The European Union brought a complaint before the WTO about two provisions of the United States Copyright law which provide that certain public communications of transmissions of copyrighted works are exempted from being infringements of the copyright in those works. The exemptions apply when either 1) " a single receiving apparatus of a kind commonly used in private homes" is used and no charge made or further transmission effected (the "homestyle exception") or 2) the communication is of a transmission or retransmission of a non-dramatic musical work "originated by a radio or television station" or a cable system or satellite carrier and is in relatively small establishments such as shops, bars and restaurants (the "business exception").

The EU claimed that these provisions breached the requirement of Article 9 of TRIPS that members of the WTO should comply with most of the provisions of the Berne Copyright Convention. Article 11 of the Berne Convention give the authors of copyrighted works the exclusive right to authorize public distribution and public performance of their works. Article 11 bis specifically states that authors of literary or artistic works (defined so as to include musical works) have the exclusive right of authorizing communication to the public by loud speakers or similar instruments of radio transmissions of their work. The EU claimed that the U.S. law permitted such public distribution of copyrighted works without the consent of the authors of the works.

The United States argued that the U.S. law was consistent with TRIPS because Article 13 permitted exceptions from the general requirement to apply the substantive provisions of the Berne Convention in "special cases which do not conflict with the normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder". The position of the United States was that the exceptions set out in the U.S. Copyright law fell within what was permitted by Article 13 of TRIPS. Additionally the United States argued that it was an accepted practice under the Berne Convention to permit minor exceptions from its rules and that Article 13 of TRIPS "clarifies and articulates the scope of (such) minor exceptions doctrine".

After consideration of the legislative history of various amendments to the Berne Convention and after recourse to the Vienna Convention on the law of Treaties, the Dispute Resolution Panel concluded that a minor exceptions doctrine formed part of the "context" of Articles 11 and 11bis of the Berne Convention. The panel went on to find that, this being the case, there was no reason why this doctrine should not also be carried over into TRIPS by virtue of Article 9 of TRIPS having incorporated the relevant parts of the Berne Convention into TRIPS.

The key issue therefore was the extent to which minor exceptions to exclusive rights were permitted and this should be determined by application of Article 13 of TRIPS. Thus exceptions were permitted when three criteria were met: (1) the situation was a special case; (2) there was no conflict with normal exploitation of the work and (3) there was no unreasonable prejudice to the legitimate interests of the rights holder.

Insofar as the first requirement is concerned, the panel concluded that in order to be a special case under Article 13, " a limitation or exception in national legislation should be clearly defined and should be narrow in scope and reach". However, such an exception might be permitted even if "it pursues a special purpose whose underlying legitimacy in a normative sense cannot be discerned". The Panel analyzed the "homestyle" and "business" exceptions of the U.S. law separately. So far as the homestyle exception was concerned, the panel found that the exception was narrow, well defined and limited in scope and reach. It also noted the stated purpose of the legislation at the time it was enacted, including statements to the effect that it was intended to provide protection for "mom and pop" businesses which "play an important role in the American social fabric". The panel concluded that the "homestyle" exception was therefore a special case as contemplated by Article 13 of TRIPS. The panel reached the opposite conclusion on the business exception. In this case the evidence before the panel showed that a substantial majority of eating and drinking establishments and close to half of the retail establishments in the country were covered by the exception. It therefore failed to meet the definition of "special case" adopted by the panel.

As to the question of whether the exceptions would conflict with the requirement that there be no conflict with a normal exploitation of the work is concerned, the panel found that, contrary to the submissions of the United States, one had to look at each individual right included in the bundle of rights commonly referred to as "copyright" separately. Therefore the fact that an exception only impinged on one right in this bundle was irrelevant to the analysis. The Board did, however, accept the U.S. approach to an understanding of what was normal exploitation as excluding "areas of the market in which the copyright owner would [not] ordinarily expect to exploit the work", although it went on to add that in considering the question of what is normal one also had to include for example a "dynamic element capable of taking into account technological and market developments". The panel went on to conclude that because of the large number of establishments to which the business exception applied, such exception did affect the royalties that copyright owners might normally expect to receive and so this exception did conflict with the normal exploitation of the works which were being distributed to the public under it. The "homestyle" exception on the other hand fell within this limb of the TRIPS Article 13 analysis.

With respect to the final requirement of Article 13 is concerned, the panel found that the key issue was what was meaning of the word "unreasonable" in considering whether an exception provided an "unreasonable prejudice to the legitimate interests of the rights holder". The panel concluded that the prejudice became unreasonable when "an exception or limitation causes or has the potential to cause an unreasonable loss of income to the copyright owner". After considering rival analyses and data on the question of royalty income and noting that since the United States was invoking the exception, it bore the burden of proof on this issue, the panel concluded that the United States "has not demonstrated that the business exemption does not unreasonably prejudice the legitimate interests of the rights holder". On the other hand, the panel held that the homestyle exemption again was permissible under the third limb of the Article 13 analysis.

The panel therefore concluded by proposing that the United States be requested to amend its law to bring it into compliance with TRIPS insofar as the business exemption was concerned.

The period within which the United States should amend its law was subsequently submitted to arbitration and the United States was given until June 15, 2001 to comply.