German FCO prohibits anti-competitive behaiour lottery cos

13 November 2006

Christian Schwedler

Following the statement of objections directed at certain practices of the German regional lottery companies in May 2006, the German Federal Cartel Office (FCO) has issued a formal decision finally prohibiting their respective behaviour. By means of prohibited anti-competitive practices the lottery companies divided markets and ensured their regional monopoly for public lotteries.

The decision of the FCO does not affect the state monopoly for public lotteries in Germany as such (which has recently been considered by the German Supreme Court), but rather addresses the way in which the existing lotteries are distributed by the publicly licensed regional lottery companies. In Germany, only publicly licensed lottery companies are allowed to offer certain lotteries. To control public gambling, especially to prevent the addiction to gambling, private commercial companies are not allowed to offer lotteries. The only commercial participants in this market are professional gaming intermediaries like Faber, Tip24 or Jaxx who only refer consumers to the lotteries and do not contract with them in person. Since 1999, the German lottery companies are generally obliged to accept referrals from these intermediaries. Nevertheless, they still tend to divide the market amongst themselves.

In particular, the following three practices have been prohibited by the FCO as they infringe German and European competition law:

  1. Behaviour which complies with the requirement of the “Deutscher Lotto- und Totoblock” (DLTB) (the association of the regional lotteries of the single Federal States) to its members not to accept referrals by stationery, commercial gaming intermediaries.

  2. The agreement according to which each lottery may only be active in the Federal State for which it has permission (principle of regionalism).

  3. The transmission of information from the lottery associations to the Federal States regarding stakes, collected fees and the share of professional intermediaries with the purpose of apportioning the achieved earnings between the lottery companies.

These measures have two different anti-competitive effects. First, the lottery companies are abusing their dominant position by impeding the activities of the commercial intermediaries. Second, they are illegally partitioning the lottery market.

The DLTB abused its dominant position by requiring that members did not accept referrals from stationery gaming intermediaries. This aimed to hinder professional gaming intermediaries from entering the market of stationery selling of lottery participation certificates. Approximately 90% of the consumers buy their participation certificates at stationery shops. Until today the professional intermediaries only contacted potential customers via internet, telephone or by post. Now, they intend to open stationery shops in gas stations or supermarkets. The refusal of the lottery companies to accept referrals from stationery intermediaries was intended to deter commercial competitors from this most profitable part of the market and seriously impeded their activities. Therefore, the FCO has prohibited compliance with the requirements of the DLTB.

The partitioning of the market between the lottery companies, also known as the principle of regionalism, is prescribed by law by means of the German Lottery Treaty (GLT) and the “Treaty regarding the Devolution of Parts of the Sales obtained by the Companies of the DLTB” (Devolution Treaty) of the Federal States. According to the GLT lotteries shall only be organised by permission. Permission is always limited to one Federal State. Cross-border lotteries require the consent of the regional lottery companies of the affected States. As the professional gaming intermediaries are not bound by the GLT, the Devolution Treaty ensures that they do not weaken the principle of regionalism by referring contracts to the different regional lottery companies unevenly. Therefore, the Devolution Treaty establishes an information and devolution system, according to which the earnings of the regional lottery companies that derive from the referrals of the intermediaries are shared between the lottery companies in accordance with the principle of regionalism.

The FCO has found that these treaties infringe European competition law. Although the aim of controlling gambling by administrative rules of the Federal States is justified under European law, the partitioning of the market is not a proportional measure to achieve this aim. Therefore, the rules have to be disregarded. Consequently, the behaviour of the lottery companies in complying with these treaties and the principle of regionalism also infringes competition law. The partitioning of the lottery market limits competition between the lottery companies as it constitutes the allocation of customers and therefore infringes section 1 of the German Act against Restraints of Competition (ARC) and article 81 of the EC Treaty. The transmission of information to the Federal States with the aim of sharing the earnings from professional referrals supports this partitioning and also infringes competition law.

The decision of the FCO could substantially increase competition on the German lottery market. The lottery companies will become competitors and the professional gaming intermediaries will constitute an important competitive factor as they are able to channel greater numbers of consumers to certain lottery companies. Without the Devolution Treaty, the earnings that derive from the referrals of the professional gaming intermediaries will be kept by the lottery company that the consumer contracted with. And the amount of consumers that are referred by the intermediaries will increase, as they will provide stationery services in the future.

The lottery companies filed a complaint against the decision of the FCO to the Higher Regional Court of Düsseldorf. On 7 September 2006, the Court decided to provisionally abandon the decision of the FCO in respect to the obligation of the lottery companies to accept referrals from stationery gaming intermediaries until the Court reached a formal decision in this case. This interim measure does not indicate how the Court will decide on the main issues, as it is not based on a legal assessment of the complaint. It is only meant to prevent the lottery companies from substantially altering their administrative systems before a final decision.