Compliance deadline looms in US-Antigua internet gambling case

1 March 2006 -- Peter Riggs

Caribbean nation Antigua and Barbuda, which last year won a major WTO dispute on gambling against the United States, has protested new legislation in Congress that would tighten restrictions on transactions by internet casinos.

Antigua’s Permanent Representative to the WTO, John W. Ashe, noted in a 16 February letter to US Trade Representative Rob Portman that legislation recently introduced in the US House of Representatives is “expressly contrary to the rulings and recommendations of the Dispute Settlement Body of the World Trade Organization.” The WTO Dispute Settlement Body gave the United States until April 2 of this year to comply fully with the dispute ruling, including possibly the amendment of the federal Interstate Horseracing Act and other measures to improve access for internet casinos abroad into the lucrative U.S. on-line gambling market.

Bills introduced by Representatives James Leach and Robert Goodlatte would enable U.S. law enforcement officials to go after companies that facilitate financial transactions with on-line casinos. Antigua has argued that exceptions in the bills for transactions made in accordance with the Interstate Horseracing Act, for in-state transactions, and for Native American tribes all run afoul of the WTO ruling in the US-Antigua case.

Much is at stake for states in this stand-off, too. States such as Utah and Hawaii that ban all forms of gambling are very nervous about the implications of the WTO ruling. Those states that obtain significant revenues from gambling are nervous for a different reason: could an expanded market for on-line games of chance threaten the growing percentage of state revenues that come from casino and lottery receipts?

The WTO case brought by Antigua is formally known as United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285. Lead counsel for Antigua in this case was provided by an El Paso-based law firm, Mendel-Blumenfeld, LLP.

To summarize the case, the WTO Appellate Body ruled that as part of its WTO General Agreement on Trade in Services (GATS) commitments, the United States was required to follow Market Access rules on gambling services. However, the WTO Appellate Body did allow the United States to cite the GATS “public morals” exception, which excused US violations of Market Access rules in some cases. But not all cases: the WTO Dispute Settlement Body specifically cited the United States Interstate Horseracing Act (IHA) as in violation of US GATS commitments, and therefore said that the “public morals” exception did NOT apply to permit remote betting on horse races, because the IHA discriminates against foreign gambling companies. The new legislation proposed in Congress continues to provide exceptions for the Interstate Horseracing Act—one of the issues that apparently triggered the recent letter from Antigua.

In its original WTO complaint, Antigua also mentioned a number of state laws as possible GATS violations. But the WTO Appellate Body decided to rule only on the federal laws, stating that Antigua had failed to explain why the challenged state laws violate GATS rules. That does NOT mean that state laws on gambling were seen as “GATS-compliant”; on the contrary, the ruling appeared to leave open the opportunity that Antigua, or another country, could re-file a WTO claim and specifically go after state laws. This legal limbo has certainly been noticed by on-line casino operators located in the United Kingdom—which is fast becoming Europe’s main center for internet gambling. “The WTO case should serve as a solid precedent should another jurisdiction decide to take the US to the WTO along similar lines,” noted Wes Himes, director of the UK’s Interactive Gaming, Gambling, and Betting Association.

As alarming as this WTO decision is for the administration of state and federal gambling laws, many states are even more concerned about how this international attempt to pry open the US gambling market could impact their current revenue base. If restrictions on gambling from home computers are weakened, how would that affect the number of visitors to casinos, and the associated spending on food and entertainment at these gaming centers? Would it reduce the number of residents willing to try their luck through state lotteries?

Five states obtain more than 10% of their total revenue from various forms of gambling (casinos, video poker terminals, lotteries, etc.), and another five states are close to that double-digit figure. Those states most dependent on gambling revenues were swift to pass laws banning internet gambling. South Dakota, which has the second-highest percentage of revenues from gambling of any state in the union (after Nevada), made it a felony to use the internet for certain gambling activities—but then explicitly exempted the State Lottery and licensed casinos in the state. Nevada passed similar legislation.

Nationwide, approximately 30% of total lottery spending ends up in state coffers, and lottery revenues now account for more than 2% of total state revenues. A 2005 New York Times article noted that “gambling revenues, once a mere trickle, have become a critical stream of income in a number of states, in some cases surpassing traditional sources like the corporate income tax and helping states lower personal income or property taxes.”

What Happens Next?
The WTO ruling does not automatically “overturn” federal law. But it would allow the winner in a dispute—in this case Antigua—to apply economic pressure through tariffs or sanctions against the loser, if laws are not changed to come into compliance with the WTO ruling. So this case raises the following important questions:

• Can the United States simply withdraw its GATS commitment on gambling services? YES. Article XXI of the GATS allows WTO member countries to “modify or withdraw any commitment in its Schedule.” The US would have to do two things to withdraw its commitment on gambling. First, it would have to give other WTO members at least three months notice of its intention to do so. More importantly, according to Article XXI, any WTO member affected by the proposed modification or withdrawal would be able to engage the United States and seek a “compensatory adjustment….[so as] to maintain a general level of mutually advantageous commitments not less favorable to trade that that provided for in Schedules of specific commitments prior to such negotiations.” Plain-English translation: If the US were to withdraw the gambling commitment, it might have to offer new or amended commitments elsewhere in the US GATS schedule that are “not less favorable to trade” with WTO members.
  
  Note that it’s not just Antigua that can ask for such negotiations. Europe could too. So could Costa Rica, another big player in the global gambling market. For example, rather than ban internet gambling, the European Union has opted to regulate (and tax) on-line casinos. European trade negotiators would be expected to seek a “compensatory adjustment” through the opening up of another GATS sector if the US moved to withdraw the gambling commitment. The EU has long-standing GATS “requests” of the United States in areas ranging from banking to legal services to water.
  
  Another major issue: It can be expected that the “compensatory adjustment” would be based on the size of the market-access offer being withdrawn. Internet gambling is a $7.5 billion business at present, and with annual growth rates in excess of 20%, is expected to more than double in the next five years. Every year that the United States waits before withdrawing that commitment, the bill for a “compensatory adjustment” could also grow by more than 20%.
  
  
• Can Antigua, or another country, re-file a WTO complaint on internet gambling? YES. As noted above, gambling interests in the European Union view the US-Antigua case as a “solid precedent” for filing a WTO case against the United States “along similar lines” to that pursued by Antigua in its filing. The dispute panel in the US-Antigua case confined its analysis to the US federal laws at issue, and did not address the complaints Antigua made against various state laws. It is therefore likely that the complaining party in any future WTO dispute filing would comprehensively detail the ways in which existing US state laws are not in keeping with the US commitment under “other recreational services.”
  
  
• Can Antigua, or another country, file a complaint on internet gambling against the United States using another trade agreement? Antigua is not currently party to a bilateral or regional free trade agreement with the United States. But NAFTA or CAFTA member countries—several of which are home to powerful internet gaming interests—might very well be tempted to bring a claim against the United States using the investment chapters of those agreements. To begin with, the GATS Article XIV clause that allowed the United States to “dodge a bullet” on the Antigua case—the “public morals” exception—is not a part of the investment chapters in either NAFTA or CAFTA. USTR could have negotiated a definitive carve-out of gambling regulation from investment rules in Annex II of CAFTA—but failed to do so. Costa Rica is a big player in the world of on-line gambling. Indeed, this CAFTA-member country will play host to the International Gaming Conference and Expo in April of this year, and the keynote speaker for that conference has been asked to address opportunities for expanding markets for on-line gambling enterprises.
  
  The Forum on Democracy & Trade is currently analyzing the possible threats to US state and federal gambling regulations presented by these FTA investment chapters; please contact for further information
  
  
• Does Antigua have any economically meaningful way to retaliate against the United States? Given the tiny size of Antigua’s economy vis-à-vis the United States, any punitive tariffs that Antigua might want to slap on the import of US goods are likely to be felt more by Antigua’s consumers than by US exporters. However, there is a precedent at the WTO for retaliation in other ways—such as through the suspension of intellectual property protections. At this stage, however, Antigua has chosen to stress the importance of U.S. compliance, rather than raising the specter of specific retaliatory actions. But Antigua’s recent letter to Ambassador Rob Portman suggests its growing impatience with the United States. Regarding the two bills introduced by Representatives Goodlatte and Leach, Antigua noted in its letter to USTR that “we can only assume that this legislation was neither sponsored by nor enjoys the support of the USTR and the current American administration.”
  
  
• If the United States does NOT amend its laws to comply with the WTO ruling, how does that affect its “moral authority” to argue for new commitments in current WTO services negotiations? The deadline for compliance in the Antigua case comes right at the “crunch time” for completion of the current Doha Round of WTO negotiations. Not just Antigua, but more than 140 other WTO member-countries, will be watching to see whether the United States intends to comply with the decision made by the WTO in this case. Again from Antigua’s letter to Rob Portman: “[the United States] has a vested interest in providing developing country members of the WTO with assurances that the WTO dispute resolution system is indeed a ‘two-way street’ that provides a level and fair playing field for all members.