ECJ judgment in the Betfair and Ladbrokes cases: new exception to the applicability of the transparency principle in the gaming sector?
By Justin Franssen, attorney at law, and Frank Tolboom, legal assistant, VMW Taxand, Netherlands, article first published in European Gaming Lawyer magazine, Autumn issue 2010 p. 30 – 32.
On June 3, 2010, the ECJ rendered preliminary rulings in the Dutch betting cases Betfair/Minister of Justice (C-203/08) and Ladbrokes/De Lotto (C-258/08) addressing the compatibility of the Dutch gambling legislation with key principles of EU law.
As generally anticipated, the rulings seek alignment with the Bwin/Santa Casa case: member states have a significant margin of discretion with which to define the requisite level of protection and may therefore opt for a single-licence system, provided that the ensuing restrictive measures are objective, non-discriminatory and proportional.
Moreover, the consideration as put forward in the Bwin/Santa Casa case regarding the rejection of the principle of mutual recognition, is again reiterated.
Consequently, it will no longer suffice for foreign licensed operators of games of chance to invoke their foreign licence in order to gain access to other member state markets in which a legitimate monopolist is active. In this respect the decisions are considered a setback to the interests of private operators.
It should be noted that the Betfair case also created a new battleground, in this case not the legality of a monopoly system being questioned, but the way a monopoly is granted and to which entity. The ECJ stated that the principle of transparency applies to the procedure for the granting of a gaming licence in a single-licence system, which essentially means that the licence-awarding procedure has to be opened up to competition.
However, the ECJ also provided two exceptions to the applicability of the transparency principle. The absence of any competitive tendering would not appear to be disproportionate if “the member state concerned decides to grant a licence to a public operator whose management is subject to direct state supervision or a private operator whose activities are subject to strict control by the public authorities” (par. 59).
In particular, the second “private operator under strict control” exception is rather controversial. This article will focus on the implications of the “private operator under strict control” exception. First, the Ladbrokes case will briefly be discussed.
ECJ ruling Ladbrokes/DeLotto (C-258)
Rejection of mutual recognition
With reference to the Bwin/Santa Casa case, the ECJ once again rejects the principle of mutual recognition: Article 49 EC must be interpreted as not to preclude the Netherlands’ legislation on games of chance, under which exclusive rights to organise and promote games of chance are conferred to a single operator, and which prohibits any other operator, including an operator established in another member state, from offering games of chance in the Netherlands via the internet (par. 58).
Furthermore, both Betfair and Ladbrokes tried to differentiate between actively and passively offering cross border gaming services. They argued that only an active offering of services can lead the applicability of the Betting and Gaming Act. Interestingly, the ECJ deems it to be irrelevant whether “an operator who offers games of chance via the internet, does not pursue an active sales policy in the member state concerned, particularly because he does not advertise in that state (par. 56).”
Implementing restrictive measures
The ECJ subsequently examined the question whether, in each separate case, the national court is required to determine whether an implementation measure, in the case at hand an order issued to Ladbrokes to block access to its website by Dutch residents, safeguards the underlying objectives of the gaming policy and is in compliance with the principle of proportionality.
Starting from the premise that the Netherlands’ gaming policy is compatible with Article 49 EC (currently Article 56 TFEU), the answer by the ECJ to this question is in the negative, insofar as the implementing measure (par. 50): 1) is necessary to ensure the effectiveness of the Netherlands’ legislation; and 2) does not include any additional restriction over and above that which arises from the Dutch Gaming Act itself.
The aforementioned consideration carries the risk that a member state could argue, based on the above reasoning of the ECJ, that measures in the form of payment blocking and ISP blocking, could qualify as implementation measures essential for the effective enforcement of gambling regulation and accordingly do not require any separate justification. In that case the court would no longer be required to determine in every specific case whether the payment and ISPblocking measures effectively safeguard the objectives of gambling regulation and can be deemed proportionate.
Relationship between expansion policy and consumer protection
Ladbrokes stated that the overall gaming policy was not part of a consistent, proportionate and systematic policy to reduce betting opportunities in the Netherlands. Ladbrokes argued that the Dutch gaming policy is characterised by the introduction of new games of chance and extensive advertising campaigns.
In its grounds for the decision (paragraphs 15-22), the ECJ upholds established case law and concludes that the Netherlands legislation on gaming “that seeks to curb addiction to games of chance and to combat fraud, and which effectively contributes to the achievement of those objectives, can be regarded as limiting gaming activities in a consistent and systematic manner, even where the holder of an exclusive licence is entitled to introduce new games and/or to advertise” (par. 38). However, the ECJ bestows on the Dutch court the considerable task of establishing:
1) whether the fact that the single licensee is allowed to offer new games and advertise is part of a policy of controlled expansion of gambling activities that aims to channel gamblers into lawful activities (par.27)
2) whether the offering of new games of chance means the Netherlands is pursuing a policy of substantially expanding betting and gaming, by excessively inciting and encouraging consumers to participate in such activities, principally with a view to social fundraising and that this is not merely an incidental beneficial advantage. If this is the case then the ECJ “must conclude that such a policy does not limit betting and gaming activities in a consistent and systematic manner” (par. 28)
3)whether in the context of thatassessment, the unlawful gaming activities may constitute a problem in the Netherlands and whether the expansion of authorised and regulated activities could solve such a problem. The expansive policy cannot be regarded as consistent unless the scale of unlawful activity is “significant” (par. 29 and 30)
In this respect we can also refer to the three preliminary rulings (Carmen Media, Markus Stoss and Winner Wetten) delivered on September 8, 2010, regarding the German legislation handed down by the ECJ which confirms that the “German rules do not limit games of chance in a consistent and systematic manner”, because “the holders of public monopolies carry out intensive advertising campaigns with a view to maximise profit from lotteries, thereby departing from the objectives justifying the existence of those monopolies.”
However, it must be noted that the German gambling legislation does not contain the objective of channeling consumers to legal offerings so the line of reasoning is different than in the Dutch betting cases.
ECJ ruling Betfair/Ministry of Justice
Application of transparency principle
The ECJ has once again confirmed prevailing case law and stated that member states have to apply the principle of transparency in the gaming sector for the award of (exclusive gaming) licences.
“Without necessarily implying an obligation to launch an invitation to tender, that obligation of transparency requires the concession-granting authority to ensure, for the benefit of any potential concessionaire, a degree of advertising sufficient to enable the service concession to be opened up to competition and the impartiality of the procurement procedures to be reviewed.”
It has been argued that the transparency principle only applies to a multiple licensing system such as in Italy (see Commission/Italy C-260/04), but the ECJ concluded that the transparency principle is also applicable to a single licence system.
The ECJ further stated that there is no need to draw a distinction between the restrictive effects of granting a licence compared to renewing a licence. Referring to its established case law, the ECJ noted that the grant of licences should be based on objective, non-discriminatory criteria known in advance, in such a way as to circumscribe the exercise of the authorities’ discretion so that it is not used arbitrarily. The ECJ concluded that the Dutch licensing system did not fulfill these conditions.
The ECJ rejected the Dutch government’s argument that the restrictions resulting from the system of granting licences to a single operator are justified by overriding reasons in the public interest (par.57): “It should be pointed out, however, that the findings of the national court to which the Netherlands government refers relate, in general, to a system of exclusive licences as provided for by the Wok [Gaming Act] and not, specifically, to the procedure for the renewal of a licence granted to an operator who has the exclusive right to organise and promote games of chance.”
Accordingly, the ECJ makes a clear distinction between a justifiable ground for the restrictive effects of a single-licence system (in principle, deemed by the ECJ to be present) and a justifiable ground for the restrictive effects of the absence of a transparent tendering procedure for the grant of a single licence. The ECJ refrains from any further in-depth examination of the latter, since it is evident that such justification is required to be present and is a subject matter for assessment by the national court. However, the ECJ makes clear that increasing consumers’ expenditure on gaming and the risks of addiction are consequences which do not have to be feared at the stage of issuing a licence.
Exceptions
The ECJ stated in paragraph 59 two situations where the grant of exclusive rights, or the renewal of such rights, without any competitive tendering procedure would not appear to be disproportionate in the light of the objectives pursued by the Dutch Gaming Act: “In any event, the restrictions on the fundamental freedom enshrined in Article 49 EC which arise specifically from the procedures for the grant of a licence to a single operator or for the renewal thereof, may be regarded as being justified if the member state concerned decides to grant a licence to, or renew the licence of, a public operator whose management is subject to direct state supervision or a private operator whose activities are subject to strict control by the public authorities.”
The ECJ explicitly referred to the Laara and Santa Casa cases, but did not elaborate further on these exceptions. The Dutch exclusive licensees in question are both private companies so it is for the Dutch court to ascertain whether their activities are subject to strict control by the public authorities. If the Dutch government fails to demonstrate that the transparency principle does not apply, it could threaten the position of the established monopolies in the Netherlands because the granting of the exclusive licence will be open for competition. Therefore, it is very important to determine the exact scope of the exceptions stated in the controversial paragraph 59 of the decision.
Further analysis: new exception to application of the transparency principle?
In principle, the transparency principle is a mandatory prior condition of the right of a member state to award to one or more operators the exclusive rights to offer games of chance. However, some argue that the ECJ provided with paragraph 59 (“private operator which activities are subject to strict control”) a new and broad exception to the application of the fundamental principle of transparency.
This conclusion will certainly be used by member states to avoid obligatory tender procedures. Because many member states grant licences to private operators whose activities are in some way strictly controlled, this could possibly erode the fundamental principles of equal treatment and transparency. This is unlikely to have been the objective of the ECJ and it seems that for various reasons the implications of the “strict control on private operators” exception is rather limited.
First of all, it is important to note that the assessment of “strict control” relates to the proportionality and necessity test. It must be noted that as the ECJ underlines in all gaming cases, the competent national authorities should first demonstrate that their procedures to grant or renew the licence actually meet an overriding reason in the public interest as established in case law (such as consumer protection, the prevention of both fraud and incitement to squander money on gambling, as well as the general need to preserve public order).
Only if member states could demonstrate that the absence of a transparent licensing procedure is justified based on overriding reasons in the public interest, it should be determined whether the procedure also complies with the proportionality principle and the necessity requirement. If there are no objective grounds for justification to grant or renew a licence without a transparent procedure, there is no need to carry out a review of the situations mentioned in paragraph 59 (directly controlled public operators or private operators under strict control of the authorities).
In this respect the ECJ made clear that it is important to distinguish between the justification grounds for competition on the market, from the effects of a call for tenders (competitions for the market). Both AG Bot and the ECJ stated in this respect that increasing consumer expenditure on gaming and the risks of addiction are not consequences to be feared at the stage of issuing a licence so it could not be an objective ground to justify non-transparent allocation.
AG Bot even stated that it can also be argued that adherence to those conditions (consumer protection and combating crime) would be ensured better by a call for tenders if the capacity to adhere rigorously to those conditions forms part of the criteria on the basis of which a licence is issued. Therefore, it is not inconceivable that it will be hard for member states to demonstrate that nontransparency is justified by overriding reasons in the public interest.
Secondly, ECJ case law already established that in-house operations (or socalled quasi-in-house departments) are exempted from the obligation of transparency (see also Opinion AG Bot in the Betfair case) if:
1) the public authority exercises the same control over the licensed operator it exercises over its own department
2) the entity carries out most of its activity with the public authority controlling it
3) the selected entity is not open to private investments
4) the selected entity is conferred with public interest tasks
It can be reasoned that the “strict control on private operators” exemption in paragraph 59 could not be perceived as a new and broad exception. Although the above mentioned conditions in general are applicable to public operators, it should be noted that the ruling in Santa Casa shows that, although pursuant to its articles of association Santa Casa is a private-law legal person, the specific circumstances of the case (see par. 12-19, 65-67 Bwin/Santa case) give rise to the conclusion that the Portuguese authorities can indeed control Santa Casa as if it were a quasi in-house department.
Furthermore, Santa Casa is not open to private capital; there is no involvement whatsoever by private investors. Santa Casa is only in theory a private company, but the very specific circumstances leads to the conclusion that it fulfills the above mentioned conditions. Therefore, it is consistent with standing European public procurement law that Santa Casa is exempted from the application of the transparency principle. In this respect there seems to be no dramatic departure from established case law.
Thirdly, in the wake of the Betfair case the ECJ delivered preliminary rulings in the German betting cases (Carmen Media, Markus Stoss and Winner Wetten) and the Austrian case (Engelmann), which also concerned the application of the transparency principle.
In the Engelmann case the ECJ concluded that “the obligation of transparency and the prohibition of discrimination on grounds of nationality precludes the grant without any competitive procedure of all the concessions to operate gaming establishments in the territory of a member state” (par. 59). It is noteworthy that the court did not discuss at all whether there could be (or currently is) strict control on the operator (Casinos Austria AG) and thus a possible exemption on the application of the transparency principle.
Apparently the ECJ believes that the specific circumstances can in no way be compared to the Santa Casa or Laara cases so they did not even asses the “private operator under strict control” exception.
Conclusion
Both the Ladbrokes/De Lotto and Betfair/Ministry of Justice cases have been referred back to the national courts.
Regarding Ladbrokes/De Lotto, the ECJ recognises that the policy objective of protecting the consumer against gaming addiction in principle is difficult to reconcile with an expansive gaming policy that is characterised by introducing new games of chance and extensive advertising campaigns. Consequently, the ECJ bestows on the national court the considerable task of establishing whether the Netherlands’ expansive policy is effectively aimed at combating illegality.
In the Betfair case the ECJ confirmed that the principle of transparency is applicable also in a one-licence system. A member state awarding rights to gaming operators is obliged to comply with the principle of transparency (as confirmed in the Engelmann case C-64/08). Only under very specific circumstances is it justifiable to derogate from this fundamental principle of EU law.
National authorities first have to demonstrate an overriding reason in the public interest requiring that an exclusive gaming licence be granted to a operator without applying the transparency principle. Only if there is a an objective justification for the absence of a transparent licensing procedure, the proportionality must be reviewed. In this context the ECJ asserts that it is not disproportionate to allocate a licence without a transparent procedure if the gaming licence is awarded to a “private operator whose activities are under strict control.”
Having regard to the specific facts and circumstances in the Santa Casa case as specifically referred to by the ECJ, it seems that the ECJ upholds its earlier (public procurement) case law regarding the criteria applicable for exemption from the application of the transparency principle. Given the fact that, in most cases, existing gambling monopolies differ from the very specific Santa Casa situation and are organised as relatively independent private companies, it is not likely that the “private operators under strict control” exception will easily be accepted by national courts.
The recent Engelmann case again confirms that the principle of transparency is a predominant principle of EU law ensuring the impartiality of licence-awarding procedures. The battleground has clearly shifted from the legality of monopolies towards the way monopoly licences are awarded. Private operators can perceive competing for a monopoly’s licence as a worthwhile route to gain market access in monopolistic-run regimes.
