Here's something else from USTR's 2018 Trade Policy Agenda and 2017 Annual Report:
iv. Appellate Body Review of facts and review of a Member’s domestic law de novo
Another significant concern is the Appellate Body’s approach to reviewing facts. Article 17.6 of the DSU limits an appeal to “issues of law covered in the panel report and legal interpretations developed by the panel.” Yet the Appellate Body has consistently reviewed panel fact-finding under different legal standards, and has reached conclusions that are not based on panel factual findings or undisputed facts.
The United States has also noted with concern the Appellate Body’s review of the meaning of Member’s domestic law that is being challenged. In a WTO dispute, the key fact to be proven is what a Member’s challenged measure does (or means), and the law to be interpreted and applied are the provisions of the WTO agreements. But the Appellate Body consistently asserts that it can review the meaning of a Member’s domestic measure as a matter of law rather than acknowledging that it is a matter of fact and thus not a subject for Appellate Body review. Furthermore, when the Appellate Body reviews the meaning of a Member’s domestic measure, it does not provide any deference to a panel’s findings of fact. As other commentators have noted:
[T]he logic of the Appellate Body’s finding [that panel findings on municipal law are issues of law under DSU Article17.6] is difficult to understand. Just because a panel assesses whether a domestic legal act – which represents a fact from the perspective of WTO law – is consistent or inconsistent with WTO law does not suddenly turn the meaning of the domestic legal act into a question of WTO law . . . . [T]here must . . . be a discernible line between issues of fact and issues of law. After all, the Appellate Body’s jurisdiction is circumscribed precisely by this distinction.
The Appellate Body’s approach is therefore not only contrary to WTO rules but again raises concerns about the purpose of insisting on an unnecessary and erroneous approach.
(footnotes omitted)
I agree that it's a mistake to treat interpretations of domestic measures as a matter of WTO law for the purposes of appellate review. Here's what we said on this issue in our DSC for China - Auto Parts back in 2009:
Appellate Review of Issues of Fact and the Legal Characterization of the Facts
DSU Article 17.6 provides: "An appeal shall be limited to issues of law covered in the panel report and legal interpretations developed by the panel." This provision defines the scope of appellate review, and, in doing so, reflects a distinction between legal and factual issues. In short, only "issues of law" and "legal interpretations" may be appealed. This language appears to exclude appeals of purely "factual" issues, although the Appellate Body has made clear that a panel's factual findings can be appealed under the more deferential standard of DSU Article 11 (under which the Appellate Body will determine whether the panel made an "objective assessment").
Roughly speaking, there are three categories of issues: pure law questions (questions of legal interpretation); pure factual questions; and mixed questions of law and fact, which are more accurately described as questions of applying the law to the facts or the legal characterization of the facts (the term used by the Appellate Body here). It is fairly clear that both pure legal questions and questions of legal characterization are considered "issues of law" or "legal interpretations" that may be appealed. However, the boundary between pure factual questions and legal characterization questions can be difficult to define.
In examining the measures at issue in relation to the claims under the Working Party Report, the Appellate Body offered some general guidance on its standard for reviewing panel findings on factual issues and issues of legal characterization. In this regard, the Appellate Body stated the following in paragraph 225:
The Appellate Body has explicitly stated that the municipal law of WTO Members may serve not only as evidence of facts, but also as evidence of compliance or non-compliance with international obligations. When a panel examines the municipal law of a WTO Member for purposes of determining whether the Member has complied with its WTO obligations, that determination is a legal characterization by a panel, and is therefore subject to appellate review under Article 17.6 of the DSU. The Appellate Body has reviewed the meaning of a Member's municipal law, on its face, to determine whether the legal characterization by the panel was in error, in particular when the claim before the panel concerned whether a specific instrument of municipal law was, as such, inconsistent with a Member's obligations. We recognize that there may be instances in which a panel's assessment of municipal law will go beyond the text of an instrument on its face, in which case further examination may be required, and may involve factual elements. With respect to such elements, the Appellate Body will not lightly interfere with a panel's finding on appeal.
Thus, the Appellate Body explained that it treats situations where "a panel examines the municipal law of a WTO Member for purposes of determining whether the Member has complied with its WTO obligations" as the "legal characterization" of the facts. These issues, the Appellate Body said, are "subject to appellate review under Article 17.6" (that is, the Appellate Body may review them de novo, with no deference given). In addition, the Appellate Body referred to situations involving "factual elements," such as "instances in which a panel's assessment of municipal law will go beyond the text of an instrument on its face, in which case further examination may be required." For these, the Appellate Body said that it "will not lightly interfere" with panel findings. (What this means is that it will show greater deference to factual issues than it would with legal characterization issues, where it would give no deference.)
The Appellate Body's statements here appear to draw the line between factual and legal characterization issues in a way that puts some issues with a high factual component and little or no connection to WTO law into the legal characterization category. In particular, the Appellate Body may be blurring two issues in relation to the legal characterization of the facts. Arguably, there are two separate issues involved with legal characterization. First, there is the examination of municipal law, which involves understanding the wording of the measure and how it operates. And second, there is the evaluation of whether that measure violates WTO obligations. The latter is clearly the legal characterization of the facts. However, the former seems more factual in nature, as it involves only the examination of the measures themselves, outside the context of any WTO obligations. The Appellate Body's apparent inclusion of the examination of the measures outside the context of WTO law as part of the legal characterization of the facts constitutes a broad scope for this category. Similarly, its view that factual questions are those that go "beyond the text of an instrument on its face" seems quite narrow, especially if these are the only issues that could be considered factual. Indeed, there may be cases where there is no examination of the measures beyond their text, in which case there would seem to be no factual issues at all if the Appellate Body's approach is followed.
Applying these concepts to this case, much of the Appellate Body's review of the measures at issue seems very factual in nature. Many of the questions it addressed involve the operation of the measures themselves, outside the context of whether these measures are consistent with the Working Party Report. As the Appellate Body itself put it in paragraph 226, it would examine the Panel's "construction of certain provisions of Decree 125." It is easy to understand how the evaluation of the consistency of provisions of Decree 125 with WTO obligations would constitute the legal characterization of the facts. However, the consideration of Decree 125 provisions on their own, outside the context of the WTO obligations in question, seems to be more of a factual question. In this regard, the Appellate Body's analysis in paragraph 227 through paragraph 238, following which it concludes that "the Panel's construction of Article 2(2), read together with Article 21(1), amounts in our view to legal error," does not even make reference to WTO obligations.
As a matter of policy, it may be desirable to give the Appellate Body a good deal of leeway in reviewing the measures that are being challenged. However, Article 17.6 explicitly narrows the scope of appellate review to "issues of law" and "legal interpretations." Arguably, the Appellate Body's decision to consider the panel's construction of the challenged measures, outside the context of WTO obligations, as a legal characterization issue stretches the boundaries of this provision, as the Appellate Body seems to have taken a very broad view of what constitutes a legal characterization question.
Most people I talk to about this agree that the Appellate Body got it wrong. Will the Appellate Body change its position at some point?
