WTO says gambling a U.S. services commitment, but U.S. sees way out

World Trade Organization's Appellate Body yesterday (April 7) upheld a 2004 panel ruling that the U.S. had agreed to allow cross-border gambling services under its Uruguay Round services commitments, a decision that could lead to future challenges of U.S. regulations on gambling. At the same time, the Appellate Body reversed several key findings by the panel that will allow the U.S. to retain its prohibition on internet gambling, according to U.S. trade officials.

The April 7 Appellate Body decision on the dispute brought against the U.S. by Antigua and Barbuda effectively said WTO rules allowed the U.S.to maintain laws prohibiting internet gambling for the purpose of protecting public morals and safety. This is a reversal from the panel decision. Key to this decision is Article 14 of the General Agreement on Trade in Services, which allows WTO members to retain laws for such purposes even if those laws prohibit the delivery of services that a WTO member agreed to allow in the Uruguay Round.

However, the Appellate Body ruled the U.S. laws at issue in the dispute with Antigua and Barbuda were not fully in compliance with the exceptions from services commitments effectively allowed by GATS Article 14. Specifically, it noted that the chapeau of Article 14 states that such measures must be applied in a manner that would not constitute arbitrary or unjustifiable discrimination between countries where like provisions prevail, or that would be disguised restriction on trade in services.

In this case, the Appellate Body ruled the U.S. had not satisfied the requirement that measures to protect public morals and safety at the expense of services commitments are being applied in a consistent manner to domestic and foreign service providers, particularly in light of three U.S. laws raised during the dispute. Specifically, the Appellate Body noted the Interstate Horseracing Act, a civil law that allows electronic bets to be placed across state lines, and thus is an exception, only for domestic providers, to the ban on Internet gambling.

Because of the horseracing act, the Appellate Body ruled the U.S. had not shown that the prohibitions on Internet gambling included in the Wire Act, the Travel Act and the Illegal Gambling Business Act -- all of which implement the ban on Internet gambling -- were applied to both foreign and domestic service suppliers of remote betting services for horse racing. It asked the U.S. to bring its measures into compliance with the decision.

U.S. trade officials signaled this would not be difficult, and praised the decision as a major victory and reversal of what it has described as a deeply flawed panel decision. 'This report essentially says that if we clarify U.S. Internet gambling restrictions in certain ways, we'll be fine,' said acting U.S. Trade Representative Peter Allgeier.

In an April 7 press release, the Office of the U.S. Trade Representative said the three U.S. laws in question would be fully in compliance with Article 14 provided the U.S. clarified its law on Internet gambling on horse racing, and that USTR would be exploring possible avenues for addressing this finding. The release said USTR would not ask Congress to weaken U.S. restrictions on Internet gambling.

However, the USTR release sidestepped the fact that the Appellate Body ruled gambling services were a U.S. services commitment, something the U.S. had adamantly denied during the panel proceedings. This could have major ramifications on other U.S. gambling regulations, including state laws allowing monopolies, as well as compacts with Indian tribes to run casinos, according to Lori Wallach, director of Public Citizen's Global Trade Watch.

Wallach argued during an April 7 press conference that because GATS prohibits government monopolies and exclusive provider arrangements, the decision would make vulnerable state lotteries and Indian gaming compacts, now that the WTO has ruled that the U.S. agreed to cover gambling services in the WTO. As a result, the ruling means it could be difficult for the U.S. to defend challenges from foreign countries that argue non-U.S. entities should be allowed to set up gambling operations that are physically located in U.S. territory, Wallach said.

A spokesman for USTR acknowledged the U.S. was not happy with every element of the decision, but said the decision was effectively a win for the U.S. since it would allow for the continuation of the ban on Internet gambling.

The Appellate Body ruled that gambling and betting services are classified as an example of other recreational services under the terms understood by WTO members. Because the U.S. said in its schedule that it was including 'other recreational services (except sporting),' the Appellate Body ruled it was reasonable for Antigua and Barbuda to assume that the U.S. was including gambling and betting services in its scheduled commitments.

In other areas, the Appellate Body reversed the earlier panel's decision that four state laws regulating Internet gambling were inconsistent with U.S. services commitments under Article XVI.2(a) and (c) of the GATS, which require that members not place limitations on the delivery of a service through any technological means, including the Internet, if that service is included in a member's schedule. The decision said Antigua and Barbuda had failed to show how state laws in Louisiana, Colorado, Minnesota and Massachusetts operated, and how they failed to comply with Article XVI.

Antigua and Barbuda had argued that the U.S. was violating its market access commitments under the GATS by barring the supply of gambling services supplied on a cross-border basis by Antigua-based websites.

Ina decision released to the U.S. and Antigua and Barbuda in April 2004, the WTO dispute panel agreed that the Wire Act, Travel Act and Illegal Gambling Business Act were measures designed to protect public morals and maintain public order as allowed under GATS Article 14.2a, and were also designed to comply with laws related to organized crime as allowed under GATS Article 14.2c.

However, the panel said these measures did not fulfill the requirement under both of these provisions that these exceptions be 'necessary.'

Itcame to this conclusion because the U.S. had rejected an invitation from Antigua and Barbuda to engage in bilateral or multilateral consultations to identify a reasonably available WTO-consistent alternative to the prohibitions on the cross-border supply of gambling and betting services under the three acts. This alternative could have met the U.S. goals of combating organized crime, and ensuring that gambling is not made more accessible to those under 18.

The Appellate Body also reversed this finding, stating that the fact that the U.S. did not enter into consultations with Antigua and Barbuda to find an alternative to the three measures at issue should not lead to the conclusion that the U.S. had not shown the three measures were necessary to protect public morals and safety. It then concluded that the three measures are necessary to protect public morals or to maintain public order as allowed under GATS Article 14a.