Gambling Law Professor, Nelson Rose, Covers WTO & 2008

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The US And The Ongoing Mess With The WTO

Every time you think the Bush Administration could not make the mess in the World Trade Organization (“WTO”) over Internet gambling any worse, it rises to a new level of arrogance and incompetence.

By a series of astonishingly inept mistakes, the Bushies in charge of America’s foreign trade policies actually forced the European Union to file a claim against the US for $100 billion. They also forced the WTO to give Antigua the right to ignore trademark and copyright laws, creating a legal pirate for American music, videos and software.

One week, the U.S. Trade Representative announces the European claims have been settled. The next, it is revealed the settlement really does not change anything, in practice or in law. So, online gaming companies file another suit. Meanwhile, American poker players are left not knowing what they can legally do, or when the situation will be corrected.

The problem started when the US signed the GATS (General Agreement on Trade in Services) treaty in 1994, designed to limit trade barriers. Nations are not required to let in everything. Dozens of others specifically listed “gambling” as an item that they would continue to prohibit.

The problem for the U.S. is that gambling is considered so unimportant that the federal government sometimes does not even bother to outlaw it. When Antigua filed a claim against the US, asserting that American laws discriminate against its licensed online gaming operators, the Bush Administration looked at what the US had agreed to with GATS. Since “gambling” was not on the excluded list, they argued that “sporting services” includes gambling. Naturally, this did not work.

But a nation can keep out gambling for good reasons. The US raised the standard arguments: children, crime and compulsive gambling. The WTO did not agree that these problems really existed. But it did accept that the US had reasonable grounds for wanting to prevent people from being able to bet from their homes.

Except… if the US really was concerned with remote wagering, why had Congress passed the Interstate Horseracing Act (“IHA”)? The IHA expressly authorizes people to bet from their homes by phone or computer on horseraces, so long as they are in a state where it is legal to make such a bet and the race and horsebook are in states where it is legal to accept such a bet. There are times when lawyers know the law is simply against them, and that they are going to lose. This is when the US should have settled.

Instead, the Bush lawyers made the ridiculous argument that the Interstate Horseracing Act did not actually authorize interstate horseracing, and that the Wire Act still makes cross-border betting a crime. So, what does the IHA do? The Bushies asserted that it authorizes people to bet from their homes on horseraces in other states, but only with horsebooks in their own states.

The WTO said that is not what the IHA says on its face. So the US lost. In April 2005 the Appellate Body of the WTO issued its formal opinion, and gave the US one year to come into compliance with the GATS treaty.

The Bush Administration took that year, and did nothing. It never asked Congress to take the easy step of eliminating the problem by changing the Interstate Horseracing Act to the International Horseracing Act, to allow Americans to bet with Antigua ’s licensed horsebooks.

Instead, when the year was up, the Bushies went back to the WTO and said that the US is now in complete compliance… because we deserved to win in the first place! When a judge has issued a final ruling against you, you do not go in front of that same judge and make the same losing argument.

The WTO now took a year to find additional reasons for the losing. For example, the WTO turned the Bushies’ own argument against them, saying that it makes no difference whether the IHA allows out-of-state bets or not: The U.S. has conceded that people can make remote wagers from their homes on horseraces, so how can it say it is so afraid of remote wagers that it has to keep out Antigua’s licensed horsebooks? And, as long as we’re talking about people betting from home, how about all those states that allow remote wagering, not only on horseraces, but on dograces, lotteries, and even sports betting in Nevada? Now the US should settle. But no…

The Bush Administration did the single worst thing it could do. It unilaterally announced that it was withdrawing the commitment in the GATS treaty to let in foreign gambling.

The President probably does not have the power to change treaties like this. But, more importantly, the GATS treaty provides that a nation can change its commitments – but only if it pays every other country compensation. Under GATS, the US has now forced every other country to file damage claims against the

And they started pouring in. The $100 billion from the European Union was only a start. Claims came from China, Costa Rica, Canada and others. Making the same losing argument, again (I’ve lost count of whether this is the fourth or fifth time), the Bush Administration said no one deserved anything, since no one could have possibly thought the U.S. intended to let in foreign gambling.

Meanwhile, Antigua had won – and now wanted to collect. It started issuing online gaming licenses left and right, so that it could point to all the business that it was going to lose by the continuing to block its licensed operators.

Compensating Antigua created a unique problem. The WTO could not order the US to send Antigua a check. The normal remedy is to raise the prices of the offending country’s goods and services, so that the victim country’s businesses will have a competitive advantage. But Antigua ships almost nothing to the US. And raising the cost of American products would actually hurt the residents of Antigua, because they buy almost everything from the US.

Since the US continued to ignore the WTO’s rulings, it was decided that something was necessary to get the Bush Administration to pay attention. How about allowing Antigua to freely and legally violate American trademarks and copyrights?

Imagine being able to legally buy a DVD of a movie that is still in the theaters for $2. Or upgrade Windows for $3. About the only good news for the US is that the WTO rejected Antigua ’s claim for $3.4 billion, instead awarding only $21 million per year. This is still more than the $500,000 the US offered. The $21 million is probably close to being right.

Antigua wanted compensation for all forms of online gambling. But, the WTO has consistently said that the US is discriminating only with the IHA, and therefore only with remote wagers on horseracing. Obviously, the US should now cut a deal. Instead, the Bush Administration has warned Antigua to not start its authorized piracy. The argument, which I can’t begin to fathom, is that the US does not owe any compensation, because it has changed its GATS commitment and is no longer obligated to let Antigua’s licensed horsebooks take bets from the US.

But the US owes Antigua compensation either way, for not fulfilling its obligation or for changing its commitment. The U.S. Trade Representatives are busy trying to settle the claims they forced other countries to file. Secret deals were announced with Canada, Japan, and Australia. Then came the announcement of a settlement of the European Union’s claim for $100 billion. The US would ease restrictions on warehousing, technical testing, research and development, and postal services relating to outbound international letters.

Only two problems: There are almost no such restrictions. DHL, a foreign carrier, already competes against Fed. Ex. and UPS in the US, and the postal service already gives the mail to foreign services. And, once again, the President does not have the power to change laws and treaties. Congress has to agree, and it is on winter recess.

For the Internet gaming community, the settlements by the US bring no satisfaction. The Remote Gambling Association, which represents the largest interactive gaming companies in Europe, has filed a claim under a provision of the European Union’s Trade Barriers Regulation. It, of course, wants the US to open its borders to foreign, licensed operators. But, that is not going to happen.

However much the Bush Administration has screwed up this one, a few points remain clear. The President is taking the position that the US has withdrawn its obligation under GATS to let in foreign Internet gambling. Right or wrong, there is nothing that anyone, including Congress, will be able to do until Bush leaves office in January 2009.

This means the federal Department of Justice (“DOJ”) is going to continue to harass foreign operators and American advertisers. It just announced that it convinced Google, Microsoft and Yahoo to agree to pay $31.5 million in fines to settle claims that they had promoted illegal gambling by running ads on the Internet.

Significantly, the DOJ announced that the fines were “for corporate conduct the government found in violation of the Federal Wire Wager Act, federal wagering excise tax laws, and various states’ statutes and municipal laws prohibiting gambling.” This is the first time the DOJ has said that is going to use the laws of states, cities and counties against operators and their advertisers. This would make it easier to go after poker operators. Prosecutors have problems using federal law, particularly the Wire Act, against anyone but sports books. But every state and municipality has laws on the books against “gambling.”

The DOJ is sending a message to affiliates: Be afraid. Be very afraid. The DOJ wants regular players to get the same message. But, most online poker players understand that there are no federal laws affecting them, and in the states where making bets is a crime, no one is going to go to jail for playing poker on the Internet.

What’s Happening at the Moment

Meanwhile, federal regulators are looking over the comments received on the proposed regulations restricting money transfers for Internet gambling. So many problems have been pointed out, that I would not be surprised if they spent a few months and then issued a whole new set of proposed regulations. The problem here is an unworkable law, the Unlawful Internet Gambling Enforcement Act. The Act requires banks and others to identify and block funds for illegal online gambling. But banks have no way of knowing whether a transaction is legal or not.

For online poker players, then, the world remains the same. Those overseas operators that are taking bets from the US will continue to do so. The only chances for American-based Internet poker is intra-state and inter-tribal. Even if a political compromise can be reached, it will take months for a state like California to get a statute approved. Tribes might set up online poker, but players would have to go onto tribal land to play.

It will remain difficult to get money to and from an online poker site. U.S. and large foreign banks are not going to allow their credit cards to be used, even for 100% legal gaming. But other companies that can transfer money, especially those overseas, are seizing the opportunity. And despite the threats, there is not a lot the DOJ can do.

Online poker players can only hope that Congress will fix this mess after the 2008 elections. And we better get a President who appreciates legal gaming. Doesn’t Obama play poker?

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© Copyright 2008. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com