,974 per
year, while the United States suggests that the level of nullification or impairment of benefits to theEC is in the range of US$ 446,000 to US$ 733,000 per year.  This discrepancy can, to a large extent,
be explained by the conceptual differences between the two approaches.
89
4.38 As regards the order of magnitude of the annual losses to EC right holders resulting from
Section 110(5)(B), we note as an illustration th at, according to the information provided by the
United States, the total domestic receipts of ASCAP - the biggest of the US CMOs - were over the
period 1997-1999 US$ 358,428,000, 377,733,000, and 422,962,000 per year;  the growth in the total
revenue in 1998 was 5.4% and in 1999 12%.  The receipts from the general licensing area, whichincludes restaurants, bars, retail establishments as well as certain other establishments, in the same
years were, respectively, US$ 67,324,000, 68,032,000, and 69,695,000 per year;  the growth in these
receipts in 1998 was 1.05% and in 1999 2.4%.  These figures indicate that, after the entry into force of
the 1998 Amendment, there has not been any dip in ASCAP's total domestic receipts or even in the
receipts from the general licensing category.  Lacking specific data on the receipts originating fromthe types of establishments that were affected by the 1998 Amendment (which receipts are included in
the broader general licensing category), we nonetheless note that the available data would not support
an assumption that there was a significant drop in the licence fees collected from the affected areas.
At the same time we note that the rate of increase of the receipts from the general licensing area was
modest at a time when the US economy was expanding fast.  Furthermore, the receipts from this areagrew at a clearly lower rate than the total domestic receipts.
4.39 For the reasons explained supra ,
90 we have adopted a "top-down" approach as suggested by
the United States.  Using this approach we have us ed the historical data on collections prior to the
1998 Amendment that have been available to us.  We now proceed to calculate the level of EC
benefits which are being nullified or impaired as a result of Section 110(5)(B) on this basis.
2. Total royalties paid to EC right holders
4.40 In their calculation, the Arbitrators have attempted to estimate the amount of royalties that
EC right holders received, prior to the entry in to force of the 1998 Amendment, for the use of
broadcast music from the types of establishments that were newly exempted by that Amendment.  For
that purpose, we have used the historical data available to us regarding the receipts of the two biggest
US CMOs to whom EC right holders have entruste d the licensing of their rights – ASCAP and BMI.
As we have noted before, both parties consider that the amount of royalties paid to EC right holdersby the third US CMO, SESAC, is insignificant.
91  Therefore, we have not included its receipts into our
calculations.
4.41 Relying on this historical data means that our calculation takes into account the licensing
income from those establishments that used broadcast music at that time and had acquired a licence
from ASCAP or BMI.  Our calculation does not include any hypothetical amount of royalties fromthose establishments that did play broadcast music but had not acquired a licence from the CMOs in
question.
92  Relying on the historical data means also that our calculation does not include any
hypothetical revenue from such small establishments that were already exempted by the original
                                                     
89 See, in particular, our discussion at paras. 3.20 et seq.  of how the two calculations take into account
the level of licensing.
90 See supra , paras. 4.7 to 4.15.
91 See supra , section IV.A, paras. 4.33-4.34.
92 See supra , paras. 3.20-3.35.WT/DS160/ARB25/1
Page 29
homestyle exemption at the entry into force of the 1998 Amendment.  For the reasons stated above93,
we did not find it necessary to include such establishments in our calculation.
4.42 The European Communities  provided us with a compilation of quantitative data by ASCAP
which includes, for the years 1996-1998, first the amounts of the total domestic distribution to EC
CMOs and second distribution to US publisher affiliates for performance of EC works.94  T h e
European Communities refers to these two categories as, respectively, "direct" and "indirect"
distributions to EC right holders.  The European Communities notes that the first category does not
include the total royalties paid for EC works in the repertoire of ASCAP, because music publishers'
share of royalties is overwhelmingly paid directly  by ASCAP to EC publishers' US affiliates, rather
than through the affiliated EC collecting societies to those EC publishers that are members of those
societies.  These payments to EC publishers' US affiliates are included in the second category.
4.43 The United States  has used the three-year averages of these figures provided by ASCAP as
the starting-points for its calculations, the "direct" distributions representing the lower range of
royalties paid to EC right holders and the sum of "direct" and "indirect" distributions representing the
upper range.
4.44 In calculating the amount of revenue that EC ri ght holders received from ASCAP prior to the
1998 Amendment, the Arbitrators  have taken as their starting-point the sums of "direct" and
"indirect" distribution to EC right holders over the period 1996-1998.
4.45 The Arbitrators note that the 1998 Amendment entered into force on 26 January 1999.
Therefore, the Amendment did not affect ASCAP's revenues collected before the year 1999.  We note
that the European Communities and the United States have provided us with relevant data on
ASCAP's distributions to EC right holders over  the three-year period of 1996-1998, and that the
United States has used the average of the distributions in these three years as the starting-points for its
calculation.  As we are calculating the level of EC benefits nullified or impaired by the Amendment
on the basis of historical data, we need to determine an appropriate previous representative period as
the starting-point for our own calculation.  In this regard, we note that under GATT practice the most
recent three-year period not distorted by restrictions has been used in assessing the consistency of ameasure.
95  In our case, the most recent representative period would be the three-year period not
affected by the 1998 Amendment, namely the years 1996-1998.  We believe that using the data made
available to us for this three-year period is consistent with the prudent approach which we have
decided to follow by using the "top-down" methodolo gy based on historical figures.  In determining a
single starting-point for our further calculation, we  have used the average of the figures concerning
these three years.  On the one hand, we do note that  in this case ASCAP's distributions to EC right
holders grew regularly over this period.  On the ot her hand, we have no evidence that this growth  is
applicable also to the sector at issue in this case and, in any event, three years are generally considered
to be insufficient to establish a particular trend in a market.  In this sense, using an average for this
three-year period would tend to reflect the average revenue at the level of the year 1997 rather than
in 1998.  We have taken this into account at the final step of our calculation when we have adjusted
the outcome of our calculation to reflect the situation at the time of the referral of the issue to theArbitrators.
                                                     
93 See supra , section IV.A.
94 Exhibit EC-15 (exhibit US ARB-5), which contains information that was provided to the European
Communities in confidence with the request that it not be communicated to private parties.
95 See the Panel Report on EEC - Restrictions on Imports of Apples from Chile , BISD 27S/98, adopted
10 November 1980, para. 4.8.  See also the Decision of the Arbitrators on EC - Bananas III (22.6) (US) , supra ,
paras. 5.24 et seq .WT/DS160/ARB25/1
Page 30
4.46 The three-year average of ASCAP's distributions to EC right holders amounts to
approximately US$ xxxxxxxx per year.  We note that this figure may not be entirely accurate, given
that the information made available to us by the parties, on which we based our calculation, may not
be complete for the reasons discussed below.  Earlier we have noted that direct payments by the
US CMOs to EC right holders (i.e., payments that ASCAP and BMI make directly to EC right holdersthat are their members rather than payments they make to EC CMOs) are relevant for our calculation
even if the EC right holders in question were to collect these fees through their US affiliates.
96
However, as regards the confidential data on ASCAP' s distributions to EC right holders' US publisher
affiliates, we note that we do not have the exact criteria that ASCAP has used in producing its figures.
Therefore, there may be a risk that a small part of this figure may represent payments to persons that
could not be considered as EC right holders or their representatives.  On the other hand, we note that
neither the first nor the second category appears to include those payments that ASCAP may make tothose individual EC authors that are members of AS CAP and thus receive their royalties directly from
it, rather than through EC CMOs.  Consequently, the figures provided may be somewhat too high in
some respects and too low in others, but we have not attempted to factor in these aspects into our
calculations, given that they compensate for each other and that any difference between the two
revenues is not likely to be substantial, and that, at any rate, their impact on the overall calculation
would be quite limited.
4.47 The United States  provided us with an estimation of the amount that BMI distributed to EC
CMOs in 1996.  The United States did not provide any data for the years 1997 and 1998.  The
European Communities  does not contest the figure suggested by the United States.  The Arbitrators
have taken this figure as their starting-point in calculating the revenue that EC right holders receivedfrom BMI.  However, they have made two adjustments to it.
4.48 The European Communities  argues that if data on BMI's distributions to EC right holders
through the EC CMOs were to be used, BMI's distributions to EC right holders' US publisher
affiliates should also be taken into account in a similar manner as in the case of ASCAP.
4.49 The Arbitrators  agree with the European Communities on this point.  Lacking any data
concerning BMI's distributions to EC right holders' US publisher affiliates, we have made an
assumption that the share between BMI's "direct" and "indirect" distributions would be the same as
the share between ASCAP's corresponding categories of distributions. We have accordingly made the
appropriate adjustment to the estimate on BMI's distribution to EC right holders provided by the
United States.
4.50 For the reasons explained above
97, in calculating EC right holders' revenue from ASCAP, we
have used the average of such revenues for the period 1996-1998.  Although we have data from BMIonly for the year 1996, we are of the view that in order to be consistent we need also to base BMI
figures on similar average from the period 1996-1998.  To be able to do so, we have determined
BMI's distributions to EC right holders in 1997 and 1998 on the basis of the 1996 estimate, assuming
that BMI's distributions grew over that period at th e same rate as those of ASCAP.  Subsequently, we
have calculated the three-year average of these BMI distributions in 1996-1998.  For the purposes of
our calculation, this figure represents the annual average amount of revenues that EC right holders
received from BMI prior to the 1998 Amendment.
4.51 Accordingly, for the purposes of our further calculations, we estimate that BMI's distribution
to EC right holders prior to the 1998 Amendment was approximately US$ xxxxxxxx per year.
                                                     
96 See supra , para. 3.56.
97 See supra , para. 4.45.WT/DS160/ARB25/1
Page 31
4.52 Adding up our estimations on ASCAP's and BM I's distributions to EC right holders, we
estimate that, prior to the 1998 Amendment, EC right holders received approximately US$ xxxxxxxx
per year.
3. Royalties from eating, drinking and retail establishments
4.53 Having established the annual average of the total amount of royalties EC right holders
received prior to the 1998 Amendment, the Arbitrators will now attempt to estimate what share of that
revenue came from eating, drinking and retail establishments.  We will do this by deducting in two
steps the royalties that were received from other types of users.
4.54 First we will estimate what share of the total licensing revenue paid to EC right holders was
attributable to the so-called general licensing category.  This category includes various types of
licensees such as drinking and eating establishments and retail establishments, but it excludes
licensing revenue from radio and television broadcasting and concerts.  From ASCAP's annual reportsfor 1996-1998 it can be calculated that an average of 18.45% of the total domestic receipts was
attributable to the general licensing category during this period.  We have not been provided data that
would have allowed us to calculate the corresponding share of BMI's receipts.  In the absence of
relevant data, we considered it reasonable to apply the same percentage to BMI's receipts.  Using this
percentage, we calculate that, of the total amount of revenue EC right holders received per year priorto the 1998 Amendment, approximately US$ xxxxxxxx per year were attributable to the general
licensing category.
4.55 The general licensing category includes, in addition to eating, drinking and retail
establishments, miscellaneous users of background music such as airlines, sports stadiums, motion
picture theatres, amusement parks, conventions, telephone music services, colleges and universities,health clubs and background music services.  Therefore, we will need to estimate what share of the
general licensing revenue is attributable to eating, drinking and retail establishments as defined in
Section 110(5)(B).  The problem we face is that we have not obtained any specific data on this
question.  Given that the general licensing category embraces many types of licensed uses, the
United States claims that "a more than reasonable estimate is that 50% is attributable to restaurants,bars and retail establishments".  We note that the European Communities has not contested this
percentage suggested by the United States.  Nor has it provided an alternative estimate.
4.56 We consider the US estimate of the percentage to be reasonable in the light of the arguments
of the parties.  Therefore, we use it in our calculation.  Accordingly, we estimate that the amount of
revenue received by EC right holders prior to the 1998 Amendment that was attributable to eating,
drinking and retail establishments was approximately US$ xxxxxxxx per year.
4. Royalties attributable to the playing of radio and television music
4.57 The next step is to determine what amount of the revenue collected from eating, drinking and
retail establishments was attributable to playing radio and television music as defined in
Section 110(5)(B).  This requires us to deduct the amount of royalty payments that was attributable to
the use of other sources of music that were not exempted under that Section.  For this purpose, both
parties use in their respective calculations a figure of xx% as representing the share of this revenuethat is attributable to the use of radio and television music.  This figure is based on data from the
National Restaurant Association and the National Licensed Beverage Association.
4.58 In using this figure, the European Communities  notes that it does not include establishments
that play music only from the television, but is not asking the Arbitrators to consider this factor.  The
United States  notes that it has used this, in its view, high number to account for the fact that it has
been unable to factor television use into the picture.WT/DS160/ARB25/1
Page 32
4.59 The Arbitrators  note that this figure of xx% is based on actual data and that both parties use
it in their respective calculations.  The Arbitrators, therefore, decided to use this percentage in their
calculation.  Accordingly, we calculate that the amount of royalties EC right holders received from
eating, drinking and retail establishments prior to  the 1998 Amendment that was attributable to radio
and television music was approximately US$ 1.55 million per year.
5. Royalties from establishments that meet the requirements of the statutory exemption
4.60 The Arbitrators have now established the annual  average amount of royalties EC right holders
received from eating, drinking and retail establishments prior to the 1998 Amendment that was
attributable to radio and television music.  Next, they need to determine what share of that amount
was attributable to establishments that were newly exempted from copyright liability by the 1998
Amendment, i.e., first establishments that were below the size limits of Section 110(5)(B) and thus
exempted, and second establishments that were above those size limits but still qualified for theexemption because they met the conditions that concerned the equipment used.
98
4.61 As regards the first category of establishments, both the European Communities  and the
United States  use in their calculations the estimate from a 1999 Dun & Bradstreet study according to
which 70% of eating establishments, 73% of drinking establishments and 45% of retail establishments
fell within the statutory size limits.99  The United States has calculated that the weighted average of
these numbers is 53,9%.  The European Communities has not contested the way the United States has
counted this weighted average.
4.62 As regards the second category, the European Communities  estimates that of those
establishments that are over the size limits of Section 110(5)(B), only 10% meet the equipment
limitations and thus benefit from the exemption.  The United States  notes that, due to lack of data, it
has not tried to quantify the number of larger establishments that would meet the equipment
limitations.  In its rebuttal, it claims that the EC estimate is excessive, but it does not provide an
alternative estimate.
4.63 The Arbitrators are of the view that they should include the establishments in the second
category in their calculation.  The problem is that neither party has provided any evidence to supporttheir views.  We note that the United States argues that it can be expected that large stores would be
especially unlikely to play radio given, inter alia , broadcasters' varied programming, and that when
businesses of sizes above the statutory limits would use broadcast music it would seem unlikely that a
total of six speakers for the entire establishment would be sufficient.  However, it would appear to us
that the use of specialized music channels does allow businesses to control the atmosphere of a store,
and that six speakers might well suffice for an establishment just over the size limit.  At any rate,
having regard to the arguments of the parties and the information before us, we are of the view thatthe EC estimate of 10% is already on the low side.
4.64 Using the weighted average of establishments below the statutory size limits provided by the
United States, we calculate that an estimated 46.1% of eating, drinking and retail establishments are
above the statutory size limits.  In our view, the EC estimate according to which 10% of them meet
the statutory limits concerning equipment is reasonable.  Therefore, we will use this estimate in ourcalculation.  Accordingly, for the purposes of our calculation, we assume that an additional 4.6% of
establishments benefit from the exemption under Section 110(5)(B).
                                                     
98 For details on the size limits of establishments and conditions relating to equipment, see the Panel
Report on US – Section 110(5) Copyright Act,  supra , paras. 2.10-2.14.
99 See the Panel Report on US – Section 110(5) Copyright Act,  supra , para. 2.12.WT/DS160/ARB25/1
Page 33
4.65 As a result, we estimate that 58.5% of eating, drinking and retail establishments are within the
scope of Section 110(5)(B), either by falling within  the statutory size limits (53.9%) or, in case their
size exceeds those limits, by complying with the statutory equipment limitations (4.6%), and thus
benefit from the exemption contained in that Section.
4.66 We note that, at the corresponding point in its calculation, also the United States has deducted
from the remaining EC right holders' royalties the percentage that represents the share of
establishments that fall within the statutory size limits, namely 53.9% (but not the 4.6% share that
represents the share of larger establishments that comply with the statutory equipment limitations).  It
appears that this methodology of making the 53.9% deduction is not entirely accurate in two respects,
although neither of these inaccuracies would appear to have a significant impact on the result of the
calculation.
4.67 First, applying this methodology may not be entirely accurate as the exempted smaller
establishments were likely to pay lower fees than the larger establishments that were not exempted.
However, we have not attempted to factor this aspe ct into our calculation, given that we have not been
provided any data or estimates that would enable us to do so.  We also note that when we add 4.6% of
the larger establishments into our calculation, we do not factor in the possibility that they may pay
higher than average licensing fees.  Overall, we believe that these considerations would not have amajor impact on our calculation.
4.68 Second, the figure of 53.9% refers to all those establishments that fell within the size limits of
Section 110(5)(B).  We note that some of the smallest of these establishments were already exempted
prior to the 1998 Amendment under the original homestyle exemption and, thus, were not newly
exempted by that Amendment.  However, as noted above, we have considered it appropriate toexclude from our calculation any hypothetical revenue for the playing of nondramatic musical works
from the establishments covered by the original homestyle exemption, given, inter alia , that such
revenue would most probably not significantly influence our calculation.
100  Similarly, we are of the
view that the fact that the figure of 53.9% include s some establishments that were prior to the 1998
Amendment already exempted under the original homestyle exemption, does not essentially changethe outcome of our calculation.  To the extent it would have any impact on the outcome, it would
compensate for the fact that we did not include revenue from such establishments in our calculations
in the first place.  For these reasons, we have not attempted to factor these aspects into our calculation.
4.69 Accordingly, we estimate that, of those royalties that EC right holders received from eating,
drinking and retail establishments prior to the 1998 Amendment for the use of radio and television
music, 58.5% was attributable to establishments that were newly exempted from copyright liability by
that Amendment.  This means that of the US$1.55 million per year that EC right holders receivedfrom eating, drinking and retail establishments prior to the 1998 Amendment for the use of radio and
television music, approximately US$0.91 million was a ttributable to establishments that were newly
exempted by that Amendment.
6. Further adjustments
4.70 As mentioned above, the Arbitrators have taken as the starting-point for our calculations the
historical data made available to us on the revenue received by EC right holders prior to the 1998
Amendment.  We have attempted to estimate, using the data and estimations provided to us by the
parties, the share of those revenues that was attributable to relevant uses of broadcast music by
establishments that were newly exempted by that Amendment.  However, in our view, these figures
                                                     
100 See supra , paras. 4.12 and 4.13.WT/DS160/ARB25/1
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have to be adjusted to take into account the evolution of the market between the entry into force of the
1998 Amendment and the date of referral of the matter to the Arbitrators, namely 23 July 2001.101
4.71 We recall that our above calculation is based on an average figure calculated on the basis of
ASCAP's and BMI's distributions to EC right ho lders in 1996-1998 (in case of BMI, we had access to
data only from 1996, but we assumed an annual growth corresponding to that of ASCAP'sdistributions).  The figure of US$ 0.91 million represents an estimate of the hypothetical level of
nullification or impairment in the year 1997, i.e., about one year before the entry into force of the
1998 Amendment.  Therefore, in adjusting this figure to reflect the level of EC benefits nullified or
impaired at the date of referral of the matter to the Arbitrators, we will need to make an adjustment
starting from the end of the year 1997.
4.72 In our view, the most appropriate way to adjust the aforementioned figure is to take into
account the growth of the US economy in the same peri od.  For this purpose, we have used the annual
rate of growth of the US gross domestic product in current dollars in the relevant period.  During this
period, the US GDP grew in current-dollar terms at  the following rate:  +5.6% in 1998;  +5.5% in
1999;  +6.5% in 2000.
102  For the first six months of the year 2001, we have used the growth rate of
1.7%, which we have approximated on the basis of quarterly annualized figures of growth rates in
current dollars.
4.73 We have adjusted the above figure representing the hypothetical annual average of revenue
that EC right holders lost as a result of Section 110(5)(B) at the level of 1997 with the annual growth
rate of the US GDP.  Accordingly, we calculate that the level of the EC benefits nullified or impaired
as a result of Section 110(5)(B) is US$1,1 million per year.
V. AWARD OF THE ARBITRATOR
1.1 For the reasons set out above, the Arbitrators determine that the level of EC benefits which
are being nullified or impaired as a result of the operation of Section 110(5)(B) amounts to
€ 1,219,900 per year.103
                                                     
101 See supra , Section IV.A.2.
102 See United States Department of Commerce Bureau of Economic Analysis News Release,
28 September 2001, http:// www.bea.doc.gov/bea/newsrel/g dp201f.htm.
103 Exchange Cross Rates, US Dollar to the Euro (11 October 2001), Financial Times ,
12 October 2001, p. 25.WT/DS160/ARB25/1
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ANNEX I
TEXT OF THE LETTERS SENT TO ASCAP AND BMI
REQUESTING INFORMATION
Dear Ms. Preston/Dear Ms. Bergman,
On 23 July 2001, the European Communities (EC) and the United States mutually agreed
pursuant to Article 25.2 of the Understanding on Rules and Procedures for the Settlement Governing
the Settlement of Disputes to enter into arbitration to determine the level of nullification or
impairment of benefits to the EC as a result of the incompatibility of Section 110(5)(B) of the USCopyright Act with the WTO Agreement on Trade–Related Aspects of Intellectual Property Rights
(TRIPS). On 13 August 2001, WTO Members were informed of the composition of the panel of
arbitrators.
In order to assist the arbitrators in determining the level of nullification or impairment, I
would be grateful if you could reply to the following questions:
1. Could you please provide the following data for each of the years 1997-2000:(a) the total domestic licensing revenues (excluding licensing revenues from foreign societies);(b) the total licensing revenues from the general licensing category;(c) the total licensing revenues from eating and drinking establishments and other establishments
as defined in Section 110(5) of the amended US Copyright Act;
(d) the deduction for administrative and collection costs made before the distribution of royalties
to right holders;
(e) the total distribution to right holders (excluding the distribution of licensing revenues from
foreign societies);
(f) the total distribution to the EC collecting societies;
(g) any other data, if available, that would indicate the amount of distribution to EC right holders
directly through your society (rather than through the EC collecting societies), in particular
US publisher affiliates for performances of EC works.
2. With reference to question 1(c) above, to the extent you have any information available, could
you please indicate the breakdown of the licensing revenue from eating and drinking
establishments and other establishments as defined in Section 110(5) of the amended
US Copyright Act that fall:
(i) under the size limits of Section 110(5)(A);
(ii) between the size limits of Section 110(5)(A) and (B);  and
(iii) establishments the size of which is beyond the limits of Section 110(5)(B).
3. Could you please provide any available information on the likely number of establishments
that would meet the requirements of Section 110(5)(B) which relay broadcast music.WT/DS160/ARB25/1
Page 36
4. To the extent feasible, please provide your estimation of the share of each category of
establishment referred to in Section 110(5) that play broadcast music you are currently
licensing.
5. Please provide the rates applicable to the various categories of establishments referred to in
Section 110(5).
Needless to say, any information described as confidential in your reply will be treated as
such.  If you so request, the arbitrators will ensure that only the parties to this case will have access to
this information.  Moreover, the public version of the arbitrator's report will be edited so as to ensure
that it does not contain any confidential data.
I should like to stress that, while there is no obligation for you to reply to the questions above
or to submit any of the information requested, your full cooperation would be greatly appreciated.
Since the arbitrators' proceedings are subject to very short deadlines, I would appreciate it
very much if you could provide us with any reply by Friday, 14 September 2001.
Yours faithfully,
Ian F. Sheppard
Chairman
Arbitration Panel on United States – Section 110(5)
of the US Copyright ActWT/DS160/ARB25/1
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ANNEX II
SPREADSHEET OF CALCULATIONS
OMITTED AS CONFIDENTIAL
__________