A theory of WTO adjudication: from empirical analysis to biased rule development.

• Author: Colares, Juscelino F.

ABSTRACT

The positive theory of litigation predicts that, under certain conditions, plaintiffs and defendants achieve an unremarkable and roughly equivalent share of litigation success. This Article, grounded in an empirical analysis of WTO adjudication from 1995 through 2007, reveals a high disparity between Complainant and Respondent success rates: Complainants win roughly ninety percent of the disputes. This disparity transcends Case Type, Party Identity, Income Level, and other litigant-specific characteristics. After analyzing and discarding standard empirical and theoretical alternative explanations for the systematic disparity in success rates, this study demonstrates, through an examination of patterns in WTO adjudicators' notorious decisions, that biased rule development explains this disparity. This Article then discusses the effect of biased rule development on perceptions of the WTO dispute settlement system's democratic legitimacy and legality. (JEL: K 33, K 41)

TABLE OF CONTENTS I. INTRODUCTION II. OPERATION OF THE WTO DISPUTE SETTLEMENT SYSTEM III. THE EXISTING LITERATURE ON WTO ADJUDICATION OUTCOMES IV. DATA DESCRIPTION AND METHODOLOGY A. Data and Methods 1. Defining a Case 2. Determining Case Outcomes B. Results V. ALTERNATIVE EXPLANATIONS A. Case Selection Effect and the Results of WTO Dispute Settlement B. Effect of Settlement Constraints on WTO Adjudication C. Asymmetry of Information and Asymmetry of Stakes D. Complainant Desire to Make Law E. Weakness of Respondents' Cases VI. BIASED RULE DEVELOPMENT AT THE WTO A. Biased Ruled Development in the Application of the AD Standard of Review 1. Nullification of the AD Standard by Capriciously Interpreting Its Terms 2. Application of a Non-Deferential Standard Where the AD Standard Controls 3. Conflation of the AD Standard with the DSU Standard B. Biased Rule Development in the Inconsistent Use of Declarations 1. Interpretation of "Pro-Respondent" Declarations as Merely Hortatory 2. Interpretation of "Pro-Complainant" Declarations as More than Hortatory C. Biased Rule Development: From Localized Patterns to an All-Encompassing Activist Jurisprudence VII. CONCLUSION [I]t is the Membership which through its appointments will ex ante ensure that the quality of Appellate Body reports will be preserved. Ex post, the civic community discusses the activities of the WTO adjudicating bodies and through its writings gives or denies its vote of confidence. (1) I. INTRODUCTION

In ordinary litigation, one expects any pattern in judicial decisions to reflect the balance of the strength of plaintiffs' and defendants' cases. Absent information asymmetries or different stakes among plaintiffs and defendants, long-term trends in favor of one type of litigant do not occur. Each party's preference for (or aversion to) litigation adjusts to cues emanating from the litigation environment. (2) Indeed, the prevailing positive theory of judicial adjudication explains that it is unlikely for a particular type of litigant to systematically prevail over time because stronger cases will settle rather than result in full adjudication. (3) With the mortality of such strong cases thus accounted for, litigation assumes an unpredictable nature, where decisions favoring plaintiffs are just as likely as those favoring defendants. (4) As no particular trends emerge under these circumstances, litigation becomes the realm of randomness. However, where trends in judicial decisions favoring a particular type of litigant emerge, and the above assumptions hold, such trends might be viewed as the product of transformational shifts in the law. If an investigation into the nature of the law being made in the adjudicatory process indicates that this process increasingly benefits one particular type of litigant, one must consider whether the discrepancy in success rates is the result of biased rule development, or even the product of conscious judicial effort. (5)

Do the insights applicable to ordinary litigation extend to the domain of the World Trade Organization (WTO) dispute system? The creation of the WTO Dispute Settlement Body (DSB) represented a major shift in the legal conception of trade disputes. (6) The political, consensus-based system of dispute settlement, prevalent during the "GATT years," gave way to a rule-based, litigation-driven architecture designed to strengthen the multilateral trading system by providing both final and legally enforceable decisions. (7) While the DSB retained GATT's sovereign-nation-centered arrangement, the shift in legal philosophy has brought it closer to the characteristics of ordinary systems of litigation. For instance, principles such as finality, basic due process, and adherence to established rules on legislative and "judicial" jurisdiction form the bedrock of both the DSB and other court-based systems. (8) This similarity in fundamental characteristics to ordinary litigation allows the application of the existing theory to the class of disputes thus far presented to the DSB. As this system has been in place for more than a decade, having decided disputes affecting more than thirty-three of its member countries in over one hundred cases, there is now sufficient data to determine if the standard model's theoretical expectations can also be verified in the outcomes of these disputes. (9)

Of course, any attempt to extend the standard model of litigation to DSB disputes must account for specific constraints unique to WTO litigants. First, because sovereigns must respond to competing domestic political concerns, they may not be subject to the same incentives or pressures as litigants in domestic adjudication. However, WTO members, like corporations and other multidimensional litigants, can and do aggregate preferences and are able to express their balanced or consensus-driven choices in a unified manner. That the WTO's basic rules and the operation of the international system impose constraints on members' ability to settle disputes has been suggested as an important distinction between WTO dispute settlement and ordinary litigation. (10) Specifically, Guzman and Simmons theorize that the coexistence of parallel international commitments and the unavailability of certain typical settlement options deriving from the operation of the Most Favored Nation (MFN) principle depress settlement activity in WTO litigation. (11) While a definite feature of WTO litigation, settlement constraints do not seem to have a significant impact on members' litigation behavior, as will be demonstrated later in the study.

After conducting a thorough examination of all disputes submitted to the DSB, this Article shows that WTO litigation does not conform to the ordinary model's prediction that no trends will develop in favor of a particular party. (12) In fact, a sustained pattern of Complainant success across all categories of disputes (e.g., trade remedy and non-trade remedy), regardless of Complainant-specific characteristics (e.g., country identity, and level of income) or product-type (e.g., commodities and noncommodities), indicates that WTO litigation results are far from symmetric. This Article then attempts to explain why there is a consistently high rate of Complainant success in WTO dispute resolution. Arguably, this pro-Complainant WTO trend might be understood as the result of the violation of the model's general assumption of zero settlement-related transaction costs. However, while the low frequency of settlement activity might positively impact the rate of Complainant wins, its overall effect is not strong enough to explain the trend favoring one particular type of litigant over the other.

This Article proposes that the pro-Complainant tendency prevailing in all forms of WTO adjudication is likely the result of biased rule development. Specifically, it theorizes that the DSB has evolved WTO norms in a manner that consistently favors litigants whose interests are generally aligned with the unfettered expansion of trade. While it is quite uncontroversial that an adjudicatory system engaged in interpreting trade-liberalizing standards would tend to favor free trade, (13) the presence of particular, consistent patterns in these interpretations raises concerns about the system's adherence to the negotiated terms of the agreements, especially with respect to Respondents' reserved regulatory competencies. Although the limited number of fully adjudicated WTO disputes requires some degree of caution in interpreting empirical results, the combination of sustained, highly asymmetric adjudication outcomes with WTO adjudicators' adoption of a pro-Complainant stance in numerous decisions supports the conclusion that WTO adjudicatory outcomes are the result of biased rule development.

Part II of this Article briefly outlines the operation of the DSB. Part III examines prior literature on WTO litigation. Part IV presents discussions on the data, methods, and empirical results of all filed and fully adjudicated disputes. Part V discusses whether various alternative empirical and theoretical explanations could account for the general pattern of observed results. Among these, the study addresses the potential impact of case selection and provides an evaluation of the extent to which the high Complainant success rate can be explained by the transaction costs associated with settling. Part VI proposes biased rule development as the explanation for the discrepancy in Complainant and Respondent success rates through an examination of decision patterns reflected in a number of cases. While this Article does not claim to resolve every competing empirical, theoretical, or normative explanation for DSB results, analysis of these decisions tends to support prior anecdotal studies alleging that WTO panels and the WTO Appellate Body have interpreted the WTO agreements in a manner that consistently promotes the goal of expanding trade, often to the detriment of...