September 25, 2007

Battling Against Goliath

By: David White

Betting against the Goliath
By David White

When 28-year-old Jay Cohen moved to the Caribbean in 1996 to launch an online gambling firm with a few friends, he certainly couldn’t have predicted that ten years later, his decision would instigate an international trade dispute between the United States and the small island-nation of Antigua and Barbuda.

But that’s exactly what happened.

In 1998, the Justice Department charged several online operators, including Cohen, with violating the Wire Act of 1961 — an arcane measure that prohibited the use of phone wires for gambling.

But even though his firm took bets from people residing in the United States, Cohen was convinced that because he was headquartered in Antigua — where gambling was legal — his company was operating within the confines of the law. So he voluntarily returned home to turn himself him, convinced that nothing would come of it.

On July 24, 2000, however, Cohen was convicted in federal court for violating the Wire Act and sentenced to 21 months behind bars. The Supreme Court refused to hear Cohen’s appeal, so in October 2002, he was sent to prison.

Shortly before entering the federal facility, Cohen received an unsolicited letter suggesting that Washington’s position left it vulnerable to a formal trade complaint with the World Trade Organization (WTO), because the U.S. had signed a trade treaty pledging to open its market to competition in “recreational, cultural and sporting services.” Gambling, of course, fit that bill.

The Antiguan government, unsurprisingly, was hesitant to file a complaint. Doing so would cost an enormous amount. Plus, it would entail taking on the world’s largest trader.

But the gambling industry agreed to pay for Antigua’s suit. So in 2003, with the help of Cohen’s friend — Texas lawyer Mark E. Mendel — Antigua filed a trade complaint against the United States, claiming that its online gambling ban violated Antigua’s rights as a member of the WTO.

The island nation argued that although the U.S. would be perfectly within its rights to ban gambling as part of an effort to protect “public morals and public order” — a key component of WTO rules — America’s own gambling industry precluded it from making such a claim. Unlike Islamic nations, which ban both the importation and domestic sale of liquor, many U.S. websites allow gambling on horse races, lotteries, and other games. Also, many horse tracks are dependent on wagers placed over the phone.

As Mendel recently explained to The New York Times, “This isn’t a case of forcing gambling on a population that has decided they don’t like it… This is the world’s biggest consumer and exporter of gambling services trying to prohibit a small country from developing its economy by offering these same services.”

In other words, the U.S. could only ban its citizens from gambling on foreign websites if it were also willing to ban online gambling within the United States.

Sure enough, in 2004, a WTO panel ruled against the United States. One year later, the WTO reaffirmed its position when the U.S. lost its appeal. Five months ago, the WTO declared that the U.S. was out of compliance with its rules.

So the case now sits before an arbitration body tasked with assessing damages.

Because Antigua’s economy is so small, the WTO’s normal remedy of granting the winning nation the right to impose punitive duties on the defendant is essentially irrelevant. So Mendel has come up with a unique solution: In addition claiming $3.4 billion in damages, he has asked the WTO to grant Antiguans the right to violate intellectual property laws by allowing them to produce and sell copies American music, movies, and software.

How wonderful that would be. It would, as Reason’s Radley Balko explained this spring, “set the stage for a steel-cage showdown between the entertainment and software industries and the anti-gambling prudes in Congress and the Justice Department.”

One can only hope that the entertainment and software industries win.

The truth is that for the last several years, Washington’s anti-choice prudes have spent way too much time far exceeding their legitimate authority — demonstrating that they’re much too eager to regulate the private lives of American citizens.

And in the case of online gambling, it’s an overreach of federal power that is both senseless and rife with long-term consequences.

Consider the futility of Washington’s efforts. In addition to the Justice Department’s interpretation of the Wire Act of 1961, federal lawmakers have placed a number of obstacles in the path of those who wish to gamble online.

Last year, just weeks before the election, the House of Representatives passed a measure designed to more effectively ban online gaming by prohibiting credit card companies and banks from sending funds to overseas gambling websites. The Senate soon passed a similar bill, and President Bush signed the legislation.

Despite these complications, Americans continue to gamble in droves. Revenues from online gambling totaled about $15 billion last year, of which about half came from U.S. players.

Further, if federal lawmakers legalized online gambling, they could regulate, monitor, and even tax the industry. When gambling, players like knowing that their money is secure and that the house is offering fair odds and being honest about its edge. This could only happen if online gambling were sanctioned.

The long-term consequences are even more worrisome. As Cato Institute policy analyst Sallie James recently explained, “failure to comply with WTO rulings… paints the United States as hypocritical and undermines faith in the system — a system that depends on the perception that all players, rich and poor, big and small, have rights, as well as obligations and responsibilities.”

In the spring of 2004, Cohen was released from prison. Ironically, the federal facility he spent his time in was headquartered in Las Vegas — the nation’s best illustration of Washington’s hypocrisy. One suspects, however, that the irony was lost on those who locked him up.

David White, a writer in Washington, is a regular columnist for Brainwash. He is also the host and producer of Inside Washington Weekly, a weekly podcast from America’s Future Foundation.