Interstate Treaty on Gambling: Blocking orders against ISPs and banks? What the experts say

TIME Law News 2 | 2009

A commentary by Attorney at law Dr. Wulf Hambach, Founding Partner, and Attorney at law Susanna Münstermann, Senior Associate, Hambach & Hambach Law Firm.

Berlin. – Under the patronage of the Verband der deutschen Internetwirtschaft e.V. (eco) (Association of German Internet Businesses), in cooperation with the law firm Hambach & Hambach, an experts’ conference was held on 26 March 2009, dealing with the legal and technical side of demands from politicians for blocking orders for the purpose of implementing the state gambling monopoly.

Prof. Michael Rotert, Chairman of the eco board, referred to a letter from the German Federal Government to the European Commission and said that the phrase stating that “ISPs and banks will accept this as justified on their own accord, and will support the German States in the implementation of their politics” has led to considerable irritation. He explained that the state gambling monopoly is questionable from his point of view. Private providers are excluded for reasons of addiction prevention, whilst the monopolists are permitted to advertise the high jackpot sums on state-run television networks during prime time viewing on a Saturday evening.

As announced by Prof. Rotert, the expert lecturers were able to explain why neither blocking orders against ISPs nor prohibition orders against banks issued by the gambling supervisory authorities can be used as a means to implement the Inter-State Treaty on Gambling:

• There is no statutory basis for blocking orders against ISPs. The relevant provision in the Inter-State Treaty on Gambling is not a statutory authorisation.
• From the technical point of view, blocking of internet sites is simply impossible. Legal and attractive online gambling offers provide the best level of protection.
• Blocking of online gambling offers involves considerable liability risks, as it is difficult to draw the line between illegal offers and legal online games of chance, legal games of skill and legal entertainment games, and also because the state monopoly most probably is unconstitutional and contrary to European law.
• Prohibition orders against banks based on the Inter-State Treaty on Gambling are also contrary to constitutional and European law.

Attorney at law Ms. Marberth-Kubicki (specialist in criminal law and author of the reference book “Computer- und Internetstrafrecht” [Criminal law aspects of computers and the internet]) summarised the latest studies on the topic of blocking orders against ISPs, and stated in her comparison of the legal analyses that the current political discussion regarding the blocking of websites with child-pornographic content has completely gone off the rails. Doubts and concerns are promptly answered with verbal abuse.

The topic of child pornography is meant to nip in the bud any kind of criticism, even though a particularly diligent establishment of a statutory basis should be the logical consequence. Ms. Marberth-Kubicki voiced the concern that other content may also be blocked once this instrument has become generally accepted. She therefore strongly recommends the ISPs not to conclude voluntary agreements, as these are highly problematic for the providers. The intervention by the blockings into legal positions which are protected by fundamental rights require a crystal-clear legal basis. The relevant provision of the Inter-State Treaty on Gambling is not suitable for this purpose. The latest judgment given by the BVerfG (Federal Constitutional Court) regarding the confidentiality and integrity of IT systems is also to be taken into consideration.

Mr. Schaeffer (Chief Security Analyst, TÜV Rheinland Secure iT GmbH) gave a pictorial description of the structure of the internet and came to the conclusion that the possibilities of bypassing blockings and censorship are endless, as the very idea of the establishment of the internet was for it to bypass blockings independently. Blockings will only contribute to improved concealment of the networks. Online gambling should not be prohibited, but rather regulated. Providing attractive up-to-date offers which are continuously refined, will intercept the users and prevent their migration to illegal offers.

Attorney at law Dr. Hambach (Founding Partner, Hambach & Hambach Law Firm) explained from the point of view of gambling law why there are substantial liability risks involved with the blockings. In addition to the pending infringement proceedings and preliminary proceedings against the German gambling monopoly before the European Court of Justice – which is why licensed EU providers should rather not be blocked – other questions regarding differentiation remain difficult. Therefore, horse betting, games of skills and games with low stakes must not be blocked on the internet, nor must mere entertainment games. The inconsistent German gambling law should be harmonised on the Federal level, and a gambling supervisory authority should be established which monitors the offers by private providers on the internet.

Prof. Dr. Ohler (University of Jena, Chair for Public Law, European Law, Public International Law and International Commercial Law) gave a lecture on the topic “Capping of the flow of funds – monitoring by order of the gambling supervisory authorities”, and expressed substantial doubts based on constitutional and European law.
Banks as uninvolved third parties may only be called upon to provide support in cases of the so-called “polizeilicher Notstand” (public emergency). From Prof. Dr. Ohler‘s point of view, the combat of illegal gambling cannot suffice to justify such public emergency. Also, the fact that the criteria for an automated filtering have not been defined, the lack of regulations in the Inter-State Treaty on Gambling in comparison with the act on money laundering, and concerns based on European law make it clear that the statutory regulation is inadequate.

Dr. Wulf Hambach, Founding Partner and Susanna Münstermann, Senior Associate
Hambach & Hambach

The EU Gaming Law Group is born!

On the 27th of January, during the International Casino Exhibition (ICE), the Founders of the portal www.gaminglaw.eu Quirino Mancini, Thibault Verbiest, Dr. Wulf Hambach, Santiago Asensi and Justin Franssen presented their new European Economic Interest Groupment – the EU Gaming Law Group – during a business breakfast at the Brown’s Hotel in London.

The mission of the new groupment was summarized in a powerpoint presentation (see attachment to this article) and can be defined as follows:

The legal battles fought in recent years before the European Court of Justice by a few brave and determined operators against national monopolies to claim the right to freely offer their gaming services across the EU regrettably did not result in the abolition of said monopolies, nor did they otherwise trigger an EU-wide harmonisation of gaming legislation.

The founders and partners of gaminglaw.eu strongly believe that the next challenge for the gaming industry in Europe is to tackle and drive the legal and regulatory changes to be introduced by the Commission – and eventually the national governments – to ensure, in a realistic and pragmatic way, that any international gaming operator may actually conduct business across Europe without too many administrative barriers and hurdles, though still under fair competition-friendly and reasonable local licensing regimes.

This goal can, in our view, be achieved only through coordinated, consistent and continuous pressure on all authorities concerned (in Brussels and elsewhere), made up of a strategic blend of efforts in terms of information, dissemination, education, consultation, political lobbying and, if required, fresh legal action.

With all this in mind, and to be able to cope with this major challenge, the founders and partners of gaminglaw.eu have now resolved to organise themselves in the form of a pan-European group of firms, fully-integrated and highly specialised in the provision of legal and non-legal services to the international gaming industry but also well equipped to interact with those central or regional authorities that may wish to bridge the communication and relations gap that too often in the past has tarnished their dealings with the operators.

Enforceability of the internet prohibition in section 4 subsection 4 ITG 2008

published TIME Law News 1/2009, Hambach & Hambach Law Firm

The spirits that I called. Balance of one year Interstate Treaty on Gambling

published in TIME Law News 1/2009, Hambach & Hambach Law Firm

A year-end retrospective of the State Treaty on Gambling from the point of view of legal economics

A commentary by lawyer Dr. Wulf Hambach, Founding Partner, Law Firm Hambach & Hambach

Year after year at Christmastime, the movie “Scrooged”, based on Charles Dickens’ story “A Christmas Carol”, flickers across the screens in Germany. In this US comedy, the unscrupulous and stubborn TV producer Frank (Bill Murray), is visited in succession by three ghosts – the ghosts of the past, present and future. The three mirrors Frank is shown by the ghosts do not show anything positive, and at the end of the film they bring him to repentance.

Let us now take the liberty of holding a mirror to the much-discussed State Treaty on Gambling and its advocates, and of taking stock.

The mirror of the past:

Before the State Treaty on Gambling took effect, in particular the 16 lottery companies of the Federal States rendered homage to the new regulation as the bringer of salvation. The website Lotto.de, for instance, stated during the ratification phase of the State Treaty on Gambling in 2007:

“With the State Treaty on Gambling, politicians consistently implement the requirements set in the fundamental judgment by the Bundesverfassungsgericht (German Constitutional Court) on 28 March 2006. The regulation of gambling in Germany thus is strictly oriented to the objective of player protection. The companies of the Deutsche Lotto- und Totoblock welcome the fact that the heads of government of the Federal States consistently move forward on this path. The State Treaty has become effective as of 1 January 2008, and leads to legal certainty (compare http://www.lotto.de/kommerzialisierung3.html.).“

On the other hand, substantial losses in turnover for the state-run providers already began to show before the new State Treaty became effective. On 19 October 2007, the newspaper Berliner Morgenpost, for instance, published the headline “Berlins Bundesliga-Sportclubs sind massiv gefährdet“ (“Berlin’s Bundesliga clubs are in serious danger”), and summarised the Federal States’ intention of implementing the State Treaty as follows:

“The political fight of the German Federal States against gambling addiction, and the private competition for the state monopolies on the gambling market, will prove to be expensive for the Berlin budget, and will – sooner or later – jeopardise the financing of various sports clubs, art events and social projects.”

The mirror of the present:

After a period of only one year “the welcome” extended to the State Treaty on gambling obviously seems to turn into regret. For instance, Hans-Peter Schössler, head of Lotto Rheinland-Pfalz, against the background of expected turnover reductions for Lotto Rheinland-Pfalz of approx. 50 million Euro, demanded “a “clean competition” between private and state-run gambling providers.” (see http://www.az-badkreuznach.de/region/regional.php?oid=4308080). In other words: “let’s get rid of the State Treaty on Gambling and bring in a liberal system.” Schössler’s indirect demand for a reasonable competition model in the area of gambling is understandable, not only in view of the decline in turnover (according to the Deutsche Lottoverband (German lottery association), the Federal States may face reductions in income due to the State Treaty on Gambling amounting to 5.5 billion Euro by 2011, see: http://www.welt.de/wams_print/article2874493/Das-Spiel-verdorben.html; also on this topic: “Taking stock of legislative activities – ½ year of the State Treaty on Gambling: a financial and legal blessing or a Waterloo for the German Federal States and the charities?”

The EU Commission is also known to lack enthusiasm in this German legislation.

“Brussels objects to re-drafting of German betting monopoly“ was the headline in the newspaper ”DIE WELT“ in a report on 28 November 2008, which continues as follows:

“The controversial State Treaty on Gambling has caused a great deal of annoyance in Brussels. The EU Commission’s legal service issued a remarkably clear statement against the State Treaty on Gambling, in a German case before the European Court of Justice (ECJ). A brief to the ECJ which has been made available to “DIE WELT” states that thus, German politics in the area of gambling are fundamentally inconsistent, so that the criteria of coherence and consistency, determined by the European Courts, are not being fulfilled. This open criticism on the European level shows that the Treaty, effective only since the beginning of 2008, and therefore the safeguarding of the monopoly of state-run providers of gambling, is on unsteady ground.”

The mentioned brief by the Commission to the ECJ relates to proceedings conducted by the Gibraltarian online gambling provider Carmen Media (represented by the law firm Hambach & Hambach) before the Verwaltungsgericht (VG – Administrative Court) of the German Federal State of Schleswig-Holstein. Carmen Media’s objective: To obtain recognition of its valid EU gambling licence against the background of the fact that the State Treaty on Gambling violates Community Law, and is therefore not applicable. At the beginning of 2008, the VG decided to suspend the proceedings and to refer the decisive questions regarding European law to the ECJ for a preliminary ruling.

Looking at the submission decision by the VG of Schleswig Holstein, it becomes clear that the Commission shares the VG’s opinion. During the hearing in January 2008, the presiding judge expressed her legal opinion that a state monopoly in the area of sports bets can only be justified with the objective of combating gambling addiction if all legal regulations and actual implementations by a Member state in the entire gambling market – not only the provisions on which the sports betting and lottery monopoly are based – form a systematic and consistent set of regulations. In this context, the judge made a very graphic comparison: If a state prohibition or monopoly on wine and beer was justified with a reference to the dangers of alcoholism, it would hardly be understandable if hard liquors continued to be freely available (see also PM von Hambach & Hambach vom 31.1.2008. This graphic comparison has its reasons: In 2007, the ECJ decided in the Rosengren case on the Swedish monopoly on the sale of alcohol that a state monopoly cannot be justified by the combat against addiction if the sales quantities of the addictive substances are unlimited (judgment dated 5.6.2007, in case C-170 (Rosengren, ECR 2007, I-4071), par. 44-47). Transferring this to “lottery addiction” (if such a thing existed), which would not be directly linked to a substance, this would mean that the state would have to introduce a quantity restriction on the addictive product “lottery”. A person potentially in danger of “lottery addiction” would, for instance, only be allowed to fill in one lottery ticket per week, and would be blocked from taking part in the other lottery draws. The participation in state lotteries without a quantity restriction, as practised today, would therefore be illegal.

Coming back to the EU Commission: In the mentioned statement, it reaches the conclusion that the State Treaty on Gambling violates higher-ranking Community law due to the incoherence of the German gambling regulations. Should the ECJ follow this opinion, German courts would have to cease application of the regulations which violate European law. In this case, the VG in Schleswig Holstein would be forced to decide on the validity of Carmen Media’s EU licence in Germany, without taking into consideration the prohibition of private providers resulting from the State Treaty on Gambling. In paragraph 43 of the brief concerned, the Commission furthermore suggests to the ECJ that mere discretionary decisions by an authority would also violate community law if all licensing prerequisites were fulfilled. This means that if the VG after the ECJ decision came to the conclusion that the regulations restrict the freedom to provide services as set out in Art. 49 EC Treaty in an unjustified manner – for instance because the monopoly system in Germany in itself is inconsistent, i.e. incoherent – it could either determine that Carmen Media may directly operate in Germany on the basis of its Gibraltarian licence, or that the discretion to be exercised by the gambling supervisory authority (in this case: the Ministry of the Interior of Schleswig Holstein), would be reduced to zero if all licensing prerequisites were fulfilled, which would mean that Carmen Media could commence legal operations in Schleswig Holstein. This inevitably means that the current flood of lawsuits against the gambling monopoly would be decided in favour of the private providers, which would overthrow the monopoly for good.

Should politicians in the German Federal States continue to stubbornly adhere to the State Treaty on Gambling, in spite of the fact that some lottery companies start to show better judgment and in spite of the current legal chaos, there will be a show down before the ECJ and, after that, before the VG of Schleswig Holstein. In an article published recently in the magazine Europäische Zeitschrift für Wirtschaftsrecht, “Gelten die Grundfreiheiten auch für Geld- und Glücksspiele?” (“Do the fundamental freedoms also apply to games for money and games of chance?”), we deal with a Portuguese case submitted to the ECJ, which is in a more advanced stage than the German cases regarding time and procedure. Can conclusions be drawn from this case for the German cases?

Prior to this, we shall deal with a topic which already formed the centre of criticism by the EU Commission in the infringement proceedings initiated against Germany at the beginning of 2008 (on this topic, see: http://www.betting-law.de/cms/cms/front_content.php?idart=373): The question regarding the enforceability of the internet prohibition in section 4 subsection 4 GlüStV. In the letter of formal notice (infringement proceedings No. 2007/4866), the Commission states as follows: “The  prohibition of games of chance on the internet is not suitable in order to reach the intended objective, as it is almost impossible for the German authorities to enforce such prohibition.”

Is this regulation a “weak link” in the State Treaty on Gambling? If this is the case, the spirits called by the advocates of the State Treaty on Gambling with its controversial passing at the end of 2007, will soon put an end to the nightmare, and will call a new spirit: horrendous damage claims by private gambling providers (such as Carmen Media) against the Federal States and thus against the already hard battered taxpayer.

The mirror of the future:

A monitored – i.e. not insidious – liberalisation of the (internet) gambling market (see also “Proposed Legislative Restructuring of Gaming Law, based on the Sports Betting Regulation”) has already become reality in Italy and Spain, and will soon also be introduced in France (see the following articles by our Italian, Spanish and French cooperation partners). This will not only provide the players or consumers with the opportunity of choosing from a variety of strictly supervised, legal online gambling offers, but will also – as was the case in Italy – fill the state’s OWN (!) coffers with money from gambling. This money is not only urgently needed for the long overdue establishment of an effective nationwide and structured system for the combat of addiction and crime in the area of (online) gambling, but is also required to ensure the continued support of charitable sports and cultural events in the future.

Berlin Court Casts Doubt Over Online Lottery Ban

published on GamblingCompliance, September 26th, 2008 by James Kilsby, GamblingCompliance Ltd.

A Berlin court ruling has boosted the hopes of private lottery distributors in Germany seeking protection from a ban on online lottery sales scheduled to take effect in January of next year, legal observers agree.

A Berlin administrative court this week upheld a challenge, launched by private lottery mediator Tipp24, to local lottery laws that were introduced in the wake of Germany’s Interstate Gambling Treaty that came into effect in January.

The Interstate Treaty in itself introduced stringent restrictions for Germany’s state-owned lottery companies – including tougher advertising regulations and a ban on lottery company directors’ salaries being set according to lottery revenues, on top of the total ban on the sale of lottery products over the internet that will come into effect in January 2009. However, the treaty also empowered authorities in each of Germany’s 16 states to introduce further legislation in accordance with the treaty’s principals.

The Berlin court this week ruled that Berlin’s law banning the state lottery from paying commissions to private lottery distributors such as Tipp24 was constitutionally invalid, as well as finding that Tipp24 did not require special permission from the state in order to offer its services as a lottery distributor in Berlin.

But more significant for the likes of Tipp24 and competitor JAXX, according to Tipp24’s director of investor relations Frank Hoffmann, was the court’s finding that the online lottery ban constituted an unjustified restriction on the free movement of services as guaranteed under German and EU law.

“This is the most important thing for us,” Hoffmann told GamblingCompliance. “The court’s ruling essentially means that the Interstate Gambling Treaty will not apply to Tipp24’s activities in Berlin.”

Tipp24 and JAXX continue to derive significant amounts of revenue from their online lottery sales businesses, and are lobbying fiercely against the ban on online lottery sales that would significantly undermine their business operations in Germany if it took effect as scheduled.

In an interim results report released earlier this year, Tipp24 acknowledged that the Interstate Treaty “and subsequent legislation passed on the basis of the [treaty] would mean the complete elimination of Tipp24’s current business basis in Germany from 1 January 2009 onwards.”

Unsurprisingly, both Tipp24 and JAXX have indicated their intentions to seek legal protection from the online ban once it comes into force, and they believe the Berlin court’s verdict boosts the prospects of them obtaining preliminary injunctions against the ban from further state courts come January.

“If we need to seek preliminary protection [from the prohibition on lottery sales via the internet] in other states, then the courts there will be certain to look at this decision from Berlin,” Hoffmann said.

In a press statement released yesterday, JAXX chief executive Rainer Jacken said the Berlin verdict raised further question marks over the enforceability of the German Interstate Treaty as it affects private lottery companies. “This precedent will certainly strengthen our position in other legal procedures,” Jacken said.

Claus Hambach, founding partner of Munich-based law firm Hambach & Hambach, agreed that the Berlin decision raised significant doubts as to whether the online lottery ban could now be brought in against the likes of Tipp24 and JAXX. He added, however, that the decision would only directly affect the German lottery market and that the judge’s ruling could not be applied to other sectors, such as online sports betting, blighted by the Interstate Treaty’s restrictive provisions.

For further information please see the webside of GamblingCompliance.