Germany: Interstate Treaty on Gambling: implications

published on worldonlinegamblinglawreport (e-comlaw.com)
Volume 7 Issue 8 August 2008
by Dr. Wulf Hambach, Partner and Marco Erler, Associate

Volume 7 Issue 8 August 2008
Germany: Interstate Treaty on Gambling: implications

The Interstate Treaty on Gambling (ITG) has imposed bans on advertising lotteries using the internet, television or telephone marketing. As well as causing problems for online operators, this has caused problems for state run lottery shows in Germany. Dr. Wulf Hambach and Marco Erler, of Hambach and Hambach, discuss recent court cases involving the ITG and the effect on those involved.

Please read the complete article in the enclosed pdf-document!

Private Betting Operator Granted German State Injunction

by James Kilsby, published on Gambling Compliance Ltd, August 26th, 2008

The High Administrative Court said last week that sports betting operator Happybet should be allowed to offer over-the-counter betting in Rhineland-Palatinate as the German state’s monopoly betting operator continues to be owned by three private sports federations rather than by the state itself.

The Interstate Gambling Treaty that came into force in January preserved the 16 German states’ monopolies over sports betting activities, “assuming that the risks associated with addiction can be controlled more effectively with the help of a state monopoly which is geared to combating addiction to games of chance and problematic gambling behaviour than by checking private organisers.”

But doubts have already been expressed over whether a monopoly could be upheld in Rhineland-Palatinate due to the fact that the betting monopoly is technically privately-owned, and particularly after the Federal Competition Authority, Germany’s anti-cartel watchdog, blocked a planned takeover of Rhineland-Palatinate GmbH by the state government last year.

The High Administrative Court’s decision applies only to operator Happybet, said Wulf Hambach, gaming law specialist at Munich-based firm Hambach & Hambach, but it will effectively open up the state’s entire sports betting market to private competition should the Court apply the same reasoning in more than 50 similar pending cases.

“Private betting shop operators in the whole state will see the opportunity from this and now look to open up their businesses,” Hambach said.

Rhineland-Palatinate authorities are faced with somewhat of a Catch 22 situation, he added, as the Federal Competition Authority (Bundeskartellamt) has made it clear the government will not be able to take short cuts to bring the public lottery company under state control.

“If they look to take the lottery company into state hands they risk breaking competition law; if not, then they are in violation of the Interstate Gambling Treaty,” said Hambach of Rhineland-Palatinate’s predicament. “But there is no way Rhineland-Palatinate can exclude other private operators if its betting monopoly is itself privately-operated.”

Other factors were at play in the High Administrative Court’s decision, Hambach added, including Rhineland-Palatinate’s recent record of compliance with the Interstate Treaty’s restrictive advertising measures.

Under the treaty, gambling advertising should be limited to offering just specific information on games, and should not be designed to entice Germans to gamble. But the High Administrative Court suggested that the Rhineland-Palatinate lottery company had violated this provision through recent promotional campaigns for sports betting products, in particular during the Euro 2008 football championships held earlier this summer.

While the state’s lottery ownership conundrum is unique in Germany, Hambach believes the court’s comments on advertising could resonate throughout the country. Already this year, German courts have ruled that lottery companies must further restrict their advertising practices in order to comply with the Interstate Treaty – the same questions could now be asked of sports betting, Hambach believes.

“How can you advertise without enticing? What does ‘informing the customer’ mean and how can you apply this in practice?” he asks rhetorically. “Of course, one state after another will break this provision.”

The Court said that Happybet could continue to operate in Rhineland-Palatinate, but resolved that the company would not be able to promote its services and would equally have to ensure compliance with the Interstate Treaty’s player protection requirements. Accordingly, Happybet must take steps to prevent minors and problem gamblers from betting, as well as issuing warnings about the dangers of gambling addiction.

Legal core assessment of German e-business

TIME Law News 1|2008

a) “The utilisation of music on the internet – still a legal minefield¹“

As stated already in the introduction, the online utilisation of third-party content is connected with substantial legal problems which must be clarified prior to the utilisation of such content. Otherwise there is the threat of drastic legal problems.

Just as Bayern Munich’s goal guarantor Luca Toni, in spite of knowing the rules, frequently is offside, many users stumble into the numerous pitfalls of the various fields of law, such as the law on copyrights, personality rights, name rights and trademark rights, in spite of having masses of information available warning them that the internet is not an unregulated field.

On 15 April 2008, Spiegel Online correspondingly, under the headline „photo agency Getty triggers online wave of cease-and-desist letters“, reported on the assertion of copyright claims by the photo agency Getty against numerous individuals using images online on their websites. This is not only a German problem. Internet forums show that Getty is pursuing those utilising online images without authorisation in other (European) countries as well. According to the information on Spiegel Online, Getty claims payment of a sum of approx. 1,500.00 Euro for a one-time utilisation per image. The unauthorised use of several images may therefore lead to painful damage payments.

Music generally is not unregulated common property!

In addition to the unauthorised utilisation of images, an online presentation may also violate other rights.

An example is the unauthorised utilisation of music within the framework of the online presentation, e. g. in e-shops. In the past, copyright claims based on the unauthorised exploitation of music, in particular ring tones, by subsidiaries of globally acting large groups of companies, were brought before courts by the holders of the rights. The former illegal download offers provided by Napster also occupied the courts. Streaming offers on Youtube have also been attacked (out of court). The International Federation of the Phonographic Industry (ifpi), i.e. the professional association of the large record labels, founded a separate company assigned with the research and prosecution of illegal online music offers on sharing networks (e.g. Gnutella). The reports to the police and the cease-and-desist letters issued to users generated this way have probably reached a four to five-digit number in the meantime.

German law important for foreign companies as well!

The problems connected with the online utilisation are not limited to German providers. Under certain conditions, foreign online providers also are obligated to comply with the requirements of German copyright law. German copyright law, just as German competition and trademark law, is applicable to foreign online cases if they are targeted directly to Germany. The Telemediengesetz (German Act on Telemedia) on the one hand provides for a privileged position for foreign online providers, according to which generally the law of the country of origin is to be applied. However, this regulation is not applicable to copyright questions, according to section 3 subsection 4 No. 6 Telemediengesetz. This means that German copyright law is applicable to foreign offers with a national reference. As the execution of German court judgements is possible within the European Union, foreign providers should also comply with the requirements of German copyright law when utilising music (online).

Rights to the music must be obtained!

Therefore, prior to using music (online), it must always be clarified which rights to the music must be obtained. There are only few exceptions where music may be used without approval by the holder of the rights (e.g. for a work of music 70 years after the author’s death), which should be legally examined in each individual case.

The described cases of illegal use of images and of music clearly show that it is necessary to clarify third-party rights in advance, during the phase of preparation of a concept and production of a website presentation. However, due to the variety of the applicable statutory regulations and due to the complexity of the various legal matters, this is easier said than done. The provider of online content must, in addition to the problems of (IT) law, such as compliance with the regulations on distance contracts and with data protection law, also comply with the provisions of the laws on copyrights, personality rights, names, marks and trademarks. The main area affected in the case of the utilisation of music is copyright law.

Where can I obtain the necessary rights to utilise music?

A particularly complex field is the question of obtaining the utilisation rights for using the music. Music transports emotions, and films and advertising campaigns would be unthinkable without it. As the internet will in the future not only be used as a source of information but more and more also as an entertainment medium, the use of music will increase.

However, it could be dissuasive that the necessary approvals must be obtained from the (numerous) holders of rights to the work of music and the musical recording prior to being able to utilise a piece of music. In contrast to regular goods and services, the authorisation to use a piece of music cannot be obtained by means of so-called “one-stop shopping”, i.e. from one person or one company. Rather, several contracts with different parties will be necessary. Uli Hoeneß, Vice-Chairman of FC Bayern Munich, would definitely feel at home here, as he would be able to once again prove his negotiation skills against several “opponents”.

Works of music are created by a composer and a texter or several composers and texters (authors) who thus obtain copyrights to the work of music. The piece of music is recorded by musicians and the singer as well as a producer who not necessarily are identical with the authors. The musical recording or the recorded performance, i.e. the rendition of the work by the singer and musicians as well as the recording by the producer (production of sound carriers) create so-called performing rights which also are regulated in the Urheberrechtsgesetz (German Copyright Act). This means that if music is to be used on a website, the copyrighted utilisation rights to the work and the copyrighted performing rights to the recordings must be obtained.

The majority of authors have (exclusively) transferred their rights to the musical works to a collecting society (Germany: GEMA) and to one or several music publishers for the purposes of exploitation. If several authors contributed to the creation of a musical work, all of the (co-) authors may conclude a contract on his/her part of the musical work with a different publisher. The music publisher and the collecting society administer different rights to the work.

The persons entitled to protection of performing rights, i.e. the singers, musicians and producers of the musical recording, will have granted the right to utilise the recordings to a record label. For cases of a secondary exploitation of the recordings (e.g. broadcast on the radio), performing rights to the recordings will have been granted to a performing rights society (Germany: GVL), by the singer and musicians as well as by the record label. This means that a division of the exploitation rights also takes place with regard to the musical recording.

The contractual relations described above only roughly show the chains of rights between the individual persons and companies who substantially participate in the exploitation of music. Other persons and companies may also be involved. However, for the sake of comprehensibility, we refrain from including a conclusive description.

The provider of a web offer now is faced with the question, whom of the many parties involved he/she will have to contact to be able to use the music online. This mainly depends on the type of utilisation. It is possible that a piece of music is meant to be used online in connection with advertising. Furthermore, a distinction must be made between downloads and streaming. The user must also examine whether the interactive use of music is possible or if the user can only listen to the music without being able to influence the beginning, length and end.

A detailed evaluation of each individual case of utilisation cannot be provided here due to the large number of utilisation possibilities. However, the following may be said as a rough assessment for the German territory: In cases of a utilisation of the work/recording of music for advertising purposes, the author and his/her music publisher and the GEMA as well as the producer or his/her record label must be contacted. In the area of downloads, a licence must be obtained from GEMA and the record label. An evaluation in the area of streaming decisively depends on the question of inter-activity. GEMA as well as GVL (in case of no inter-activity) or GEMA and the record label (in case of inter-activity) may be responsible.

However, prior to any utilisation it is necessary to legally examine in detail how the music is to be used in the specific case. This is the only way to filter out the affected rights and the parties holding these rights. A legally binding evaluation thus is only possible when looking at the specific case in question.

Payment for music!

Determining the affected rights and the correct addressee of the utilisation inquiry is, however, only the first step on the way to the licence. Now, the remuneration sum must be agreed. As numerous fixed tariffs are offered in the area of online utilisation (e.g. for music-on-demand or webradios), in particular by the collecting and performing rights societies, the user should in advance obtain information on the tariffs and their applicability to the intended type of utilisation. Through this procedure, the offer can subsequently be adapted to be able to use an economically reasonable tariff. Should a record label and/or a music publishing company be responsible, the user of the piece of music will be forced to enter into specific negotiations with this company.

Conclusion

Just as Luca Toni is puzzled by the offside traps set by his opponents, licensing music is not an easy business. One thing, however, applies for Luca Toni as well as for the user of music: If you stick to the rules, what you will get is a goal – or legal utilisation of music respectively.

The compliance of online offers with the statutory provision must be the top focus for German as well as foreign providers, despite the complexity of the various fields of law involved. The necessary rights should be obtained in advance, after consultation of a lawyer familiar with the trade. In our times, characterised by so-called “waves of cease-and-desist letters” and by companies systematically scanning the internet for infringements, there is the threat of painful damage claims for violations, in addition to the obligation to stop using the music due to cease-and-desist claims. On top of this, violations of copyrights may be subject to criminal prosecution.

It definitely is in the interest of the users to be able to use music without any restraints. However, it is essential to obtain a proper licence in order to also ensure musical diversity for the users. Luca Toni also is forced to live with the offside decisions against him – whilst still firmly targeting the goal-getter crown.

b) Threat to existence due to cease-and-desist letters – updates, continuous monitoring and legal consultation in cases of doubt regarding the content of the internet site will pay off²

Cost trap cease-and-desist letters

The risk of becoming the addressee of a cease-and-desist letter dangles above all internet providers like the sword of Damocles. The reasons for such cease-and-desist letters are varied and often are found in what seem to be bagatelles. A few thoughtless words in the notification on the user’s cancellation rights, in the general terms and conditions or the price information may lead to costs amounting to four or five-digit sums. The notification on the user’s cancellation rights is a particularly good example for the fact that even diligent businesses are not safe from cease-and-desist letters, as even the sample notification compiled and suggested up to now by the German Federal Ministry of Justice did not provide protection.

Cease-and-desist letters under competition law are always connected with the request to reimburse the costs for the assignment of a lawyer and may lead to surprisingly high court and lawyer’s fees for a legal dispute if the action is lost, as values for such disputes have been fixed at up to 30,000 Euros³. However, in the meantime there is a tendency in court decisions and legislation to take action against “mass cease-and-desist letters” issued by one provider, and against the collusive cooperation between a “cease-and-desist lawyer” and a company, because competition law is not meant to create a source of income for lawyers, but to provide competitors with means of taking action against the advantages obtained through infringements by their fellow competitors.

However, large and small providers on the internet must equally anticipate to be issued cease-and-desist letters which may make an expensive issue out of what seemed to be a minor carelessness. The old sample notification on the user’s cancellation rights, for instance, was objected to because according to its wording, the deadline for the issue of the cancellation declaration began “at the earliest upon receipt” of the notification instead of on the day “after receipt” of the notification. This risk is a serious burden for the internet economy in Germany; almost 50% of the online shops questioned in a study felt that their existence is threatened by the practice of cease-and-desist letters in Germany⁴.

New sample notification on cancellation rights

With the sample notification on cancellation rights, the legislator intended to provide a proper notification, upon the economy’s request, in order to make the wording of the notification easier for the companies, and at the same time to fulfil some statutory information obligations. However, this sample notification on cancellation rights has been criticised by the courts, so that even such businesses who had trusted in the validity of the sample notification received cease-and-desist letters. As a consequence of this criticism by the courts, a new sample notification on the user’s cancellation rights was compiled. Internet providers using the former sample text should modify the text correspondingly⁵. If the shop is re-designed, the new regulation, valid as of 1 Apr. 2008, should be implemented immediately, for all existing internet offers this should be implemented by 30 Sep. 2008 at the latest.

The new statutory regulation takes into consideration the criticism voiced by the courts up to now; however, there always is the danger that some judges may hold that the new sample notification text is not free of mistakes either. For the practice, what remains to be stated is that the wording of the sample notification still is long and clumsy. The ultimate aim, which is to inform the consumer in an easy and understandable way, can hardly be achieved by this. However, the new sample notification text will probably provide businesses with the highest possible level of protection against cease-and-desist letters.

General terms and conditions and distance sales law

Additional pitfalls are lurking in the general terms and conditions and in the compliance with the information obligations for distance sales contracts. For instance, a violation of the necessary precision of the general terms and conditions may already lie in the inclusion of the – often used – supplement “usually” when stating the delivery time⁶, and a reference to “insured shipment” may be considered to mislead the consumer⁷. Not all faulty clauses in general terms and conditions present a reason for a cease-and-desist letter; however, special attention is to be paid to the transparency of the wording, the price information and the compliance with the statutory provisions in the area of warranty rights⁸. Mistakes and inaccuracies in these areas may lead to the assumption of an anti-competitive advantage for the user of this clause, and thus allow the issue of a cease-and-desist letter.

Data protection – an underestimated duty?

The users’ interests in the protection of their data should not be underestimated, as can be seen from the angry reactions to the intended modification of the data protection regulations by StudiVZ around the turn of the year. The enthusiasm shown by the users when compiling their user profiles and filling them with content does not mean that they agree to their data being used for commercial advertising purposes.

Many internet providers regard the compliance with data protection regulations as a nuisance and negligible duty. However, in particular web 2.0 in all its forms of appearance shows that users readily and willingly disclose personal data, while they have some reservations against the utilisation of their data for commercial advertising. The statutory requirements and the extent of the users’ consent, however, are of substantial importance for the use of the customer data, in order to avoid costs for cease-and-desist letters, fines or even penalties under criminal law. Section 43 subsection 3 BDSG (Bundesdatenschutzgesetz – German Federal Data Protection Act), for instance even provides for a fine of up to 250,000 Euro, and section 44 BDSG provides for imprisonment of up to two years in case of an intentional violation of certain provisions of data protection law.

c) E-payment in Europe: Current technical and legal framework conditions⁹

”When I was young I thought that money was the most important thing in life; now that I am old I know that it is.”

Oscar Wilde

The basic requirements for payments of money have always been the same, and remain unchanged even now while the important flows of money only take place in the virtual world:

The wish to ensure safe payments and fast transactions.

While the virtual world promises independence of business transaction from time and place, the speed of payments with a sufficient level of security still had to be developed and had to be accepted by the users.

The new uniform European payment standard “Sepa” is meant to speed up money transfers in Europe in the future, however, it is not to be expected that the transferred sum will be credited in the same second. However, this is exactly what e-business requires, and what, prior to the introduction of alternative payment methods, could only be achieved through the use of credit cards. The reservations against the disclosure of the credit card number on the internet and the restricted access to credit cards due to the necessary credit worthiness still left a gap which was filled by the new payment methods such as PayPal, Giropay, Click & Buy or Moneybookers. Here, the transferred sum is credited immediately, also providing a minimum security standard with account and password authentication.

With PayPal, the payment system purchased by ebay, and the payment system Click & Buy used for a number of news magazines, a high level of market saturation and popularity of e-payment has already been achieved. However, some legal questions are yet to be clarified; new technical standards are required and additional regulations are expected, a small selection of which shall be described hereinafter.

EU Commission: User trust in e-payment in need of improvement

EU Commissioner Charly McCreevy recently declared on a study carried out on behalf of the Commission in 2007, that the EU Commission actively strives to keep the dangers due to fraud in cashless payment transactions at the lowest possible level, in the interest of the consumers as well as the financial service providers and credit institutions. According to the study, the users’ trust can still be improved, while significant directives, such as the Directive on the Prevention of Money Laundering (2005/60/EC) and the Directive on Payment Services (2007/64/EC) have either not been incorporated into national law, or this has only been done recently. The long-term success of these regulations and the spread of improvements among the users have therefore for the most part not yet been achieved.

New security standards for credit card transactions

The obligation to comply with new security standards for credit card transaction has developed without any pressure from Europe (PCI DSS – Payment Card Industry Data Security Standards).

This concerns regulations created directly by the leading credit card organisations, and which obligate all companies working with credit card transactions. This ensures additional security against system manipulation – in the interest both of the credit card institutions and of the customer.

In order to implement the regulations, it was made clear that the credit card institutions are entitled to impose severe penalties on their trading banks, while the dealers may be obligated to hold the banks harmless and bear any damages which may have been incurred. Contractual penalties of up to 500,000 US dollars per case of infringement are possible if data have been compromised due to the non-compliance with security standards. The most painful possible penalty would, however, be the discontinuance of acceptance of credit cards for the provider concerned.

For companies with more than 6 million credit card transactions per year, 30 September 2007 was the deadline for the implementation of the new PCI DSS. From January 2008 onwards, these compliance requirements also apply for companies with one to six million credit card transactions.

Framework with regard to supervisory law for e-money providers

A long-term cooperation with an e-payment provider in Germany is not only measured according to its business concept and solvency, but also according to the legal requirements. As the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin – Federal Financial Supervisory Authority) supervises among others the credit and financial services institutions and is authorised to close down their businesses if they do not have sufficient licences, the requirements set by this institution are decisive under the Kreditwesengesetz (German Banking Act).

As the requirements set by the BaFin, in particular for e-money institutions located in Germany, are very demanding, and the definition of the term “e-money“ by the BaFin is very narrow and restricted, this business form has hardly developed with German business locations and German banking permissions (the only known company is NCS mobile payment GmbH – Crandy).

The promising business areas already existing on a large-scale for e-money institutions thus are operated from other countries. With a registered location in one of the countries of the European Economic Area, the provider can extend the licence it holds there under the bank or finance supervision of its own country to the entire European Economic Area, with the help of the “European single passport”.

Applications for the “European single passport“ are filed with the supervisory authority in the respective country in which the company is based. The foreign supervisory authority informs the German BaFin of the intended commencement of activities of the e-money institution, whereupon BaFin will inform the institution within two months of some special regulations applicable in Germany which must be complied with; following this, business operations in Germany (e.g. via the internet) can be commenced.

With this regulations, less strict requirements set by other countries of the European Economic Area can be exploited to the advantage of the e-money institutions which are based in the European Economic Area and wish to do business in Germany without applying for a separate licence there.

The economically interesting German e-money market can thus be operated cross-border without the requirement of any large expenses. This means that there is an opening in the banking market, the possibilities of which have not yet been fully utilised.

Summary

The new e-payment methods can boast high growth rates and continuous new designs which require the implementation of further technical security standards and provide specific chances of a cross-border market from the legal point of view. However, legal security in detail does not exist so far, so that a specific risk analysis is necessary, from the point of view of supervisory law as well as with regard to the risks of money laundering. This not only applies to e-payment providers, but also to internet shops or service providers only looking to cooperate with an e-payment provider.

1The article „The utilisation of music on the internet – still a legal minefield“ was written by the Attorney-at-Law Marco Erler

2 The article an article „Threat to existence due to cease-and-desist letters – updates, continuous monitoring and legal consultation in cases of doubt regarding the content of the internet site will pay off“ was written by Attorney-at-Law Susanna Münstermann

3 compare OLG (Higher Regional Court) of Hamm, resolution dated 28.03.2007, ref. 4 W 19/07.

4 Poll by Trusted Shops GmbH, Shop-Abmahnungen im Internet, April 2007.

5 You will find the current version in Annex 2 to the Informationsverordnung zum Bürgerlichen Gesetzbuch (Information Decree to the Civil Code) under www.gesetze-im-internet.de.

6 KG (Regional Court) of Berlin, resolution dated 03.04.2007, ref. 5 W 73/07.

7 LG (Regional Court) of Hamburg, resolution dated 06.11.2007, ref. 315 O 888/07.

8 For instance, the hidden exclusion of sales to consumers is not legally valid (OLG of Hamm, judgement dated 28.02.2008, ref. 4 U 196/07), nor is the reference to third-party general terms and conditions (Landeslotteriegesellschaft) which also are meant to be included into the procurement contract (OLG of Celle, judgement dated 28.02.2008, ref. 13 U 195/07).

9 The article “E-Payment in Europe: Current technical and legal framework conditions”was written by Attorney-at-law Dr. MIchael Hettich

Jackpot Promotion Ban ‘Commercial Suicide’ For German Lotteries

published on GamblingCompliance, June 6th, 2008 by James Kilsby

A High Court has ruled that Bavaria’s state-owned lottery can no longer mention jackpot amounts in advertisements as to do so would violate the advertising provisions of Germany’s Interstate Gambling Treaty, which came into force in January. The local ruling is likely to have a nationwide effect and could strangle the ability of all German lotteries to promote their services, say observers.

The Bavarian High Court in Munich has banned Bavaria’s state lottery from mentioning jackpot amounts in advertising campaigns, upholding the March 2008 ruling of a lower court.

The court said that the lottery could face a fine of up to €250,000 if it continues to run such campaigns.

The case was brought by Bavaria’s competition watchdog against three particular adverts for the state lottery, a member of Germany’s state monopoly lottery grouping Deutscher Lotto- und Totoblock. In its decision, the High Court agreed with the earlier Administrative Court ruling that all three instances violated section 5 of the Interstate Gambling Treaty.

One advert featured the slogan “Play with…”, while another detailed the current jackpot being offered by the lottery. The Court said both contravened the Interstate Gambling Treaty’s advertising provisions by offering enticements to gamble.

As well as banning the television advertising of all gambling products, the Interstate Treaty states that all “advertising in relation to public games of chance shall be limited to providing information on the game of chance and clarification of the opportunities pertaining thereto.”

Furthermore, it states that lottery adverts “should not be to call on or encourage individuals to participate in games of chance.”

According to Wulf Hambach, gaming law specialist with Munich-based firm Hambach & Hambach, the treaty’s advertising provisions reflect a preceding March 2006 Federal Constitutional Court ruling that effectively said state governments could only maintain their monopolies over lottery and sports-betting products if they drastically limited their own ability to advertise.

Said Hambach: “The Interstate Gambling Treaty says that lottery monopolies should reduce their advertising down to what is purely information. However, the High Court said that a lottery jackpot is not just information; it is also a way of promoting the lottery. So to include mention of the jackpot in an advertisement runs contrary to the Interstate Treaty.”

Although the decision was in a state court, Hambach believes that the same reasoning could be applied throughout Germany. “The ruling will definitely have a federal impact,” he said, adding that a possible effect could therefore be that all Germany’s state lotteries are prohibited under the new gambling treaty from mentioning jackpot amounts when advertising their games.

The impact of higher jackpots – and lotteries’ ability to promote them – on German lottery revenue was underlined just last December when sales records were shattered as a series of rollovers saw the maximum prize in a midweek interstate lottery draw climb as high as €45m.

With the Interstate Treaty not yet in effect, lottery operators were able to capitalize on the media frenzy that accompanied the inflated jackpot by taking out extensive advertising campaigns.

Repeating that level of revenue would be impossible under the Interstate Treaty, warned Norman Faber, president of private lottery association Deutscher Lottoverbandes. “Lotto set the record sales in motion with an enormous advertising campaign. All that is to be forbidden starting from January,” he said after the record-breaking draw.

For Hambach, the Bavarian High Court decision further underlines the commercial cost Germany’s state lotteries will face under the Interstate Treaty which extended their gambling monopolies.

“It has been suggested that the treaty’s restrictions would sever the limbs of the state operators, and not being able to promote jackpots means one of those has now been cut off.

“Only now are people coming to see the reality that the treaty is tantamount to commercial suicide for the state monopolies themselves.”

For further informations please see the website of GamblingCompliance Ltd.

Germany: A turbulent regulatory framework

by Dr. Wulf Hambach, Senior Partner, Hambach & Hambach Law Firm
Specialization: TIME-Law (Telecommunication – IT – Media & Entertainment)

Approximately 100 days have now gone by. As is customary for newly established governments, this period of time is sufficient to take stock of the success or failure of the route taken by a government or – in this case – of the success of a law. This is because the “legislative period” of the State Treaty on Gambling surprisingly also is 4 years and – just as a government – a law can also be overthrown before the end of this period. Regarding the route taken by the Merkel government: “Should, for instance “Golden TV Productions” in 2016 produce its big TV movie “Angie – a Chancellor’s fateful years”, we already now know what the tenor will be for 2005/2006: Initially: Pain after the elections were almost lost. After that, a change to harmonious pictures – rapprochement between the Conservatives and the Social Democrats and Angela Merkel as the phoenix from the ashes. Cinderella turns into the most popular head of government ever in the Federal Republic of Germany.”

Let us now move to the question: How do 100 days of the State Treaty on Gambling “feel”.

The law was announced as a “court-proof solution”, and thus as a legal blessing. Flashback: As late as 15 Mar. 2007, the legal counsel for the German Lotto- und Toto-Block, Dr. Manfred Hecker, declared during a hearing before the state Parliament of North-Rhine Westphalia (quote from the official minutes of the hearing before the Parliament on the topic of gambling):

“Let us initially turn to a monopoly which is based on an irreproachable legal foundation. Such a monopoly, contrary to the present situation, is court-proof. This means that it will be possible to prevent illegal providers by means of administrative law, civil law and also criminal law from offering, operating and brokering their illegal services in the German market.”

Let us initially turn to the financial consequences for the German Federal States:

The former Minister of Finance and the Interior for the State of Schleswig-Holstein, Ralf Stegner, obviously just like the decision-makers in the other Federal States, was of the opinion that the maintenance of the state monopoly in the area of sports betting and lotteries is indispensable for charitable purposes. Mr. Stegner, in the final parliamentary debate regarding the State Treaty on Gambling on 13 December 2007 in Kiel, still said – quote:

“…At the same time, the maintenance of the state monopoly continues to secure the state’s income from lotteries and sports bets, which is used for charitable purposes such as sports, culture and social projects…”

The Prime Minister of Schleswig-Holstein, Peter Harry Carstensen, also could only justify his “giving in” – contrary to his personal opinion – regarding the draft of the State Treaty on Gambling with financial interests:

“At present, there are no legally safe alternatives to ensure the income from gambling for charitable purposes.”

compare: http://www.ftd.de/politik/deutschland/224566.html?mode=print)

Less than four months later, a report on the State Treaty on Gambling in the newspaper Kieler Nachrichten was fittingly titled “Gambling: Is the State the loser?”. This is because even now a massive reduction in gambling turnover for the first quarter of 2008 must be recorded for the state-run providers. The news met with a divided response among the members of the parliamentary parties in government. “What we feared would happen is now actually happening”, declared the member of parliament for the CDU, Hans-Jörn Arp, who had been fighting vehemently against the State Treaty. For the Chairman of the State’s FDP parliamentary party, Wolfgang Kubicki, it is a “financial catastrophe”.

On the figures:

Gross earnings of the gambling houses are down 10 per cent, Oddset’s turnover collapsed by up to 50 per cent. For the KENO-bet, the reduction amounted to 30 per cent, Lotto on Wednesday and on Saturday each had to record losses of approx. 11 per cent of their turnover. Thus, altogether about 8 million Euro of turnover have been lost since January”, said Mr. Kubicki after inspecting the parliamentary query (Drucksache 16/2007) at the end of April 2008.

The Bavarian Ministry of State also had to take criticism from the Highest Bavarian Court of Auditors. This institution, in its annual report for 2007 in particular states that an examination of the marketing organisation and of the cost structures of internet marketing is overdue. This is because the state-run lottery administration subsequently expanded and improved sales continuously through the internet. For instance, additional personnel was employed specifically for the gambling offers on the internet, and several million Euro were invested into software and hardware. Between 2001 and 2006, this distribution channel developed very successfully.

As the internet offers up until recently were blocked in Bavaria and most of the other Federal States in 2007, the lottery administration calculates that turnover will be down by approx. 50 million Euro for the last year. According to the Court of Auditor’s estimate, this alone would lead to reduced income (net proceeds and lottery tax) for the State of Bavaria amounting to 20 million Euro. A few days ago, Lotto Bayern resumed its offers through the internet. The justification provided in this context of the alleged fight against addiction will not be very credible against this background.

The reasons for the huge reductions mainly are massive restrictions on advertising and marketing, which is what the independent ifo-Institut already predicted at the end of 2006 in a comprehensive study on gambling. The self-imposed shackles will most probably lead to further losses in turnover for the state-run providers, and to an expansion of the black market, if the monopoly is obstinately maintained without taking into consideration the actual circumstances.

Legal consequences for the Federal States

“At this point, I do not wish to respond in detail to the concerns regarding European and constitutional law expressed against the State Treaty on Gambling by the Parliamentary Scientific Service and by others…”.

This was the reply to the legal concerns given by the Minister of the Interior of Schleswig-Holstein in the Parliament’s final debate on the State Treaty on Gambling at the end of 2007. The Parliamentary Scientific Service had raised considerable legal concerns in case of an implementation, based on a study by Prof. Dr. Johannes Caspar dated 11. October 2007, which – had it been considered reasonably – could only have led to a rejection of the new law. The legal weaknesses have also already been recognised by numerous German administrative courts.

The non-compliance with constitutional and community law of the State Treaty on Lotteries has not only been confirmed by the European Commission, but – since the beginning of this year – also by more than a dozen German administrative courts. Under the title „A black day for the State Treaty on Gambling“ the law firm Hambach & Hambach reported as early as in January 2008 that the Administrative Court of Schleswig – just like the EU Commission – considers that EU law is being violated and that the Court submitted to the ECJ questions under European law regarding the new sports betting monopoly. Since the beginning of the year, the main proceedings of several law suits were suspended, also by the highest administrative courts of the Federal States, against the background of these preliminary ruling procedures. The law firm has now also been able to obtain a positive decision for a private provider of sports bets in the main proceedings before the Administrative Court of Freiburg, and thus a suspension of the State Treaty on Gambling for this client. On 8 May 2008 Hambach & Hambach received the reasons of this pathbreaking decision. The court states among other things:

“A sports betting agent (betshop) who transfers bets to an EU-licensed operator does not act illegal in the sense of Art. 284 of the German Criminal Code (illegal gambling) as the new Interstate Treaty on Gambling breaches EU law. Therefore the authorities cannot base an administrative prohibition order on the violation of criminal law.”

The Court’s arguments are a downright slap in the face for the new distribution concept of the German Lotto- und Totoblock: During the hearing, the Court reached the conclusion that the state supervision did not even dictate a marketing concept for the state-run provider, that no advertising guidelines had been created and that the receiving offices would continue to work on a commission basis. The receiving offices – accessible to the public – continue to present a danger for youth protection, just as had been criticised by the Federal Constitutional Court in 2006. Thus, the VG of Freiburg for the first time held that a sports betting broker also has the right to broker sports bets at fixed odds for providers holding a licence in another EU country, without having to obtain permission by an authority in Baden-Württemberg.

The Federal State’s failure to implement advertising guidelines and the unrestrained fuelling of the passion for gambling by the state-run operators inevitably lead to an examination by the courts. For instance, the queues in front of the lottery shops known from the past have recently come to an abrupt end through a decision by the Higher Regional Court of Munich dated 22 April 2008. In a case against the Federal State of Bavaria, the Court prohibited advertising for a lottery jackpot in three cases. The slogans “play along” and “Lotto … current jackpot: approx. 18 million Euro” were held not to comply with the requirements set by the State Treaty on Gambling for the advertising for the operation of lotteries. This was reported by the Wettbewerbszentrale (central office for the prevention of unfair competition), an inter-branch and independent institution of the German economy, which had initiated the proceedings.

However, it is not just the private (online) providers of sports bets who criticise the implementation of the new State Treaty, but also large German advertising vehicles such as the football club VfB Stuttgart, who initiated a court clarification of the advertising prohibition for BWin. Friedhelm Repnik, boss of the Toto-Lotto-Gesellschaft of Baden-Württemberg, defends the state betting monopoly and considers a clarification by the courts as initiated by the club to be “simply indecent”, as he said in a recent interview with Südwest Aktiv. During the same interview, Mr. Repnik, when asked what the advertising prohibition would mean with regard to the addiction potential, replied – quote:

“We no longer advertise in a stimulating way, but only provide information.“

Conclusion

The first 100 days of the State Treaty on Gambling have been disillusioning for the advocates of the gambling monopoly. This is because in reality we are rather seeing the beginning of the end of this short-lived law. We may even see BWin banners in the Allianz Arena during the next Bundesliga season, instead of lottery “information” provided by the state