Debate on the future of the German gambling market intensifies

26 March 2007

Christian Schwedler

The controversy regarding the regulatory framework of the German gambling market is becoming more intense. Whilst the majority of German Federal States are still fighting for the implementation of the draft amendment to the German Lottery Treaty (GLT), which further strengthens the state monopoly for lotteries and applies additional restrictions to all forms of commercialisation in the area of gambling, the German Federal Cartel Office (FCO) continues to promote increased competition within the system of a monopolistic market. In addition to this, the European Commission has also entered the dispute, by raising doubts whether the state monopoly for lotteries complies with European law.

The German gambling market debate started with a decision of the German Supreme Court in March 2006. In its decision the court found that the state monopoly for gambling, and in particular for sports bets, infringed the German Constitution. The objectives of controlling public gambling and prevention of pathological gambling could justify the establishment of a state monopoly for gambling, but as it restricts the constitutional right of private persons to offer gambling services, the state monopoly is only an appropriate measure, if it is designed strictly in alignment with these objectives. In fact the public lotteries and in particular the public sports bets company Oddset advertise extensively and achieve profits for the Federal States amounting to billions of euros. In the light of this practice, the Supreme Court found that it was not appropriate to prohibit private gambling companies by reference to their commercial character. Thus, the German Supreme Court ordered the Federal States to adapt the regulatory framework for gambling to the constitutional requirements - which means either to design the monopoly in accordance with the aims of controlling public gambling and prevention against pathological gambling, or to abolish the state monopoly and to open the market for private companies while applying uniform restrictions to all market participants.

In reaction to this judgment, the Federal States published a draft amendment to the GLT intended to further restrict all forms of gambling. The draft amendment contains inter alia a clarification that all forms of private gambling continue to be subject to severe restrictions, a comprehensive limitation of advertising for gambling and a prohibition of the offering of gambling services via the internet. The commercial gaming intermediaries, who are the only private participants in the German lottery market (which only refer consumers to the lotteries and do not contact them in person), could in particular be deprived of their commercial activity by this amendment. The draft amendment made very clear that the Federal States are determined to retain the state monopoly and the associated profits by any means necessary. Nevertheless, the prohibition on advertisements for gambling could threaten the profits of public lottery companies.

It is doubtful whether the new GLT will come into force in the way it was drafted. There is strong opposition against the strengthening of the state monopoly. Numerous claims based on doubts regarding the constitutionality and compliance with European law of the draft GLT are pending in the German courts. Recently, the European Commission claimed an interest in the matter, announcing investigations into the compliance of the state monopoly with the European principles of freedom of establishment and services and European competition law. The European Court of Justice is expected to give a judgment in 2007, in which it will underline that the state monopoly for gambling contradicts European law.

In addition, the FCO attempted to limit at least the arbitrary manner in which the Federal States interpret the state monopoly on gambling. The competition authority objected to a number of practices of the regional public lottery companies with which they limited any remaining form of competition. In particular, the FCO found the partitioning of the lottery market between the regional public lottery companies is an impediment for commercial gaming intermediaries and infringes European competition law. These measures were not legitimised by the aims of controlling public gambling and preventing pathological gambling, regardless of the fact that the state monopoly as such might suit these aims.

The FCO’s objections were not solely directed at the lottery companies, but also openly confronted the state authorities as the practices objected were based upon legal requirements described by state law. The dispute reached its peak when the FCO ordered the public regional lottery companies to open their internet services to customers from other Federal States. The state authorities reacted with a concerted order to the lottery companies to completely shut down the internet service. The FCO – once again - objected to this reaction as this concerted practice also infringed European competition law. The lottery companies or the state authorities were each individually allowed to decide to shut down the service, but the concerted practice infringed Article 81 EC. Although the FCO abstained from further insisting on an internet offer, it made quite clear, that it will have an eye on the behaviour of the lottery companies and the state authorities.

In reaction to these controversies the first effort of the Prime Ministers of the Federal States to ratify the new GLT failed, as one Prime Minister was not willing to sign the Treaty. Nevertheless, the great majority of the Prime Ministers are still insisting on strengthening the state monopoly as it is constituted in the draft amendment, even if this would mean sacrificing the long-established commercial gaming intermediaries and the thousands of jobs of their employees. Nevertheless, they have to face an increasing opposition consisting of German and European competition authorities and the majority of the public opinion. Certainly this is not the last word in this matter.