Background. In March 2003, the government of Antigua and Barbuda (“Antigua”) commenced the dispute resolution process of the World Trade Organization (“WTO”) to challenge the United States’ total prohibition of cross-border gambling services offered by Antiguan operators such as the World Sports Exchange to consumers in the United States (“US”). For several months, Antigua went through a pre-dispute negotiation process with the US in an effort to resolve the trade dispute. In June 2003, after the United States refused to engage in meaningful negotiations, Antigua asked the WTO to form a three-judge panel (“Dispute Panel”) to resolve the dispute.
The First Round (2003-2004): The Dispute Panel Rules in Favor of Antigua: On March 24, 2004, the WTO Dispute Panel issued a confidential ruling in favor of Antigua, finding that the US restrictions against online gambling violated international treaties. The Dispute Panel Report ruling was a smashing victory for Antigua, which maintained all along that its sportsbooks and casinos were lawful businesses which were entitled to access the huge US gambling market. The WTO ruling took the gambling world by storm because it moved the possibility of fully and clearly legal online gambling closer to reality in the US and elsewhere.
Following the Dispute Panel’s confidential ruling (the “Panel Report”), Antigua and the US again attempted to negotiate a resolution to their trade dispute. Although Antigua was ready and willing to negotiate, the US did not make any material offers or concessions to Antigua and the negotiations quickly broke down. The US simply maintained that federal law totally prohibited all betting and gambling services that could be offered from Antigua to the US. On November 10, 2004, with negotiations having failed, the WTO released the Panel Report in favor of Antigua.
The Second Round (2004-2005): US Appeal to the Appellate Body is Denied.
On January 7, 2005, the US appealed the Panel Report to the WTO’s Appellate Body. Antigua proceeded to file its own cross-appeal on a number of technical grounds. Over the course of the next two months, the US and Antigua filed their respective submissions to the Appellate Body. The two countries then presented oral arguments to the Appellate Body on February 21, 2005. On April 7, 2005, the WTO issued the Report of the Appellate Body in this matter. The Report of the Appellate Body upholds the Dispute Panel’s Final Report, although on slightly different and narrower grounds. In its report, the Appellate Body made four key rulings:
First, the Appellate Body ruled that the US had made a commitment to free trade in betting and gambling services in its schedule of commitments to the General Agreement on Trade in Services (“GATS”). The US had contended throughout the dispute that it had not made such a “commitment.” The Appellate Body disagreed, holding that the commitment was made in Section 10.D of the US’s GATS Schedule, under the heading “Other Recreational Services (Excluding Sporting).”
Second, the Appellate Body ruled that the US had adopted “measures” that interfered with its obligation to provide free trade in betting and gambling services with Antigua. Specifically, the Appellate Body ruled that Antigua established the existence of three federal laws which prohibited Antigua’s gambling services: (1) the Wire Act of 1961, 18 U.S.C. §1084 (“Wire Act”); (2) the Travel Act, 18 U.S.C. §1952 (“Travel Act”); and the Illegal, 18 U.S.C. §1955 (“IGBA”). Antigua had sought to have more federal and state laws considered “measures” that violate the US’s GATS commitment. Antigua listed a large number of other federal and state laws that it contended were measures in this case. Antigua also contended that the US maintained a “total prohibition” against the supply of gambling services from Antigua, and that this “total prohibition” was itself a measure. The Appellate Body disagreed with these additional arguments, finding that the other list of federal and state laws were not discussed in sufficient detail by Antigua in its submissions and that a “total prohibition” cannot serve as a measure by itself. The Appellate Body limited the offending “measures” in this matter to the three federal statutes listed above.
Third, the Appellate Body found that the “measures” established by Antigua – the three federal statutes – violated Article XVI of the GATS. Specifically, the Appellate Body found that the US prohibition limits service providers from Antigua in such a way as to violate Article XVI of the GATS.
Fourth, the Appellate Body found that the US could not invoke a “moral defense” to its violation of the GATS. Under Article XIV of the GATS, a country can violate the terms of the free trade treaty if the violation is necessary to protect “public morals” or maintain the “public order.” In order to establish its so-called morals defense, the US was required to meet a two-part test: (1) prove that the three federal statutes were necessary to protect public morals or maintain public order and (2) satisfy a legal balancing test, referred to as the “chapeau.” With respect to the first element of this morals defense, the Appellate Body determined, over Antigua’s objections, that the three federal statutes were necessary to protect public morals or maintain public order. With respect to the second element of this defense, the Appellate Body ruled that the US did not establish the chapeau. The Dispute Panel had found several reasons why the US could not meet the chapeau. The Appellate Body disagreed with the Dispute Panel’s reasoning, but nevertheless ruled that the US could not establish the chapeau because the US either sanctioned or permitted “remote gambling” in the US, primarily in the form of off-track account wagering on horse races. The Appellate Body noted that there were several companies in the US that provided telephone and Internet betting services on horse races. These companies were sanctioned to provide these services by the Interstate Horseracing Act (“IHA”). The Appellate Body concluded that the US could not justify why it permitted US-based companies to offer remote gambling in the form of telephone and Internet account wagering while the US prohibited Antiguan companies from offering the same type of gambling services. By making this finding, the Appellate Body held that the US could not prevail on its morals defense – technically known as its Article XIV defense.
Whereas the Dispute Panel Report was a clear defeat for the US, the Appellate Body’s ruling was ambiguous in a number of material respects. Antigua immediately hailed the decision as a confirmation of its original victory, but conceded that the language of the report probably meant that the US could bring itself into compliance with the GATS in one of two ways – either by (i) allowing Antiguan operators access to the US market or (ii) prohibiting all forms of remote gambling in the US-whether domestic or foreign and whether intrastate or cross-border. The US jumped upon the lack of coherency of the Appellate Body decision to itself claim victory in the matter, publicly asserting that the WTO had held the US entitled to maintain the illegal laws under the “morals defense”, but that it just had to “tweak” the IHA to make things somehow “clear”. The indecisiveness and ambiguity of the Appellate Body’s report combined with the desire of the US to claim victory led to much confusion as to what the decision really meant. It took some time before Antigua’s interpretation of the decision was confirmed correct – but it was.
The Third Round (2005): Arbitration Over the Amount of Time for the US to Comply with the Appellate Body’s Ruling. Under WTO rules, the US had a “reasonable period of time” to correct its offending laws. The parties were unable to agree on what the period should be and so under the rules had to request arbitration to set the compliance period. In 2005, the Arbitrator issued a ruling in which he gave the US a little less than a year to comply, and this period passed on April 3, 2006 without any laws being adopted by the US to implement the rulings.
After the compliance period passed, the US submitted a status report to the WTO, saying that it was in compliance with the prior rulings based solely upon a statement of the US Department of Justice in which it said it “views the existing criminal statutes as prohibiting the interstate transmission of bets or wagers, including wagers on horse races. The Department is currently undertaking a civil investigation relating to a potential violation of law regarding this activity. We have previously stated that we do not believe that the Interstate Horse Racing Act . . . amended the existing criminal statutes.”
The US further told the WTO “in view of these circumstances, the US is in compliance with the recommendations and rulings of the [WTO] in this dispute.” Antigua expressed its disagreement with the US’ claim, noting that the quoted statement was just a restatement of one of the arguments made by the US to the panel and the Appellate Body during the course of the original proceedings.
The Fourth Round (2006-2007): WTO Compliance Panel Finds the US Has Failed to Comply. In June 2006 Antigua again sought recourse under WTO rules by requesting consultations with the US over the US’s failure to comply with the original rulings. Again, these consultations did not result in agreement so on July 6, 2006, Antigua requested the establishment of yet another WTO panel to resolve this latest disagreement. In this next round of proceedings, Antigua advanced the straightforward argument that since the US had done nothing at all to come into compliance with the rulings, it could not, therefore, be in compliance. The US returned with the incredible claim that it actually was in compliance, and that what the WTO had really asked of the US was for it to convince this new “compliance” panel that the three laws were not in fact “disguised restrictions on trade” so that the US would, in its view, thus be entitled to the “morals defense” after all. In its report, issue March 2007, the Compliance Panel made three major findings in favor of Antigua:
The US had taken no action to comply with the rulings and thus remained out of compliance;
The US was not entitled in to reargue the case that failed before the first panel and the Appellate Body; and
Even assuming that the US was entitled to reargue its failed case, based upon the evidence presented the US “morals defense” case would still fail.
As a result of the Compliance Panel decision Antigua became entitled to impose trade sanctions against the US to “encourage” the US to meet its international trade obligations to Antigua. The Compliance Panel decision also made it impossible for the US to continue to maintain the pretense that it had somehow “won” the dispute or that the WTO had ruled that the US was entitled to prohibit the provision of remote gambling services from Antigua.
The Fifth Round (2007): The United States Attempts to Withdraw Its Gambling Commitment, But the Process Remains In Doubt. In the face of this clear and comprehensive victory for Antigua, rather than deciding to come into compliance with the rulings or to settle with Antigua, the US took the unprecedented step of declaring that it was going to withdraw the original commitment to allow the cross-border provision of gambling and betting services that had resulted in the adverse rulings in the first place. While there is a provision of the GATS that allows the withdrawal of a commitment, it has never before been used as a means of settling an adverse WTO ruling.
Under WTO rules, before the US can withdraw the commitment, it must find means of compensating “any affected” WTO members as a result of the withdrawal of the commitment. If the parties cannot agree on the “compensation”, then there is a procedure for arbitration of any dispute in that context. As this provision has never been used before, and never taken to arbitration, immense uncertainty exists as to what kind of “compensation” or “compensatory adjustments” complaining members are entitled to. As a result of the US announcement, in addition to Antigua, the EU, Costa Rica, Canada, Macau, Canada and Australia filed claims for compensation with the US. As of today, all of these countries, including Antigua, continue negotiating with the US over this issue. It must be said that the considerable uncertainty surrounding the proposed withdrawal continues and it is virtually impossible to predict how this will play out in the coming months.
The Sixth Round (2007): Trade Sanctions Against the US Heard by Arbitration Panel, As Antigua is Entitled to the “Suspension of Concessions or Other Obligations.” Antigua has submitted a request to level concessions against the US – to offset the economic effect of the continuing failure of the US to comply with the rulings and allow Antiguan operators access to American consumers. In determining what concessions to impose, Antigua is entitled to ensure that they be a “practical and effective” way of inducing US compliance. Antigua has requested approval to achieve its concessions by suspending up to $3.4 billion annually in intellectual property rights with respect to American copyrighted and trademarked products under the WTO’s intellectual property rights agreement, or “TRIPS”. A decision by the Arbitrators is anticipated by the end of November 2007.