Internet gambling case ruling important for future GATS disputes

Geneva, 17 Nov (Chakravarthi Raghavan) - The ruling by a three-member WTO panel on the dispute between Antigua and US under the General Agreement on Trade in Services (GATS) on the remote supply of gambling and betting services, will provide some important guidance in future disputes relating to mode 1 supply, specific commitments of Members and how they are to be interpreted, and need for prior consultations before unilateral modification of specific commitments.

The panel ruling and conclusions were briefly reported in SUNS #5686.

This is the fourth WTO dispute case involving the General Agreement on Trade in Services GATS), but is the first where the basic structure of the GATS and several of its important provisions have come up for interpretation. If the interpretations are not over-turned by the Appellate Body (AB), the ruling will become important in future disputes relating to the GATS - even if public perceptions of this case and the panel ruling is affected by the fact that it relates to Gambling and Betting Services.

Antigua and Barbuda raised the dispute in March 2003, and held unsuccessful consultations with the US. At Antigua’s request, the DSB set up a panel on 12 June 2003, and the panel was constituted by the WTO Director-General on 25 August 2003 - with B.K.Zutchi as chairman, and Virachai Plasai (Thailand) and Richard Plender (UK), both lawyers, as members. The final report was issued to the parties on 30 April 2004, but its publication and circulation was held up as the two sides tried to settle. But it failed, and the report was finally published on 10 November.

Gambling and betting games are available commercially in the US and elsewhere. The legal commercial gambling industry in the US is a multi-billion dollar one - with gamblers in the US estimated to have wagered more than $630 billion annually in state-sanctioned gambling activities and losing $50 billion in the process.

Apart from the commercial gambling industry, where governments are heavily involved and use it for raising revenues, there is considerable illegal gambling. The largest gambling companies in the world are said to be of US origin and many with overseas interests - using sophisticated computer technology to control and monitor overseas operations.

The panel in a sense went into uncharted territory, though the Chairman of the panel, Amb. B. K. Zutchi (former Indian ambassador to the GATT from 1989 to 1994) was one of, if not the most important, negotiator among developing countries - coordinating and consulting with them and getting technical assistance and advice for developing countries.

Canada, the EC, Japan, Mexico and Chinese Taipei appeared as third parties, confining their presentations mainly to the GATS provisions and issue of specific commitments and how these are to be interpreted.

Among the important issues that came up for ruling by the panel are:

First, the status of the 1993 scheduling Guidelines and W/120 - documents providing the “context” (under the Vienna Convention on the Law of Treaties) for the interpretation of the specific market access commitments entered into in terms of Article XVI of the GATS and inscribed in a country GATS schedules.

If the Appellate Body (AB), functioning as it seems to like the Star Chamber in medieval England, does not upset it, the panel’s findings and the reasonings behind it will be important in future GATS disputes.

Second, the GATS provides for four Modes of delivery for ‘trade in services’, and this ruling provides an important interpretation of Mode 1 -         ‘from the territory of one member into the territory of another member’. This mode has now become important because of technological developments.

This will be important for developing countries - given the growing volume of the services trade in this mode - including services that are now ‘outsourced’ and delivered over the internet and for which many developing countries have set up the facilities.

Third, the ruling also gives an interpretation of Art. XVI of the GATS - the link between paragraph 1 of this Article and paragraph 2 and its various sub-paragraphs - particularly the kind of restrictions that may or may not be placed against supply of services in some sectors or sub-sectors and on which there are specific commitments by a member.

Fourth, the panel has provided an interpretation of Article XIV of GATS, the general exceptions clause, the GATS equivalent of Article XX of the GATT.

Drawing on some of the rulings and views of the AB in disputes involving GATT Article XX (and in some of which the AB has in fact hinted at its applicability to GATS with similar language), the Zutchi panel has held that in GATS too, in invoking Art. XIV to over-ride specific commitments in a country’s schedule, there is an obligation to consult with the other party or parties to find a less trade-restrictive way than an outright ban.

The panel has based its ruling on this last - about obligation to consult before imposing the restrictions - as arising from both GATS provisions and the way the US scheduled its commitment.

After the interim ruling, and then handing down of the final ruling, the United States has unleashed a propaganda war of sorts against the ruling on the ground that the panel has created a new rule for prior consultations before invoking Article XIV to find a less trade-restrictive way.

Any reading of the ruling shows how little factual basis the US has in its tirade - as if the panel and the WTO want ‘gambling’ or encourage ‘money-laundering’. In the long-run the US attempt (part of the Bush administration’s unilateralist view of the world?) will be counter-productive and only result in damaging the WTO.

The US has benefited the most from the WTO visasvis the developing world: all WTO instruments, including dispute settlement provisions, have proved invaluable to the US in ensuring that developing countries, though unable to enforce their own rights against the powerful, still comply with obligations undertaken under US pressures in the Uruguay Round (UR).

In announcing that the US would appeal the ruling (and hopes to get it reversed), the USTR has used some hard language to hit the panel for having concluded that the US (even if inadvertent), had committed itself to Mode 1 supply without any restrictions in respect of ‘Gambling Services’. In a statement circulated here by its Mission to WTO, the US has argued that throughout its history it has had ‘restrictions’ on gambling, like many other countries, and that “it defies common sense” that the US would make a commitment to let international gambling operate within US borders.

The statement also took umbrage with the panel for saying that the US should have explored with Antigua international cooperative arrangements to find a least trade restrictive solution other than an outright ban.  The panel was accused of creating ‘new legal theory’ to restrict the right of Members to exercise their right to regulate, and conduct international consultations before acting to protect public morals and public order.

However, the panel has not created or read into the GATS provision a new requirement, but rather has found that, in this particular case, it arises from the wording of the US commitment entered in its schedule, which unambiguously said ‘NONE’ on market access or national treatment conditions for mode 1 delivery of ‘Other recreational services (except sporting)’ a sub-sector category that includes ‘Gambling and Betting Services’, according to the classification provided in a secretariat document drawn up during the UR negotiations at the instance of the membership. The scheduling guidelines clearly said that members could either refer to this classification or set out clearly the actual sector or sub-sector of service where they were making a positive market access commitment and set out the limitations.

The panel in fact has merely followed the thinking and logic of the AB in disputes, involving virtually the same language in respect of exceptions under GATT Article XX.

In this regard, the panel has made clear that the obligation to consult flows directly from the market access commitment, even if there is no such explicit obligation under Article XIV. As long as there is a commitment, there is an obligation to consult to explore the possibility of WTO-consistent alternative to meet a policy objective under Article XIV, the panel says.

Citing (in paras 6.523-6.525) Antigua’s claims of futile efforts to consult with the US and invitation to the US to pursue international cooperation methods to meet US particular concerns (arising from issues of public order and morality), the panel has said (para 6.527) that it has concluded that the US has made a “full market access commitment” in its Schedule for gambling and betting services for mode 1, and the principle of effective treaty interpretation required “meaning and effect” being given to this commitment, “regardless of the motivation behind that”.

The panel adds: “In our view a full commitment in respect of market access in a Member’s schedule for a particular mode of supply creates legitimate trade expectations, and thus, obligations with respect to the committed sector.” Article XIV allows members to derogate from their obligations under GATS, subject to the conditions stipulated in that Article. Under Art. XIV (a), the challenged measures must be “necessary” to protect public morals and/or public order.

“Based on Appellate Body decisions, we believe that a key element of the application of the ‘necessity’ test... in this dispute, is whether the US has explored and exhausted reasonably available WTO-consistent alternatives to the US prohibition on the remote supply of gambling and betting services that would ensure the same level of protection.”(para 6.528).

It is in this context, that Antigua’s invitation to the US to engage in consultations and/or negotiations on the particular concerns associated with the remote supply of gambling and betting services identified by the US is relevant, says the panel. “Through bilateral and multilateral consultations and negotiations, Members may be able to determine whether their concerns can be adequately addressed in a WTO-consistent manner.  In this case, we note that a Mutual Legal Assistance Treaty exists between Antigua and the US, that could be the framework within which such consultations could take place.”

On the US view that consultations would not have been ‘fruitful’, the panel observes that despite this view, the US “cannot prejudge” that the situation would remain unchanged in the future.

“The US obligation to consult with Antigua before and while imposing the prohibition on the cross-border supply of gambling and betting services derives from the fact that it has undertaken a specific market access commitment for mode 1. More specifically, it is because of the existence of this specific market access commitment.... that the US remains obliged to consider WTO-consistent alternatives, including those that may be suggested by Antigua and other Members, before and while maintaining its prohibition on the cross-border supply of gambling and betting services.

“In rejecting Antigua’s invitation to engage in bilateral or multilateral consultations and/or negotiations, the US failed to pursue in good faith a course of action that could have been used by it to explore the possibility of finding a reasonably available WTO-consistent alternative.”

The US has argued that the panel should have merely referred to the dictionary meaning of ‘gambling’, and not looked at the WTO secretariat document of services classification in sectors and sub-sectors or the guidelines.

Observers and experts note however that if one were to go merely by the dictionary meanings, and the implications in mode 1 delivery in terms of maintaining ‘ordre public’ or ‘morality’, even such aspects of modern capitalism and globalization - cross-border stocks, bond or currency trading and trading in derivatives, and through internet communications, would come under that. For it would be an activity involving the ‘staking of money’ in support of an outcome (say prices of stocks, bonds or currency going up or down), and over which the ‘stakers’ have no control, and which are forfeit (paid or lost to the other party) when the outcome is known.

Nevertheless, for the US ‘sporting’ includes ‘gambling’ and it argues that it has excluded ‘sporting services’.

But the panel has noted the meanings in various dictionaries, including in French and Spanish, to conclude that the ordinary meaning of sporting does not include gambling; the panel has fallen back on the ‘supplementary means of interpretation’ (as required under the Vienna Law of Treaties), to look at the context (in relations to the scheduling of specific commitments); and the 1993 Scheduling Guidelines and the W/120 the secretariat document in the UR put together at request of the members in listing the various sectors and sub-sectors of service activities (based on the Central Product Classification used by international and multilateral institutions for statistical purposes).  Both these were drawn up in parallel with the texts of the GATS articles. Though not part of the GATS, the scheduling guidelines and the W/120 were part of the preparatory work for GATS.

In cover notes to its conditional offers, and its draft Final Schedule in December 1993 (when the negotiations were officially concluded), the US repeatedly said that “except where specifically noted, the scope of the sectoral commitments of the US corresponds to the sectoral coverage in the Secretariat’s Services Sectoral Classification List (...W/120).

The panel said the subsequent activity in early 1994 - verification of schedules - (where this cover note disappeared) was not meant for any modification of schedules, and the scope of the negotiations could not be modified unilaterally after 15 December 1993, when the negotiations were concluded.

The US International Trade Commission, in its own pronouncements, understood the term ‘other recreational services’ to include ‘gambling services’.

As a result, the panel (para 6.134) found that “the US schedule includes, under sub-sector 10.D. entitled ‘other recreational services (except sporting)’ specific commitments on gambling and betting services.” The panel then comments (in paras 6.135-6.138), on the US view that it could not have scheduled ‘gambling and betting’ services given the long domestic history of heavy regulation.

The panel has shown some sympathy (though others will view it as unwarranted for reasons set out later in this analysis), for the US views before the panel that the US commitment on gambling services by mode 1 without any restrictions (the US has used the term ‘None’) was inadvertent.

In fact, the US contended before the panel (set out by the panel in paragraphs 6.135 and 6.136 of the report) that the US did not and indeed could not have scheduled a commitment for gambling and betting services given the long legislative history of tight regulation of these services.

The US argued before the panel that “it would have been incomprehensible” for the US to make this specific commitment, “given the over-riding policy concerns surrounding these services, which are reflected in the extremely strict limitations and regulations of these services.... In fact, in view of these concerns, and the numerous bans or restrictions and strict controls on gambling, it would be surprising to find that the US did schedule such a commitment.”

In its comments (para 6.136), the panel notes that the US has repeated several times in these proceedings that the US did not intend to schedule a commitment for gambling and betting services. The panel adds:

“This may well be true, given that the legislation at issue in this dispute predates by decades, not only the GATS itself, but even the notion of ‘trade in services’. We have therefore some sympathy with the US point in this regard. However, the scope of a specific commitment cannot depend upon what a Member intended or did not intend to do at the time of the negotiations. The purpose of treaty interpretation under Art.31 of the Vienna Convention is to ascertain the common intention of the parties. These common intentions cannot be ascertained on the basis of subjective and unilaterally determined ‘expectations’ of one of the parties to a treaty.”

The panel adds: “While Members are expected to negotiate, apply and interpret their treaty obligations in good faith, there are no provisions in the WTO Agreement that would allow a Member’s intentions to be probed and determined, except as reflected in the treaty language.”

However, in the context of the US contentions, and use of terms like ‘incomprehensible’, about the specific commitment in its schedule, and the sympathy shown by the panel for the US point about ‘inadvertence’, it is not irrelevant to note that the entire UR negotiations and agenda were driven by the coalition of US service industries (with powerful lobbying influence in Congress), and they played from start to finish an important role in providing guidance to the US negotiators, on virtually every sector and sub-sector of ‘trade in services’.

The US service negotiators were some of the most skilled trade negotiators in the Uruguay Round, and had highly qualified legal and technical expertise on hand (with powerful and instantaneous communication tools available to them), and at every stage were in constant touch with Washington, and the interests concerned. Until the final stages, most other countries did not pay much attention or bring their top negotiators to the job.

If the US negotiators could commit such ‘inadvertent’ errors, it is easy to see what developing countries have done - many of them were servicing the entire range of negotiations with only one or two negotiators, (and often with little expertise back home), and influenced by the trade expertise of US and Washington based institutions, who merely applied theories of ‘trade in goods’ (welfare benefits for liberalisers) and ‘comparative advantage’ theories based on movement of goods across frontiers among industrialized countries. Even after a number of studies have shown that there is no empirical evidence for the theories of trade in goods being applied to either services or investment, the neo-liberal think tanks and the Bretton Woods Institutions are persisting with the same line - like the ‘village school-master’ of whom Goldsmith wrote “though vanquished he could argue still.”

The panel turned down Antigua’s position that it could rely on the US ‘total prohibition’ on cross-border supply of gambling and betting services existing in federal and state laws as a “measure” in itself in the dispute (and thus need not show or prove the effect in the various US federal laws or the state laws), and that it must rely on the measures identified in the panel request.

Analysing (in paras 6.267 to 6.286) the meaning of mode 1 supply, and the inscription by the US of ‘None’ under limitations, the panel concludes (para 6.287) that “mode 1 supply includes all means of delivery.

Says the panel: “We are of the view that when a Member inscribes the word ‘None’ in the market access column of its schedule for mode 1, it commits itself not to maintain measures which prohibit the use of one, several or all means of delivery under mode 1 in a committed sector or sub-sector. This is especially so in sectors and sub-sectors where cross-border supply is effected essentially if not exclusively through the Internet.”

The panel has concluded (para 6.290) that “when a Member makes a market access commitment in a sector or sub-sector, that commitment covers all services that fall within the scope of that sector or sub-sector. A Member does not fulfil its GATS obligations if it allows market access for only some of the services covered by a committed sector or sub-sector while prohibiting all others. If a Member wishes to restrict market access with respect to certain services falling with a sector or sub-sector, it should set out restrictions or limitations on access in the appropriate place in the Member’s schedule. A specific commitment in a sector or sub-sector is a guarantee that the whole of that sector, that is all the services included in that sector or sub-sector are covered by the commitment. Any other interpretation would make market access commitments under GATS largely meaningless.”

Analysing the market access issues in the context of the objectives and purposes of GATS, and some of its various other provisions (including Article VI), the panel says: “The ordinary meaning of the words, the context of Article XVI, as well as the object and purpose of the GATS confirm that the restrictions on market access that are covered by Art.  XVI are only those listed in para 2 of this Article.”

Examining the various limitations that could be invoked in terms of Art.XVI para 2 and its sub-paras, the panel has ruled that the limitations set out in 2 (a) are not illustrative (as Antigua argued), but only those stipulated. A prohibition on one, several or all of the means of delivery included in mode 1 constitutes a limitation on mode 1, the panel said (para 6.355). A ban thus becomes a ‘zero quota’, and thus falls under the prohibition of quota limitations.

The panel has examined the three US Federal laws and the several state laws cited in Antigua’s panel request, and identified those that prohibited or otherwise set limitations on remote supply of the service or by the service providers. The panel on that basis held that Antigua had not proved a prima facie case in respect of laws of several states (like Colorado, Minnesota, New Jersey and New York) that made gambling or the profession of gambling illegal, but did not deal with the issues of suppliers or remote supplies.

But three US Federal laws - the Wire Act, the Travel Act or Illegal Gambling Business Act - that directly or for enforcement of state laws, prohibited either remote supply or service suppliers, were found to be in violation of the GATS obligations. Similarly, the laws in this regard of Louisiana, Massachusetts, South Dakota, Utah all have restrictions on one, several or all means of delivery in mode 1, and thus amount to ‘zero quotas’ and contrary to Art. XVI.1 and XVI.2.

Having found the US in violation of its market access commitments, the panel has exercised judicial economy in not ruling whether there is also a violation of ‘national treatment’ in terms of Art. XVII of the GATS.

On the US obligations under Art. VI, that measures of general application affecting trade in services are administered in a reasonable, objective and impartial manner, the panel has said this provision applies not to measures of general application, but only their administration. After examining Antigua’s claims and evidence, the panel has said the claim was on the basis that Antiguan suppliers require authorization and have been unable to obtain such authorization. The panel found that Antiguan suppliers have never made any application, and thus no prima facie demonstration that the measures at issue are inconsistent with Articles VI.1 and VI.2.

On the claim against US over Art. XI (payments and transfers) and the US purported prohibition of transfers under credit cards or bank transfers, the panel underscored that the Art. XI of GATS has not been the subject of interpretation so far, that the limited facts and arguments advanced by Antigua do not provide the panel sufficient material for a meaningful analysis. The panel hence chose to exercise judicial economy and not rule.

At the same time it said, Art XI is an indispensable complement to GATS disciplines on market access and commitments. At the same, the Article does not deprive Members from regulating use of financial instruments, such as credit cards, provided the regulations are consistent with other GATS provisions, in particular art. XI.

On the Article XIV (general exceptions) and the US view that it was acting for public order and morality, the panel has examined a number of rulings in GATT disputes, noting that in the Banana III case the AB has said that the GATT 1994 jurisprudence (under Art.XX exceptions) could be relevant for interpretation of analogous GATS provisions.

The panel concludes that the concerns (including combatting organized crime and money laundering etc) that the US Wire Act, Travel Act and Illegal Gambling Business Act do seek to address are those within the scope of ‘public morals’ and/or ‘public order’ within the meaning of Art.XIV (a).

As to whether the measures taken by the US are ‘necessary’, the panel notes that in contrast to its treatment of remote supply of gambling and betting services, the US does not prohibit outright the non-remote supply of gambling and betting services, the panel has examined in depth whether there are aspects associated with ‘remote supply’ that would justify a total prohibition.

On the US contention that remote supply raised particular concerns in relation to organized crime, the panel says the US has certain concerns with respect to money laundering, fraud, health and under-age gambling are in the panel’s view are specific to remote supply.

However, measures used by the US to address these concerns with respect to these very concerns in the context of non-remote supply cannot be compared and examined as WTO-consistent alternatives that the US could have used to address its specific concerns on remote supply.

Referring to Antigua’s assertions about its own regulatory measures to deal with these very concerns, and that it has offered to consult with the US to meet any specific concerns that remain, the US response and arguments (that it would be futile), the panel said that in the circumstances of the case and reasons it had outlined in paras 6.526-530 (set out earlier in this analysis), “We consider.... that before imposing a WTO inconsistent measure, (the US) was obliged to explore these options in a good faith manner with a view to exhausting WTO-consistent alternatives, even if it considered that the measures in question were ‘indispensable’..... The US has not been able to provisionally justify that the measures are necessary to protect public morals and/or public order”, though they are designed to protect public morality or maintain public order. And while the US insists that its federal laws are necessary to secure compliance with state laws, it has not given any specific discussion of why or how the state laws are WTO consistent. It has merely argued that Antigua has failed to make out a prima facie case.

In terms of overall conclusions on Art XIV, the panel has found (para 6.608), that in light of the particular circumstances of this case and for reasons explained, the US has not been able to provisionally justify the three Federal laws - in terms of the provisions of Art. XIV (a) and XIV ( c) of GATS. Though they were not required to do so, the panel has however examined the consistency of these measures with the requirements of the chapeau of Art. XIV, so as to “assist the parties in resolving the underlying dispute in this case.”

The panel has said the DSB should recommend that the US bring its laws and measures into compliance. – SUNS 5690

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