Online gambling dispute goes far beyond Antigua and U.S.
By Lorraine Woellert Bloomberg News
Published: December 17, 2007
WASHINGTON: The refusal of the United States to comply with a World Trade Organization decision on online gambling is threatening to undermine the entire set of rules binding the international trade system.
The WTO is to decide soon on a demand from the Caribbean nation of Antigua and Barbuda for $3.4 billion in annual compensation from the United States, whose law banning Americans from wagering on Internet gaming sites was ruled illegal by the WTO in 2005.
The implications of the case go far beyond Antigua, a nation of 69,000. That is because instead of rewriting its gambling laws, the U.S. rewrote its trade rules to remove the issue from the WTO's jurisdiction. The prospect that other countries may take a similar tack if cases do not go their way has alarmed the international trade community.
"This is by far the most significant WTO case ever," said Naotaka Matsukata, a policy adviser in Washington with Alston + Bird and a former U.S. trade official.
Meanwhile, Antigua, which has rebuffed U.S. overtures to settle the dispute, wants WTO permission to waive intellectual property protection on digital software and entertainment so it can collect its compensation. That is raising alarm among trade associations that represent companies like Microsoft, Universal Pictures and Warner Brothers, as well as among industry groups like the Recording Industry Association of America.
"Antigua literally is the mouse that roared," said Robert Lighthizer, head of the international trade practice at Skadden, Arps, Slate, Meagher & Flom.
The fight began a decade ago, after Jay Cohen, a former options trader from California, moved to Antigua. There, he set up a sports book that accepted online bets from around the globe. U.S. prosecutors said the enterprise was illegal, and Cohen returned to fight the charges. A U.S. District Court jury found him guilty in 2000 and he spent 17 months in prison.
Returning to the Caribbean nation, Cohen persuaded the government to bring a WTO complaint against the United States. The island's booming gambling industry, which at its height in 2001 had $2.4 billion in revenue and accounted for more than 10 percent of employment, helped finance the case, which Antigua filed in 2003.
The dispute dragged on, with Antigua's gambling industry, led by Cohen, banking on a clear victory that would open the U.S. market.
Instead, the conflict has multiplied, with other U.S. trading partners with online gambling interests - including Japan, the European Union and Canada - following Antigua's lead in demanding compensation from the United States. If Washington cannot negotiate a package of concessions, it may face new litigation at the WTO from those countries.
"We would've written a check to Antigua, paid them to go away," said John Magnus, a trade lawyer at Miller & Chevalier in Washington. "Instead, they pressed the point."
Magnus said "the strategy they've pursued is not designed to advance the interests of Antigua. It's pique and anger from some individual businessmen."
Cohen declined to comment. A lawyer representing Antigua said it was the U.S. stance that jeopardized global trade. "The U.S. has been a big beneficiary to this system," said Mark Mendel, a partner in the Cork, Ireland, office of Mendel-Blumenfeld. "They have a real stake in keeping everybody believing in it and following its rules. This is going to weaken the entire institution."
After the United States lost the case in 2005, the U.S. government invoked a WTO rule that allowed it to revise its trade obligations.
"This is the trade equivalent of taking our ball and going home," Representative Shelley Berkley, a Nevada Democrat, told the Judiciary Committee of the U.S. House of Representative in November. "You can be sure that if China one day decides that it shouldn't have to comply with its WTO obligations, we will be the first to object."
The U.S. government raised the ante in October 2006, passing a law placing further restrictions on online gambling. That hurt European companies like PartyGaming, Bwin Interactive Entertainment and Sportingbet.
Last month, the European Union trade commissioner, Peter Mandelson, visited Washington to encourage the Congress to pass legislation overhauling U.S. gambling laws. The EU has a $70 billion online-gambling industry, based primarily in Britain.
The other twist in the case is that Antigua trades so few goods that it would be unable to collect enough compensation by raising tariffs, the way aggrieved trading partners typically resolve disputes.
Tourism is the main contributor to Antigua's $875 million economy. The country exports about $40 million a year in goods and services to the United States and imports about $350 million, so taxing products from the United States would mainly hurt Antiguan consumers and businesses.
The island nation's proposed remedy - WTO permission to waive intellectual property protection on some software -raises concerns in Hollywood as well as among technology companies like Microsoft. The Motion Picture Association of America said the United States should retaliate by stripping Antigua of any trade or foreign-aid preferences.
"Does it make sense for a country to expressly allow criminal conduct? We believe that it most certainly does not," said Jonathan Lamy, a spokesman for the Recording Industry Association of America.
While software and technology lobbyists said it was unlikely Antigua would get what it was asking for, they said they were concerned nonetheless.
"The demand by Antigua is ridiculous," said Morgan Reed, executive director of the Association for Competitive Technology, the industry trade group that includes companies like Microsoft and eBay. "The scary thing is that they're asking for it."