Germany’s regulatory framework: recent developments

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

Arendts Rechtsanwälte
Perlacher Str. 68
D - 82031 Grünwald (bei München)
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) 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 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 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.‘