FINAL REPORT OF THE PANEL UNDER CHAPTER 18 OF THE CANADA-UNITED STATES FREE TRADE AGREEMENT

(d) Regulation of Production of UHT Milk in Québec

3.19 UHT milk from Québec exported to Puerto Rico meets the FDA's definition of a low-acid canned food and is processed and packaged under a standard identical to the Low-Acid Canned Food Regulations⁹ of the U.S. Food and Drug Administration since 1983.

3.20 The legislative and administrative framework for regulation of the dairy industry in Québec subjects producers and processors to federal, provincial and municipal regulation which regulate many aspects of dairying. The relevant Acts and Regulations are:

(e) Effect of Adoption of Pasteurized Milk Ordinance

3.21 In January 1990, Puerto Rico notified representatives of Lactel that Puerto Rico had joined the NCIMS and would consequently need to adopt regulations in accordance with the PMO.¹⁰ In December 1990, Puerto Rico authorities had provided Lactel representatives with a complete copy of the new regulations.¹¹ United States FDA officials noted that Québec was not a member of the NCIMS and thus did not implement either the PMO or the Procedures.¹²

3.22 In January 1991, Lactel represented to FDA authorities that UHT milk from Québec qualified for entry into Puerto Rico under Section 11 of the PMO, which authorizes the sale of milk outside ''routine official supervision'' if it is processed under conditions ''substantially equivalent'' to the PMO. Lactel submitted that the technical standards under which UHT milk was produced in Québec were at least equivalent to the PMO.¹³

3.23 On February 19, 1991, the local distributor of Québec UHT milk was advised that its import, sales and distribution licence, issued by the Puerto Rico Department of Agriculture, would be cancelled effective July 1, 1991 because of ''non-compliance'' with Department of Health Regulation 138¹⁴.

3.24 On June 20, 1991, the Puerto Rico Department of Agriculture extended Lactel's licence until December 31, 1991. On July 1, 1991, the Puerto Rico Department of Health informed Lactel that Québec UHT milk was not made under the conditions of the PMO and therefore did not meet the requirements for sale in Puerto Rico. Lactel's agent was thereby notified that its pasteurized milk agent's licence would be revoked within thirty days of receipt of the letter of notification.¹⁵

3.25 On August 12, 1991, the Puerto Rico Secretary of Health extended the import, sales and distribution licence for 150 days to allow time to resolve the deficiencies identified by the agency. He stated that if the deficiencies were not solved during the extension period, the licence would then be suspended.¹⁶

3.26 On December 16, 1991, the Québec UHT milk distributor learned that the import, sales, and distribution licence extended by the Department of Agriculture would not be extended a second time.¹⁷

3.27 On December 31, 1991, the Governor of Puerto Rico rejected a request made by the Government of Canada on behalf of Lactel that the waiver be extended. He wrote:

Since December 31, 1991, UHT milk produced in Québec has been excluded from the Puerto Rico market.

3.28 On October 29, 1992, a Puerto Rico Administrative Tribunal found that the refusal to renew the distributor's licence was justified on the grounds that the milk did not comply with Section 12 of Regulation 5 and, in particular, the failure to demonstrate that the milk had been rated by an FDA-certified Rating Officer. The distributor filed a motion for reconsideration of the decision, which was rejected on December 17, 1992.¹⁹

3.29 An administrative review before the Department of Health scheduled for January 14, 1992 was adjourned sine die pending the outcome of the hearing before the Department of Agriculture. As a result of that adjournment, the importation, sale, and distribution licence issued by the Department of Health continued in force until October 1992. The refusal to renew the Department of Agriculture licence remained the basis for the import prohibition that has continued to date.²⁰

(f) Search for a Test to Determine Equivalence

3.30 In accordance with Section 11 of the PMO, Lactel with the assistance of the governments of Canada and Québec sought to establish the equivalency of the Québec and Puerto Rico UHT milk regulatory systems and to agree upon a modus operandi for rating the Québec UHT milk in the future.

3.31 In a letter to the FDA, dated January 2, 1991, Lactel's counsel asked that Québec UHT milk be admitted into Puerto Rico under Section 11 of the PMO.²¹ The FDA responded on January 9, 1991, that they were not familiar with the Québec Grade A system and that they ''had repeatedly invited Canada and/or any of their Providences [sic] to join the NCIMS''. The FDA further stated that:

3.32 In the same letter, the FDA asserted that the decision to allow the entry of imported milk rested with Puerto Rico since the PMO is enforced exclusively by state authority. Consequently, the FDA could not rule on ''substantial equivalency'' under Section 11 of the PMO; the decision was for Puerto Rico to make.²³

3.33 On February 27, 1991, the Canadian Ambassador to the United States wrote to the FDA Commissioner to propose that the FDA certify Canadian officials pursuant to FTA Article 708 to conduct inspections to certify Lactel's compliance with the PMO and the Procedures:

3.34 The FDA responded to the letter of February 27, 1991 on June 20, 1991. The FDA did not address the Canadian request for an equivalency study and rejected the request for certification of Québec milk inspectors. The letter referred to discussions that had taken place at the March 4, 1991 meeting of the Dairy, Fruit, Vegetable, and Egg Inspection Technical Working Group (the "Technical Working Group"), established under the U.S.-Canada Free Trade Agreement. The FDA stated that the purpose of the meeting had been to explore the short, medium and long term alternatives that would respond to the specific problem referred to in the Canadian Ambassador's letter.²⁵

3.35 During this meeting of the Technical Working Group on March 4, 1991, FDA representatives present stated that the Canadian Ambassador's short-term proposal for FDA certification of Canadian inspectors would not solve Lactel's problem, since ''substantial equivalency'' under Section 11 of the PMO did not mean a one-time inspection. Rather, it required a system of preventative standards, oversight and verification that complied with the PMO and Procedures. They went on to say that Section 11 required implementation of the PMO, including the adoption of an oversight and verification system under the Procedures, with routine official supervision and FDA-certified state oversight through check ratings.²⁶

3.36 At the March 4, 1991 Technical Working Group meeting two alternative short-term solutions had been suggested to address Lactel's concerns. The FDA proposed these solutions to the Canadian Ambassador in the June 20, 1991 letter. First, it was suggested that Lactel request a waiver from Puerto Rico of the requirement that the milk be from a NCIMS processing state. Second, the FDA suggested that Lactel contract with a U.S. regulatory agency near the Québec border (such as New York or Vermont) to have the authorized inspectors, certified laboratory officials, and certified ratings officers carry out the inspections and ratings required under the PMO and Procedures. The FDA noted that this avenue would have to be approved by the Puerto Rico Department of Health.²⁷

3.37 The second short-term solution became known as the ''Vermont option'' and involved Québec approaching a northern U.S. state, to determine if it would be willing to have its authorized inspectors, certified laboratory officials, and certified ratings officers carry out the inspections and ratings required under the PMO and Procedures. Lactel, and the governments of Québec and Canada rejected this proposal. The ''Vermont option'' was rejected as unacceptable because, on Canada's understanding, it did not allow for the use of Québec milk in the UHT testing process.²⁸ Furthermore, it felt that it was based on the assumption that the Québec regime was not equivalent to that of the PMO, an assumption that Canada denies.

3.38 At the same March 4, 1991 meeting, a medium term solution involving direct interaction between the Canadian government and the NCIMS was also identified. The FDA encouraged Canada and Québec to attend the April 22-26, 1991 NCIMS conference. The Conference was scheduled to review a proposal by Puerto Rico to change the by-laws of the NCIMS and establish "criteria that should be met by foreign countries that wish to be part of the IMS program".²⁹

3.39 It was further suggested at the Technical Working Group meeting on March 4, 1991 that the long term solution was for Canada to develop ''a parallel system to the NCIMS and work, with FDA assistance, for reciprocal acceptance of both systems''. It was urged by the FDA that any review of the equivalence of the two systems be reciprocal, covering both the U.S. and Canadian systems.³⁰

3.40 At the August 18, 1991 meeting of the Canada-U.S. Trade Commission, the Canadian Minister of International Trade requested that the Technical Working Group give the issue of equivalence top priority. He also sought assurances that the Puerto Rico market would remain open until an equivalency study had been completed.³¹

3.41 A UHT Sub-committee was established to work toward a determination of equivalency of the Puerto Rico and Québec milk regulatory systems. The UHT Sub-committee met on three occasions -March 5, 1991, July 15-16, 1991 and October 1-2, 1991 - to continue its review of ''equivalence'' under Section 11 of Annex 708.1 of the FTA. Copies of United States and Canadian/Québec regulations and standards governing milk and milk products were exchanged.³²

3.42 On November 8, 1991, following the initial request for an equivalency study by Canadian Ambassador Burney on February 19, 1991 and the three UHT Sub-committee meetings, Agriculture Canada (the Canadian Federal Department of Agriculture) proposed a detailed timetable for evaluation of the equivalence of the two systems. The proposal suggested that an equivalency study, limited to UHT milk, be undertaken and completed by December 31, 1992.³³

3.43 In a letter to the Governor of Puerto Rico dated November 26, 1991, the Canadian Minister for International Trade requested that Puerto Rico extend the waiver to December 1992.³⁴ As noted in 3.27, this request was rejected by the Governor of Puerto Rico and the Puerto Rico market was subsequently closed to Québec UHT milk.³⁵

To Continue with Search for a Test to Determine Equivalence

⁹ 21 C.F.R. 113.

¹⁰ Letter from Delia M. Olivo Rivera, Director, Puerto Rico Milk Hygiene Program to Charles Petty, Jr., Hopkins & Sutter dated January 31, 1990 (United States First Submission, Attachment 20).

¹¹ Letter from Delia M. Olivo Rivera, Director Puerto Rico Milk Hygiene Program to Joaquin Marquez, Hopkins & Sutter dated December 13, 1990 (United States First Submission, Attachment 21).

¹² Letter from Johnnie G. Nichols, Chief Milk Safety Branch, Center for Food Safety and Applied Nutrition, FDA to Charles Petty, Jr., Hopkins & Sutter dated January 9, 1991 (United States Attachment 24).

¹³ Letter from Charles Petty, Jr. to L. Robert Lake, Director, Office of Compliance, FDA, Center for Food Safety and Applied Nutrition, Milk Safety Branch dated January 2, 1991 (United States First Submission, Attachment 22)

¹⁴ Letter from Getulio Rodriguez Gonzalez, Puerto Rico Department of Agriculture to Carlos Matos Jordan, Marketing & Brokerage Specialists, Inc. dated February 19, 1991 (Canadian Exhibit G). 

¹⁵ Letter from José E. Soler Zapata, M.D., Secretary of Health, Puerto Rico, to Carlos Matos, Marketing & Brokerage Specialist, Inc. dated July 1, 1991 (Canadian Exhibit H).

¹⁶ Letter from José E. Soler Zapata, M.D., Secretary of Health, Puerto Rico, to Jorge Luis Cordova, Bufete Rivera, Tulla & Ferrer dated August 12, 1991 (Canadian Exhibit I).

¹⁷ Letter from Agro. Getulio Rodriguez Gonzalez, Administrator, Puerto Rico Department of Agriculture, dated December 16, 1991 (Canadian Exhibit J).

¹⁸ Letter from the Honourable Rafael Hernandez Colon, Governor of Puerto Rico to Michael H. Wilson, Canadian Minister for International Trade dated December 31, 1991 (Canadian Exhibit T).

¹⁹ Decision of Lcda. Carmen Aulet Martinez, Office of Milk Industry Regulation of Puerto Rico (ORIL) dated October 29, 1992, in the matter of Carlos F. Matos Jordan, Marketing & Brokerage Specialists (English translation), (Canadian Exhibit K).

²⁰ Canada's First Submission, p. 7, para. 18.

²¹ Letter from Charles Petty, Jr., Hopkins & Sutter, to L. Robert Lake, Director, Office of Compliance, FDA, Center for Food Safety and Applied Nutrition, Milk Safety Branch, dated January 2, 1991 (United States Attachment 22).

²² Letter from Johnnie G. Nichols, Chief Milk Safety Branch, FDA to Charles W. Petty, Jr., Hopkins & Sutter dated January 9, 1991.(United States Attachment 24).

²³ Letter from Johnnie G. Nichols, Chief Milk Safety Branch, FDA to Charles W. Petty, Jr. dated January 9, 1991 (United States Attachment 24).

²⁴ Letter from the Canadian Ambassador to the United States D.H. Burney to Dr. David A. Kessler, Commissioner, FDA, dated February 27, 1991 (Canadian Exhibit N).

²⁵ Letter from John E. Kvenberg, Director, Division of Cooperative Programs, Center for Food Safety and Applied Nutrition, FDA to Canadian Ambassador D.H. Burney, dated June 20, 1991 (Canadian Exhibit O).

²⁶ U.S. First Submission, p. 13, para. 65. (See United States Submissions Attachment 34, FDA Minutes of the meeting of the Working Group, March 4, 1991.) Seven Canadian representatives, from Agriculture Canada, the Québec Ministère de l'Agriculture, Direction des pêcheries et des légumes, and the Canadian Embassy, and five United States representatives, from the United States Department of Agriculture and Food and Drug Administration, were present at the meeting.

²⁷ Infra, notes 30 and 31.

²⁸ Canada's First Submission, p. 15, para. 36 and Canada's Supplementary Submission para. 9-13. Neither Canada nor the United States provided official documents regarding this matter. See FDA Minutes of March 4, 1991 meeting of the Working Group, United States First Submission, Attachment 34. However, the record of Canadian participants at the March 4, 1991 Technical Working Group meeting, Canadian Supplementary Exhibit 15, set out on Page 2, Paragraph 2 of a telex, dated March 7, 1991, from Mr. John McNab, Counsellor Commercial of the Canadian Embassy in Washington, states that:It became clear, however, that feasibility of Vermont option for FDA rested on use of USA milk from supplier listed in National Conference of Interstate Milk Shipments (NCIMS). Use of Québec milk would require certification of farms by Vermont or another state and FDA presented host of reasons why this could not/not be done easily. Option was thus less attractive to CDA since interests of fifty supplying farms would not/not be protected. FDA agreed that inspection and certification in CDA could theoretically be done by PR.

²⁹ United States First Submission, Attachment 26. Canada did not respond favourably to this suggestion which it believed would submit its milk production regulations to an American organization and compromise its milk marketing system. Letter dated June 20, 1991, supra, and Minutes of Working Group meeting, supra. See also: Record of Canadian participants at the March 4, 1991 meeting of the UHT Sub-committee of the Technical Working Group, telex dated March 7, 1991, from Mr. John McNab, Counsellor Commercial of the Canadian Embassy in Washington (Canadian Supplementary Exhibit 15).

³⁰ Letter from John E. Kvenberg, Department of Health & Human Services, FDA to Canadian Ambassador Burney, June 20, 1991. (Exhibit O). See also: Record of Canadian participants at the March 4, 1991 meeting, telex dated March 7, 1991, from Mr. John McNab Counsellor Commercial of the Canadian Embassy in Washington (Canadian Supplementary Exhibit 15).

³¹ Canada's First Submission, p. 12, para. 13. There is no official document in the record to support this assertion.

³² United States First Submission, p. 15, para. 77. Canada's First Submission, pp. 12-13. There are no official documents of these meetings in the records.

³³ Canada submitted that the proposal was conditional on the willingness of Puerto Rico to guarantee continued access for Québec UHT milk while the equivalency evaluation exercise was under way. Letter from P.J. Brackenridge, Director, Food Production and Inspection Branch, Agriculture Canada, to Dr. Kenneth C. Clayton, Deputy Administrator, Marketing Programs, U.S. Department of Agriculture, dated November 8, 1991 (Canadian Exhibit R). Canada also said that there was no U.S. response to this proposal (Canada's First Submission, p. 13). 

³⁴ Letter from the Canadian Minister of International Trade to the Governor of Puerto Rico, dated November 26, 1991 (Canadian Exhibit S).

³⁵ Letter from the Governor of Puerto Rico to the Canadian Minister of International Trade, dated December 31, 1991 (Canadian Exhibit T).