NEWS

Legal experts and representatives of the gaming industry are raising serious doubts about claims by U.S. trade officials that a decision by the Appellate Body on U.S. Internet gambling obligations in the World Trade Organization is a major victory for the United States and will be easy to implement. Specifically, they are taking issue with a statement by acting U.S. Trade Representative Peter Allgeier that the decision merely requires the United States to clarify one narrow issue concerning Internet gambling on horse racing in order for the U.S. to meet its WTO obligations. "The path to implementation is treacherous and rocky," said one trade lawyer familiar with the decision. He and other legal experts said the clear legal response to implementing the WTO decision is to expand or repeal the provision in the Interstate Horseracing Act, which allows Internet gambling in the United States. However, neither of these options is necessarily politically viable, legal and gaming industry sources said. "At the end of the day to comply with the decision, they either have to give Antigua market access or get rid of on-line gambling," a lawyer for the Antiguan government said. Antigua brought the WTO challenge to U.S. state and federal laws prohibiting the supply of gambling services over the Internet with the argument that they were inconsistent with U.S. commitments under the General Agreement on Trade in Services (GATS). But the lawyer also signaled that Antigua was open to negotiating a settlement with the United States that would include some limits to on-line gambling to address such problems as underage gambling. The U.S. has to announce to the Dispute Settlement Body on May 19 whether it wants to comply with the ruling or not, a U.S. trade official said. Governments are not required to announce how they will comply. The official said the U.S. is not currently involved in negotiations with Antigua to settle the case. The Appellate Body ruled that U.S. federal laws prohibiting Internet gambling violate U.S. GATS obligations, but found that they could be justified under Article XIV of the GATS, which can exempt laws that are "necessary to protect public morals or maintain public order."

To qualify for an Article XIV exemption, a country must prove that the laws in question "are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail." The Appellate Body ruled that the United States had not demonstrated that the laws challenged applied equally to both foreign and domestic suppliers of Internet gambling services. It made that finding based on the fact that the Interstate Horseracing Act (IHA), which was not challenged in the case, appears to let domestic companies offer Internet gambling services, but does not allow foreign companies to do the same. If the U.S. cannot clarify that the laws subject to the case are not discriminating between foreign and domestic service providers, the federal laws at issue in the case may not qualify for the Article XIV exemption. The administration continues to maintain that the IHA does not allow any companies, foreign or domestic, to provide wagering services on horse racing via the Internet, one informed source said. The U.S. had made that argument in the WTO dispute settlement process unsuccessfully, and other legal experts and gambling industry sources point out that the law was amended in 2000 to specifically state that it allows Internet gambling. If the administration were to repeat its argument and Antigua rejected it, Antigua could seek a compliance panel after an implementation deadline has expired to look at the issue again. If the U.S. lost that case, the Bush Administration could opt to ignore the finding, which could lead Antigua to seek the right to retaliate from the WTO. But the threat of retaliation from a small country like Antigua may not have the administration overly worried, gaming industry sources said. But, the administration could also ask Congress to amend the IHA to either clearly ban Internet wagering on horse racing or to open up the business to foreign service providers. Amending the IHA to make Internet wagering on horse racing illegal would face opposition from the horse racing lobby, which was politically powerful enough to have the IHA amended in 2000, a gaming industry source said. Moreover, Internet wagering on horse racing is big business in the U.S., generating $2.5 to $3 billion in revenues to the $15.5 billion horse racing industry, a horse racing industry source said. The horse racing industry sought to have the IHA amended in 2000 to specifically allow for Internet wagering after the Justice Department declared that it was illegal, a horse racing industry source said. Despite Justice's stance on the IHA, he pointed out, it has never prosecuted suppliers of Internet betting on horse racing. The IHA could also be amended to make it non-discriminatory by allowing both foreign and domestic companies to provide wagering on horse racing via the Internet, but this would seriously undercut the U.S. argument that it needs to ban Internet gambling to protect public morals, a trade lawyer said. Also, any measure that could be seen as expanding legalized gambling in the U.S. is likely to face strong opposition from the anti-gambling lobby, a gaming industry source said. The case poses a problem for state-level officials even though it did not directly rule on state laws, state sources said. The Appellate Body did not rule on Antigua's argument that state laws violated the U.S. GATS obligations because it found Antigua had failed to make sufficiently cogent arguments to back up its claims. "The Appellate Body basically said the state laws are not in violation, because Antigua didn't make a good enough case," a state source said. "It's just a matter of waiting for the next plaintiff with a better and stronger case."

Because Antigua succeeded in its argument that the U.S. had made commitments on gambling services in general, state regulation of the land-based casino industry or state lotteries was also potentially vulnerable to another WTO challenge, according to trade lawyers. A state source questioned whether the Article XIV public morals exemption would be strong enough to resist these challenges. Regardless of how the case gets settled, it is significant by virtue of its finding that the U.S. made a GATS commitment to open its gambling sector, sources said. This exposes the U.S. to challenges from countries with larger economies and more significant trade relations with the U.S., they said. "There is a huge amount of interest in this case," the Antigua lawyer said. "Most jurisdictions are waiting to see how this plays out. The Appellate Body decision provides a roadmap for someone who wants to follow in our footsteps."

The prospect of another challenge in the WTO to states' regulatory authority over gambling has state officials worried, state sources said. They also point to the case as an example of how USTR has insufficiently consulted with them on international trade matters, a charge which a trade official disputed this week. Gaming industry sources point to the United Kingdom as a country whose on-line gambling industry could grow in the next few years because it has passed a law that would create a new commission to regulate on-line gambling. On-line gaming companies prefer to operate in regulated markets, these sources said, making a migration of on-line casinos to the UK likely. Christiansen Capital advisors, a gaming industry consultancy, estimates the worldwide on-line gambling industry to be worth $10 billion in 2005, up from $3 billion in 2001. More than half of the industry's revenue comes from U.S.-based gamblers, so on-line gambling providers are unlikely to ignore the U.S. market, a gaming industry source said. State officials from Utah, one of only two states along with Hawaii that bans all forms of gambling, question whether the public morals exemption is solid enough to protect the morals of a state that is different from the majority of the country, Utah sources said. "We are concerned about the impact on state sovereignty of the federal government speaking on behalf of all states, without considering the specific circumstances of the individual states," a Utah source said. Another state source pointed to the case as a "good example" of where there were not sufficient consultations between the federal government and the affected state interests. He charged that state jurisdiction was negotiated away in an international trade agreement. In a letter sent to acting U.S. Trade Representative Allgeier before the Appellate Body ruling, the National Conference on State Legislatures sought a commitment from the USTR to engage in "meaningful consultations" with state legislatures on the gambling dispute and in future negotiations on international trade agreements. It noted that such a commitment "would go a long way to assuaging the growing concern among state legislators that trade agreements do indeed pose a viable and palpable threat to state authority and sovereignty."

The letter is dated March 30, before the Appellate Body decision on April 7, which reversed some of the WTO's panel's more controversial rulings. But an NCSL source said the organization's basic points remain as set forth in the letter. But a U.S. trade official insisted that the federal government had closely consulted with state officials during the course of the WTO case through regular conference calls, in which the administration kept state officials updated on the case and asked for their input. He said he was surprised that a process that "we opened up to any state official could be described by them as anything less than an open door policy."

The NCSL source said that the group did not have an explicit strategy yet for responding to the ruling, but has begun the process of putting together "a greater coalition on gambling." He noted that the NCSL had discussed the matter with members of the National Association of Attorneys General (NAAG) at a joint seminar held in mid-April. Meanwhile, a NAAG source said attorneys general discussed the WTO gambling case at a spring meeting and other state officials said they were currently educating state legislators on the gambling case and other international trade matters and working to coordinate their efforts.