Rolling the dice.

Rolling the dice.

Rolling the dice.

The law, lawyers, and the court.
Nov. 15 2006 5:32 PM

Rolling the Dice

The United States' big legal gamble with Internet gaming.

Illustration by Mark Alan Stamaty. Click image to see expanded view.

In the wee hours of an early Saturday morning several weeks ago, about half an hour before Congress left for its pre-election recess, it passed the Unlawful Internet Gambling Enforcement Act of 2006. The act tries to bar credit-card payments to Internet gambling sites, and there has been much speculation about its wisdom and likely efficacy. What has been less noted, though, is that through this bill and a handful of similar missteps, the government has put itself in a position to be taught a sharp lesson about the nature of power in a globalized marketplace. Unless Congress and the Bush administration begin to pay a little more attention to how they handle Internet gambling, they could well end up creating an entirely avoidable headache for some very powerful constituents—holders of U.S. copyrights and patents—by punching a hole in the international web of agreements that protects them. Taken as a whole, these efforts offer a veritable master class in how not to regulate a 21st- century economy.

The new law doesn't make any additional types of gambling illegal. Rather, it merely attempts to make it harder to engage in online-gambling activities that Congress already believes are illegal—by requiring credit-card companies to identify and block transactions with online casinos. But in laying out with specificity what kind of Internet gambling Congress thinks is—and is not—already prohibited, the law likely will add to a free-trade debacle in which the United States already finds itself knee-deep.

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To understand why this new law may cause free-trade problems, you need to know a little bit about U.S. laws governing both online and brick-and-mortar gambling. Gambling in the United States is governed by a bewildering array of both state and federal laws, but the main statute that was used to chase online casinos out of the United States was the federal Wire Act. Passed in 1961, the Wire Act basically prohibits those "in the businesses of betting" from sending or receiving certain types of bet-related information over interstate or international wires. The Wire Act doesn't prohibit everything, though. It doesn't, for instance, cover bets placed and taken within a single state, which turns out to be a significant exception. Likewise, because of a separate 1978 statute called the Interstate Horseracing Act, the Wire Act doesn't prohibit interstate betting on horse racing, either.

In 2003, the island nation of Antigua and Barbuda took a look at the thicket of U.S. laws governing gambling and decided that they violated the United States' free-trade obligations, as administered by the World Trade Organization. Antigua had a more than scholarly interest in this issue because, when offshore Internet gambling businesses were first being set up, the country decided to both welcome and strictly regulate them. Not liking what it saw in the U.S. law, Antigua initiated a WTO proceeding challenging the regulations.

Antigua's basic theory in its WTO complaint was simply that, if the United States allows any Internet gambling at all, it couldn't, in light of its WTO obligations, impose barriers to foreign companies seeking access to its market. It was a pretty straightforward free-trade argument. In response, the United States tried to take advantage of a "morals" defense in WTO proceedings that says, reasonably enough, that if you don't make a product in your country due to moral objections, you needn't open your market to foreign providers of that product.

Interestingly, the United States was able to establish that there was a defensible "moral" distinction between brick-and-mortar casinos in the United States and online casinos and that it could prohibit the latter while allowing the former. But to take advantage of this distinction, the United States had to show that it prohibits all forms of Internet gambling. And to do so, it could only turn to laws such as the Wire Act, which rather plainly do no such thing. As a result, the WTO upheld Antigua's complaint and essentially ruled that while a "morals" defense could theoretically be made, the United States was in no position to actually make it, since it doesn't completely prohibit Internet gambling.

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The WTO gave the United States a year to comply with its ruling by either changing its laws to fully ban online gambling or by allowing foreign access to the online-gambling market. That year ended last April, but rather than do anything to comply, the United States simply issued a statement to the effect that it had spent the year reviewing the matter and decided that it has been in compliance all along. Antigua is, unsurprisingly, challenging this response. A final decision from the WTO is expected early next year.

It was in this context—a context to which Congress seems to have been largely oblivious—that Congress enacted its recent legislation. The legislation causes new problems, because it seems to clarify beyond any doubt that the United States does not, in fact, prohibit all forms of Internet gambling. Indeed, the law contains an explicit list of circumstances in which Internet gambling is permitted, including betting on horse racing and in-state gambling. So, whatever slender chance the United States may have had of establishing some broad moral objection to online gaming appears to have disappeared. In fact, things look so bleak for the United States that the government recently published a "Request for Comments" in the Federal Register that is essentially a nationwide call for help from anyone who thinks they can come up with an argument it can use here. The government, it seems, is all out of ideas.

The obvious question is what Antigua can do with a victory at the WTO. Retaliatory tariffs plainly aren't particularly appealing for small country like Antigua, because they would certainly hurt more than they would help. But the plucky little island paradise does have some creative options at its disposal. If the United States remains recalcitrant, under the WTO rules, Antigua would potentially have the right to suspend its own compliance with the treaty that obligates it to respect the United States' intellectual-property laws. That, one can well imagine, might get Washington's attention.

Want a cheap copy of Microsoft's latest software or a nice medical device that, annoyingly, is protected by a U.S. patent? Come to Antigua. In such a scenario, Antigua couldn't simply be ostracized as a rogue state. It would have every right under WTO rules to pursue such a course. In fact, Antigua could go down this road only in response to the United States' continuing refusal to honor its international obligations. While there undoubtedly would be complicated issues and restrictions on the scope of any suspension the WTO approves, the United States shouldn't assume that the world body is too timid to hand Antigua this sort of stick with which to retaliate, since it has authorized intellectual-property-based reprisal before. Antigua's frank calculation here, of course, is that while the administration might be comfortable stiffing the Antiguan trade representative, it would probably take notice if, say, an irate Microsoft or Disney started insisting that it get this problem solved.

This whole episode may turn out to be a case study of what can go wrong when Congress succumbs to an idea that probably should never have made it out of the 19th century—prohibition—in far more complex contemporary circumstances. To the extent it has been thinking about the dispute with Antigua at all, the United States may have been assuming that it could white-knuckle any public-relations fallout and not actually have to change its behavior. In the past, in an economy based largely on physical goods, this might have been a reasonable strategy, but it doesn't look good when intellectual property is such a crucial asset. As the United States knows better than anyone, useful intellectual-property protection requires a shared set of global enforcement agreements. Precisely because it has the most to gain from this system, the United States is also uniquely vulnerable to gaps in it. And that's why allowing countries like Antigua to suspend intellectual-property treaties in trade disputes gives them such a potent weapon, a fact that the United States, much to its annoyance, may soon learn.