Summary of the Case By Mark E. Mendel, Lead Counsel to Antigua.

Antigua - United States WTO Internet Gambling Case

"United States — Measures Affecting the Cross-Border Supply of Gambling and Betting Services" (WT/DS285)

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 WTO Ruling in Favor of Antigua: the Dispute Panel Report. 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 an international trade treat, the General Agreement on Trade in Services ("GATS"). The 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 in good faith, the US did not make any material offers or concessions to Antigua and the negotiations quickly broke down over the course of the summer of 2004. 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 WTO Appeals Process: On January 7, 2005, the US appealed the Panel Report to the WTO's Appellate Body. Antigua proceeded to file its own counter-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.

The Second and Final WTO Ruling in Favor of Antigua: the Appellate Body Report. 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 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 Illega Gaming Business Act, 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 some of 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 deposit 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 deposit 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.

The Compliance Period. The US has been given until April 3, 2006 to bring its "offending measures" - the Wire Act, the Travel Act and IGBA -- into compliance with the Appellate Body Ruling.

The US contends that it can come into compliance by merely tweaking or clarifying the relationship between the IHA and the Wire Act. The US takes the position that the Wire Act (a criminal statute) makes it a criminal offense for companies to engage in remote wagering on horse races, even though the clear language of the IHA (a civil statute) says otherwise. The US seems to be taking the position that Congress can clarify the Wire Act and/or IHA to make it clear that account deposit wagering is illegal and must cease. Gambling experts and commentators are divided on whether the US will be able to close down the successful US-based companies that offer account wagering on horse races. The companies that allow such wagering include www.Youbet.com and www.CapitalOTB.com. In addition, several states, including New York, California and Oregon, specifically sanction telephone and Internet wagering on horse races. The question becomes whether the horse racing industry and its lobby can prevent federal legislation that will close the "loop hole" that permits online and telephone horse wagering.

While the US contends it must merely crack down on US-based remote horse race wagering, the US is apparently ignoring other forms of remote wagering that are sanctioned and flourishing in the US. As long as the US permits forms of remote gaming for its domestic industry (such as online sports books in Nevada), it cannot discriminate against Antigua providers of similar services.

What Does the WTO Ruling Mean? The WTO ruling is very important because, among other things, it (1) legitimizes the off-shore sports and casino industry as providing a tradeable service recognized by the WTO; (2) provides a continuing forum for US-Antigua negotiations on the provision of remote wagering by Antiguan operators in the US gambling market and (3) it places international pressure on the US to comply with the WTO ruling.

This is a landmark victory for Antigua as the first, and smallest, WTO member to defeat the US, the largest member, in this well-respected international trade court. "The impartial dispute resolution machinery of the WTO has functioned as we had expected," says Mark Mendel, lead legal counsel for Antigua's case. The WTO ruling is anticipated to pave the way for new financial and media opportunities for Antiguan gaming operators. Previously US companies such as Citibank, Chase Manhattan, Bank of America, Clear Channel Communication, Discovery TV, Yahoo and MSN were discouraged from conducting financial transactions or broadcasting advertisements involving online gaming products. The WTO determination is expected to end subpoenas or threats of prosecution from the federal government to US companies who choose to do business with Antigua offshore gaming companies.

The US now faces compliance issues that will require the federal government to thoughtfully address its approach to on-line gaming rather than simply prohibiting it altogether. "At the end of the day," said Mendel, "we expect that major internet search engines, including Google and Yahoo, financial institutions and credit card service providers will be required to accept transactions and advertising from Antiguan internet gaming sites as they do currently with US gaming interests, including hundreds of American casinos and state lotteries."

Will the US Comply with the WTO Ruling? The US has sent mixed messages whether it will comply with the WTO ruling in this case. As a general matter, President George W. Bush has made it a priority of his administration for the US to comply with rulings of the WTO. In response to the issuance of WTO trade sanctions against the US in another matter, President Bush said, "We've worked hard to comply with the WTO. I think it's important that all nations comply with WTO rulings. I'll work with Congress to get into compliance." Yet in its initial response to the Antigua WTO ruling, the US Trade Representative stated that the US Trade Office “would not ask Congress to weaken U.S. restrictions on Internet gambling" as ordered by the WTO Appellate Body in its report.

Antigua's Legal Counsel and Points of Contact: Antigua was represented by a team of attorneys in this case from two separate firms, Mark Mendel and Robert Blumenfeld of the law firm of Mendel · Blumenfeld, LLP (with offices in both Texas and Ireland), and Craig Pouncey and Lode Van Den Hende from the Brussels office the London-based firm of Herbert Smith. For further information about this case, please contact the attorneys or Jools Moore of Its a Media Thing: +44 (0) 207 395 0500 . From the US to the UK: 011 44 207 395 0500; e-mail jools@itsamediathing.co.uk