Bridges Weekly Trade News DigestVolume 12Number 1 • 16th January 2008

Antigua awarded modest cross-retaliation rights in gambling dispute with US

Antigua and Barbuda last month won the right to retaliate against US intellectual property, including patents and copyrights, as part of their longstanding WTO dispute on internet gambling. However, the value of the penalties Antigua was awarded fell far short of what it had initially sought.

The tiny Caribbean island nation had asked to impose $3.443 billion in annual retaliatory sanctions, after WTO dispute panels and the Appellate Body ruled that the US’ multilateral commitments to liberalise its "recreational services" sector prevented it from legally shutting its internet gambling market to operators based in Antigua. Washington’s attempt to justify the ban on the grounds of public morals was compromised by the fact that domestically-based companies there are currently permitted to provide online betting on horseracing.

Instead, a WTO arbitrator awarded Antigua the right to impose annual sanctions worth only $21 million against US patents, copyrights, trademarks, and other intellectual property, as well as services companies.

Washington had argued that the damages should be limited to $500,000. Nevertheless, it was "pleased that the figure arrived at by the arbitrator [was] over 100 times lower than Antigua’s claim," according to a statement from the US trade representative’s office. The US had described Antigua’s claims, worth roughly three times the island’s annual gross domestic product, as "patently excessive."

Antigua’s reaction was mixed. Mark Mendel, lead counsel for Antigua in the case, said that the arbitration panel’s reasoning when arriving at the $21 million amount was "clearly contrary to established WTO jurisprudence."

The compensation due to Antigua was to be based on "lost exports" - what Antigua would have earned from gambling exports to the US in the absence of the offending measures. The US and Antigua differed on how these should be calculated: Washington said that only bets on horseracing should be considered; Antigua said that the distinction between horseracing and other forms of gambling was specious.

In its report, the arbitration panel expressed dissatisfaction with both sides’ arguments, as well as the various mathematical proxies that they used to come up with their respective compensation figures. "We, therefore, have no choice but to adopt our own approach," it wrote. "In so doing, we feel we are on shaky grounds solidly laid by the parties." The arbitration panel said that the measurement of lost exports should reflect the "most likely scenario of compliance" by the US, and deemed that this scenario would likely have been the removal of restrictions on horseracing bets alone. It then arrived at the $21 million figure, factoring in calculations suggesting that Antigua’s market share in the US would have diminished even in the absence of restrictions, due to increased competition from elsewhere.

Mendel said that the arbitrator’s distinction between horseracing and other kinds of gambling was not in accordance with past rulings. He pointed to the fact that one of the three arbitrators had issued a dissenting opinion - highly unusual in WTO practice - agreeing with Antigua’s argument that compensation should be measured against what would have happened if its access to the US online gambling market had been unfettered.

How would cross-retaliation operate?

Nevertheless, Mendel expressed satisfaction that the arbitrator had approved Antigua’s ability to ‘cross-retaliate’ against the intellectual property rights of US businesses, describing this as "very potent weapon." "$21 million a year in intellectual property rights suspension going forward indefinitely is not such a bad asset to have," he said.

Mendel suggested that there was some lack of clarity about how to go about retaliating against intellectual property rights, something that has never been done. Patent rights, for instance, might be suspended within the country in question, but what would happen if products produced under this legalized piracy were exported? The answer was unclear, he said.

The US trade representatives’ office said it was "concerned" that the arbitrator had agreed with Antigua’s request for cross-retaliation. It argued that any intellectual property rights suspended would have to be "strictly limited to Antigua." "Even with respect to Antigua," it said, "it would establish a harmful precedent for a WTO Member to affirmatively authorize what would otherwise be considered acts of piracy, counterfeiting, or other forms of IPR infringement."

Putting a precise monetary value on different kinds of intellectual property could also prove complicated, Brendan McGivern, a Geneva-based trade lawyer with White and Case, told the New York Times. "Even if Antigua goes ahead with an act of piracy or the refusal to allow the registration of a trademark, the question still remains of how much that act is worth," he said. "The Antiguans could say that’s worth $50,000, and then the US might say that’s worth $5 million."

US compensates EU, Japan, Canada

The case, which dates back to 2003, pitted one of the world’s smallest economies against its largest, and was seen by some as a test of the WTO dispute system’s efficacy for countries to small to frighten their trading partners with the threat of retaliatory tariffs. Internet gambling is Antigua’s second biggest employer after tourism.

Washington has maintained from the outset that it never meant to open its market to cross-border gambling when scheduling its commitments during the Uruguay Round, and thus should not be penalised. Last May, the US controversially decided to invoke rarely-used procedures under the General Agreement on Trade in Services to modify its multilateral liberalisation commitments to explicitly exclude internet gambling (see BRIDGES Weekly, 9 May 2007).

GATS Article XXI requires countries seeking to alter their services trade commitments to compensate trading partners that may potentially be negatively affected by the change. Antigua had hoped that demands for compensation from countries such as the EU, Macao, and Japan - potentially for losses to their gambling companies worth billions of dollars - would encourage the US to comply with the WTO rulings.

However, the US trade representative announced on 17 December that it had compensated the EU, Canada, and Japan by making new liberalisation commitments in warehousing, postal, technical testing, and research and development services. Other countries claiming compensation, including Antigua, have until the beginning of February to seek arbitration on the US’s proposed compensatory adjustments to its services commitments.

Way forward for Antigua

Arbitrator awards are not subject to appeal under WTO rules. However, Mendel suggested that some legal avenues remained open to Antigua. Antigua’s GATS Article XXI negotiations with the US on compensation for closing off its gambling sector remained unresolved and thus likely headed for arbitration, he said. Antigua could ask the compensation arbitrators to consider the online gambling sector in its entirety, in effect asking them to overturn the reasoning that led recent arbitration panel to look only at horseracing revenues.

Another potential option, Mendel told Bridges, would be for Antigua to invoke a never-before used clause in the Marrakesh Agreement that established the WTO. This provision (Article IX(2)) says that WTO Members (either as the Ministerial Conference or the General Council) can adopt interpretations of multilateral trade rules. If Antigua managed to secure Members’ support for a more favourable interpretation of how GATS rules should apply to its dispute, the US would not be able to veto it alone: unlike most decisions in the global trade body, these interpretations are not approved by consensus, and would only need the backing of three-quarters of the Membership.

Mendel stressed that Antigua’s goal remained a serious negotiation with the US to "come up with some sort of settlement." One such settlement, he suggested, could involve a time-limited period of US regulatory cooperation with the Antiguan industry, in order to soothe fears that about the potential effects on public morals of inadequately regulated overseas internet gambling.

ICTSD reporting; "WTO limits Antigua rights in US case," FINANCIAL TIMES, 22 December 2007; "In Trade Ruling, Antigua Wins a Right to Piracy," NEW YORK TIMES, 22 December 2007; "EU and US make deal in WTO internet gambling dispute," ASSOCIATED PRESS, 17 December 2007; "Antigua wins modest sanctions in U.S. gambling case," REUTERS, 21 December 2007.