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The WTO Gambling Decision:

Implications for State Regulation of Gambling

In a decision released on April 7, 2005, the WTO Appellate Body held that U.S. gambling laws are subject to challenge under the General Agreement on Trade in Services (GATS), but the WTO concluded that most federal restrictions on Internet gambling are justified by the “public morals” exception of GATS. This holding reverses a lower WTO panel which had sided with Antigua in November 2004. In its original complaint in 2003, Antigua challenged nine federal laws and 84 state laws (in all 50 states). Among the Appellate Body’s major rulings are these:

  • Antigua failed to explain why the challenged state laws violate GATS rules, so those claims were dismissed.
  • Antigua succeeded in establishing that the United States made a commitment to follow Market Access and National Treatment rules on gambling services.
  • Three federal laws that prohibit Internet gambling violate Market Access rules because they amount to a “zero quota,” which “totally prevents the use of ... one, several or all means of delivery” of cross-border gambling services. The federal laws include the Wire Act, the Travel Act and the Illegal Gambling Business Act.
  • The violations of Market Access rules are excused (except for laws that permit remote betting on horse races through domestic services only) because the federal measures are “necessary to protect public morals.” The “public morals” exception does not apply to the federal law on remote betting on horse races because the law discriminated against foreign gambling companies.

The WTO gambling decision is only the second major interpretation of GATS and the first interpretation of the public morals exception. This decision is a positive development in the WTO’s approach to interpreting exceptions to trade agreements, yet it raises several questions of interest to state and local officials.

1. Future threat to state gambling laws – Does the WTO decision reveal any future threat to state regulation of gambling?

The WTO’s Appellate Body overturned the lower panel’s decision against both state and federal laws except for the federal law that limits remote betting on horse races to U.S. service providers. However, the decision on state laws was not on the merits; it reflected Antigua’s complete failure to make a specific legal argument regarding the state laws.

In rejecting the claim against most federal laws that prohibit Internet gambling, the Appellate Body agreed with the United States that its ban on Internet gambling is permissible under an exception for measures that are “necessary to protect public morals.” The WTO accepted the U.S. argument that certain concerns about public morals are greater with Internet gambling than they are with casino gambling. These include money laundering, fraud, gambling addiction and underage gambling. While accepting the U.S. argument, the WTO explained that Antigua failed to propose a “reasonably available alternative measure,” which implies that such a claim could be presented in the future.

Despite the Appellate Body’s decision on the public morals exception, the WTO ruled on two points that could have an adverse impact on state regulation of gambling:

  • Gambling commitment. First, the WTO ruled that the United States made a commitment on gambling services, which includes not only cross-border gambling, but also gambling operations with a “commercial presence” in the United States. This commitment covers state monopolies, tribal gaming operations and state regulation of casinos, racing, slots and all other forms of gambling.
  • Market Access rules. Second, The WTO ruled that a prohibition on Internet gambling violates the GATS rules on Market Access, which prohibit limits on the number of service providers or operations in the form of a monopoly or a quota. Specifically, the WTO ruled that a prohibition is a “zero quota.” Unlike Internet gambling, state and tribal monopolies or limits on the number of casinos, race tracks or slots do not appear to benefit from a “public morals” defense that is limited to concerns about remote gambling through Internet technology.

2. Public morals and federalism – Will the “public morals” exception to trade rules respect a principle of federalism, which is that state governments make their own choices on matters of public morality?

The scope of the “public morals” defense regarding remote gambling through Internet technology did not include the broader moral concerns of states like Utah and Hawaii that ban gambling completely. This suggests that the public morals exception will not be available in future challenges if some states permit activity that other states ban or regulate more heavily. The fact that states make different choices about what to regulate, based on their unique political and cultural traditions, can itself be used against them in a trade dispute.

3. Future safeguards under GATS – Will the United States withdraw its commitment on gambling services in order to prevent future challenges to regulation of land-based gambling?

The U.S. Trade Representative (USTR) stated that the United States was prepared to withdraw its GATS commitment on gambling services if Antigua prevailed in its WTO challenge. While the WTO held that the U.S. ban on Internet gambling was permissible under the public morals exception (except for remote horse racing), Antigua did succeed in proving that the United States made a commitment on gambling services in general. Based upon this ruling, the “land-based” casino industry — which earned after-tax profits of $35 billion in 1993, $55 billion in 1998 and $73 billion in 2003 (American Gaming Association) — might be a lucrative target for future WTO challenges. The USTR could prevent any such challenge under GATS to the regulation of “land-based” gambling by following through on the option of withdrawing all gambling commitments.

4. Future safeguards under investment agreements – Will the United States carve out regulation of gambling from investment agreements that include no “public morals” exception?

The United States is party to numerous investment agreements such as ch. 11 of NAFTA (or ch. 10 of the proposed CAFTA, the Central American Free Trade Agreement). These agreements empower individual foreign investors to challenge domestic law on grounds that the law disfavors foreign firms. Antigua made such arguments, but the WTO did not make a decision in this regard. Discrimination arguments may be more successful in the investment context because U.S. investment agreements do not contain a “public morals” exception.

U.S. trade negotiators appear to have some concerns that foreign investors might launch an investment claim against regulation of Internet gambling. They exchanged letters with Costa Rica in an attempt to avoid such a claim under the proposed CAFTA. However, the Costa Rica letter says that gambling regulations are immune from challenge only if they comply with the investment agreement. U.S. negotiators have yet to negotiate a definitive carve-out of gambling regulation from investment rules in Annex II of CAFTA.

5. Federal-state consultation – Is there a reason for USTR to consult with state governments?

On March 30, 2005, the National Conference of State Legislatures (NCSL) sought a commitment from USTR for consultations on how to avoid future challenges of state regulation of gambling under GATS, CAFTA or other agreements. NCSL said that a written commitment to consult “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 ...”

For more information contact: Peter Riggs, Director, Forum on Democracy and Trade
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