Last week, the World Trade Organization issued a surprise ruling in a case brought by the island nation of Antigua and Barbuda against the U.S. The ruling claims that U.S. laws restricting Internet gambling violated global trade agreements signed in the early 1990s, raising a number of issues for U.S. gambling companies such as MGM Mirage (NYSE:MGG), Mandalay Resort Group (NYSE:MBG), and Caesars Entertainment (NYSE:CZR).
The ruling comes as Congress is debating proposals to specifically ban taking or placing bets over the Internet. Most officials consider betting across state lines illegal, and this legislation would solidify its outlaw status. The WTO ruling is the first involving the Internet, and although the ruling applies only to companies based in Antigua and Barbuda, it opens the door to any number of suits from other nations, such as Costa Rica, Panama, and Australia, eager to tap the U.S. gambling market.
U.S. gaming companies are facing the possibility that offshore Internet gambling could be legal in the U.S., while gambling sites run by U.S. companies could be prohibited. MGM Mirage enthusiastically entered the offshore Internet gambling market some years back, but found it unprofitable without access to U.S. customers. Many of the existing offshore gaming interests have also realized how important it is to have access to the U.S. market. Hence, this lawsuit.
In the U.S., gambling is regulated by the states, and this ruling implicitly denies their sovereignty on the issue. The introduction of legalized Internet gambling will have a negative effect on state lottery sales, a fact that won't go over well in state legislatures around the country. It's doubtful the states will roll over and give up the gambling revenue, and U.S. gaming interests are likely to encourage resistance.
Antigua and Barbuda's victory is likely to be more symbolic than substantive, because it'll be years before the U.S. has to comply with the ruling. Plus, resistance from state lawmakers, and the inevitable lobbying by U.S. gaming interests, will virtually guarantee non-compliance. I think Congress will eventually come up with a legislative compromise giving U.S. citizens the right to gamble online, possibly in return for a special tax. Demand exists, and the federal government needs to decide if it wants the dollars to flow out of the country or stay here at home.
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Fool contributor Chris Mallon is a terrible gambler, and he doesn't own shares in any of the companies mentioned here.
