Update on relevant 2007 case law

In this article, we provide an overview of European case law that is relevant for private gaming operators. We discuss case law from Germany, Denmark, Sweden, the Netherlands, Malta, Belgium, France and Norway. We also discuss the major regulatory and political developments.

Germany:

2007 has been marked by mostly “favorable” case-law for private gaming operators and by seven references for a preliminary ruling on the interpretation of national betting and gaming provisions with article 49 EC Treaty, currently still pending.

Moreover, following the entry into force in January 2008 of the new interstate treaty (“Glücksspielstaatsvertrag”), the European Commission has opened an infringement proceeding against Germany. The European Commission questions whether the treaty is consistent with article 43 and 49 of the EC Treaty. It also has doubts on the consistency of the treaty with article 56 of the EC Treaty (free movement of capital).

Here are a few lines on the recent relevant national decisions:

– In January 2007, the Higher Administrative Court of Bavaria decided that the Bavarian ministry for research and sciences was not entitled to order the Bavarian agency for new medias to prohibit the advertising of sports betting.

– In May 2007, the Higher Administrative Court of Bavaria ruled that a national measure prohibiting internet gaming was not justified since current technologies do not permit the enforcement of such a prohibition.

– In July 2007, the administrative court of Stuttgart made a reference for a preliminary ruling to the ECJ concerning the consistency of the sports betting monopoly and of national gaming licences with articles 43 and 49 of the EC Treaty.

– A Stuttgart court also held that the local football club (VFB Stuttgart) could not be prevented from advertising for Austrian bookmaker Bwin.

– On 6 November 2007, the administrative court of Hesse cancelled the regional authorities decision to prohibit Bwin from offering its services in the state of Hesse on the ground that it was technically impossible to prohibit the provision of online gaming in one state only.

– The administrative court of Dresden cancelled in October 2006 a decision by the German authorities ordering Bwin and other sports betting operators to stop their activities in Germany. The court considered that the situation was not clear in view of national and European Community law. It also referred to the March 2006 Federal Constitutional Court decision ordering the German state to reexamine the national sports betting monopoly in the light of European Community law.

– The Federal Court of Justice confirmed in August 2007 a regional decision cancelling prosecutions against a bookmaker accused of having operated illegal sports betting in the state of Saarland in 2003 and 2004.

– In December 2007, the Higher Administrative Court of Saxony decided that the licence granted to Bwin by the ex RDA in 1990 entitles it to offer online sports betting only in the 5 ex-DDR states. This decision contradicts previous regional court decisions (Hesse and Bavaria).

– The administrative court Frankfurt/Main decided in January 2008 in interim proceedings in favor of a suspending effect for a private sport betting provider against a cease and desist order.

– In January 2008, the administrative court of Schleswig seized the ECJ of a request for a preliminary ruling in the context of the new sports betting monopoly. The hearing in Schleswig pertained to the law suit filed by an online provider of sports bets based in Gibraltar who is looking for the acknowledgement of his European licence for the German Federal State of Schleswig-Holstein as well, on the basis of the principle of the freedom to provide services. The court asked the ECJ whether consistent and systematic restrictions of the sports betting market were possible, when areas (i.e., slot machines) which are relevant with regard to addiction are not included in the scope of application of the interstate treaty.

– The administrative court of Regensburg suspended in January 2008 a defended claim against a cease and desist order with regard to the preliminary rulings at the ECJ.

– In February 2008, German Federal Court of Justice dismissed competition law actions filed by state-run gambling providers (among others Westlotto) against private sports betting providers holding ex-DDR and EU licences (among others bwin).

– In March 2008, the Federal Court of Justice dismissed Bwin’s claim to delay the application of a Cologne court decision dating September 2007 which was rendered following an action brought by Westlotto and granting the latter the right to claim damages for unlawful competition; this decision was rendered whilst Bwin’s appeal of the Cologne court decision is still pending.

– In March 2008, the Higher Administrative Court of Baden-Württemberg allowed an appeal against a dismissive judgment by the Administrative Court of Karlsruhe, due to substantial doubts as to whether politics regulating games of chance in Germany are implemented in a consistent way. The case concerns a claim by a plaintiff that its UK licence is also valid in the state of Baden-Württemberg and is to be regarded as a licence under German law. The court will most probably suspend the proceedings until the ECJ has replied to the requests for preliminary rulings of which it had been seized.

– In April 2008 the administrative court Berlin explained in detail why in interim proceedings the private interests of the sports betting provider outweigh the public interest. The court especially elaborates on the guidelines set by the Federal Constitutional Court in 2006 and gives examples why most probably these guidelines have not been realized in Berlin.

– For the first time a German court decided in principal proceedings in favor of private sports betting broker. In April 2008 the administrative court in Freiburg focused on the legal situation in Baden-Wuerttemberg and how the state monopoly is realized. The court came to the conclusion that the marketing concept of the state provider is contradictory to the goals of the interstate treaty.

Denmark

Case law

Danish case-law in 2007 includes two judgments that are noteworthy to the gaming industry. Although the first one was favorable for specific private gaming operators, the second overturned the first judgment. These judgments were rendered in a case revolving around the legal regime applicable to poker. In July, a District Court in Lyngby acquitted the president of the Danish Poker Association of charges of organizing illegal gaming. The District Court considered tournament poker (Texas Hold ‘em style) to be skill game and not a game of chance. However, this landmark judgment was overturned by the High Court on 19 December 2007, ruling that poker was in fact a game of chance. It is reported that an appeal at the Supreme Court can be awaited.

Political developments

Developments outside the courts are also noteworthy. On 21 March 2007, the European Commission sent Reasoned Opinions to several Member States: Hungary, Finland and Denmark. The European Commission stated that the regulations on sports betting of these countries are in breach of the freedom to provide services, as laid down in article 49 of the EC-Treaty. The Commission considers these regulations to be incompatible with EU law, and have not been shown to be necessary, proportionate and non-discriminatory.

The pressure from the European Commission may have been effective. In April 2008, the Minister of Tax Kristian Jensen stated that the Danish government is considering a reform of the gaming market which includes licensing opportunities for online gaming and skill games (including sports betting). The Minister emphasized that the licensing requirements for online gaming and skill games will be strict.

Sweden

Case law

A judgment by the Supreme Court ordered the Court of Appeal to assess the compatibility of Swedish gaming law with the EC-Treaty. This decision obliged the Court of Appeal to assess the compatibility of Swedish gambling legislation with EC law in light of the Reasoned Opinion sent by the European Commission and the case-law in Placanica (C-338/04). Following this judgment, the prosecution of media that carried gaming ads was halted by the Prosecutor-General.

Infringement proceedings

The European Commission has criticized both the Swedish legal regime on sports betting and the Swedish legal regime on poker. Regarding sports betting, the Swedish government received a Reasoned Opinion on 27 June 2007, together with France and Greece. A Reasoned Opinion constitutes the second stage in an infringement procedure. The third and final stage is a legal procedure with the European Court of Justice, in which Sweden can be ordered to alter its regulations.

The Netherlands

Case law

Several private gaming operators have tried to obtain gaming licenses in the Netherlands. The Minister refused all of these applications. Two remarkable judgments on refusals for gaming licenses were rendered by the Council of State in 2007. These judgments paved the way for a third judgment by that same judiciary in which the Council referred to the European Court of Justice for an answer on preliminary questions regarding the application for gaming licenses. In the first case, a District Court had rendered a positive ruling for private gaming operators, but the Council of State overturned that ruling. In the second case, the Council itself gave a ruling that can be considered positive for the private gaming industry.

– The first judgment revolved around the refusal of a casino license to CFR, a subsidiary of French casino operator Tranchant. The District Court of Breda had ruled that the State had not proven that the monopoly is a justified infringement of EU-law, while referring to the Gambelli judgment. The Council of State overturned this decision, stating that the Dutch regulations are coherent and systematic and fall within the criteria formulated by the European Court of Justice in Gambelli and Placanica.

– In the second judgment, the Council’s ruling was more positive to the private gaming industry. The well-known lottery intermediary Schindler had applied for a license to operate its own charity lottery. Three of such licenses are already issued at a semi-permanent basis and there is no law that restricts the number of operators. This is a remarkable difference with the CFR decision, because the monopoly for the operation of casinos is laid down in the 1964 Gaming Act.

– On 14 May 2008, the Council of State rendered its referral judgment in the case Betfair. It asked questions on the subjects of mutual recognition of gaming licenses, equal treatment of potential candidates for licenses and the transparency of the allocation procedure. Further more, it asked under which conditions the exclusion of third parties in the allocation of gaming licenses is justifiable.

– In the proceedings on the merits, the De Lotto vs. Ladbrokes case is pending before the highest civil judiciary; the Supreme Court. The opinion of Advocate-General mr. Keus is noteworthy. He opposes a referral to the European Court of Justice, because he considers the pending infringement procedure by the EC on the very same subject to be more suitable to assess the compatibility of the Dutch policy on sports betting with European law. Despite his reluctance to refer to the ECJ, his opinion does contain well thought proposals for preliminary questions.

Political developments

Besides the developments in case-law, their have also been regulatory issues that are noteworthy to the private gaming industry. At the moment, all offering of online gaming to Dutch residents is prohibited. To counteract private gaming operators, the authorities intended to create a state monopoly for online gaming by introducing a new piece of legislation, the Online Gaming Act. The exclusive license would have been issued to state owned casino monopolist ‘Holland Casino’. The Senate rejected the proposed Online Gaming Act in the narrowest vote possible.

– Another method for the Dutch authorities to counteract private gaming operators is the blocking of financial transactions with online gaming operators. This only relates to banks with Dutch licenses that process direct transactions between Dutch residents with Dutch bank accounts and a specific black list of online gaming operators.

– Because the payment blocking can be easily circumvented, the Minister also intends to address Internet Service Providers. The Minister considers these service providers to be facilitating an illegal act. The Ministry will ask these service providers to block the access to the websites of online gaming operators. It is likely that this will also include a blocking of the gaming servers.

Infringement proceedings

In 2006, the European Commission sent a Letter of Formal Notice and a Supplementary Letter of Formal Notice to the Dutch authorities, regarding the regulations on sports betting who seem to be violating the freedom to provide services. On 28 February 2008, the European Commission also sent a Reasoned Opinion, which is the second stage of an infringement proceeding. It is reported that in this Reasoned Opinion, the European Commission asked the Netherlands to alter its regulations on sports betting. The third and final stage is a legal procedure before the European Court of Justice, which may order the Netherlands to alter its regulations.

Malta

Case law

On 9 January 2007, the Court of Appeal delivered a favorable judgment to the private gaming industry. In this landmark judgment, the Court prevented the enforcement in Malta of a French judgment in a case between French horse betting operator PMU and the Maltese company Zeturf. It is noteworthy that under Council Regulation 44/2001, only judgments in civil and commercial matters in the Member States of the EU can be enforced. The Court of Appeal decided that the French judgment consisted of a public law nature, concerning the protection of state monopolies.

Belgium

– The sponsoring of cycling teams by private gaming operators led to the decision of race organizer ASO to refuse a ProTour cycling team to participate in two ProTour Belgian cycling events. In a judgment of 27 June 2007, the president of a Belgian commercial court ordered the ASO to allow the participation of a cycling team sponsored by the private gaming operator Unibet.

– The Liège first instance court dismissed an action filed by the French tennis Federation against three private online betting operators (Ladbrokes, Bwin and Betfair) on 28 April 2008. The action was aimed at preventing Belgians from betting on the results of the Roland Garros tournament and the French Master Series. The judges concluded that these private operators had behaved in a prudent and diligent manner, and secondly, considered that the use of a sports event name for online betting cannot be considered an act of parasitism. The use of the name of a sports event is necessary to identify the game on which the participant can place a wager. It is noteworthy that in France, a similar action of the FFT against private online betting operators Unibet and Expekt was allowed by the District Court (Tribunal de Grande Instance) on 30 May 2008. In contradiction to the Belgian court, the French court did consider the use of a sports event name by online betting operators to be an act of parasitism.

France

Case law

2007 has especially been marked by the landmark decision rendered by the Cour de cassation in July 2007. Furthermore, two decisions rendered in 2008 highlight the forthcoming liberalization of the gambling sector in France.

– On 25 March 2007, the District Court of Nanterre condemned two persons for having made accessible an online gambling website from the French soil, in spite of the prohibition. The judges considered that the French criminal law was to be applied because the website was accessible to the French public.

– On 10 July 2007, France’s Supreme Court, the Cour de Cassation, endorsed the ECJ teaching of the Gambelli and Placanica cases by deciding that where French gaming laws restrict free movement of services, lower courts must verify whether these restrictions comply with the requirements set by article 49 of the Rome Treaty. The Supreme Court also required from lower courts that they check whether general interest is guaranteed in the Member State where private operators are established.

– In January 2008, the Court of Appeal of Versailles decided to assess whether the French gambling legislation is compatible with community law and the criteria established by the European Court of Justice case law.

– On 9 May 2008, the highest French administrative court, the Conseil d’Etat, as requested by the Maltese operator Zeturf Ltd., decided to suspend its decisions until the European Court of Justice rules on two preliminary questions regarding the consistency of PMU’s monopoly with the EC treaty and how the infringement to the free provision of services should be considered: from the sole perspective of the provision of online betting services or more widely from the perspective of the whole gambling sector.

– On 30 May, the Paris District Court decided to block Roland Garros betting by the private operators Unibet and Expekt. The judges found that the betting operators were guilty of commercial free-riding, by unduly profiting from the investment made by the French Tennis Federation.

Regulatory developments

The law on the prevention of delinquency has encapsulated criticism, especially the application decree regarding the obligation for financial institutions to block the transfer of funds from unauthorized websites.

– The law on the prevention of delinquency, adopted on 5 March 2007, provides a set of legal sanctions (including criminal convictions) for online gambling operators.

– On 30 November 2007, France notified the European Commission of the draft decree, requiring financial institutions to block the transfer of funds from unauthorized websites. The European commission announced its opposition to this legislation on February 29, 2008 in an opinion which prolongs the standstill period of this act to March 31, 2008. France has still not submitted a report explaining its reaction to the opinion.

EFTA

The gaming regulation of the Kingdom of Norway and its compatibility with the freedom to provide services and the freedom of establishment were the subject of two EFTA-Court cases. Norway is not a Member State of the European Union, but it is a Member State of the European Economic Area (EEA). The EEA is based on the same “four freedoms” as the European Community. Compliance with these four freedoms in the EEA is examined by the court of the European Free Trade Association (EFTA).

Case law

– On 14 March 2007, the EFTA-Court ruled that the implementation of an exclusive rights system for gaming machines in Norway is compatible with the freedom of establishment and the freedom to provide services. This case was lodged by the Surveillance Authority of the EEA.

. On 30 May 2007, Norway’s gaming regulations were again discussed by the EFTA-Court in a proceeding on preliminary questions. These preliminary questions were referred by the Oslo District Court in a case between British bookmaker Ladbrokes and two Norwegian Ministries. The EFTA-Court emphasized that requirements fulfilled in the Home State must be taken into account.

Trademarks: Online gaming operators vs. sports organisations

Online gambling operators have recently been at the centre of two court cases, one in France and one in Belgium. Both cases concern trade mark law, an area harmonised by European Community

In the most recent case, opposing the French Tennis Federation v. Ladbrokes, Betfair and Bwin, the tribunal of Liège (Belgium) ruled in favour of online bookmakers, judging that the use of the French Open name on their websites did not qualify as an act of unlawful parasitism.

In an earlier decision (3e Chambre,Tribunal de Grande Instance de Paris, 30.01.08), the Tribunal de Grande Instance of Paris, considered that Unibet’s use of the name “Juventus” in order to promote its online sport betting activities constituted an act of counterfeiting.

Unlike gambling policy, where general principles of EC law on the free movement of services apply, trademark law is harmonised by EC legislation. Directive n°89/104 (“the Directive”) provides the regulatory regime legal for trademarks framework in the 27 Member States. In this context, how can the different interpretations of similar facts be explained?

Trade mark law grant owners of a sign or mark an exclusive right to it. This exclusive right creates an exception to the economic freedoms guaranteed by the E.C. treaty (“the Treaty”), including the free provision of services. Hence, whenever judges assess facts in light of trademark law they need to consider and weigh in the balance two opposite values: the individual and limited protection of trademark owners and the general EU wide freedom to trade.

In the two decisions, the national judges applied the same techniques, with the same legal criteria, but they arrived at different conclusions. Indeed These are the first such cases concerning online gaming operators. The present case law illustrates, once again, the challenges that online economic operators pose to the traditional legal analysis.

After a brief analysis of the national ruling they will be placed in their broader legal context.

A trade mark aims to protect both its owner and consumers. For consumers, trademarks “guarantee the origin of the product bearing the sign to the consumer or final user, allowing him/her to distinguish, without any likelihood of confusion, this product from those of a different origin” .

A trademark also grants an exclusive right to its owner when putting products into circulation for the first time. Competitors or individuals cannot to take advantage of the status and reputation of the trade mark by marketing their own products under the protected trade mark .

Article 6 of the Directive sets limits to trademark rights, to ensure the respect of free competition within the Single market. One may use a protected trademark as long as it is necessary to indicate the intended purpose of a product and is consitent with honest commercial practice .

The Belgian decision

The Fédération Française de Tennis (“FFT”) had lodged a complaint before the Tribunal de première instance of Liège, requesting that Betfair, Ladbrokes and Bwin cease offering betting services on the French Open and the French Master Series to Belgian citizens. The FFT claimed that offering these services induced for example, for players to act corruptly for financial advantages and that the use of the name “French open” harmed its legitimate interests. The FFT accused the three operators of economic parasitism, exploiting the name, reputation and renown of the French Open.

Belgian law does not define or punish economic parasitism as such. The judges turned instead to case law and academic works, which consider that parasitism is “any behaviour where an operator benefits unduly and directly from another operator’s substantial efforts or investment without equivalent efforts or investment”.

The Liège court dismissed this argument considering that the defendants did not use the name “French Open” in a promotional way. Indeed, it was considered that the “mere mention of the event’s name was necessary information to the [operators’]online betting activity” which could not therefore “be considered as an act of parasitism since its sole purpose was to entitle the player identify which sport evenst to place a bet on”.

The French decision

The Juventus Footballclub brought a claim before the Tribunal de Grande Instance of Paris against Unibet Ltd (“Mr Bookmaker.com Ltd) for trade mark infringement. The online betting operator was charged with acts of counterfeiting for mentioning the protected football club name on its website. The French court considered that Unibet, by using the Juventus brand in slogans or commentaries looking to promote their online betting activities, had committed acts of counterfeiting” .

The court recognised that Unibet was entitled to use trade marks to identify the matches where players could place their bets. However, judges considered that the use of the Juventus brand by Unibet was not merely “necessary” but that it was also a way to promote its own business activity. Unibet was therefore taking an unfair advantage from the fame and prestige of the famous Italian club.

It is not clear whether Unibet has decided to appeal this decision.

The European Court of Justice position on trademarks

Where an area of law has been harmonised, national courts may interpret, autonomously the law, in the light of the Treaty and the Directive in question itself. Therefore there should be less room for divergent interpretations. However, the European court of Justice (“ECJ”) remains the ultimate and supreme judge of EU law.

The ECJ has previously defined the limits of article 5 and 6 of the Directive in the Gillette case : “the lawfulness of the use of the trademark [under the 88 Directive] depends on whether that use is necessary to indicate the intended purpose of a product”. The use of a trademark is deemed necessary, “where such use in practice constitutes the only means of providing the public with comprehensible and complete information on that intended purpose, in order to preserve the undistorted system of competition in the market for that product.”

The use of a trade mark will be deemed contrary to honest practice in industrial and commercial matters when:

• Third party creates the impression that there is a commercial connection between it and the trade mark owner;

• It affects the value of the trade mark by taking unfair advantage of its distinctive character or repute;

• It casts discredit or denigration on that mark.

The ECJ has clearly established the principle that when an operator wishes to claim the benefit of article 6 of the Directive (restrictions to trademark exclusive right), a trade mark should be used in an informative purpose or in a purely descriptive way .

Analysis

In both the French and the Belgian cases, gambling operators used trademarks for the purpose to providing services to the public. The information was meant to help customers identify the sports event on which they could place bet.

The Belgian court referred to this informative purpose as its basis for ruling in favour of the online betting operators. It considered that the exclusive rights granted by trade mark owners cannot prohibit its necessary and honest use for an informative purpose. The analysis appears closer to the ECJ position.

On the contrary, the French court seemed to have adopted a less liberal approach, considering the mere use of a protected name is likely to be a prohibited use. This position has not been consistently adopted by French courts which have previously been more moderate in their rulings. This is the first time that such an infringement has been held to have been committed on an online gaming operator.

Until very recently, the French monopolies and the French authorities have led aggressive campaigns against online operators. Could the French decision be the result of such bad press? Indeed, the main claims were that online gambling brings corruption, and does not financially contribute to the development of the sports events that they exploit.

This judgment could indeed show the reluctance of the French establishment to admit online gambling as a decent economic activity. Will this case remain isolated? The forthcoming French online gambling legislation may bring an answer to this question.

Online Gaming Act: a new monopoly and new restrictions

This article was previously published in World Online Gambling Law Report, Volume 7 Issue 3, March 2008.

As well as creating a new temporary exclusive license for state-owned operator Holland Casino, a proposed Online Gaming Act also suggested that the Ministry of Justice is to target financial institutions dealing with unlicensed remote gambling operators. Justin Franssen and Aernout Kraaijeveld, of Van Mens & Wisselink, explain how although the Ministry’s initial proposals have been watered down, the proposed Act still fails to justify its restriction on the freedom to provide services.

In the political debate on the proposed Online Gaming Act, which creates a new exclusive temporary license for remote gaming for Dutch state-owned casino monopolist Holland Casino, the enforcement of the prohibition of remote gaming is brought into focus. The Minister intends to address financial institutions licensed in the Netherlands and Internet Service Providers (ISPs), urging them to stop facilitating unlicensed remote gaming operators. On 29 January 2008, the Ministry of Justice issued a press release stating that it will ‘take a firm line’ against financial institutions dealing with unlicensed gaming operators. On 4 March 2008, the Minister sent a letter to the Senate which mentioned the Minister’s intention to address not only financial institutions, but also ISP’s.

The Ministry put together a list of 30 online operators that are aimed at the Dutch market. This list will be issued this spring to the Dutch Banking Association (NVB). The Ministry expects financial institutions to refuse clients who operate illegal remote gaming websites in the Netherlands, or foreign remote operators targeting the Netherlands. The press release mentioned that the Ministry will take legal actions against companies who “nevertheless have relations with clients who operate illegal gaming websites in the Netherlands.” It is noteworthy that the press release was not issued by the public prosecution department but the Ministry of Justice. The Ministry itself has no authority to indict individuals or companies, it can merely file a complaint with the public prosecution department.

In the evening of 29 January 2008 a debate on the proposed Online Gaming Act was held in the Senate. The Minister of Justice stated in this debate that the Ministry has consulted financial institutions on its intentions to combat unlicensed remote gaming operators. The Ministry expects financial institutions, such as banks and operators of online payment systems, to comply with Dutch law and stop facilitating payments to remote gaming operators. Furthermore, he stated that his statement made against the institutions was ‘persuasive enough’. Senators asked if this ‘firm line’ includes criminal prosecution, which he promptly confirmed. However, no clear jurisprudence exists which confirms the position that facilitating payment services is illegal. In our view, it might be a misinterpretation of the 1964 Gaming Act to conclude that this Act prohibits the facilitation of payment services to online gaming operators. The Ministry based its statements on an alleged violation of article 1 of the 1964 Gaming Act that prohibits the offering of the opportunity to participate in games of chance without a Dutch license and the promoting of participation in such games of chance.

These statements resulted in several critical reactions in the press from the Dutch Banking Association (NVB) and ‘Currence’, the operator of leading Dutch PSP ‘iDEAL’. A spokesman for Currence mentioned in a radio interview on 30 January 2008 that it is in principle unwilling to comply with the Minister’s request for as long as no judge has ruled that facilitating payment transactions to gaming operators is illegal.

The criticism from the NVB, as uttered on its website may have been effective. In his letter to the Senate of 4 March, the sharpness of the Minister’s statements of 29 January was toned down. The Minister now states that only the provision of bank accounts to remote gaming operators is illegal. The Minister also acknowledges that banks cannot completely monitor or block financial transactions between Dutch residents and remote gaming operators. Dutch banks cannot prevent Dutch residents from transferring funds through a third party, such as an online bank account at a bank in another jurisdiction. The Minister explicitly mentions a PayPal account. Since PayPal has a banking license in Luxemburg, the Ministry cannot oblige it to break up its relations with remote gaming operators.

The legality of facilitating payments

In view of the legislative history of article 1 of the 1964 Gaming Act, it is arguable that “promoting” should be defined as: ‘to induce others to participate’ in games of chance. The legislative history mentions, by way of example, an intermediary that sells foreign lottery tickets in the Netherlands. It must be noted that the Ministry of Justice uses a broad interpretation of the word ‘promoting’ in order to also include ‘facilitating transactions’ between Dutch residents and remote gaming operators. To substantiate its position, the Ministry of Justice selectively cites a civil (summary) judgment by the Court of Appeal at The Hague from 19 November 1998. The Court of Appeal ruled that ‘promoting’, inter alia, includes advertising and facilitating the participation and the payment of the bets by the participants. However, this civil injunction judgment was given in the case of an intermediary selling tickets for German lotteries in the Netherlands, similar to the example given in parliamentary history.

A different interpretation of the word ‘promoting’ can be found in a criminal judgment rendered by the Supreme Court of 23 February 1971. This case regarded the publication of winning numbers of a foreign lotto in a local Dutch newspaper. The Supreme Court ruled that all the physical acts that potential participants have to perform in order to participate in an unlicensed game of chance have to be distinguished. The Supreme Court distinguished the following acts: obtaining the lotto forms, filling in these forms, sending the forms and the wager to the foreign operator, obtaining the result of the lotto and report oneself to the foreign operator to collect the winnings. The local newspaper helped obtaining the results of the game by publishing them. This publication did not contain any recommendation. According to the Supreme Court, the publishing of the results is only simplifying an already simple act (for which at least four alternatives were widely available). It cannot be considered to be promoting the participation in unlicensed games of chance.

Following the Supreme Court’s rationale, the same conclusion can be made for the facilitation of payment services. Transferring funds to an operator of remote gaming is just one of several acts that an individual has to perform in order to participate in remote gaming. Since several alternatives to transferring funds directly from a Dutch bank account into the operators bank account are available, such as through foreign online bank accounts, it is reasonable to assume that contrary to the Minister’s statements the facilitation of payment services to remote gaming operators is not illegal under the 1964 Gaming Act.

It is noteworthy that regulations in France and Germany with similar effects to the Minister’s approach of financial institutions have lead to criticism from the European Commission (EC). France received a Detailed Opinion from the EC on 3 March regarding a draft decree, and Germany received a Letter of Formal Notice on 31 January after it implemented the federal Inter State Gambling Treaty (IGT). The EC criticized the IGT for infringing the free movement of capital as laid down in article 56 of the EC-Treaty. It is likely that the intended Dutch enforcement of the prohibition on remote gaming will also lead to criticism, and a possible infraction procedure, from the EC. If financial institutions are prosecuted, it is possible that Dutch courts will consider this prosecution to be in violation with European law and either acquit the financial institution or ask preliminary questions to the European Court of Justice (ECJ) regarding the conformity of such prosecution with European law.

Prediction of future developments

In its fight against remote gaming operators, the Netherlands has drafted legislation creating a monopoly on remote gaming for the state-owned casino monopolist Holland Casino, and at the same time increased the pressure on intermediaries. The proposed legislation has already met severe criticism on its conformity with European law from the EC, the Council of State and the Senate. The main criticism is the lack of a justification for the restriction of the freedom to provide services. A vote in the Senate was planned on 5 February 2008, but in an unlikely move, the Minister asked the Senate to postpone the vote. A second debate will be held on 18 March. As the proposed legislation was rejected by the Senate in a narrow vote on 1 April, it is possible that the Netherlands will avoid infringement proceedings by the EC for infringing European la. However as the Minister of Justice, Ernst Hirsch Ballin, wants to re-introduce proposals for a single online license to be granted to Holland casino in the Gaming Act reforms scheduled to be debated in the lower house this summer, this seems unlikely.

Justin Franssen Attorney

Aernout Kraaijeveld Paralegal

Van Mens & Wisselink

franssen@vmw.nl

kraaijeveld@vmw.nl

www.vmw.nl

Current affairs in the Netherlands

Gaming law in the Netherlands has seen numerous developments in the first months of 2008. The European Commission took a new step in the infringement proceeding targeting the sports betting monopoly. The proposed Online Gaming Act has been rejected by the Senate. The highest administrative judiciary intends to ask preliminary questions to the European Court of Justice on the allocation of sports betting and horse betting licenses.

EGB Preview

Despite these developments, the government has made it clear that it does not intend to liberalize its policy on gaming. The Netherlands Moreover, Justice Minister Ernst Hirsch Ballin has stated that he intends to maintain the prohibition on online gaming by addressing payments service providers and Internet service providers assisting online gambling operators.

The Rejected Proposal for an Online Gaming Act

Currently, all offering of online gaming to Dutch residents is illegal. This includes the offering of online gaming to Dutch residents by operators licensed in other member states. It is not possible to obtain a license for offering online gaming in the country.

The proposed Online Gaming Act was a part of the government’s fight against online gaming operators. The proposed act would have created an exclusive but temporary license for online gaming. Justice Minister Hirsch Ballin’s intention was that the temporary offer would be an experiment to gain knowledge on, and experience with, online gaming. The experimental license was supposed to be granted to Holland Casino, the state-owned casino gambling operator. Holland Casino, in turn, was supposed to offer a trustworthy and safe alternative for the estimated 400,000 Dutch residents that are currently gambling with illegal operators. The proposed act has met fierce criticism from the European Commission, high advisory bodies and members of the Senate. One of the points of critique was a possible infringement of European law. Two rounds of debate were held in the Senate, and on April 1, 2008, Senate members voted 35-37 against the proposed act.

It is noteworthy that a majority of the Senators did not express any concern about a possible infringement on European law, or about provoking the European Commission to initiate a second infringement proceeding on Dutch gaming regulations. The main arguments expressed in the debate ranged from a wish by the conservative Christians and socialists for a total ban on online gaming and a strict enforcement policy on illegal operators on the one side, to, on the opposite side, the liberals’ wish to admit more companies in the participation of the experiment.

However, the rejection of the proposed Online Gaming Act does not mean that the government’s efforts to create an exclusive license for Holland Casino have come to a full stop. Justice Minister Hirsh Ballin has stated that he now intends to incorporate the exclusive online gaming license in the newly-proposed Gaming Act. This new act is intended to replace the 1964 Gaming Act. The justice ministry expects that this separate piece of legislation will be discussed in the Tweede Kamer, or Lower House, this summer. Setting aside the possible incorporation of regulations on online gaming in the near future, the proposed act would not drastically change Dutch gaming policy. In our view, the most notable change is the installation of a Gaming Authority with more competences than the current Gaming Board.

Reasoned Opinion on Sports Betting Monopoly

The European Commission has initiated an infringement proceeding against the Netherlands because of the single-license system for sports betting. The commission has stated in its letter of formal notice, dated April 4, 2006 — and in its supplementary letter of formal notice, dated March 21, 2007 — that this monopoly on sports betting infringes the freedom to provide services, contained in Article 49 of the European Community Treaty (EC Treaty).

On February 28, 2008, the European Commission issued a press release stating it had sent a reasoned opinion to the Netherlands regarding its policy on sports betting. A reasoned opinion initiates the second stage of an infringement proceeding. (The third and final stage is a proceeding before the European Court of Justice.)

In the reasoned opinion, the Dutch government was reportedly asked to change its current regulations into regulations that are compatible with European law. However, Justice Minister Hirsch Ballin has thus far refused to publish the reasoned opinion. During the second senatorial debate on the Online Gaming Act, Mr. Hirsch Ballin stated that when his reaction to the European Commission is published, he will publish the reasoned opinion. It is expected that Mr. Hirsch Ballin will ask for an extension of the date by which a response must be given. If so, it is expected that the reasoned opinion and the reaction will be made public in late June of this year.

During the senatorial debate Mr. Hirsch Ballin emphasized that he does not agree with the Commission’s point of view. He persisted in his position that the Dutch policy on sports betting does not contravene Article 49 of the EC Treaty. Mr. Hirsch Ballin also noted that the European Commission expects the Netherlands to recognize sports betting licenses issued in other member states. According to Mr. Hirsch Ballin, however, there is no case law by the European Court of Justice stating that the principle of mutual recognition of licenses is relevant in gaming law.

Pending Proceedings

At the moment, two cases involving online gaming operators are pending before the highest judiciaries. In the proceedings on the merits, the De Lotto v. Ladbrokes case is pending before the highest civil judiciary, the Supreme Court. The opinion of Advocate General Keus is noteworthy in many respects and discussed below. In the administrative case, Betfair v. Ministry of Justice, preliminary questions from the Council of State to the European Court of Justice are expected.

De Lotto v. Ladbrokes

The dispute between De Lotto and Ladbrokes was decided in summary proceedings by the Supreme Court on February 18, 2005. The pending litigation constitutes the proceedings on the merits.

De Lotto demanded an injunction verdict, prohibiting Ladbrokes from offering games of chance to Dutch residents. De Lotto stated moreover that Ladbrokes, by offering said services, committed a tortious act. According to De Lotto, Ladbrokes is, de facto, given an unjustified advantage, because De Lotto is bound to strict Dutch licensing obligations and requirements while Ladbrokes is not. In the proceedings on the merits, a more substantive examination of the conformity of Dutch gaming policy with European law, and of the role of the sports betting licensee, De Lotto, can be made in comparison to the summary proceedings.

In his opinion, delivered during the hearing on April 4, 2007, Advocate General Keus referred to the infringement proceedings initiated by the European Commission. Other preliminary questions from courts in other member states that are relevant to this case are also discussed, as is the fact that the Council of State intends to ask preliminary questions regarding the allocation of sports betting licenses. According to Mr. Keus, an infringement proceeding by the European Commission is a more suitable framework for a substantive examination of the Dutch gaming policy, compared to the national civil dispute between De Lotto and Ladbrokes. Mr. Keus emphasized that if the European Commission proceeds with the infringement proceeding, this will lead to a final answer from the European Court of Justice on the conformity of Dutch gaming law with the EC Treaty.

Although Mr. Keus concluded that Ladbrokes’ appeal on European law should be rejected, he also provided guidelines for the subjects of possible preliminary questions, and proposed two possible, preliminary questions regarding the compatibility of European law with the Dutch situation.

The first proposed question is based on a comparison of the current gaming policy and its aims — as described by Mr. Hirsch Ballin — with a situation in which there is no national regulation of gambling, and asks if the current situation is compatible with European law. However, this proposed question takes for granted that the Dutch gaming policy is aimed at, and suitable for, the containment of the human urge to gamble. This is the definition of the aims of the current gaming policy expressed by the government, a view which Ladbrokes opposes.

The second proposed question relates to the specific nature of a civil injunction proceeding by a licensee against a non-licensed competitor. Mr. Keus proposes to ask the European Court of Justice whether an injunction verdict by a judiciary, which leads to a specific restriction on the freedom to provide services, should also be justified by a reason of overriding general interest — such as the protection of consumers, prevention of problem gambling and the counteraction of fraud and criminal activities — as defined in case law by the European Court of Justice.

Betfair v. Ministry of Justice

In Betfair v. Ministry of Justice, the highest administrative judiciary — called the Council of State — stated in a letter to the litigating parties on Feb. 4, 2008 that it intends to ask preliminary questions regarding the compatibility of the Dutch allocation of the exclusive license for sports betting and the exclusive license for horse betting.

In its proposal for preliminary questions, the council formulated questions on the principle of mutual recognition of gaming licenses, the transparency of the allocation of an exclusive license and the automatic renewal of gaming licenses.

The litigating parties were offered a four-week period during which to formulate comments on draft preliminary questions that were proposed by the council. It is not yet clear when the final questions will be made available by the council.

Possible Blocking of Financial Transactions and Access to Web Sites

In a press release dated Jan. 29, 2008, the ministry of justice stated that it will “take a firm line” against financial institutions that offer services to unlicensed gaming operators. On March 4, 2008, Justice Minister Hirsch Ballin sent a letter to the Senate which mentioned his intention to address not only financial institutions, but also Internet service providers.

The justice ministry compiled a blacklist of 30 online operators that are aimed at the Dutch market. This list will be issued this spring to the Dutch Banking Association. The ministry expects financial institutions to refuse clients who are either operating illegal online gaming Web sites in the Netherlands, or clients who operate online gaming Web sites from abroad and are excepting Dutch residents as clients. The press release stated that the ministry will take legal action against companies who “nevertheless have relations with clients who operate illegal gaming websites in the Netherlands.” It is noteworthy that the press release was not issued by the public prosecution department but the justice ministry, which, itself, has no authority to indict individuals or companies — it can merely file a complaint with the public prosecution department.

On the evening of Jan. 29, 2008, a debate on the proposed Online Gaming Act was held in the Senate. Senators referred to the press release that was issued in the morning and asked if this “firm line” includes criminal prosecution, which Mr. Hirsch Ballin promptly confirmed.

These statements by Mr. Hirsch Ballin resulted in several critical reactions in the press from the Dutch Banking Association and Currence, operator of leading Dutch payments service provider IDEAL. A spokesman for Currence mentioned in a radio interview on Jan. 30, 2008 that it is in principle unwilling to comply with Mr. Hirsch Ballin’s request, for as long as no judge rules that facilitating payment transactions to gaming operators is illegal. The Dutch Banking Association mainly pointed to the practical problems and stated that the debate on the acceptance of clients should only relate to Dutch accounts, held by Dutch companies at Dutch banks.

The criticism from the Dutch Banking Association, as expressed on its Web site, may have been effective. In a letter to the Senate dated March 4, 2008, Mr. Hirsch Ballin was less threatening in his remarks than in his Jan. 29 statement. Mr. Hirsch Ballin now stated that only the provision of bank accounts to online gaming operators is illegal. The justice minister also acknowledged that banks cannot completely monitor or block financial transactions between Dutch residents and online gaming operators. Dutch banks cannot prevent Dutch residents to transfer funds through a third party, such as an online bank account at a bank in another jurisdiction (Mr. Hirsch Ballin explicitly mentioned a PayPal account). Since PayPal has a banking license in Luxemburg, the justice ministry stated that it cannot oblige a bank with a foreign license to break up its relations with online gaming operators.

Because of the fact that the blocking of Dutch payments service providers can be circumvented, Mr. Hirsch Ballin stated on March 4, 2008 that he intends to address Internet service providers, as Internet service providers can remove, or block access to, illegal Web sites. Mr. Hirsch Ballin stated that the police and the public prosecution department can indicate this possibility to the Internet service providers regarding online gaming operators. The justice minister stated that such an approach on illegal Web sites by police and public prosecutors often leads to a “positive action” by the Internet service providers.

According to Mr. Hirsch Ballin, the public prosecution department is willing to take action against operators of online gaming, and against intermediaries such as payments and Internet service providers that serve these operators.

However, if the approach as described above proves to be ineffective, Mr. Hirsch Ballin has threatened to propose legislation that blocks transactions to and from online gaming operators. This legislation would be similar to the U.S. Unlawful Internet Gambling Enforcement Act. The justice minister did not mention that similar regulations to the UIGEA that prevent financial transactions to and from online gaming operators have already been criticized by the European Commission as infringements of the free movement of capital, as laid down in Article 56 of the EC Treaty.

On March 3, 2008, France received a detailed opinion from the European Commission following a draft decree similar to the UIGEA, and Germany has received a letter of formal notice because of the its Interstate Gambling Treaty. The letter of formal notice contains criticism on the prohibition of financial transactions with online gaming operators. These documents are a clear sign that the (eventual) Dutch legislation, prohibiting financial transactions to or from online gaming operators, can also be non-binding because such legislation potentially constitutes a violation of European law, notably Article 56 of the EC Treaty.

Conclusion

Despite several setbacks in administrative proceedings and the creation of a state monopoly on online gaming, Justice Minister Hirsch Ballin seems to be reluctant to make a move towards liberalization of the Dutch gaming market. With the latest statements on the blocking of payments and Internet service providers, Mr. Hirsch Ballin has shown that he intends to take the fight against online gaming operators to a new level. While it has become clear that the blocking of financial transactions can be easily circumvented, it is still unclear how Internet service providers will react to the government’s appeal to block access to online gaming Web sites.

This article was previously published in I-Gaming News and on the I-Gaming News website, as a preview to the 2008 European Gambling Briefing in Amsterdam. (http://www.igamingnews.com/index.cfm?page=artlisting&tid=8659)

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