Will the US change its restrictive gambling laws?

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

There have been further developments relating to internet gambling in the US at both an international and domestic level, but there seems to be little change in the US mindset at this stage.

As we reported in January of this year, there were two faint causes for optimism amongst online gambling operators. The first was the continuing case brought by Antigua against the US at the World Trade Organisation ("WTO"); and the second was the change in the balance of political power in the US. Given the deep seated antipathy to gambling within the US, one can never be very optimistic that the US market will be re-opened to online gambling operators but events have nevertheless taken a positive direction more quickly than many commentators would have expected.

In relation to the WTO dispute, the WTO's Appellate Body had stated that the US ban on foreign operators offering online gambling services to US citizens may be justified as "necessary to protect public morals", but also stated that the US should not discriminate between foreign and domestic operators (US law currently allows internet horserace betting between American states). The WTO gave the US until 3 April 2006 to implement the Appellate Body's recommendations. The US took no action by that deadline and stated on 10 April 2006 that it was in compliance with the WTO's recommendations. Indeed, the US subsequently went further and sought to withdraw from its WTO trade commitments concerning online gambling. In response, Antigua commenced a claim in June of this year for compensation from the US under Article 22 of the WTO's Understanding on Rules and Procedures Governing the Settlement of Disputes and the US has been given until 14 December 2007 to come up with a compensation scheme.

Article 22(2) provides that if a member (in this case the US) fails to remedy non-compliance with its obligations within a reasonable period of time, the member will enter into negotiations with any party which has invoked the Dispute Settlement Procedure (in this case Antigua) with a view to agreeing compensation. If no compensation is agreed, the party that invokes the Dispute Settlement Procedure may request or seek authorisation to suspend the application of other WTO obligations. The WTO arbitration panel is reported at the time of writing to be about the deliver its decision.

Antigua has sought the suspension of its intellectual property obligations to the US, which would allow Antigua to produce, for example, software and pharmaceuticals without paying licence fees. The European Union, Canada, Australia, India, Costa Rica and Macau have all since joined Antigua on its side of the battle line. The EU Trade Commissioner, Peter Mandelson, has upped the ante by claiming, at a White House trade summit in early November, that the Unlawful Internet Gambling Enforcement Act ("the UIGEA") is unfair to foreign firms and should be repealed. Mr. Mandelson was in the US to negotiate compensation on behalf of the EU and is reported to have said "It's not in the interest of American consumers to have good responsible competitors in this market excluded by regulatory mechanisms. What we need to see is a change in US legislation that removes that discrimination against EU operators. When a member of the WTO defaults on its commitments, compensation is due and that’s the case of online gambling".

It was reported on 17 December that the EU and US had reached agreement on their dispute. In return for gambling services being excluded from the US' WTO commitments, the US will provide trade concessions to the EU in mail services and technology. It was reported that such concessions fell short of the $100 billion that the EU was seeking. The EU has said that it will continue to seek a "non-discriminatory policy towards internet gambling in the US", but obviously, with the settlement of its compensation claim, most of the EU's leverage has disappeared.

Pressure was further increased at a hearing of the House of Representatives Committee on the Judiciary on 13 November when various witnesses gave evidence on "Establishing Consistent Enforcement Policies in the Context of Online Wagers". The case against the UIGEA was forcefully made by Professor Joseph Weiler of the New York University School of Law.

He pointed out that under the General Agreement on Trade in Services (GATS), established under the WTO, the US had chosen to open up gambling services to providers from other WTO member countries. He then continued by explaining how the use of the Wire Act and other legislation to prosecute gambling providers had led to the WTO's decisions that the US had infringed its GATS commitments and that, as a result, the US had withdrawn from its GATS commitments but continues to mount prosecutions in relation to online gambling. He then explained that, contrary to some suggestions, the US is entitled to outlaw gambling but, if it chooses to do so, it cannot impose the ban in a discriminatory way; the latter is what the WTO found the US had done by continuing to allow domestic online betting on horseracing. Professor Weiler went beyond the legal analysis by contending that the US, as a world leader, is setting an example which will be detrimental both to its reputation and to its long term commercial interests. His conclusion was that online gambling does indeed create risks for US citizens but that the correct approach, which would also be consistent with its legal obligations, would be for the US to regulate gambling and apply that regulation equally to both US and overseas operators.

On 30 September 2006, the US Congress passed the Safe Ports Act which included the UIGEA. As is well known, that led to many online gambling operators closing down their US-facing businesses and massive reductions in the values of their companies. The Federal Reserve together with the Attorney General had 270 days from the commencement of the UIGEA to prescribe regulations requiring financial institutions to identify, block or otherwise prevent or prohibit unlawful internet gambling transactions.

It was only on 1 October, several months overdue, that the Federal Reserve and the Department of Treasury published their joint proposal for the rules to implement the UIGEA. Interested parties had until 12 December to comment on the proposed rules – it is unclear when the Rules are likely to come into effect.

Also, Barney Frank, the chairman of the House of Representatives' financial services committee in April of this year proposed the Internet Gambling Regulation and Enforcement Act, a bill which is intended to regulate and tax online gambling. This bill is only at the first stage of the legislative process but its proponents argue that it would resolve all of the current issues in one fell swoop. First, it would provide a licensing and regulatory framework which would serve to protect US citizens; second, it would raise revenues from licensing and taxing US-based online operators; and finally it would enable the US to comply with its WTO obligations and not have to pay compensation to Antigua, the EU and other claimants. Whilst there is a persuasive logic to this argument, it would require a significant change of the US mindset for this bill to be passed.