The WTO Gambling Dispute: Antigua Mulls Retaliation as the U.S. Negotiates Withdrawal of its GATS Commitments

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Date: 
April 8, 2008
Volume: 
12
Issue: 
5
By: 
Simon Lester

Introduction

The WTO Gambling dispute between Antigua and the United States has evolved from what some considered to be an obscure, long-shot complaint by one of the smallest countries in the world into a primer on some of the most important and controversial substantive and procedural issues in WTO law. This International Economic Law ASIL Insight offers a general overview of the dispute, explaining each stage and highlighting the key issues, with a focus on the most recent stages: (1) The request by Antigua for suspension of concessions and other obligations and the resulting ruling, and (2) the U.S. decision to modify its GATS Schedule to remove gambling services from the scope of coverage. As explained below, both of these controversial developments are well under way and are likely to unfold in the coming months.

The Original Complaint

Upon the conviction of a U.S. citizen, Jay Cohen, in the late 1990s for operation of online gambling web sites based in Antigua,[1] Antigua filed a WTO complaint against U.S. restrictions on cross-border trade in gambling services, in particular on "remote" gambling (such as that taking place over the internet). The Panel found that a number of the U.S. federal and state laws at issue violated the "market access" rules in Article XVI of the General Agreement on Trade in Services (GATS). It also found that these laws were not justified under the GATS Article XIV(a) defense for measures "necessary to protect public morals or to maintain public order," on the grounds that the U.S. failed to negotiate with Antigua in relation to the gambling restrictions.

On appeal, the Appellate Body narrowed this finding of violation to the federal laws only. With regard to Article XIV(a), the Appellate Body reversed the finding, concluding that the three federal laws were, in fact, necessary. Having found that the measures fell within Article XIV(a), the Appellate Body then considered whether they met the terms of the Article XIV chapeau, which requires that measures not be "applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services." On this point, the Appellate Body found that based on the existence of the Interstate Horseracing Act -- which Antigua alleged "permits the remote supply of gambling and betting services for horse races" -- the United States had not demonstrated that the three federal laws are applied consistently with the chapeau. On this basis, the Appellate Body rejected the Article XIV defense, and thus the violation of Article XVI could not be justified.[2]

Implementation and the Compliance Proceedings

Having been found in violation, the United States was required to bring the laws at issue into conformity with the GATS. The approach envisioned by the United States was to modify or clarify the relationship between the federal laws challenged by Antigua and the Interstate Horseracing Act. In the view of the United States, because the Article XIV defense failed solely on the basis of this Act, a modification or clarification to show that there was no exemption from the relevant laws for gambling on horseracing would mean that the United States now satisfied the terms of Article XIV, and thus any violation of Article XVI would be justified. However, while various government actors in the United States considered actions to be taken in this regard, ultimately nothing was done. As a result, on July 6, 2006, Antigua requested that a panel be established under DSU Article 21.5 to determine whether the United States was in compliance.

In the compliance proceeding, the United States did not argue that its measures had been brought into compliance, but rather contended that it should have the opportunity to re-argue its Article XIV defense. In a report issued on March 30, 2007, the Panel rejected this view. This compliance report paved the way for the current stage of the dispute, involving the following two issues. First, as a result of the compliance Panel finding, upon adoption of the panel report (there was no appeal) on May 22, 2007, Antigua could now pursue trade retaliation under Dispute Settlement Understanding (DSU) Article 22.[3] Second, for its part, the United States decided to withdraw its GATS commitments on gambling services pursuant to GATS Article XXI. These issues are discussed in the next two sections.

Trade Sanctions

On June 22, 2007, Antigua requested authorization from the Dispute Settlement Board DSB to suspend concessions or other obligations (that is, to retaliate against or "sanction" the United States), pursuant to DSU Article 22.2. In this regard, Antigua argued that it should be permitted to impose sanctions in an amount of US$3.443 billion. This figure was based on a consultant's report that estimated Antigua's lost gambling revenues as a result of the U.S. laws at issue. Importantly, Antigua argued that it should be able to "cross-retaliate" (i.e., suspend under an agreement other than the one at issue in the underlying complaint), by suspending obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The basis for this argument was that Antigua's economy was not big enough to allow for effective sanctions in the area of trade in services. According to Antigua, any sanctions it imposed would not affect the United States much at all, while at the same time causing great harm to Antigua's economy. Suspension of intellectual property protection, by contrast, could, in theory, provide an effective remedy, as the United States is one of the leading producers of intellectual property, in industries such as entertainment, software and pharmaceuticals.

The United States disagreed with the retaliation amount proposed by Antigua. According to the United States, the proper approach to determining the amount of "nullification or impairment" under DSU Article 22 is to begin with the US$47 million of Antiguan "other commercial service" exports in 2001, a figure taken from official WTO statistics, which includes gambling services. Then, the United States argued, because the basis of the rejection of the U.S. Article XIV defense was limited to certain statutory provisions related to remote gambling on horse-racing, that figure should be reduced in order to take into account gambling on horse-racing only. In this regard, the United States argued that horse-racing is 7% of the gambling market, so, based on the official statistics noted above, the maximum possible Antiguan horse-racing gambling service exports would have been US$3.3 million. Finally, because Antigua's gambling market share has fallen dramatically, due in part to competition in the market, the United States argued that the true damage faced by Antigua is US$500,000. In addition, the United States questioned the appropriateness of cross-retaliation under the TRIPS Agreement, arguing that Antigua had not justified this approach under the relevant DSU rules.

In a decision circulated on December 21, 2007,[4] the arbitrators hearing the case split on the key issue of how to determine the amount of nullification or impairment, with one of the arbitrators making a rare dissent. Two arbitrators agreed with the United States that the appropriate basis for assessing nullification or impairment was a "counterfactual" under which the United States "would provide unrestricted market access for remote gambling and betting services only in respect of horseracing gambling and betting." By contrast, a dissenter took the view that full market access in the cross-border provision of remote gambling services was the proper basis for this determination. In this regard, the dissenter explained that the overall conclusion of the Appellate Body was that the measures at issue, rather than simply the discriminatory treatment provided in respect of horseracing, were not justified under Article XIV. However, although the dissenter did not agree with the legal interpretation reached by the majority on this issue, he did not attempt to determine an amount of nullification or impairment based on his own approach. Instead, in the rest of the decision, he worked with the other arbitrators in calculating this amount based on their approach and in addressing the other issues that arose.

On the basis of the "counterfactual" used by the majority, the arbitrators found that the annual level of nullification or impairment of benefits accruing to Antigua is US$21 million. In addition, the arbitrators found that the Antiguan request for cross-retaliation under the TRIPS Agreement had been made properly, and it thus found that Antigua may seek to suspend obligations under the TRIPS Agreement (which has led some to brand Antigua as the "Pirate of the Caribbean.")

In a sense, the arbitration decision was a win for Antigua, as it has been given the right to retaliate against the United States, and, importantly, this right is in the form that it wanted, cross-retaliation under the TRIPS Agreement. However, the amount awarded was quite small, and thus any sanctions imposed may not have a great impact. Also, there may be legal restrictions imposed on the process of retaliation, such as limiting the violations of intellectual property rights to the Antiguan market and making sure that only intellectual property that is completely of U.S. origin is taken.[5] Moreover, practical considerations relating to suspending intellectual property protection, such as how to ensure that the amounts "pirated" are limited to the amount set out in the arbitration decision, might make retaliation under this provision difficult to implement. For these reasons, it is likely that the United States will challenge whatever actions Antigua might take in this regard. To date, Antigua has not requested authorization from the DSB to retaliate. However, it has recently emphasized that it is serious about moving forward with retaliation.

The Withdrawal of GATS Commitments

Just prior to the beginning of the DSU Article 22 proceeding, the United States opened another front in the dispute. On May 4, 2007, after circulation of the compliance panel report but before its adoption, the United States announced that it would withdraw the commitments it had made on gambling services,[6] pursuant to the GATS Article XXI procedures for the "Modification of Schedules."[7] Under Article XXI, a Member may withdraw specific commitments, but must negotiate with "affected Members" over "compensation" for the withdrawn commitments. This procedure has only been invoked one other time, in a situation involving re-negotiation of EU GATS commitments in relation to the enlargement of the EU. While technically within the rules, the U.S. withdrawal of GATS commitments in the face of an adverse dispute settlement ruling resulted in a number of accusations of bad faith.

Official documentation of this process has not been made publicly available, but according to press reports, in response to the U.S. announcement, eight WTO Members requested compensation: The EU, Japan, Canada, Australia, India, Macau, Costa Rica, and, of course, Antigua. Over the ensuing months, the United States was able to reach settlements with a number of these Members,[8] but not with Antigua. As of this writing, Antigua had not yet settled, and on January 28, 2008 Antigua requested arbitration with the United States pursuant to GATS Article XXI:3(a) in relation to the amount of compensation. Such an arbitration would be the first of its kind, and thus there is no direct guidance for its conduct. The standard terms of reference for Article XXI arbitrations provide that the arbitrator is "to find a resulting balance of rights and obligations which maintains a general level of mutually advantageous commitments not less favourable to trade than that provided for in Schedules of specific commitments prior to the negotiations."

Conclusions

The Gambling dispute has worked its way through many stages, and might now be winding its way towards the end. However, the ultimate resolution is still uncertain. As noted, Antigua has not yet requested DSB authorization to suspend its obligations under the TRIPS Agreement, but can do so at any time. With regard to the withdrawal of GATS commitments, it appears that the United States and Antigua are likely headed for arbitration on this matter as well. Ultimately, it may be that resolution of the dispute will not occur until a GATS Article XXI arbitration body establishes a new "balance of rights and obligations," through a determination of the appropriate amount and type of compensation the United States must provide to Antigua.

But regardless of this new complaint, the U.S. invocation of GATS Article XXI sends a clear signal that the United States is unlikely to relax its laws in this area in the near future. International trade obligations can be, and have been, effective in changing Members' laws, but given the nature of the rules in this area (in particular the possibility of withdrawal of commitments), and the sensitivity of the policy issues related to online gambling, it does not appear that WTO rules can force a change in the current legal situation. For that to occur, it may take a shift in public attitudes on gambling and/or a new group of U.S. law-makers.

About the Author
Simon Lester, a former Legal Affairs Officer at the Appellate Body Secretariat of the World Trade Organization, has taught courses on international trade law at American University's, Washington College of Law. He is co-founder of WorldTradeLaw.net.

About the International Economic Law Interest Group
The International Economic Law Interest Group promotes academic interest, discussion, research and publication on subjects broadly related to the transnational movement and regulation of goods, services, persons and capital. International law topics include trade law, economic integration law, private law, business regulation, financial law, tax law, intellectual property law and the role of law in development. Click here to learn more about the International Economic Law Interest Group.

Footnotes

[1] See United States v Cohen, 260 F. 3d 68 (2d Cir. 2001), cert. denied, 536 U.S. 922 (2002).

[2] For a more detailed discussion of the Panel and Appellate Body reports in the original Gambling complaint, see the ASIL Insights by Joost Pauwelyn on these reports: WTO Condemnation of U.S. Ban on Internet Gambling Pits Free Trade Against Moral Values, available at http://www.asil.org/insights/2004/11/insight041117.html; and WTO Softens Earlier Condemnation of U.S. Ban on Internet Gambling, but Confirms Broad Reach into Sensitive Domestic Regulation, available at http://www.asil.org/insights/2005/04/insights050412.html.

[3] As set out in a "sequencing" agreement between the parties. WT/DS285/16.

[4] Decision by the Arbitrator, United States - Measures Affecting the Cross-Border Supply of Gambling and Betting Services, Recourse to Arbitration by the United States under Article 22.6 of the DSU, WT/DS285/ARB, circulated December 21, 2007, available at http://www.worldtradelaw.net/reports/
226awards/us-gambling(226).pdf
.

[5] The Gambling arbitrators referred to the decision of the one previous Article 22.6 arbitration authorizing suspension under the TRIPS Agreement, which had made some remarks along these lines. Decision by the Arbitrator, European Communities - Regime for the Importation, Sale and Distribution of Bananas, Recourse to Arbitration by the European Communities, WT/DS27/ARB/ECU, available at http://www.worldtradelaw.net/reports/
226awards/ec-bananas(226)(ecuador).pdf
.

[6] The United States had argued that it had made no commitments, but as noted above, the panel and Appellate Body found otherwise.

[7] See USTR Press Release, Statement of Deputy United States Trade Representative John K. Veroneau Regarding U.S. Actions under GATS Article XXI, May 4, 2007, available at http://www.ustr.gov. This development had been anticipated in Joost Pauwelyn's ASIL Insight on the Panel report in this dispute. See footnote 2 above.

[8] See USTR Press Release, Statement by USTR Spokeswoman Gretchen Hamel on Gambling, December 17, 2007, available at http://www.ustr.gov.