20 January 2007

Legal Problems regarding the projected Interstate Treaty on Gambling

On 13 December 2006, the state prime ministers of the 16 German states agreed to a new draft of a new Interstate Treaty on Gambling (Glücksspiel-Staatsvertrag) against the single vote of the state prime minister of Schleswig-Holstein, i.e. from a sportive point of view 15 : 1. On 1 January 2008, this new Interstate Treaty shall become effective and replace the current Interstate Treaty on Lotteries, which came into force on 1 July 2004. According to the perception of the agreeing states, this new treaty shall regulate gambling law in a constitutional way after the Federal Constitutional Court’s fundamental decision of 28 March 2006 on sports betting. The new treaty shall explicitly include sports betting (which is disputed with regard to the current Interstate Treaty on Lotteries) and shall contain explicit provisions for casinos. Nonetheless, particularly addictive slot machines will not be regulated by the new Interstate Treaty.

According to the will of the 15 consenting state prime ministers the state sports betting and gaming monopoly shall be upheld for further four years. A licensing system, allowing private operators to be licensed as well, which was proposed and supported by many, was rejected by the majority.

However, the procedure of passing the new treaty as well as the content of the new Interstate Treaty on Gambling is highly problematic from a legal point of view. The following legal aspects have to be considered:

Is market foreclosure compatible with Community law?

The current as well as the projected Interstate Treaty lead to a foreclosure of the German gambling market with regard to operators from other EU Member States as well as those from the European Economic Area (EEA). Only German state operators or those related to them are legally allowed to offer sports betting and other games of chance, whereas private operators as well as state operators from other Member States are left out by the monopoly. Especially Internet offers, which are particularly suited for the cross-border provision, will be completely forbidden without any objective reasons.

The evidently intended market foreclosure by the states is in particular a violation of the freedom to provide services and is therefore neither compatible with EU law nor with EEA law.

Are the requirements set forth by the Federal Constitutional Court being implemented?

The Interstate Treaty is meant to create a consistent legal situation for all 16 German states. An Interstate Treaty which is not adopted by all states leads to a split legal situation in Germany and therefore exactly not to a coherent, comprehensible and systematic legal regulation. However, from a constitutional point of view, such a coherent regulation for the whole area of gambling is necessary to uphold the monopoly. The requirements set forth in the decision of the Federal Constitutional Court of 28 March 2006 are therefore not implemented by an Interstate Treaty which is not applicable in all the states.

May private competition be banned?

The projected Interstate Treaty does not take into consideration concerns and objections voiced by the Federal Cartel Office (Bundeskartellamt). The Cartel Office repeatedly stressed that the rest of marginal competition had to be upheld. The complete ban of private competition is neither compatible with German nor with EU competition law.

As we already mentioned in no. 50 of our newsletter German Gaming Law updated, the Court of Appeal of Düsseldorf explicitly retained that an Interstate Treaty cannot suspend European competition law. From a constitutional point of view, a transitional period as short as one year should not be able to be upheld.

Legitimacy of the 13/16 rule?

According to the draft of the new Interstate Treaty, it comes into effect, if it is ratified by 13 of the 16 state parliaments. This is not compatible with the principle of Federalism and violates the state parliaments’ rights. The Interstate Treaty leaves open the consequences for the (up to three) states in which the Treaty will not come into effect.

What happens to the current Interstate Treaty?

Every treaty, the current Interstate Treaty included, can be annulled or modified by unanimous decision. Without such a unanimous decision one could only think of a unilateral termination. The current Interstate Treaty on Lotteries, in its Art. 17, provides for a termination with a period of two years to the end of a calendar year, with the first termination possibility on 30 June 2014. The other states, even by a clear majority vote, can not release themselves from their obligation towards their contractual partner Schleswig-Holstein.

Conclusion: If the majority of the German states will continue to pass and implement the new Interstate Treaty, this will certainly lead to considerable legal disputes on German as well as on European level.

District Court of Nuremberg-Fürth acquits sports betting agent

The District Court of Nuremberg-Fürth (Landgericht Nürnberg-Fürth), by decision of appeal of 14 December 2006 (file no. 14 Ns 372 Js 11605/2005), acquitted a sports betting agent on the charge of having engaged in illegal gambling (Art. 284 German Criminal Code).

The court declared in its decision that it now follows the reasoning of the Court of Appeal of Munich (Oberlandesgericht München), it had postulated in its decision of 26 September 2006 (file no. 5 St RR 115/05) as court of last resort. The Court of Appeal of Munich based its decision not to judge the transmission of sporting bets to a bookmaker, licensed in another EU Member State, as a criminal offence particularly on the supremacy of Community law. The District Court declared that all chambers of appeal and meanwhile even the public prosecutors subscribe to this view.

German Gaming Law updated No. 57

16 January 2007

Does WestLotto offer Sports Betting without a License?

The online magazine Spiegel Online reported already more than seven months ago that the state lottery operator of North-Rhine Westphalia, Westdeutsche Lotterie GmbH & Co. oHG (WestLotto), did not hold a license for operating sports betting (Dietmar Hipp: Oddset droht in NRW das Aus, Spiegel Online of 1 June 2006). WestLotto was therefore served a cease and desist letter and, according to a press release of an association of private betting operators, Verband Europäischer Wettunternehmer (VEWU), had to issue a statement, supported by contractual penalty, to refrain from claiming to be hold such a license on 12 January 2007 in proceedings before the Court of Appeal of Cologne (Oberlandesgericht Köln, case-no. 6 U 196/06). WestLotto thereby engages not to appear as license holder of sports betting operations anymore.

According to VEWU, a private bookmaker from Cologne and the German bookmaker’s association (Deutscher Buchmacherband e.V.) had filed suit. They had complained that WestLotto appeared as the operator of sports betting, whereas the holder of the license was in fact Nordwestlotto in Nordrhein-Westfalen GmbH (Nordwestlotto). According to VEWU, the Court of Appeal of Cologne considered proved that WestLotto was indeed not the holder of the license. The Court expressed severe doubts as to the legal construction invoked by WestLotto in order to justify its operation. Thereupon WestLotto made a statement to refrain. WestLotto now has time until 31 January 2007 to establish a legal situation.

According to documents produced by WestLotto upon summons of the Court of Appeal of Cologne, it was in fact Nordwestlotto which filed for a license for the operation of sporting bets with fixed quota (“ODDSET-Wette”) in the state of North-Rhine Westphalia on 14 December 1999. Thereupon the Ministry of the Interior of North Rhine-Westphalia granted Nordwestlotto the “license for the operation of a betting enterprise for sporting bets with fixed quotas” on 11 January 2000. Management of this operation by WestLotto is not mentioned in the text of the license itself; instead it explicitly mentions the operation by Nordwestlotto. In the aftermath it was not Nordwestlotto who apparently operated ODDSET bets, but exclusively WestLotto. The last annual report of 2005 of WestLotto reports sports betting revenues as its own revenues (page 27) and the license of 11 January 2000 is mentioned under “licenses/concessions” granted to WestLotto (page 35). Under the participation conditions, a gaming contract is concluded between the operator (WestLotto) and the participant. WestLotto therefore is the bookmaker and bears the economic risk of an operator. At least from a civil law point of view, agreements like those between a principal and an agent do not seem to exist. In addition Nordwestlotto evidently is not accountable.

On the other hand, WestLotto argued in several court proceedings that Nordwestlotto acted as the “responsible body” (Träger) with regard to sports betting, whereas WestLotto was commissioned with the management (which cannot be concluded by the terms of license, but only by the participation conditions). Furthermore WestLotto produced a strange letter of the Ministry of the Interior of the state of North-Rhine Westphalia of 7 December 2006 stating that “for reasons of clarification” it informed that the license of 11 January 2000 applied to the “management of the operation of sporting bets” by WestLotto as well.

Commentary: Regarding the sports betting business this is insanity by method. Only a state enterprise could possibly have an almost seven year old license, duly signed by the state prime minister, the minister of the interior and the minister of finance, be referred to another company by a civil servant. The fact that a state operator apparently acts without a license does not surprise anymore. Possible penal sanctions will have to be examined. Last year already a criminal investigation was initiated on these facts, but will probably come to nothing. For the rest, in several court proceedings WestLotto had maintained to hold a license for operating sports betting. One will have to examine whether this does not constitute an act of deceitful plea or malicious use of process.

(German Gaming Law updated No. 62)

Bavarian Administrative Court of Appeal: Media Agency does not have to ban advertisement for private sports betting

The Bavarian Administrative Court of Appeal (Bayerischer Verwaltungsgerichtshof) decided that it is illegal for the Bavarian Ministry of Science, Research and Art to order the Bavarian Agency for New Media (Bayerische Landeszentrale für neue Medien) to ban advertisement for private sports betting with regard to the channels it supervises (decision of 9 January 2007, case-no. 7 CS 06.2495). The Court affirmed the decision of the Administrative Court of Munich and dismissed the complaint of the Ministry of Research.

The Ministry’s action was caused by a commercial of the sports betting operator betandwin (now: bwin). The Ministry of Research had therefore ordered the Agency for New Media to immediately ban the transmission of advertisement for non-state sports betting offers immediately. It argued that private sports betting was in violation of Art. 284 par. 1 German Criminal Code (illegal gambling) in connection with Art. 2 par. 4 Bavarian State Lottery Act. The Agency for New Media resisted. For an intervention on the basis of media law, it argued, the preliminary question, whether the offered bet was really illegal, had to be clarified first. The Agency for New Media filed suit and a petition for temporary relief.

In its decision of 8 August 2006 (case-no. M 17 S 06.2945), the Administrative Court of Munich granted the Agency temporary relief against the instruction to immediate comply with the order. The Administrative Court of Appeal affirmed this decision and explicated that under the Bavarian Media Act (Bayerisches Mediengesetz) measures of supervision with regard to “programme matters” were barred. Commercial advertisement was part of the respective programme and therefore was counted amongst such “programme matters”. Therefore, the absolute exclusion of measures of legal supervision had to be applied to advertisement as well. The Bavarian legislator did not make a difference between more constitutionally protected media coverage and less protected media elements such as advertisement. For the rest, the legal situation with regard to nationwide online advertisement for regionally licensed sports betting was not clear. With respect to the Community law questions to be clarified, one had to await the concluding decision of the European Court of Justice.

(German Gaming law updated No. 61)

Federal Court of Justice expresses doubts about the punishability of transferring sporting bets

The Federal Court of Justice (Bundesgerichtshof) expressed substantial doubts about the punishability of transferring sporting bets. With decision of 29 November 2006 (file no. 2 StR 55/06), the Federal Court of Justice therefore annulled the conviction of the accused sports betting agent by the District Court of Frankfurt am Main (Landgericht Frankfurt am Main). The District Court had accused the agent of committing the crime of illegal gambling in accordance with Art. 284 German Criminal Code by transferring sporting bets without a licence to a London based company, which (only) holds an UK license.

The Federal Court of Justice provides the following reasoning:

The contested decision is subject to doubts with respect to the Federal Constitutional Court’s decision of 28 March 2006 – 1 BvR 1054/01 (NJW 2006, 1261) – regarding the unconstitutionality of the Bavarian sports betting monopoly – and various decisions of the European Court of Justice (in particular its decision of 6 November 2003 – Case C 243/0 1- Gambelli – regarding the violation of Community law by Italian sports betting provisions). For further details reference is made to the statement of the Federal Prosecutor in its brief of 28 June 2006 and the described practise of the Hessian prosecutors to dismiss criminal proceedings in similar cases.”

In the brief cited by Federal Court of Justice, the Federal Prosecutor argued that it was questionable whether “criminal law could serve to enforce a state monopoly that is in violation of German constitutional law as well as Community law”. In addition, the Federal Prosecutor referred to the reasoning of the Court of Appeal of Stuttgart (Oberlandesgericht Stuttgart) in its decision of 26 June 2006 (file no. 1 Ss 296/05) which stated that the risk of extremely diverging and in part contradicting jurisprudence of criminal courts and administrative courts did not have to be carried out at the expense of a citizen.

Commentary: Considering the decision of the Federal Court of Justice, it seems now to be clarified with regard to criminal law that the cross-border transmission of sporting bets is not subject to punishment. Since not only the Federal Court of Justice but other Courts of Appeal (of Munich and Stuttgart), District Courts (of Ratisbon, Munich, Ravensburg, Essen, Berlin and others) as well as scores of County Courts (of Bielefeld, Munich, Ratisbon, Essen, Biberach and others) decided against classifying the transfer of sporting bets as a punishable offence after the sports betting decision of the Federal Constitutional Court of 28 March 2006, punishment should be excluded due to the lack of guilt at least. Art. 284 German Criminal Code is not applicable due to the primacy of Community law, if the bookmaker, to whom the bets are transferred to, is licensed in his country of origin.

(German Gaming law updated No. 60)

Administrative Court of Appeal of Schleswig-Holstein grants temporary relief against an order of prohibition

With its decision of 2 January 2007 (file no. 3 MB 38/06), the Administrative Court of Appeal of Schleswig-Holstein (Oberverwaltungsgericht Schleswig-Holstein) dismissed the Free and Hanseatic City of Lübeck’s appeal against a decision of the Administrative Court of Schleswig-Holstein and also granted protection to a sports betting agent. The Administrative Court, in its decision of 23 August 2006, had followed the agent’s petition for relief and restored the suspensive effect of the agent’s objection against the prohibition order of the City of Lübeck. According to the Administrative Court, the agent could invoke constitutional law as well as Community law principles.

Community law is material to the Administrative Court of Appeal as well. In particular, the court points out that punishability of transferring sporting bets to a private operator in accordance with Art. 284 German Criminal Code was more than doubtful after the ECJ’s Gambelli decision of 6 November 2003. The outcome of the main proceedings was therefore correctly judged as open.

The required consideration of the interests at stake turns out in favour of the agent. The Administrative Court of Appeal can not see why the private operators’ continued activity until the end of this year (the end of the transition period set forth by the Federal Constitutional Court) should lead to a an endangerment of concerns of the public good. The “additional harmful effects” are not identifiable to the Administrative Court of Appeal. In the view of the year long practise of state lottery operators and the activity of private operators on the market, already the Administrative Court was incapable of identifying such dangers.

Commentary: It is to be welcomed that, after the Administrative Court of Appeal of Saarland, a further Administrative Court of Appeal sides with Community law and disagrees with the open suspension of Community law by the Administrative Court of Appeal of North-Rhine Westphalia. The Administrative Court of Appeal of Schleswig-Holstein correctly points to the fact that the Federal Constitutional Court did not examine the question of a possible violation of Community law by the state monopoly for sports betting. The alleged punishability of transferring sporting bets is highly problematic (as the Federal Court of Justice now pointed out). The only justification left over for a ban, the alleged “negative effects” of private agents, are evidently not seen as sustaining. In fact the state operators have not cared for the protection of minors or for fighting gambling addiction so far, reasons that are now often advanced for justifying the state monopoly. With regard to Community law, especially with regard to the ECJ’s Lindman decision, the state has to prove that negative effects can exclusively be faced or met by a monopoly (without milder means such as sanctions or supervisory measures being suitable).

(German Gaming law updated No. 60)

02 January 2007

Germany: Germany's regulatory framework: recent developments (world online gaming law report 11/2006)

Recent proposals for a new interstate treaty prohibiting internet gambling, conflicts between community law and domestic courts' decisions, and a recent antitrust ruling against 'Deutscher Lotto- und Totoblock' by the Federal Cartel's Office, affirmed by a Dusseldorf Court of Appeal, means the current German position is one of confusion. Martin Arendts, an Attorney-at-law, at Arendts Anwalte, examines the current position.

Measures against foreign operators

In Germany, the legal situation with regard to sports betting and gambling is still in turmoil. The long-awaited landmark decision of the Federal Constitutional Court (Bundesverfassungsgericht)1 on sports betting did not bring legal certainty, especially as it did not expressly deal with the Community law issues. The 16 German state lottery operators (one in each state, either a private company or an authority), cartelized in the Deutscher Lotto- und Totoblock, have urged the authorities to wage 'war' on private gaming operators and private betting shops. Alongside intensive political lobbying, members of the Deutscher Lotto- und Totoblock sued many private operators from other EU Member States, invoking unfair competition and infringement of trademarks. Until now, most of the politicians have been supporting the proposal to uphold the monopoly at any price (with several exceptions, though). As a result, several hundreds of betting shops (transferring bets to licensed operators in the UK, Gibraltar, Austria, Malta or to private operators with a license from the former GDR) have been closed, or ordered to close, over recent months. Also, prohibition orders were served on private operators. Apart from that, hundreds of criminal proceedings were initiated against agents and operators.

Draft of a new Interstate Treaty on Lotteries

In the sport betting decision of the Federal Constitutional Court, the state monopoly, in its current form, was clearly held to be unconstitutional. Fiscal reasons, such as the promotion of sports, cannot justify the state monopoly. However, instead of declaring the act in question - the Bavarian Act on Lotteries2 - to be null and void, the Court ordered the legislator to change the law. According to the decision, the law governing sports betting must be reconsidered and amended before the end of 2007. The legislator may choose between two ways of regulating sports betting. It may either keep the state monopoly, but with clear limitations for marketing and sales, or it may liberalise the market, by opening it up to private operators (thus abandoning the state monopoly). Advertising for ODDSET, the sports betting provider for the state operators, is prohibited for the transitional period, instead only factual information is allowed. The state operators are also not allowed to introduce new products.

As a result of the decision of the Federal Constitutional Court, a new legal framework for gaming has been decided by the prime ministers of the German states at a meeting in Bad Pyrmont, in October 2006, upholding the state monopoly. The draft of a new Interstate Treaty on Lotteries (Lotterie-Staatsvertrag) has been discussed and shall be signed on 13 December 2006, at the next meeting of the prime ministers. This draft now expressly covers sports betting and also contains provisions for casinos. According to the draft, offering gambling (which, according to the proposed legal definition, also covers betting) over the internet is illegal, as well as advertising it. This is meant to also restrict foreign operators and the cross-border offering of gambling. According to several reports, the authorities already discussed how to block gambling websites and how to restrict payments to foreign operators (following the ideas behind the Unlawful Internet Gambling Enforcement Act).

However, it is questionable whether the draft, in its current version, would survive a legal revision. Imperative provisions of anti-trust law and Community law cannot be overruled by state law, as the Court of Appeal of Dusseldorf recently pointed out.

Application of Community law

The Constitutional Court could not, and did not, have the competence to decide on Community law. The primacy of Community law still applies. Nonetheless, the Constitutional Court noted that operating and conveying sports betting was approved by Community law and could therefore not be reserved to the public authorities. For the rest, the court cited the ECJ's Gambelli decision and pointed out that verifying the justification of the state monopoly, according to the German Constitution, had to be conducted parallel to the verification according to Community law.

Although the Court mentioned Community law as relevant, a growing conflict between national German law and Community law, often neglected by German courts and authorities, becomes apparent. Prevailing Community law, unlike the Act on the Federal Constitutional Court,3 does not provide for temporary regulation and a transitional period. Therefore, the current legal situation in Germany - despite the Federal Constitutional Court's requirements (prohibiting advertisement for the state betting offer) - remains incompatible with Community law. Several criminal decisions have confirmed this. The Court of Appeal of Munich (Oberlandesgericht Munchen), in its decision of appeal on 26 September 2006,4 holds that the transmission of sports bets is not punishable under the current legal situation.

However, a controversy between German criminal courts and administrative courts seems to arise, as the Bavarian Administrative Court of Appeal (Bayerischer Verwaltungsgerichtshof ) believes not to be bound by this criminal law assessment.5 Several administrative courts even suspended the basic freedoms guaranteed by the EC Treaty. The Administrative Court of Appeal of North-Rhine Westphalia,6 despite establishment of a violation of Community law, 'invented' a sort of 'transitional period' for the application of Community law. As a reaction, a German court has now, for the first time ever, referred a sports betting case to the ECJ in accordance with Article 234 EC Treaty. The Administrative Court of Cologne (Verwaltungsgericht Koln), in its decision of 21 September 2006,7 would like to know whether national provisions (in this case, the provisions regarding the North-Rhine Westphalian state monopoly) can be applied for a transitional period, despite their violation of the freedom to provide services and of the freedom of establishment.

On 4 April 2006, the European Commission also initiated infringement procedures against Germany and six other Member States.8 Germany responded by a letter set up by the governments of the states (Lander). In case of insurmountable positions, these cases will have to be resolved by the ECJ. The Commission's opinion on the cases is expected in the near future.
Anti-Trust Proceedings against Deutscher Lotto- und Totoblock

The cooperation of the members of the Deutscher Lotto- und Totoblock is regulated under a contract of alignment (Blockvertrag). The market allocation and market foreclosure thereby achieved, as well as the coordination of actions concerning private operators, has to be regarded as extremely problematic from an anti-trust law point of view. This considerably interferes with, constrains and, in part, completely excludes competition. Therefore, the Federal Cartel Office (Bundeskartellamt) forbade the DLTB to exclude the private gaming agent, Faber, in 1995. This was affirmed by the Federal Court of Justice (Bundesgerichtshof) in its Faber decision of 1999. In recent years, the DLTB has, nonetheless, increasingly tried to restrict competition. On 23 August 2006, the Federal Cartel Office therefore issued a decision against Deutscher Lotto- und Totoblock and its members.9 The Office found a breach of Article 81 EC Treaty and Art. 1 of the Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschrankungen GWB) and Article 82 EC Treaty and Art. 21 par. 1 GWB. One could not assume that the operators acted in a sovereign capacity, since games of chance were also offered abroad (Luxembourg), new products were developed, the gaming rhythm was shortened and the gaming offer was being advertised significantly.

The state operators filed appeal against the Federal Cartel Office's decision and proceeded by filing for temporary relief with regard to the decision (so that they would not have to implement the Federal Cartel Office's injunctions). However, the Cartel Senate of the Court of Appeal of Dusseldorf (Oberlandesgericht Dusseldorf), in its decision of 23 October 2006,10 affirmed the Federal Cartel Office's injunctions in its material points and only clarified the wording of some of the injunctions.

Thereupon, the Deutscher Lottound Totoblock immediately announced it would proceed against the Court of Appeal's decision and it would file an appeal (Rechtsbeschwerde) with the Federal Court of Justice. An affirmation of the Federal Cartel Office's injunctions by the Federal Court of Justice would probably mark the end of Deutscher Lottound Totoblock in its current form. The first and foremost goal of restricting competition in the German market, by market allocation within Germany and by market foreclosure towards the exterior, could not be pursued anymore.

The Court of Appeal of Dusseldorf affirmed that Deutscher Lotto- und Totoblock constituted an association of undertakings, in terms of Article 81 EC Treaty and Art. 1 GWB. The members had documented their common intention to act in concert with regards to the federal market for the commercial transfer of games of chance. This was done with the intention of preventing competition.

The Court of Appeal's findings as to the relation of the current Interstate Treaty on Lotteries (which went into force on 1 July 2004) and Community law are of special interest. An illegal territorial allocation could not be justified by state provisions:

'Neither performing the task of warding off dangers for public safety and order nor the states' legislative competence in the domain of gaming and lotteries (so called "lottery sovereignty") lead to a legal or logic exclusion of competition between the different lottery operators. (...) On the other hand - and this is essential - state law cannot abrogate European anti-trust law. (...) As far as the Interstate Treaty on Lotteries intends to prevent competition between undertakings beyond the public task of securing an adequate gaming offer in the respective state, it is in breach of Article 10 EC Treaty, which insofar obliges not to apply state law.'

For the rest, the Court of Appeal finds the regionalisation of gaming proceeds deriving from commercial agents to be illegal. This would sustain and reinforce the illegal territorial assignment, as practised by the state operators. The incentive to compete for those proceeds would be curbed from the beginning. According to the Court of Appeal, the states' financial sovereignty could not justify the breach of anti-trust laws either.

'Financial sovereignty and European anti-trust law coexist side by side. This means that the states' financial sovereignty is amongst others limited by the provisions of European anti-trust law. Competition restraining agreements are not legal for reasons of being embedded in an interstate financial equalisation scheme.'

1. Bundesverfassungsgericht, decision of 28 March 2006, case-no. 1 BvR 1054/01.
2. Bayerisches Staatslotteriegesetz.
3. Bundesverfassungsgerichtsgesetz.
4. case-no. 5 St RR 115/05.
5. decision of 4 October 2006, case-no. 24 CS 06.2229.
6. Oberverwaltungsgericht NordrheinWestfalen, decision of 28 June 2006, case-no. 4 B 961/06.
7. case-no: 1 K 5910/05.
8. IP/06/436.
9. case-no. B 10-92713-Kc-148/05.
10. case-no. VI - Kart 15/06.