One of the lingering questions for me after the U.S. - Gambling WTO dispute was how a pure internet gambling ban would be treated under WTO rules. The measures at issue in U.S. - Gambling had some pretty clear discriminatory aspects. What if the U.S. measures had simply banned all internet gambling, regardless of whether the web site was foreign or domestic? Would that have been found to be a violation, or upheld under a "public morals" or other justification?
Perhaps we can gain some insights on this issue from yesterday's Washington state Supreme Court decision in Rousso v. State of Washington, which dealt with an internet gambling ban under the dormant commerce clause of the U.S. Constitution. The dormant commerce clause has a number of parallels with WTO non-discrimination rules and exceptions.
The Court explained the measure as follows:
[T]he legislature ... enact[ed] and amend[ed] RCW 9.46.240, which criminalizes the knowing transmission and reception of gambling information by various means, including use of the Internet. Since sending and receiving gambling information is illegal, Internet gambling in the state of Washington is effectively banned.
In essence, as far as I can tell, it's a pure internet gambling ban. Very straightforward and simple, not like the complex set of measures at issue in U.S. - Gambling.
As noted, the legal issue was whether this internet gambling ban violates the dormant commerce clause:
The only issue before this court is whether Washington's ban on Internet gambling is an unconstitutional infringement of the dormant commerce clause.
...
Determining whether Washington's ban on Internet gambling violates the dormant commerce clause is a multistep analysis. Outlined briefly, we must first determine whether Congress has granted the states authority to regulate Internet gambling. If it has, the dormant commerce clause does not apply and RCW 9.46.240 is upheld. ...
If Congress has not, the dormant commerce clause applies, and we must determine (a) whether the language of the statute openly discriminates against out-of-state entities in favor of in-state ones or (b) whether the direct effect of the statute evenhandedly applies to in-state and out-of-state entities. ...
If the statute does not openly discriminate and applies evenhandedly, it does not violate the dormant commerce clause if (1) there is a legitimate state purpose and (2) the burden imposed on interstate commerce is not "clearly excessive'" in relation to the local benefit. ...
If the statute openly discriminates or does not apply to in-state and out-of- state entities evenhandedly, it is upheld only if it is necessary to achieve an important state interest unrelated to economic protectionism. ...
With that as background, the Court then considered the internet gambling ban under the dormant commerce clause, as follows.
First, the Court concluded that "Congress has not delegated to the states its authority to regulate interstate Internet gambling," and thus "[t]he dormant commerce clause is applicable here, ... ."
Moving on to the substance of the dormant commerce clause, the Court first asked, "Does [the measure], by its language or effect, discriminate against interstate commerce in favor of in-state economic interests?" (This part is somewhat parallel to the WTO non-discrimination requirements, such as GATS Article XVII.) The Court began by noting:
the language of RCW 9.46.240 is not discriminatory; it equally prohibits Internet gambling regardless of whether the person or entity hosting the game is located in Washington, another state, or another country.
Basically, there is no explicit discrimination in the measure itself. It does not single out foreign internet gambling web sites; it bans all of them.
It then considered the "effect" of the measure:
Neither does RCW 9.46.240 have a direct discriminatory effect on interstate commerce. The statute prohibits Internet gambling evenhandedly, regardless of whether the company running the web site is located in or outside the state of Washington. ... The effects imposed on in-state and out-of-state entities engaging or that would engage in Internet gambling are the same. ... RCW 9.46.240 is not discriminatory under the dormant commerce clause.
I'm not quite sure how this analysis differs from the preceding part about the "language." It doesn't seem that they were looking at whether there was a disparate impact on out of state companies. I don't know exactly what they were looking at, and how it differed from the issue of whether there is explicit discrimination.
Next the Court gets into the issues of "likeness" (although that's not the term they use, of course) and disparate impact (sort of):
Rousso argues RCW 9.46.240 is discriminatory because the Internet gambling ban excludes Internet gambling web sites, all of which are out-of-state businesses, from the Washington market while leaving untouched an alternative service—in-state, "brick and mortar" (i.e., where individuals are physically present) gambling businesses. This argument misconstrues and misapplies the test under the dormant commerce clause in several ways.
First, Rousso misapprehends what constitutes a direct discriminatory effect on interstate commerce. The question is how the effects of the ban are imposed on in-state and out-of-state entities, not what the effect is on those entities' revenue. The ban on Internet gambling has the same effect on all entities, regardless of origin: a ban on the transfer of gambling information via the Internet.
The Supreme Court addressed this distinction in CTS Corp., 481 U.S. 69. There, state regulations hindering hostile takeovers of Indiana companies were deemed nondiscriminatory because they imposed the same effects on in-state and out-of-state entities. 481 U.S. at 87-88. It was immaterial to the Court's consideration that the majority of entities seeking to effectuate a hostile takeover of an Indiana corporation were out-of-state, and thus the law, as applied, would affect out-of-state entities more often. Id. at 88.
Second, Rousso alleges direct discrimination because banning Internet gambling will have a secondary effect of promoting in-state, Internet gambling substitutes—such as brick and mortar gambling. But this misses the mark on two counts. Internet gambling and brick and mortar gambling are two different activities, presenting risks and concerns of a different nature, and creating different regulatory challenges; a state can regulate different activities differently. The dormant commerce clause only prevents a state (under most circumstances) from discriminating based on whether the business is in-state or out-of-state. Again, RCW 9.46.240 treats all entities engaging in Internet gambling equally, regardless of origin.
Furthermore, the discriminatory effect under this analysis must be direct. Brown-Forman Distillers, 476 U.S. at 579; Bostain, 159 Wn.2d at 718. Here, the ban on Internet gambling has a direct effect on Internet gambling operations, preventing them from doing business in Washington. Rousso argues this ban has an effect on a substitute service—brick and mortar gambling—because individuals will gamble at casinos if they are unable to gamble on-line. But an increase of business for another industry is not a direct effect of the ban; the ban makes no mention nor imposes any regulation on brick and mortar gambling. This alleged secondary effect on brick and mortar gambling will also occur for any goods or services a person might purchase or use instead of banned Internet gambling - whether a person instead engages in on-line stock trading, buys more snacks for an in-person poker game among friends, or signs up for cello lessons. Increased revenues for in-state banks, snack producers and grocery stores, and music teachers would also constitute "discriminatory effects" under Rousso's argument, but again, these are secondary effects. Purchasing substitute goods and services does not constitute direct discriminatory effects.
On the comparability of the services at issue, the Court refers to internet and "brick and mortar" gambling as "different activities." Presumably, they think that these services are not "like," to use the WTO term. However, they didn't really go into much detail. I didn't find this part of the reasoning all that convincing. Not that I think "bricks and mortar" gambling is definitely "like" internet gambling, but I would have been interested to see more analysis of this issue, in particular the degree of substitutability. Their reference to spending money on other activities, such as "cello lessons," seems to miss the key point here.
As to the role of disparate impact, they seem pretty dismissive of this. I'm not really sure why. I would have liked to see how they dealt with this factor if they had found that the services were "like" (that is, not "different activities").
The Court concluded as follows on the discrimination point:
The discriminatory language or direct effect step of the dormant commerce clause weeds out laws that regulate by virtue of whether a business is in-state or out-of-state. It ferrets out "simple protectionism." See id. at 471. RCW 9.46.240 applies based upon whether an individual—regardless of origin—is engaged in Internet gambling operations. The statute does not directly discriminate against out-of-state businesses in favor of in-state ones.
At this stage, the Panel turned to the issue of whether "the burden on interstate commerce [is] 'clearly excessive' in relation to a legitimate state interest?" (This part is somewhat parallel to the GATT/GATS exceptions.) Here, the Court said:
Because neither the language nor direct effect of RCW 9.46.240 is discriminatory, the statute does not violate the dormant commerce clause if (a) there is a legitimate state purpose and (b) the burden imposed on interstate commerce is not "clearly excessive" in relation to the local benefit, considering also whether the local interest could be promoted in a way that would impose a lesser impact on interstate commerce.
With regard to the "state interest" here, the Court explained:
The State wields police power to protect its citizens' health, welfare, safety, and morals. On account of ties to organized crime, money laundering, gambling addiction, underage gambling, and other societal ills, "[t]he regulation of gambling enterprises lies at the heart of the state's police power." ...
Internet gambling introduces new ways to exacerbate these same threats to health, welfare, safety, and morals. ... Washington has a legitimate and substantial state interest in addressing the effects of Internet gambling.
It then noted the burden placed on interstate commerce by the ban:
RCW 9.46.240 imposes a burden on interstate commerce by walling off the Washington market for Internet gambling from interstate commerce. ... preventing Internet gambling businesses from having access to Washington consumers who would otherwise patronize those businesses still has a considerable impact on interstate commerce. This burden on interstate commerce is comparable to the substantial state interest stemming from the State's police power to protect the health, welfare, safety, and morals of its citizens.
Finally, the Court considered whether this burden is "cearly excessive" in relation to the state interest:
... The phrase "clearly excessive" carries with it a sense of "too much"—that is, whether the burden is clearly unnecessary to achieve the state interest, whether that same interest could be protected in another way while imposing a lesser burden on interstate commerce. We thus consider whether the State clearly could avoid threats to health, welfare, safety, and morals posed by Internet gambling equally as well in a manner that imposed less of a burden on interstate commerce.
Rousso argues regulating Internet gambling is a less restrictive alternative. This falls short of the mark because (1) it is not clear regulation could avoid concerns over Internet gambling as well as a complete ban and (2) it is not clear, even if regulation providing comparable protection is possible, the burden on interstate commerce would be decreased through that regulation. ...
... Under the dormant commerce clause, we observe only that it is not clear that regulation of Internet gambling could protect state interests as fully as, or at least in a comparable way to, a complete ban.
Moving on to the interstate commerce burden, Washington regulation of Internet gambling would be an interstate-commerce burdening nightmare. ...
Even assuming there is an equally effective, Internet equivalent to Washington's brick and mortar regulations, Washington would need to impose its regulatory requirements and intrusive vigilance on foreign on-line operations to regulate foreign Internet gambling. The very structure and practice of those foreign operations would need to be reorganized in conformity to Washington regulations. When a foreign operation failed to conform, all Washington commerce on that web site would be precluded.
And when the conflict is not with only one web site, but also the regulations of the country of origin of that web site, that country would be blacklisted from Washington on-line gambling. ...
...
Rather than impose its pervasive regulation on Internet gambling, Washington could permit Internet gambling without regulating it at all or, as Rousso suggested at oral argument, Washington could trust in the regulatory systems of the native countries of the Internet gambling web sites to protect Washington citizens. But whether either of these options would address the concerns of Internet gambling as effectively as a complete ban is not clearly established here, nor could it be.
...
... Under the dormant commerce clause, the burden on interstate commerce is not "clearly excessive" in light of the state interests. RCW 9.46.240 does not violate the dormant commerce clause.
So, after considering alternative measures, the Court finds that the internet gambling ban is not "clearly excessive."
All very interesting, and I would be curious to see how the WTO would deal with such a measure. And for that matter, I'd be curious to see how the U.S. Supreme Court deals with it. In that regard, the plaintiff said he is planning an appeal:
Rousso said he would appeal to the U.S. Supreme Court, and he said he was also considering filing an additional action in federal court.
"I think this is an important issue of constitutional law," he said.
