Battle Over German Interstate Treaty Heading For Home Front Skirmishes

published on GamblingCompliance ltd. by James Kilsby, January 9th 2008

The German Interstate Gambling Treaty came into force as of January 1, despite doubts as to how enforceable the legislation will ultimately turn out to be. However, while some operators are pinning their hopes on European Commission action to overturn the treaty, a European decision may be years off and experts believe the first challenges are likely to emerge via domestic court action within the next few weeks.
After making rapid but belated progress through a number of state Parliaments over the Christmas period, the German Interstate Gambling Treaty came into force on January 1, 2008 – the very deadline set by the Federal Constitutional Court in March 2006 for new gambling legislation to be enacted in the country.

The Treaty’s adoption by all 16 sixteen German Lander preserves state lottery and sports betting monopolies until at least 2012 and bans throughout Germany the use of the internet for all gambling services (including authorised state games) with the exception of horserace betting. The Treaty also enables authorities to demand that German internet service providers block gambling websites and order banks and other financial institutions to block transactions between sites and German customers. Furthermore, the advertising of unauthorised gambling services in German media will be subject to more stringent restrictions under the treaty.

For German-facing private betting and lottery operators the future would seem to be bleak. However, observers of the legal situation in Germany have long pointed to doubts that have emerged over the controversial treaty’s enforceability. Several German courts have referred sports betting cases (brought under old legislation) to the European Court of Justice and the Federal Cartel Office has expressed its reservations over the constitutionality of the regionalised division of the German lottery market amongst the individual state lottery companies.

It is on the European Commission in Brussels that most of the attention now seems to be focused, however. In two Detailed Opinions on the draft version of the Interstate Treaty issued in the first half of 2007, the European Commission clearly suggested that the treaty was not compliant with EC law. The Commission can initiate formal infringement proceedings against Germany now that the treaty has formally come into effect.

A spokesman for Paddy Power, which launched a German-language version of its service in 2006, said this week that Paddy Power expects the European Commission to overturn the ban, echoing the opinion of a spokesman for Bwin’s German subsidiary Bwin e.K. who said in a December 18 interview that the company expected the ECJ to have taken action to prevent Bwin’s exclusion from the German online gaming market by the second half of 2008.

In reality, European Commission infringement action is unlikely to have a great impact in Germany in the short term. In accordance with article 226 of the European Treaty, the Commission must first send Germany a formal letter, to which the German Government will have a period of two months to respond, before deciding whether to elevate the proceeding to the level of a Reasoned Opinion.

If the Commission remains dissatisfied with Germany’s response to this second letter, only then can it refer the matter to the ECJ, which has the power to impose punitive sanctions on non-compliant EU Member States. It would likely take two years for the case to be heard in the European court, however, and it is worth noting that the Commission has yet to even refer any of the ongoing infringement proceedings against various Member States’ sports betting legislation to the ECJ, even though some of those proceedings were first launched as long ago as April 2006.

According to Wes Himes, managing partner of lobbying firm Policy Action and European advisor to the Remote Gambling Association, any Commission action against the Interstate Treaty would be unlikely to proceed much faster. “The only thing that will accelerate the process is the fact that the Commission has already applied some intellectual firepower to this,” Himes told Gamblingcompliance.com. “It has already done its homework on the treaty [in issuing the two Detailed Opinions], but other than that the infringement process is the same.”

With the EU unlikely to be able to take direct action against Germany for several years, lawyers within the country believe that the battle against the treaty will instead commence in domestic courtrooms. “As has occurred in France and Italy, court proceedings will play the most important role,” says Wulf Hambach, gaming law expert with the Munich-based law firm Hambach and Hambach.

Hambach explains that private betting companies in Germany have previously initiated local court proceedings within each German state to apply for immunity from prosecution under gambling laws by arguing, for example, that the company’s licence issued elsewhere within the European Union should entitle that company to operate throughout the EU. Several gambling operators, including private lottery company Tipp24, have intimated their intention to launch legal action to protect their rights to operate within Germany now that the latest treaty has entered into force.

It may also be possible to claim direct compensation in certain states, says Martin Arendts, gaming lawyer with the firm Arendts Anwalte, particularly if the operator is issued with a prohibition order by a state authority.

It is possible in certain German states to take direct action against the state Acts of Parliament bringing the provisions of the Interstate Treaty into local effect. Bwin e.K., for example, has already said that it will pursue damages worth €4bn from four states. However, taking such action is complicated, according to Arendts. “Companies could sue for compensation with regards to prohibition orders, but it is not so easy under state Acts,” Arendts told Gamblingcompliance.com.

The earliest challenges are likely to be appeals against prohibition orders issued by state authorities to private betting shops in Germany. The first of these appeals could even be made in preliminary hearings within the next few weeks, says Arendts. “How these first decisions go will be crucial,” Arendts says. “Will they be in favour of the bookmakers or the state authorities?”

The penalties for violating the various provisions of the Interstate Treaty vary from state to state. Media owners found guilty of marketing or advertising unauthorised gambling services can be subjected to a fine of between €250,000 and €500,000, depending on where the action is brought.

Regulations concerning the sanctioning of online gambling operators have yet to be finalised, however. Gamblingcompliance.com understands that provisions detailing the level of administrative fines faced by internet-based operators were withdrawn from the enacting legislation after states failed to notify them to the European Commission.

The impossibility of administrative sanctions for online operators would seem to reduce internet gambling operators’ liability under the treaty to a degree but, as Hambach and Hambach’s Susanna Münstermann points out, operators could still be subject to criminal prosecution under the German Criminal Code. Operating gambling without proper authorisation is punishable under the code by a prison term of up to five years.

At present, a number of German-facing websites continue to operate in defiance of the ban but Münstermann suggests that online activities could yet be strangled if the relevant gambling authorities approach internet service providers with a view to blocking the sites. “This approach would be more like an order, not a polite request,” Münstermann says.

With so many question marks surrounding the treaty, private operators and other groups are continuing to lobby against it. Operators Bwin and Interwetten, along with sports clubs such as Werder Bremen and VFB Stuttgart and media groups including Eurosport, have established the Kein Monopol (“Without Monopoly”) campaign.

Despite the inauguration of the Interstate Treaty, observers remain optimistic that Germany’s restrictive gambling market will eventually be liberalised to some degree. “I am convinced that the Lander or the German Government will open up at least the sports betting market, or choose not to enforce the treaty as it has so many weak points,” concludes Hambach.

Arendts, however, does not anticipate such wholesale change to occur within the short term and believes that a breakthrough will not be achieved until the European Court of Justice rules over the sports betting cases referred from courts in Gieβen and Stuttgart. “There definitely won’t be a clear legal situation in Germany over the next two years,” Arendts told Gamblingcompliance. “Not before the ECJ pronounces a really clear decision.”