Appellate Body Decision on the US-Gambling Case

On April 7, the WTO Appellate Body published its decision on the US-Gambling case. In November, 2004 a panel had largely ruled in favour of a complaint by Antigua-Barbuda that US federal and state laws prohibiting cross-border gambling violated US commitments under the General Agreement on Trade in Services (GATS).

The immediate ramifications for the US stemming from the Appellate Body decision require the US to change some of its gambling laws. While the Appellate Body concluded that US federal laws violated US GATS commitments, they decided they were mostly justifiable as 'necessary' protections for public morals and public order. But because the Interstate Horse Racing Act seems to permit domestic but not foreign suppliers to provide remote betting services, the Appellate Body found that in this regard US federal laws appear to discriminate against foreign suppliers of gambling services. To bring its laws into conformity with the Appellate Body decision, the US will have to revise this Act.

However, the longer term ramifications of the Appellate Body decision are much broader. The Appellate Body agreed with the panel that the US had, in fact, made a commitment of gambling services despite protests from US officials that they had never intended to do so. The US attempted to claim that the meaning of the categories it used for its services commitments were not the same as the ones used by most WTO members, which are the WTO Secretariat's categories supplemented by more specific UN classifications - the 'CPC codes'. The Appellate Body ruled, however, that 'notwithstanding the absence of CPC codes in the United States' Schedule', that the US commitment for recreational services corresponds to 'Class 964 of CPC, along with its sub-categories' (paragraph 205 of the decision).

Since one of the sub-categories in UN 964 is gambling, according to the ruling the US effectively has made all of its gambling regulations subject to the GATS. Internet gambling regulations are not the only ones affected by the Appellate Body's conclusion that the US has committed gambling. Regulations over casinos, state lotteries, racetracks and slot machines, activities all based entirely within US borders, are subject to the US obligation to provide market access for and national treatment of 'commercial presence' trade in gambling services. Local regulatory bans or restrictions in these areas would be very hard for the US to defend at the WTO because it argued in its case with Antigua that remote gambling poses exceptional problems not faced with 'bricks and mortar' operations. In addition, state monopolies over lotteries appear to be a clear violation of market access commitments not to maintain limitations in the form of monopolies. Indian tribe casino licenses appear to be a clear violation of both national treatment and the market access prohibition on 'exclusive service suppliers.'

This conclusion that the US schedule of commitments corresponds to WTO and UN codes unless deviations are explicitly identified means the US is open to more challenges where the UN codes can now be read into the US schedules. For example, the US administration is currently trying to prohibit cross-border sales of pharmaceuticals. Yet using the UN codes to interpret the US retail commitments, the US has committed 'Retail sales of pharmaceutical and medical goods and cosmetics' - UN Class 6321. According to the Appellate Body's reasoning in US-Gambling, the US cannot prohibit cross-border trade in this class of retail services without violating its GATS commitments.

The Appellate Body's decision needs to be thoroughly understood not only by the US but also by all WTO members, since they are in the midst of negotiations to expand their GATS commitments and are under pressure to deliver up significant new concessions by May 2005. Two GATS panels and now the Appellate Body have concluded that a violation of market access does not have to take a specific form such as a quota, despite wording that would lead to a contrary conclusion in the actual agreement. The Appellate Body stated: 'we are satisfied that a prohibition on the supply of services in respect of which a full market access commitment has been undertaken is a quantitative limitation on the supply of such services.'(para. 250)

By concluding that a ban on a service is equivalent to a 'zero' quota, the meaning of GATS market access has been interpreted very broadly. Wherever countries have made full market access commitments, any prohibitions they impose - eg. bans on the dumping of toxic wastes - are equivalent to a zero quota and a violation of market access. This interpretation of market access is a severe constraint on the regulatory authority of WTO members.

Despite these findings, US officials characterized the Appellate Body's decision as a win for the US because it overturned the panel on a number of grounds. The Appellate Body did reverse the panel's conclusions that:

• Antigua had made a specific enough case against state laws to warrant the panel ruling on their compliance with US GATS commitments;
The US had an obligation to consult with Antigua on alternative measures under the 'necessity' requirements defined in the GATS exceptions article (Article XIV.)The US had failed to meet its burden of proof under the Article XIV requirement that to qualify as an exception, regulations be applied in a discriminatory way.

But these positive findings for the US were based on the inadequacy of Antigua's arguments rather than the fundamental GATS compliance of US regulations on cross-border gambling. In contrast with what press reports are saying about the decision, the Appellate Body did not conclude that state prohibitions on Internet gambling complied with the GATS, only that Antigua failed to make a case that addressed them specifically. When it ruled on the necessity of US federal regulations, the Appellate Body faulted Antigua for not proposing a 'reasonably available alternative measure' to the US ban on cross-border gambling. When it ruled that discrimination in the application of US federal law generally had not been proven, the Appellate Body said that the cases cited by Antigua were inadequated, requiring more evidence to be put in 'their proper context.'(para. 356).

The Appellate Body's reasoning for these conclusions suggests that, unlike the tiny island of Antigua, a WTO member with more significant resources might successfully challenge US federal and state prohibitions on cross-border gambling.