Betting on the wrong horse: the detrimental effect of noncompliance in the Internet gambling dispute on the General Agreement on Trade in Services (GATS).

• Author: Codd, Kathryn B.

INTRODUCTION I. THE RISE AND FALL OF INTERNET GAMBLING II. DISPUTE SETTLEMENT UNDER THE GENERAL AGREEMENT ON TRADE IN SERVICES (GATS) A. Antigua Fights Back B. Basic Provisions of GATS C. Remedies Available Under the Dispute Settlement Framework D. Outcome of Antigua's Complaint III. COMPLIANCE UNDER THE TWO DISPUTE SETTLEMENT FRAMEWORK A. Benefits of a Strong Agreement for Regulation of Trade in Services B. Statistics on Compliance with the DSU C. Problems with Compliance D. Specific Issues with U.S. Compliance 1. U.S.--Byrd Amendment Dispute 2. U.S.--Hot-Rolled Steel Dispute 3. U.S.--Section 211 Dispute 4. U.S.--Section 110(5)(b) Dispute E. Differentiating Between Previous Instances of U.S. Noncompliance and the Internet Gambling Dispute IV. THE EFFECT OF U.S. NONCOMPLIANCE IN THE GAMBLING DISPUTE ON THE LEGITIMACY OF GATS A. Fragility of GATS as a Mechanism for Regulating Trade in Services B. U.S. Influence on the Creation of GATS and the Current DSU C. U.S. Expression of Discontent with the Panel's Ruling D. Lack of Recourse to the Usual Excuses for Noncompliance E. Vulnerability of the United States to Further Challenges Under GATS CONCLUSION INTRODUCTION

Over the past decade, Internet gambling has become a global force. In 2003, the projected industry revenues summed five billion dollars worldwide. (1) With the click of a button, bettors could link up with counterparts in other parts of the globe for a poker tournament or a game of blackjack. As other countries embraced the operators of this new recreational activity, recognizing it as an opportunity to spur economic growth and bring in valuable tax revenue, the United States began to crack down on the industry. (2)

As part of this crackdown, the U.S. federal government and the states started to pass and enforce regulations prohibiting Internet gambling, resulting in the arrest and conviction of executives of foreign gambling operations who dared to set foot on U.S. soil. (3) This onslaught against the foreign gaming industry did not go unnoticed, however, and eventually, one small country, Antigua and Barbuda, attempted to fight back against what it perceived as unfair discrimination against one of its primary sources of income. Antigua brought a complaint against the United States to the World Trade Organization (WTO), alleging violations of U.S. obligations under the General Agreement on Trade in Services (GATS). (4) The WTO found the United States to be in violation of a specific provision of GATS and ordered the United States to bring federal law into conformity with its GATS obligations. (5) Though many scholars consider the violation to be minor and the fix relatively uncomplicated, (6) thus far the United States has failed to comply with the WTO's recommendations. (7)

The Dispute Settlement Understanding (DSU) governs disputes, such as this one, that arise under GATS, as well as disputes under other WTO agreements. (8) The DSU vests adjudicatory power in the WTO for all disputes that arise under WTO agreements. (9) Although WTO member nations have failed to comply on occasion with WTO decisions involving violations under other agreements--such as the General Agreement on Trade in Tariffs (GATT) or Trade-Related Aspects of Intellectual Property Rights (TRIPS)--this lack of compliance has not proved fatal to these agreements. (10) GATS, however, is a fairly young multinational trade agreement, and some scholars argue that GATS has struggled to shape its identity amidst problems with overly flexible provisions and lack of attention from WTO ministers. (11) Although most countries are likely to acknowledge that the agreement has been a relative success thus far, (12) it has yet to weather any serious tests to its legitimacy. Because it was instrumental in the formation of GATS, (13) other countries will likely look to the United States as an example when deciding whether to comply with WTO decisions under GATS.

The outcome of the gambling dispute may prove to be a bellwether for the success or failure of the agreement as a mechanism for regulating trade in services. This Note argues that if the United States fails to respond appropriately to the recommendations made by the WTO, the legitimacy of GATS as a mechanism for regulating trade in services disputes will be undermined. Without legitimacy, GATS becomes nothing more than symbolic lip service to the importance of liberalization in the service trade. Member nations will perceive the agreement as a weak guarantor of rights and, as a result, will be less likely to resort to the GATS dispute mechanism should a service trade dispute arise. This in turn may compel WTO members to take unilateral action to enforce their rights, leading to elevated hostilities and possible trade wars. To avoid these devastating results and to preserve GATS, the United States should adopt the WTO recommendations proffered in the gambling dispute.

Part I provides background on the Internet gambling industry, both in Antigua and worldwide. Part II discusses Antigua's complaint against the United States and the WTO decision in the gambling dispute and sets forth the basic GATS and DSU provisions governing such a dispute. Part III considers the benefits of maintaining a strong mechanism for resolving service trade disputes under GATS and addresses specific compliance issues under the DSU generally. Part IV analyzes previous compliance issues under other WTO agreements and explains why noncompliance in the gambling dispute, in particular, is more likely to damage the pertinent multilateral trade agreement, GATS. Finally, this Note argues for the United States's quick adoption of the WTO recommendations in the gambling dispute to preserve the legitimacy of GATS.

1. THE RISE AND FALL OF INTERNET GAMBLING

   In 2002, the United States jailed Jay Cohen, an operator of World Sports Exchange Ltd., for violations of a federal law (14) prohibiting the use of phone wires for gambling. (15) Cohen had based his Internet gambling empire out of Antigua and Barbuda, a tiny island nation in the Caribbean, and the operation accepted bets from the United States. (16) Cohen returned to the United States voluntarily, but, once he set foot on U.S. soil, the FBI took him into custody in an attempt to crack down on what the United States perceived as illegal Internet gambling. (17) He received a twenty-one month sentence after the Court of Appeals for the Second Circuit affirmed his conviction on eight counts of conspiracy and substantive offenses in violation of the federal Wire Act. (18) Just before Cohen began serving his sentence, he received a mysterious letter suggesting that the United States might be violating its international trade commitments. (19) Cohen notified Antigua of this possibility, and although Antigua was reluctant to spend any of its small budget on a major legal undertaking at the WTO, the gambling industry eventually fronted the money on behalf of the island nation. (20)

   Gambling operators and bettors alike have been focused on the Cohen case since its inception. Internet gambling has enjoyed an explosion of popularity over the past decade and has evolved from an enjoyable pastime into a multimillion-dollar industry. (21) By 1995, the first Internet gambling sites were up and running. (22) Seven years later, about 1800 gambling websites existed. (23) These websites' operators often flocked to smaller countries that were willing to loosen regulations on gambling operators in exchange for the industry's attendant economic prosperity. (24)

   Antigua and Barbuda was among the first countries to allow gambling companies to locate on its shores. Initially Antigua permitted the operators to accept foreign bets without paying taxes, (25) and by 1999, the tiny island nation hosted 119 operators. (26) Antigua's only form of regulation was required licensing fees, which created revenue. (27) The gambling companies also provided a boost to the local economy through the creation of jobs. At its peak, the gambling industry provided around 10 percent of Antigua's gross domestic product. (28)

   Although the gambling industry on Antigua began virtually unregulated, requiring only a licensing fee, by 2001 the country had set up a Gaming Directorate to oversee the industry and had improved regulations to better protect players and reduce financial fraud. (29) Antigua made this shift in response to U.S. concerns about unregulated Internet gambling. The move proved costly, however, and by 2003 the number of operators on Antigua dropped to only twenty-eight, which in turn negatively affected the job market and licensing revenue. (30) More than 3,000 Antiguans, or about 10 percent of the total workforce, found themselves jobless after the U.S. crackdown on Internet gambling. (31)

2. DISPUTE SETTLEMENT UNDER THE GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)

   1. Antigua Fights Back

      Antigua's complaint to the WTO alleged that the United States's ban on "remote-access" international gambling and restrictions on international payments for such services were inconsistent with U.S. obligations under the General Agreement on Trade in Services (GATS). (32) Antigua alleged that those obligations required the United States to allow other member nations equal access to its domestic gambling and betting markets. (33)

      In the complaint, Antigua also contended that the drastic reduction in licensed gaming operators on the island was due primarily to both "the increased standards of regulation," which drove some operators to seek out countries with more relaxed standards of operation, and to the "increasingly aggressive strategy on the part of the United States to impede the operation of cross-border gaming activities in Antigua." (34) As examples of such a strategy, Antigua pointed to the restrictions on international transfers and payments for gambling services in the United States, (35) and to the fact that the U.S. government permits local and regional...