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April 7, 2005

Final WTO Panel Upholds Ruling Against U.S. Internet Gambling Ban in Explosive Decision With Broad Political, Policy Implications

WTO Panel Rejects U.S. Contention That Gambling Is Outside WTO Jurisdiction, Instead Rules that ALL Gambling Services in U.S. Are Subject to WTO Disciplines, with Broad Implications for Indian Gaming, State Lotteries and Scores of Other Gambling Regulations

WASHINGTON – A World Trade Organization (WTO) ruling today that the federal law ban on Internet gambling violates U.S. WTO obligations deepens the crisis of legitimacy the troubled institution already faces after the results of a decade of its operations have eroded support from developing countries and a growing number in the U.S. Congress alike, said Public Citizen.

The ruling, which came in response to a challenge filed by U.S. lawyers serving the gambling industry on behalf of the Caribbean nation of Antigua, has broader ramifications for the entire $80 billion U.S. gambling sector and an array of unrelated state and local laws. It comes just weeks before WTO signatory nations face a May 2005 deadline to offer to expand which of their domestic service sectors will be subject to WTO rules.

Among the most important and controversial elements of today’s WTO Appellate Body ruling, which mainly upheld an earlier WTO lower panel judgment, are:

  • The entire U.S. gambling service sector is covered by the provisions of the WTO’s General Agreement on Trade in Services (GATS) even if that is not what the United States intended during negotiations, and thus the ability of the U.S. government to regulate not only Internet but ALL forms of gambling at the federal, state and local level is limited by the rules of GATS;
  • The GATS rules that forbid numerical restrictions on covered services are interpreted to mean that a ban on an activity, even if applied to domestic and foreign service providers alike, is a “zero quota” and thus a violation of GATS rules – with broad implications for bans on any pernicious activity; and,
  • The GATS exception for public morals, defending otherwise GATS-illegal domestic policies, is not applicable because the United States does not apply its ban on remote gambling equally to domestic and foreign companies, including through the U.S. Interstate Horseracing Act, which waives the three laws challenged by Antigua for certain domestic firms.

“Maybe this explosive ruling finally will wake up U.S. policymakers, press and the public to what a serious threat to democracy and sovereignty is posed by the WTO and its requirements that we conform all of our domestic policies to its 900 pages of backwards dictates,” said Lori Wallach, director of Public Citizen’s Global Trade Watch.

The Appellate Panel reversed the lower panel on two significant grounds. It held that because of lawyer error in not properly listing the state laws of Louisiana, Massachusetts, Utah and South Dakota that the lower panel also found violated U.S. WTO obligations, these laws could not be considered in this specific challenge, though the logic of the ruling would have resulted in these laws also being ruled against. The Appellate Body also issued a clever legal two-step ruling regarding whether the U.S. gambling laws could meet the WTO exception for laws that violate WTO rules but nonetheless are allowed as “necessary to protect public morals or to maintain public order.”

“This WTO panel pulled a Solomon-like stunt in that it gave the U.S. a talking point by reversing the lower ruling and declaring that these gambling laws could theoretically fall under the WTO morality exception but then ruled that in fact the laws did not qualify for such treatment because they failed to meet all of the exception’s terms,” Wallach said.

The ruling comes at a difficult time for the Bush administration as congressional criticism to the WTO builds as the number of adverse WTO rulings against U.S. laws grow and as state and local officials grow increasingly aware of the threat “trade” agreements pose to their authority.

“This ruling opens the door to WTO attacks against many additional U.S. gambling regulations set by any level of government because the panel affirmed the decision that the U.S. gambling sector is covered by GATS rules even if the U.S. government says it is not,” said Wallach. “Because GATS also prohibits government monopolies and exclusive provider arrangements, the ruling that gambling is covered by GATS puts state lotteries and Indian gaming compacts at risk as well.”

In the United States, there are 41 states that use lotteries to fund schools and other essential services. As well, there are 29 states with Indian gaming compacts, and countless other state and local gaming policies implicated by the ruling. The lawyers representing Antigua at the WTO also represent the powerful European gaming lobby for whom today’s ruling that U.S. gambling services are subject to WTO rules could be an enormous boon. Meanwhile consumer and religious groups concerned about gambling regulation; native tribes, states and school districts relying on gambling revenue; and those concerned about the WTO’s encroachment on U.S. sovereignty to set its own policies are the biggest losers in this ruling.

“The USTR has repeatedly assured concerned parties, such as state attorneys general and legislators, that the GATS safeguards their right to regulate in a GATS-covered service sector,” said Sara Johnson, state and local outreach coordinator for Public Citizen’s Global Trade Watch. “Today’s ruling makes clear that the USTR is not protecting states from the WTO’s constraints on essential public interest regulation, and in fact this ruling proves the USTR has failed in past GATS negotiations even to be precise about what aspects of the U.S. economy are subject to WTO rules. The USTR is not at all leveling with state and local officials about the implications of the GATS.”

BACKGROUND AND DETAILED SUMMARY OF FINDINGS

The case against the United States was filed in June 2003 by the tiny Caribbean nation of Antigua, which was represented by European and American law firms with strong ties to non-Antiguan gambling corporations. Antigua’s WTO complaint argued that U.S. federal and state anti-Internet gambling regulations violated the United States’ obligations under the WTO, and that such polices had decimated its burgeoning Internet gaming industry. In November 2004, a WTO panel ruled in favor of Antigua and against the United States on all points. The United States appealed shortly thereafter, and today that ruling was upheld by the WTO appellate body. The WTO appellate body is the final arbiter in WTO disputes, so the Antigua case concludes with this decision.

Appellate Panel Affirms Lower Panel’s Ruling That Gambling Is a Service Covered by WTO GATS Even if United States Says it Never Agreed to Such a Commitment: The WTO also upheld the initial ruling’s determination that the United States had inadvertently submitted all of its federal, state and local gambling regulations to WTO rules when it agreed to commit “recreational services” to WTO disciplines. The Appellate Panel agreed that even if this was not the United States’ intention, U.S. action should be interpreted under WTO guidelines that include a subcategory of “gambling and betting services” to the U.S. GATS commitments, rather than under the actual U.S. submission documents. While this case focused on the gambling subcategory Internet gaming, the ruling that the United States committed gambling services to WTO jurisdiction has significant implications for all U.S. federal, state and local gaming policies. This aspect of the ruling means that (even if the U.S. Internet gambling laws are allowed) any other U.S. gambling regulations, including limitations on the number of casinos or state monopoly lotteries or Indian gaming rights, can be challenged.  In the United States, there are 41 states that use lotteries to fund schools and other essential services. As well, there are 29 states with Indian gaming compacts, and countless other state and local gaming policies, implicated by the ruling

Appellate Panel Upholds Extreme Lower Interpretation Regarding “Quotas of Zero”: The Appellate Panel affirmed the radical lower panel ruling that outright bans on gambling were “quotas of zero” that violate U.S. market access obligations by impairing the right of Antiguan gambling companies to enter the U.S. market. This aspect of the ruling means that not only are bans on Internet gambling WTO-illegal, but so are bans on any types of gambling or bans on any type of unsavory activity – even if a ban applies equally to potential domestic and foreign providers – in any area that a panel would interpret as covered under WTO rules.

Appellate Panel Reverses and Upholds Lower Panel on Whether GATS Public Morals Exception Applies: In a reversal of the earlier ruling, the Appellate Panel accepted the United States’ argument that its Internet gambling bans were covered under an exception to the WTO’s General Agreement on Trade in Services for regulations that are “necessary to protect public morals or to maintain public order.” This interpretation of this exception clause is an extreme departure from earlier WTO rulings, which almost never allow use of similar exceptions applicable to other aspects of WTO rules. It is hard to understand the panel’s decision to allow this exception – despite the strong factual counter-arguments by Antigua that the U.S. allowance of numerous other forms of gambling belies a moral aversion to the activity – as based on political rather than jurisprudential motivations. Interestingly, by making a definition of “necessary” that includes the U.S. gambling laws under the exceptions coverage, the WTO Appellate Panel has opened several major cans of worms. As a policy matter, this definition will make it much more difficult for future panels to reject the use of related exceptions regarding the environment, health and other social policies. As a political matter, permitting use of this exception reopens the debate about “social clauses” being added to the WTO, given effectually allowing this exception allows a social clause to be read into the existing text. However, in the end, the Appellate Panel then ruled that while the U.S. gambling bans might be necessary to protect public morals, the exception in fact could not be used in this case because the U.S. policy discriminates against foreign gambling service providers thus failing to meet an essential criteria of the exception.

WTO Threat to State and Local Sovereignty: When a state policy loses in the WTO, the federal government is obliged to take all constitutionally available steps to force the state’s compliance, such as enacting preemptive legislation, suing state or local governments, or withholding federal funding until the state changes or eliminates nonconforming laws. The law must be eliminated or changed, or permanent trade sanctions are put into place. Even if the Bush administration chooses to accept trade sanctions from Antigua rather than force the compliance of states with regard to this particular ruling, such a strategy is untenable in the long term. In future cases resulting in more substantial sanctions, or in situations where the administration is less supportive of a particular state law, the federal government could easily resort to more coercive tactics. The status quo for state and local governments vis-à-vis the WTO is especially problematic, as U.S. negotiators negotiate agreements with scant consultation with state and local officials.   While states find themselves bound to many aspects of WTO agreements, currently there is no adequate mechanism in state or federal law to systematically notify appropriate state officials when agreements containing terms affecting state authority are under negotiation, much less to obtain the consent of state legislatures before federal negotiators offer to permanently bind state laws. 

The tribunal found that the three federal laws in question violated the WTO’s 1994 General Agreement on Trade in Services (GATS). This agreement sets international rules constraining how governments can regulate the services covered by the agreement, regardless of whether the services are provided by foreign companies operating within a country or provided across borders. These rules place a series of constraints on domestic regulation of services in an effort to guarantee market access for foreign service corporations.

Despite the threats to U.S. laws from the existing GATS agreement, trade officials are currently engaged in negotiations to dramatically expand the GATS. Next month, countries are scheduled to make new “offers” to other WTO countries, meaning proposals to open up new service sectors to WTO enforcement. In 2003, some WTO countries, including the European Union, demanded the United States place more service sectors under the terms of the GATS – including energy, water, insurance, alcohol distribution and more – sectors largely regulated by U.S. states. Yet states are not being consulted in these negotiations, an oversight that prompted 30 attorneys general to write the Bush administration to highlight the lack of consultation over matters of their jurisdiction [this letter is available online at 

In comments about the Antigua gambling case, officials from the Office of U.S. Trade Representative (USTR) have stated the GATS agreement safeguards federal, state and local governments’ “right to regulate” in ways “necessary to protect public morals or to maintain public order.” The final WTO tribunal’s ruling contradicts that claim on several grounds and exposes an array of other gambling regulations to future WTO challenges.

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