WTO Softens Earlier Condemnation of U.S. Ban on Internet Gambling, but Confirms Broad Reach into Sensitive Domestic Regulation

As was widely expected, on April 7, 2005, the WTO Appellate Body substantially reversed an earlier Panel decision condemning a US ban on internet gambling.[1]

 

Both the Panel and the Appellate Body construed the U.S. ban as a restriction on trade in services covered by U.S. commitments under the General Agreement on Trade in Services (GATS). Yet, contrary to the Panel, the Appellate Body found that, with the exception of the potentially discriminatory Interstate Horseracing Act, this ban was justified as "necessary to protect public morals or to maintain public order."

 

Although the United States hailed this latest Appellate Body report as "an important victory,"[2] crucial Appellate Body findings may come back to haunt it.[3] The Appellate Body's broad interpretation of "market access restrictions" per se prohibited under GATS may threaten the validity of many domestic service regulations that were so far considered to be safe and subject only to future disciplines currently under negotiation. Even though it may take little for the U.S. to implement this ruling, the decision is likely to be of huge systemic importance.

 

In a textbook example of applying the Vienna Convention rules on treaty interpretation, the Appellate Body first confirmed the Panel's finding that the U.S. had, indeed, made commitments in the sensitive sector of gambling and betting services (although the U.S. schedule to GATS never said so explicitly). At the same time, the Appellate Body criticized the Panel for literal dictionary definitions as conclusive proof of "ordinary meaning" (Vienna Convention Art. 31.1) and confusing certain WTO documents as "context" or "subsequent practice" (Vienna Convention Arts. 31.2 and 3), while they were in fact only "supplementary means of interpretation" (under Vienna Convention Art. 32).

 

Having found U.S. commitments on gambling, the Appellate Body next confirmed that domestic regulation banning the remote supply of gambling services, be it domestic or from overseas, constitutes a per se prohibited market access restriction "in the form of numerical quotas." To do so, the Appellate Body stretched the explicit reference to "form" and "numerical" quotas (in GATS Article XVI:2(a)) to include also restrictions that merely have the effect of a quota. Hence, even a U.S. measure regulating how gambling services are to be supplied (e.g., face-to-face only, not remotely or over the internet), becomes a quantitative restriction simply because it has the effect of keeping out cross-border supplies of gambling services (in this case, those supplied over the internet from Antigua, the complainant).

 

Nevertheless, the Appellate Body was quick to justify this market access violation as a measure "necessary to protect public morals or to maintain public order" under GATS Article XIV(a). It referred to problems of money laundering, fraud, compulsive gambling and underage gambling that accompany internet gambling. Crucially, the Appellate Body rejected the Panel's finding that lack of prior negotiations with Antigua made the ban not "necessary" and confirmed that it was up to Antigua, as the complainant, to raise WTO-consistent alternatives to an outright ban (something that Antigua failed to do in this case).

 

Turning to the introductory paragraph or chapeau of Article XIV, the Appellate Body also disagreed with the Panel's finding that the U.S. enforced its gambling laws more strictly against foreigners than against U.S. suppliers. It did, however, confirm one other form of discrimination based on an apparent (but not decisively confirmed) authorization in the Interstate Horseracing Act permitting domestic, but not foreign, service suppliers to offer remote betting services in relation to certain horse races.

 

For all other purposes, the Appellate Body ultimately found that the U.S. gambling laws at issue were justified under the public morals exception in Article XIV, including its introductory paragraph.

 

Although the U.S., to implement this ruling, must simply clarify that its Interstate Horseracing Act does not permit remote gambling, the long term effects of this ruling lie elsewhere.

 

By broadly interpreting the per se prohibited market access restrictions exhaustively listed in Article XVI of GATS, the Appellate Body has considerably expanded the reach of GATS prohibitions from explicitly numerical, quantitative restrictions to include also substantive, qualitative regulations applied indistinctly to overseas and domestic suppliers. To give an example: So far, a driving test requirement to obtain a taxi license was presumed to fall under the (to date) very lenient provisions of Article VI of GATS on domestic regulation. Under the Appellate Body's logic, however, the mere fact that such a substantive driving requirement has the effect of lowering the number of foreign taxi drivers (i.e., keeps out those that fail the driving test), may transform the requirement into a per se prohibited market access restriction.

 

This may well mean that, with the stroke of a pen, the validity of scores of domestic services regulations, including those that are non-discriminatory, are threatened. It also raises the question of what current negotiations on disciplines for domestic regulations (under GATS Article VI) should be about. If many (perhaps all) of those regulations are already covered as market access restrictions, since presumably all of them have a quantitative effect on service supplies, what remains to be negotiate'[4]

 

This latest Appellate Body ruling should put all WTO Members on notice and induce them to re-read (and in some cases, re-negotiate) their schedules of GATS commitments. If not, more surprises lie just around the corner.

 

 

 

About the author

Joost Pauwelyn, an ASIL member, is Associate Professor of Law at the Duke University School of Law. From 1996 to 2002 he worked as a legal officer with the WTO Secretariat. He is the author of Conflict of Norms in Public International Law: How WTO Law Relates to Other Rules of International Law (Cambridge University Press, 2003).

 

Footnotes 

[1] Appellate Body Report on US - Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, circulated 7 April 2005. For a discussion of the Panel report, see my earlier ASIL Insight, 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.

 

[2] USTR Press Release, U.S. Internet Gambling Restrictions Can Stand as U.S. Wins Key Issues in WTO Dispute, April 7, 2005, available at www.ustr.gov.

 

[3] See, for example, the Press Release by Public Citizen (April 7, 2005, available at www.insidetrade.com) arguing that "[b]ecause GATS also prohibits government monopolies and exclusive provider arrangements, the ruling that gambling is covered by GATS puts state lotteries and Indian gaming compacts at risk as well."

 

[4] See Joost Pauwelyn, Rien ne Va Plus? Distinguishing Domestic Regulation from Market Access in GATT and GATS, available at http://www.law.duke.edu/fac/pauwelyn/pdf/RienNeVaPlus.pdf (forthcoming in World Trade Review July 2005).