German Online Casino Looks To Loophole in Internet Gambling Ban

by James Kilsby, GamblingCompliance Ltd., April 8th, 2008

A Casinos Austria-owned online casino will soon begin to offer its games to residents in the German state of Lower Saxony following a court victory last week, despite the general prohibition on internet gambling in Germany under the Interstate Treaty which came into force in January 2008. The Treaty’s draconian provisions may mean the internet casino is short-lived, but its very existence could further undermine the already maligned Treaty, say legal experts.

Rainer Chrubassik, managing director of Casinos Austria’s Spielbanken Niedersachsen GmbH (SNG), says that SNG has begun preparations for the launch of a full suite of online casino games following the decision by the Higher Administrative Court of Luneberg last Thursday. The court rejected an attempt by the state of Lower Saxony to appeal a decision issued in August of last year which upheld SNG’s right to offer internet casino gambling in the state.

SNG was acquired by Casinos Austria International in 2005 and currently holds a licence to operate the 10 land-based casinos in Lower Saxony. The terms of that licence also include the possibility of offering online casino games, but state authorities have refused to grant SNG final permission to proceed.

The court last week agreed with SNG that the law applicable at the time of SNG’s application did not impose any prohibition on internet gambling services in Germany, and that Lower Saxony therefore had no right to deny SNG authorization to develop an online casino. However, the ruling did not take into account the Interstate Gambling Treaty which came into force on January 1, 2008.

The Interstate Treaty establishes a general prohibition on the use of the internet for all forms of gambling in Germany (except horserace betting) but was not at issue in the SNG hearings as the Luneberg court received Lower Saxony’s reasoning before the treaty came into effect, says Claus Hambach, founding partner of Munich-based law firm Hambach and Hambach.

Therefore, it remains possible that Lower Saxony could launch new proceedings against the online casino website, he said. Alternatively, the court may decide that it has already issued a definitive ruling on the SNG case and refuse to hear a new challenge.

“It is hard to predict what will happen as offering an online casino definitely breaches the wording of the Interstate Treaty, but SNG could not be subject to criminal law as it is in possession of a valid state licence,” Hambach told GamblingCompliance.

SNG said in a press release that it expected to be permitted to operate regardless of the new treaty as applicable gambling legislation in Lower Saxony specifically “permits the operation of an online casino for and in the state of Lower Saxony.” SNG is only permitted to offer its online casino games within state borders.

The case of those looking to overturn the new treaty will be strengthened if SNG is able to launch its own, legitimate internet casino within Germany, according to Hambach. Certain online gaming websites, including the state-owned Wiesbaden online casino and Irish bookmaker Paddy PowerPortfolio have already withdrawn from the German market as a result of the new treaty. But even though the treaty has sought to outlaw internet gambling, conflicting court rulings have allowed operators such as Bwin e.K., which has an old GDR sports betting licence, and now possibly SNG, to continue in operation.

“Everywhere we have these small islands where the authorities cannot enforce the new treaty, which suggests it will not be possible to achieve interstate treaty’s stated aims,” Hambach said.

According to Chrubassik, it will be impossible to maintain a blanket ban on internet gambling in Germany, and the state treaty’s player protection aims would be better served by regulation.
“It is impossible to implement a ban on internet gaming sites. The clock cannot be turned back on the reality of the internet,” he said. “Only licensed internet gaming sites can meet regulatory channeling requirements and prevent players from turning to illegal, unregulated sites. [SNG] are committed to these requirements.”

The Higher Administrative Court of Baden-Württemberg voices serious doubts as to the consistency of politics in the area of games of chance in Germany

In a case represented by the law firm Hambach & Hambach, the Higher Administrative Court of Baden-Württemberg (VGH) allowed an appeal against a dismissive judgement by the Administrative Court (VG) of Karlsruhe. Just as in the previous resolution dated 12 Feb. 2008, leave to appeal was also granted in these parallel proceedings in a resolution dated 3 Mar. 2008 (ref: 6 S 1408/07), due to substantial doubts as to whether politics regulating games of chance in Germany are implemented in a consistent way.

The plaintiff requested a declaration stating that its licence – issued for Great Britain – is also valid in the German Federal State of Baden-Württemberg, and that this licence is to be regarded as a licence in the sense of section 284 StGB (Strafgesetzbuch – German Criminal Code). The VG of Karlsruhe dismissed the claim, stating as the reason that the sports betting monopoly in Germany was in compliance with European law. It assumed that the restrictions of the freedom of establishment and the freedom to provide services, which resulted from the state monopoly, were implemented in compliance with community law. It was wrong to assume that the VGH in the next instance would back this decision, which is what it had done during the transitional period up until 31 Dec. 2007.

However, the VGH now has an entirely different evaluation of the new legal situation. In its reasons for the decision, the VGH explains that considerable doubts remain with regard to the statements made by the VG on the case, as it had been questioned conclusively in the proceedings whether the evaluation of a consistent and systematic contribution to the limitation of betting activities, which is necessary for a justification of a state monopoly under community law, must be based only on the state’s betting politics or whether it should also be based on the state’s entire politics relating to games of chance.

“Should the latter be the case, or have to be seriously considered, it could not be finally decided on the basis of the determinations made by the Administrative Court, whether the differing restrictions can be justified by the differences existing in the markets for the respective games of chance.”

It can be seen from this comment that the VGH wishes to take the pending statement from the ECJ into consideration for the decision-making process for this judgement. In the meantime, eight cases have been suspended, and questions regarding the interpretation of community law have been submitted to the ECJ requesting a reply (most recently: VG of Schleswig in proceedings in the main action, resolution dated 30 Jan. 2008).

This obvious U-turn by the court of appeal is to be welcomed, as the Court had – as recently as November 2007 – been of the opinion that a consistent and systematic restriction of betting politics could be assumed (resolution dated 5 Nov. 2007, 6 S 2223/07 par. 19). This re-alignment can also be noted for other courts of appeal; for instance, the VGH of Hesse also decided in favour of suspensions in similar cases (e.g. ref. 7 A 14/08), as it held that this was the only way to ensure the priority of application of community law.

New Decision by the BGH (German Federal Court of Justice) on Betting Law: Legal History or U-Turn?

On Monday 14 February, the I. Zivilsenat (first division for civil matters) at the Bundesgerichtshof (German Federal Court of Justice) dismissed in four cases action filed by state-run gambling providers (among others Westlotto) against private sports betting providers holding GDR and EU licences (among others bwin). In its press release, the BGH headlined: “Old cases of offering and operating sports bets do not constitute a violation of competition”. Initial press reports state that “the flood of law suits against providers of sports bets was thrown out on Thursday by the Bundesgerichtshof (BGH)”.

In its 2004 decision, the previous instance, the OLG (Higher Regional Court) of Hamburg had made reference to the so-called “Schöner Wetten“ decision of the BGH and had stated in the headnote:

“The only basis for the evaluation of the question of a violation of competition is the lack of a domestic licence. The question as to whether the applicable provisions of the laws of the respective Federal State are unobjectionable under European law and/or whether the process of issuing licences is actually being conducted free of discrimination, is not decisive, at least from the point of view of competition law. (Court’s headnote).”

Now, in its most recent press release dated 14 Feb. 2008, the BGH states as follows:

“(…) the previous instances had held that the prohibition of illegal gambling, enforced by penalties, does not violate European Community law nor German Constitutional Law. (…) The Bundesgerichtshof has not assented to this evaluation. The landmark decision by the Bundesverfassungsgericht (Federal Constitutional Court) dated 28 March 2006 (1 BvR 1054/01) is said to mean that the state betting monopoly in Germany, in the legal and actual form it had taken during the decisive period of time before 28 March 2006, represented a disproportionate interference with the freedom of profession of persons interested in professional activities of this kind, this therefore being inconsistent with Art. 12 paragraph 1 GG (Grundgesetz – German Constitution). At the same time, it represented an unjustified restriction of the freedom of establishment and the free movement of services guaranteed under Art. 43 and 49 EC. Due to the state betting monopoly’s inconsistency with the Constitution and with Community law during the period of time before the judgment of the Bundesverfassungsgericht on 28 March 2006, Section 284 StGB (Strafgesetzbuch – German Criminal Code) could not be applied to the offering of sports bets in the cases to be decided here, where acts carried out in the years 2003 to 2005 are to be considered (so-called “old cases”).”

This means that, while the BGH in the “Schöner Wetten” decision in 2004 expressly demanded a German betting licence in order to exclude the applicability of Section 284 StGB, it now abandons this principle and turns to Community law.

Thus, if the new state treaty on gambling also violated Community law, an EU licence would be sufficient to exclude the applicability of Section 284 StGB, and thus a violation of competition. And a lot speaks for this inconsistency with EU Community law:

In the letter to the German Federal Government initiating infringement proceedings against the German Federal Government, the EU Commission states among other points that Sections 284, 285 and 287 violate the free movement of services guaranteed under Art. 49 EC.

Furthermore, a violation of the German gambling monopoly against Art. 43, 49 EC is being examined by the European Court of Justice, after referral of this question to the ECJ by the VG (Administrative Court) of Schleswig in a decision achieved by the law firm Hambach & Hambach.

The new decision by the BGH has far-reaching significance beyond competition law and beyond the so-called “old cases“. The highest German court for civil matters unambiguously subjected the central provision of the entire gambling law to the priority of application of Community law. This also is of decisive importance for the legal situation under the new state treaty, a fact which has also been confirmed by the European Commission in its most recent letter.

Hambach & Hambach Law Firm obtains referral to the ECJ

As already mentioned in our press release of 31 January 2008, the Administrative Court of Schleswig-Holstein (VG Schleswig-Holstein) decided to stay the main proceedings brought by Hambach & Hambach Law Firm, its subject matter being the validity of a European license for a sports betting offer in Schleswig-Holstein and to refer the relevant Community Law questions for a preliminary ruling by the ECJ.

Background on the Administrative Court of Schleswig-Holstein’s Gambling Monopoly Decision of 30 January 2008

In the course of the oral hearing the Administrative Court of Schleswig Holstein already voiced its legal opinion that a sports betting monopoly can only be justified by the goal of fighting compulsive gaming, if all legal provisions and factual regulations of a Member State with respect to the entire gaming market – and not only to those concerning the sports betting- and lottery monopoly – are made the subject of the examination as to a systematic and coherent gaming limitation. The judge drew a very graphic comparison on this: In the case that a state ban or monopoly on wine and beer were to be justified by the dangers of alcoholism, it would hardly be coherent, if other alcoholic beverages such as Schnapps would keep being available over the counter.

This courageous court decision shortly after the coming into effect of the Interstate Treaty on Gambling shows, that the doubts already expressed by the jurisprudence in several earlier decisions to stay proceedings (VG Stuttgart, decision of 24 July 2007, VG Gießen, decision of 7 May 2007, VG Köln, decision of 21 September 2007) with regards to the conformity of the former legal situation with Community Law apply to the new Interstate Treaty on Gambling as well.

As soon as the end of last year (decision of 8 November 2007) the Administrative Court of Appeal of Hesse (Hessischer Verwaltungsgerichtshof (VGH)) had suggested that its current jurisdiction, which declared the hitherto existing measures to be sufficient, was solely based on the transition period granted by the Federal Constitutional Court’s (Bundesverfassungsgericht) sports betting decisions until 31 December 2007. The pending proceedings however are stayed, with regards to the legal questions already referred, since, in the view of the Administrative Court of Appeal, the answer to these questions referred and thus the decision on the requirement of an “overall consistency” in particular is of crucial importance.

The Administrative Court of Appeal points to the inconsistency of the state objective invoked as a justification for the state monopoly on the one hand and the actual conduct of the state as gaming operator on the other hand and cites the EU-Commission’s letter of formal notice in the infringement proceedings no. 2003/4350, para. 38. One could therefore determine that, in defiance of the increased addiction potential of casino games, the German authorities kept pursuing expansionary politics in this area. The number of licensed casinos for example had expanded from 66 in the year 2000 to 81 in the year 2005.

Regarding the fact, that the requirements of the ECJ are not fulfilled despite the Interstate Treaty on Gambling coming into effect, the court explains:

“Regarding the question of a coherent and systematic limitation of gambling, the court is therefore not capable to find that the ECJ’s requirements for enacting a valid limitation were complied with. A holistic view of all licensed and permitted offers of games of chance is obviously nonexistent. Only such a holistic view can enable the legislator called upon to comprise the perceived dangers of gaming- and gambling addiction for the individual and society and to provide the necessary remedies.”

Moreover, the Administrative Court of Schleswig explicitly explains that it does not share the opinion expressed by the Administrative Court of Appeal of Hamburg (OVG Hamburg) in its decision of 9 March 2007, but instead acted on the assumption that the ECJ’s decision of 9 March 2007 did not result in a break-up of the market into different gambling sectors. Looking at a single gambling sector one did not only have to consider prevalent sports betting but the other various forms of gambling as well. In this respect the Administrative Court of Schleswig refers to the EFTA Court’s judgement of 3 May 2007 (Landbrokes Ltd. ./. Norway; case E-3/06) and thus corrects a frequently observed misinterpretation of this judgement. This decision states that the national court must “decide on the consistency of the gaming policies”.

Amongst others, in its decision the EFTA Court addresses the question, whether it was compatible with the freedom to provide services, that a Member State provides for a monopoly system for certain gaming sectors. The Court formulates a very general answer to this, stating that a limitation of the freedom to provide services is admissible, if it is established for reasons of overriding general interest and the measures taken to achieve this objective are adequate, consistent and do not exceed the necessary extent for its implementation. The interesting question with regards to the German legal situation, that is, whether a regulation of a Member State can still be regarded as a coherent and systematic measure to allow for a limitation of the freedom to provide services, if only few gaming sectors are affected by the state monopoly, whereas those games with high addiction potential are liberalised, was not answered by the EFTA Court. The EFTA Court merely declares that, with regards to the examination of Adequacy and Consistency of a measure, it was up to the national court to assess the consistency of the gaming policies (para. 52). Moreover, the necessity of a state monopoly could be at stake, if there was only a very low protection level. The national court could use the number of licensed gambling possibilities and types to determine the existing level of protection. In particular, the number of gambling offers per week/day, the number of outlets, sales- and marketing strategies and the development of new games had to be taken into account for the assessment (para. 60). From these explications one can understand that the national court should assess the consistency and necessity of the given regulations applying a holistic view.

With regards to the fact that the diverging directions of statutory provisions in Germany are attributed to differing legislative authority the Administrative Court of Schleswig-Holstein explicates:

“In the opinion of the chamber federal particularities regarding legislative authority of the Federation and the states cannot justify a state monopoly applying to one sector of potential games of chance, especially since Art. 74 para. 1 no. 11 of the Constitution provides for the federal legislator’s concurrent legislative authority on sports betting and lottery matters.”

It was this deliberation that caused the Administrative Court of Schleswig-Holstein to submit this question, which explicitly includes that the diverging regulations are incoherent with regards to the danger of addiction and are attributed to the diverging legislative authority of the Federation and the states:

“Is Art. 49 EC-Treaty to be interpreted to the effect that it conflicts with a national state monopoly on the operation of sports betting and lotteries (with more than minor addiction potential) justified by the need to fight compulsive gaming, if other games of chance with considerable addiction potential may be offered by private service providers and the different statutory regulations regarding sports betting and lotteries on the one hand and other games of chance on the other hand are based on the differing legislative authority of the federation and the states?”

In case this question is answered in the affirmative by the ECJ the Administrative Court of Schleswig-Holstein asks for an additional ruling on the two following two questions:

c) Is Art. 49 EC-Treaty to be interpreted to the effect that it conflicts with a national regulation that leaves the granting of a license for the operation and the transfer of games of chance to the licensing authority’s discretion even in case that the statutory requirements for granting such a license are fulfilled?

d) Is Art. 49 EC-Treaty to be interpreted to the effect that it conflicts with a national regulation that prohibits the operation and the transfer of public games of chance via the internet, in particular, if – although limited to a transition period of one year – the operation and the transfer via the internet complying with youth- and gamer protection provisions is permitted in order to observe the principle of proportionality and to allow two commercial gaming agents, who had been operating via Internet so far, to adapt to the distribution channels to be permitted by the Interstate Treaty?

The Administrative Court of Schleswig-Holstein has thus already suggested which steps it is going to take in case that the state monopoly is declared illegal. For, even if an online sports betting operator is in principle capable of obtaining a license, it is of material importance whether the decision to grant a license is left to the authority’s discretion or if the latter must grant the license provided that all requirements are fulfilled. Following the European Commission’s deliberations on this issue, a decision based on the authority’s discretion is probably going to pose the great risk of discriminatory decisions. The same applies for the transition period for internet offers, which does first and foremost boil down to privileging German operators and thus constitutes a form of discrimination as well.

In a next step the Hambach & Hambach law firm is going to prepare a written opinion regarding the questions referred to the ECJ and is full of expectation as regards to the ECJ-proceeding.

A Black Day for the new German State Treaty on Gambling

The Verwaltungsgericht (Administrative Court) of Schleswig – like the EU Commission -thinks that EU laws are being violated and has decided to refer questions relating to European law issues in the context of the new sports betting monopoly to the ECJ.

The 30th day of the new year 2008 was, from the legal point of view, definitely anything but a good day for the advocates of the State Treaty on Gambling, which is only a few weeks old. This is because on Wednesday this week, the young Treaty was not only sharply attacked by the European Commission; the VG of Schleswig – like the EU Commission – also thinks that EU laws are being violated and has decided to refer questions relating to European law issues in the context of the new sports betting monopoly to the ECJ.

The hearing in Schleswig pertained to the law suit filed by an online provider of sports bets based in Gibraltar who – represented by Hambach & Hambach Law Firm – is looking for the acknowledgement of his European licence for the German Federal State of Schleswig-Holstein as well, as he can invoke the European freedom to provide services.

The background: According to the European Court of Justice, the freedom to provide services also applies for offers provided on the gambling market. However, restrictions to this freedom are possible, provided they are aimed at pursuing general interest objectives and provided the measures taken are suitable and proportionate. The Federal State of Schleswig-Holstein invokes the objectives stipulated in the State Treaty on Gambling, i.e. the combat of gambling addiction and the protection of minors. The private sports betting company replies that the State Treaty on Gambling above all is intended to safeguard the Federal States’ fiscal interests, and thus cannot create a consistent and systematic regulation. The area of slot machines in particular, which is especially relevant with regard to addiction issues, is not affected by the new regulation. Even when looking at the area of sports betting in isolation, the regulation lacks consistence, as (Internet) horse race betting continues to be liberalised under German Federal legislation. Also, according to a current survey by the Deutsche Hauptstelle für Suchtfragen (German Institution for Addiction Issues, Jahrbuch Sucht 2008), the addiction dangers of lotteries is 0.0%. Lawyer Ms. Münstermann states that “a monopoly can hardly be justified by reasons of player protection if the danger in the monopolised areas is close to zero, and if at the same time gambling offers which actually do present dangers are being liberalised.” Lawyer Dr. Wulf Hambach adds “The referral to the ECJ is a consistent and correct decision by the VG of Schleswig, and is definitely in our client’s best interests.”

The VG of Schleswig asks the ECJ whether consistent and systematic restrictions of the sports betting market are possible, when areas which are relevant with regard to addiction are not included in the scope of application – as is the case with the State Treaty on Gambling:

“The Chamber has expressed legal concerns as to whether the objective of preventing gambling addiction and protecting minors – on which the State Treaty between the Federal States is based – may lawfully exclude private providers from the area of lotteries and sports bets only. Other forms of gambling, for instance slot machines, which are regulated by Federal statutes, are not subject to such restrictions.”

(Source: Press release of the VG of Schleswig dated 30 Jan. .2008)

The concerns expressed by the VG of Schleswig are obviously shared by the European Commission, which makes the following consideration in its press release dated 31 Jan. 2008:

“However, it should be noted that in Germany horse race betting on the Internet is not prohibited and slot machines have been widely expanded. Moreover, advertising of games of chance by mail, in the press and on radio is still permitted.

The European Court of Justice has previously stated that any restrictions which seek to protect general interest objectives, such as the protection of consumers, must be “consistent and systematic” in how they seek to limit activities.”

(Source: Press release of the Commission IP/08/119

Link: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/119&type=HTML&aged=0&language=EN&guiLanguage=en)

This is a body blow to the State Treaty on Gambling which will – only one month after it has come into force – not only occupy the European Commission in infringement procedures, but also the ECJ due to the referral by national courts. The 30 Jan. 2008 will probably not have been the last Black Day for the young monopoly. It may, however, be the day which heralded the beginning of the end of the new State Treaty on Gambling.