The Importance of Competition Law for the German Gaming Market – ISA-GUIDE.de

The Importance of Competition Law for the German Gaming Market

Rechtsanwalt Martin Arendts, M.B.L.-HSG

Arendts Rechtsanwälte
Perlacher Str. 68
D - 82031 Grünwald (bei München)
Tel.: +49 89 649111-75
Fax: +49 89 649111-76
E-Mail: martin.arendts@anlageanwalt.de
1. Initial Situation

The 16 German state lottery operators (one in each state, either a private company or an authority) have united to form the Deutscher Lotto- und Totoblock (DLTB). From a legal point of view, this constitutes a partnership under the German Civil Code, without acting in sovereign capacity. Their cooperation 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 already 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 and exclude private gaming agents.

2. The Anti-Trust Proceedings

On 23 August 2006, the Federal Cartel Office therefore issued an extensively reasoned decision (case-no. B 10-92713-Kc-148/05) of 200 pages against the Deutsche Lotto- und Totoblock, its 16 members as well as the Free and Hanseatic City of Hamburg (cf. our commentary in German Gaming Law updated no. 40).

The lottery operators concerned 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). The Cartel Senate of the Court of Appeal of Düsseldorf (Oberlandesgericht Düsseldorf), in its decision of 23 October 2006 (case-no. VI – Kart 15/06), affirmed the Federal Cartel Office’s injunctions in its material points and only clarified the wording of some of the injunctions.

Thereupon, the Deutscher Lotto- und Totoblock immediately announced to proceed against the Court of Appeal’s decision and to file an appeal (Rechtsbeschwerde) with the Federal Court of Justice.

3. Subject Matter of the Anti-Trust Proceedings

The ongoing anti-trust proceedings concern three different issues:

(1) The request of the Deutsche Lotto- und Totoblock that the state operators shall stop to accept any stakes placed with commercial “terrestrial providers of gaming” (land-based distribution channels: receiving offices, fuel stations, supermarkets and other shops).

(2) The principle of regionalism (Regionalitätsprinzip), that is, the fundamental understanding in the contract of alignment to exclusively operate lotteries and sports betting in the territory of one’s own state.

(3) The so called “little” Interstate Treaty on Regionalising Revenues, according to which transactions from commercial gaming agents are apportioned by a specific quota, that is “regionalised”.

The Federal Cartel Office found this behaviour to be in breach of German and European competition law. It constituted this to be a behaviour of untertakings restricting competition. Regarding the first issue, the Office found a breach of Article 81 EC Treaty and Art. 1 of the Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen – GWB) and Article 82 EC Treaty and Art. 21 par. 1 of the Act against Restraints of Competition. With regards to the other two points the Office found a violation of Article 81 EC Treaty. One could not assume that the operators acted in a sovereign capacity, since games of chance were offered abroad (Luxembourg) as well, new products were developed, the gaming rhythm were shortened and the gaming offer was being advertised significantly (EUR 108 m).

4. Key statements of the current decision of the Court of Appeal of Düsseldorf

The Court of Appeal of Düsseldorf affirmed the Federal Cartel Office’s legal assessment. The Deutscher Lotto- und Totoblock constituted an association of undertakings in terms of Article 81 EC Treaty and Art. 1 of the Act against Restraints of Competition. 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 to prevent competition. In addition, the lotto companies were not charged with warding off dangers for public safety and order. This was incumbent upon the competent authorities.

The Court of Appeal’s findings as to the relation of the Interstate Treaty on Lotteries (Lotterie-Staatsvertrag) 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.”

5. Consequences for the further development

As one could expect from the Federal Cartel Office’s decision, material points of the new legal framework for gaming as decided by the prime ministers in Bad Pyrmont in October have now become obsolete by the decision of the Court of Appeal of Düsseldorf. It is nonetheless surprising with how much ignorance the “dukes” of the German states treat imperative provisions of anti-trust law and Community law. They can not override prevailing law, which was already pointed out by the president of the Federal Cartel Office. The operators’ and the states’ infringements can neither be justified by police law nor by the states’ financial sovereignty.

The new Interstate Treaty on Lotteries which is supposed to become effective on 1 January 2008 (cp. German Gaming Law updated no. 42) and which became necessary after the Federal Constitutional Court’s fundamental decision of 28 March 2006 is clearly unlawful in its current draft. The limitation of the sales region to a single state clearly is in violation of German and European anti-trust law. It will therefore have to be revised radically in order to survive a legal revision.

Private sales companies (“commercial gaming agents” under the current Interstate Treaty on Lotteries), which the Deutscher Lotto- und Totoblock and the states tried to eliminate, receive a chance to succeed in competing as a result of the very positive anti-trust proceedings so far. Gaming services may especially be offered “terrestrial”, that is at the supermarket counter and at fuel stations for example. This means significantly increased competition for the more than 26.000 currently existing acceptance offices of the state gaming offer (who really have not cared a lot about the protection of minors and other police law standards, cp. German Gaming Law updated no. 39). Sales and distribution over the Internet is legal as well (and was, by the way, pushed by the state operators).

An affirmation of the Federal Cartel Office’s injunctions by the Federal Court of Justice would probably mark the end of the Deutscher Lotto- und 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 lottery companies will inevitably compete in terms of conditions and as well as in terms of proceeds if the regionalisation would cease to exist. They would also increasingly care about revenues from private distribution companies.

One can only hope that the necessary restructuring will lead to at least some reduction in scheming between state politicians and state lottery companies. In addition, an independent supervisory authority should be installed in order to supervise the lotto companies’ and the gaming shops’ compliance with the legal requirements, since, so far, there is an evident lack of control. Control by the ministry of finance, which inevitably favours fiscal aspects, can not be effective, which was already pointed out by the Federal Constitutional Court.

Other illegal behaviour of the state operators, such as market foreclosure, was not subject matter of the current anti-trust proceedings. The Deutscher Lotto- und Totoblock tries to hold off foreign bookmakers and gaming operators from other EU Member States with all political and legal means, whereas, on the other hand, the German state operators are themselves active in other Member States. This aspect will be treated during the ongoing infringement proceedings against Germany, initiated by the European Commission. In a recent edition of the German magazine “Der Spiegel” the Single Market commissioner McCreevy correctly called for “equal rights for all”.