Client Alert. Online Gambling: Is Now the Time to Enter the German Market? The current legal framework in 15 out of the 16 German States

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1 Number March 2012 Client Alert Latham & Watkins Corporate Department Online Gambling: Is Now the Time to Enter the German Market? Providers may consider taking the opportunity in Schleswig- Holstein to start a German online gambling business. The German State of Schleswig- Holstein has enacted a new Gambling Act (Glücksspielgesetz), which makes it legal for gambling service providers with the appropriate license to offer online gambling to individuals in Schleswig-Holstein from March 1, 2012 onwards. The other 15 German States, however, continue to pursue a more restrictive approach and have signed a revised version of the German Interstate Gambling Treaty (Glücksspielstaatsvertrag the GIGT) on December 15, The new GIGT is currently under review by the European Commission in Brussels. Until the ratification of the new GIGT, the current GIGT, which was ratified in 2007, remains in force in all German States 1 except Schleswig-Holstein. The current GIGT contains a general prohibition of online gambling services as well as any advertising for, or distribution of them. This prohibition has been upheld by several fairly recent decisions of German federal courts despite the ongoing discussions about the compatibility of the GIGT with European Union law. It is currently unclear what impact Schleswig-Holstein s Gambling Act will have on the legal situation in the other German States, in particular, whether or not the fact that some types of online gambling will be permissible in one of the German States might compromise the general prohibition of online gambling in the rest of Germany. In any event, providers may consider taking the opportunity in Schleswig- Holstein to start a German online gambling business. A valid license in Schleswig-Holstein might strengthen an online gambling service provider s position when taking legal steps against restrictive administrative orders issued in the other States. Furthermore, it is not clear at this point whether Schleswig-Holstein will hold on to its pioneering role, or whether it will return and join the other German States in a new version of the GIGT. A license that is now granted in Schleswig-Holstein under the Gambling Act is not easily revoked if online gambling laws become more restrictive again. The current legal framework in 15 out of the 16 German States In all German States with the exception of Schleswig-Holstein, the terms of the current GIGT are in force at present. Although the GIGT expired on December 31, 2011, its provisions will nevertheless remain in force as state law until a new interstate gambling treaty has been ratified. The GIGT provides for a state monopoly on sports betting and lottery, and an express Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom, France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in association with the Law Office of Mohammed A. Al-Sheikh. In Qatar, Latham & Watkins LLP is licensed by the Qatar Financial Centre Authority. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2012 Latham & Watkins. All Rights Reserved.

2 general prohibition of public online gambling as well as any advertising for, or distribution of it. The regulatory gambling authorities of the German States (Glücksspielaufsichtsbehörden der Länder) may issue administrative orders (interdicting any further action in furtherance of the gambling) directed at the organizer of the gambling, the financial institutions that provide services in connection with the payments for the gambling, and the online provider that enables individuals to access the gambling website. In addition to the prohibition stipulated in German administrative law, the organization of and advertising for illegal gambling (including paid online gambling) is also a criminal offence and punishable under Section 284 of the German Penal Code (Strafgesetzbuch). Any action in furtherance of the illegal gambling may be punishable as aiding and abetting. The prohibitions stipulated in the GIGT also apply to online gambling where the respective organizer operates from abroad as long as the online content is directed, solely or inter alia, at the German market. In this regard, it is irrelevant whether the foreign gambling services provider has a license issued by another country (whether within or outside the European Union). The German sports betting monopoly under scrutiny by the ECJ On September 8, 2010, the European Court of Justice (ECJ) delivered three preliminary rulings 2 (the ECJ Decisions) regarding the German sports betting monopoly. Immediately following these ECJ Decisions, several articles and commentaries stated that the ECJ considered the GIGT as conflicting with European Union law, and that German courts and authorities are therefore prevented from enforcing its stipulations until new legislation has been enacted. Other commentators, however, stressed that the ECJ Decisions, in fact, declared a state sports betting monopoly such as the German one as being in conformity with European Union law. The reason for the diverging interpretations of the ECJ Decisions is that the ECJ did not (as some may think) expressly rule on the conformity of the German legal framework with European Union law. Rather, the ECJ issued general guidelines stipulating the circumstances under which national courts may legitimately be led to consider that a piece of national legislation that limits the free provision of gambling services within the European Union is not suitable to fight against the risks associated with gambling in a coherent and systematic manner, thereby violating respective European Union law. The ECJ expressly stated that it is ultimately the responsibility of the national courts to determine whether national legislation meets these requirements. Following the ECJ Decisions, German courts for the most part differentiate in the legal analysis of the provisions of the GIGT between the provisions regarding the sports betting monopoly on the one hand, and the general prohibition of online gambling on the other hand. The courts ruled 3 that even if the sports betting monopoly is inapplicable due to its inconsistency with European Union law, this does not affect the validity of the prohibition of online gambling, which is a separate provision, unrelated to the monopoly, and itself in conformity with European Union law. This approach has been recently confirmed by decisions of two German federal courts 4, namely the German Federal Administrative Court (Bundesverwaltungsgericht) and the German Federal Court of Justice (Bundesgerichtshof). In their analyses, these courts stress that the general prohibition of online gambling is justified because of the greater risks associated with online gambling due to its anonymity, lack of social control, and permanent availability. The courts also held that the German regulation limits the ability to provide online gambling services in a coherent and systematic manner, thereby observing the applicable European Union requirements. 2 Number March 2012

3 In the light of the German federal courts rulings, German trial and appellate courts will most likely continue to uphold the prohibition of online gambling as contained in the current GIGT in all States except Schleswig- Holstein. The unique situation in Schleswig-Holstein The situation in the German State of Schleswig-Holstein is different from the rest of Germany. The State of Schleswig- Holstein is the only German State that has enacted a gambling law of its own, the Gambling Act, which became effective on January 1, The Gambling Act is much more liberal that the GIGT and allows, as of March 1, 2012, the provision of licenses for online sports betting and online casinos for private entities that have their registered office, their head office, or a branch within the European Economic Area. The Gambling Act maintains a state monopoly only for the organization of big lotteries but not for sports betting. The provision of gambling services without a license is, however, still illegal. The relevant bill was notified to the European Commission in May of 2011 pursuant to the procedure stipulated in Directive 98/34/EC, and the European Commission did not respond with material concerns regarding the bill s conformity with European law. Therefore, from March 1, 2012 onwards, licensed gambling service providers may provide their services in Schleswig- Holstein, including online gambling services. On January 11, 2012, the Ministry of the Interior of Schleswig-Holstein published an ordinance, which further specifies the requirements and the process for applying for a gambling license. Since the procedure is new, it is not yet fully clear how the gambling authority in Schleswig-Holstein will interpret and apply the statutory requirements. One of the prerequisites for obtaining a license for online gambling services is the provision of a collateral in the form of a bank guarantee in the amount of one million Euros. The required amount can, however, be increased even further by the gambling authority to up to five million Euros. Licenses will be granted for an initial eight-year period and may be renewed subsequently for four-year periods. The potential impact of the Gambling Act on the rest of Germany It is unclear what impact the Gambling Act of Schleswig-Holstein will have on the legal situation in the other German States in the medium and long term. There are two main arguments that are currently brought forward to argue that the legality of certain types of online gambling in Schleswig-Holstein compromises the general prohibition of online gambling in the rest of Germany. First, gambling service providers have always argued when being sued in one of the German States over their obligation not to provide online gambling (the prohibition has always been state-bound due to its nature as state law) that it is technically impossible for them to ensure that their online services do not cross state lines. With a similar argumentation, gambling service providers licensed in Schleswig-Holstein will now argue that an administrative order issued in one of the 15 GIGT-States will unreasonably burden them because in order to comply with such order, they would, in effect, have to switch off their online platform for the whole of Germany (including Schleswig-Holstein, where they have a license). In past decisions 5, several courts have evaded the question regarding the accuracy of geo-localization by stating that this question is irrelevant since online gambling is prohibited in the whole of Germany anyway. After March 1, 2012, however, this argumentation will no longer be applicable. On the other hand, the majority of recent court decisions 6 addressing this issue have at least indicated that in the eyes of the court, geo-localization (if necessary, with subsequent tracking of static and cell 3 Number March 2012

4 phones) is accurate enough in order to enable online service providers to respect state lines within Germany. It remains to be seen how case law develops in this regard after March 1, The second main issue currently discussed is the question whether the different treatment of online gambling within Germany now causes the general prohibition of online gambling in the 15 remaining GIGT-States to violate European Union law (which would render the prohibition inapplicable). Courts have always stressed that the prohibition of online gambling is in conformity with European Union law because it limits the ability to provide online gambling services in a coherent and systematic manner. This coherence, however, might now be lost on a national level due to the different treatment of this matter in Schleswig- Holstein compared to the rest of Germany. The new GIGT Since the current GIGT expired on December 31, 2011 (but, as was said above, its terms will nevertheless continue to apply until a new GIGT has been enacted), all German federal States with the exception of Schleswig-Holstein signed a new GIGT on December 15, The new GIGT provides for an effective date of July 1, 2012, however, in order to enter into force in any of the German States, the treaty requires ratification by the respective State parliament. Such ratification has not yet taken place. The new GIGT loosens the restrictions on online gambling to some extent and allows for the provision and distribution of online sports betting services if certain prerequisites are met, one of them being that the maximum betting limit does not exceed 1,000 per person and month. Online casinos remain generally prohibited. However, the permissibility of online sports betting services does not benefit the majority of private gambling service providers because the new GIGT, in essence, maintains the state monopoly on sports betting and lottery. Only during a sevenyear experimental phase, a total of 20 licenses may be temporarily granted to private gambling service providers. It is unclear at this point whether the German States will ratify the new GIGT because the State prime ministers declared that such ratification will only take place if the European Commission in Brussels has no concerns regarding the new GIGT s compatibility with European Union law (which is an unprecedented approach in the history of German interstate treaties). The European Commission heavily criticized the last draft of the new GIGT, and although some amendments were subsequently made to the version that has now been signed, it is widely expected that the European Commission will demand further modifications. In particular, the limitation of licenses for private gambling service providers to a total of 20 seems random and in violation of EU law. In a very recent ECJ decision 7 dated February 16, 2012, regarding limitations on the granting of new gambling licenses, the ECJ affirmed its position that the public authorities which grant betting and gaming licences have a duty to comply with the principles of equal treatment and of non-discrimination. 4 Number March 2012

5 Endnotes 1 In the German State of Hessen, the current GIGT will only remain in force until December 31, If the new GIGT is not ratified before that date, the legal situation regarding gambling services in Hessen will be unclear. 2 Docket no. C-316/07 (Markus Stoß, joined cases C-358/07, C-359/07, C-360/07, C-409/07, C-410/07), C-46/08 (Carmen Media Group), and C-409/06 (Winner Wetten). 3 For example: Decision of the Administrative Court of Appeals Lüneburg dated June 21, 2011 (docket no. 11 LC 348/10); decision of the Administrative Trial Court Düsseldorf dated April 29, 2011 (docket no. 27 L 471/10); decision of the Bavarian Administrative Court of Appeals dated April 1, 2011 (docket no. 10 CS ); and decision of the Administrative Court of Appeals Berlin-Brandenburg dated November 5, 2010 (docket no. 1 S ). 4 German Federal Administrative Court (BVerwG), decision of June 1, 2011 (docket no. 8 C 5/10); German Federal Court of Justice (BGH), decisions of September 28, 2011 (docket no. I ZR 92/09 and I ZR 189/08). 5 For example: German Federal Administrative Court (BVerwG), decision of June 1, 2011 (docket no. 8 C 5/10), para For example: Administrative Court of Appeals of Münster, decision of February 22, 2010 (docket no. 13 B 1809/09); Administrative Court of Düsseldorf, decision of June 21, 2011 (docket no. 27 K 6586/08) 7 ECJ, decision of February 16, 2012, docket no. C-72/10 (Marcello Costa) If you have any questions about this Client Alert, please contact one of the authors listed below or the Latham attorney with whom you normally consult: Stephan Kress stephan.kress@lw.com Frankfurt 5 Number March 2012

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