ECJ case law on gambling: how technology thwarts regulatory barriers

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The market of gambling services has been broadly growing over the last two decades. Most notably, the development of the Internet has made more and more common and attractive such industry. Accordingly, a wide set of games has flourished and a number of operators and consumers is today involved therein.

However, the growing of the gambling industry has been regarded by the States as a threat to some principles under national constitutions, such as consumer protection and the maintaining of public order. Rules implemented by most of States to regulate the domestic practice of games of chance, thereby, have been intended to place restraints, and resulted in two alternative approaches. On one hand, some States created monopolies on the organization of gambling activities, by reserving such exclusive right to a unique operator (usually public companies or private companies partly owned or subject to the control of States); on the contrary, other States opened their markets to competition, allowing a certain number of companies to operate therein, by awarding a limited set of licenses.

Such types of regulations have been challenged by some operators as sources of restraints to the general principles of European Union law, such as the freedom to provide services. These objections were addressed over the time by national courts (especially criminal courts intended to adjudicate cases concerning the illegal practice of gambling by unauthorized operators) and entailed that several prejudicial questions were raised before the European Court of Justice.

Does a total prohibition comply with EC law? The Schindler case

The first decision in the ECJ case law on gambling was rendered in 1994 (Case C-275/92, Her Majesty’s Customs and Excise v Gerhart Schindler and Jörg Schindler, judgment of 24 March 1994). Even if it doesn’t affect online gambling, it must be deemed as the leading case that also the most recent judgments are still referring to.

In Schindler, a British law banning national lotteries was disputed in so far as it prevented companies established in another EC States from providing such services in UK (in this particular case, from sending envelopes containing lottery tickets to British citizens). The ECJ said that a total prohibition, since it obviously curbs the freedom to provide services, can however be justified by imperative requirements in the general interest in so far as it aims at avoiding the threats to the public order and consumer protection arising from the practice of gambling. In any case, the restrictions must be suitable for achieving the objectives pursued by the States and not go beyond what is necessary in order to attain them. They must be applied without discrimination, as well.

Schindler also focused on some aspects relating to the lotteries and, generally speaking, to all the activies of gambling and reasoned about how they could give rise to different approaches and, accordingly, different rules in the Member States.The Court held:

“First of all, it is not possible to disregard the moral, religious or cultural aspects of lotteries, like other types of gambling, in all the Member States. The general tendency of the Member States is to restrict, or even prohibit, the practice of gambling and to prevent it from being a source of private profit. Secondly, lotteries involve a high risk of crime or fraud, given the size of the amounts which can be staked and of the winnings which they can hold out to the players, particularly when they are operated on a large scale. Thirdly, they are an incitement to spend which may have damaging individual and social consequences. A final ground which is not without relevance, although it cannot in itself be regarded as an objective justification, is that lotteries may make a significant contribution to the financing of benevolent or public interest activities such as social works, charitable works, sport or culture. […] Those particular factors justify national authorities having a sufficient degree of latitude to determine what is required to protect the players and, more generally, in the light of the specific social and cultural features of each Member State, to maintain order in society, as regards the manner in which lotteries are operated, the size of the stakes, and the allocation of the profits they yield. In those circumstances, it is for them to assess not only whether it is necessary to restrict the activities of lotteries but also whether they should be prohibited, provided that those restrictions are not discriminatory”.

The case law on Italian betting regulation: does Internet work as a remedy to restore EC principles?

Afterwards, three decisions involved the Italian regulation of betting services, which requires operators to get a public license and a subsequent authorization that presupposes it. The Italian law on betting has been challenged for a long time because it originally excluded listed companies from the tender procedures for the awarding of such licenses, with the purpose of keeping operators with criminal connections out of such market (since individual shareholders are not always identifiable). Among the excluded companies, some important foreign bookmakers (especially from UK) complained that these rules had been construed to restrain the Italian market of gambling services.

Therefore, some of them started to operate in Italy by means of independent agencies (also known as “Data Transmission Centers operators”) which, as intermediaries, transmitted by the Internet the stakes placed by players in their premises to the bookmaker established in UK. However, such intermediaries were charged for illegal practice of gambling (under Article 4 of Law no. 401/1989) because they lacked the authorization required by Italian law (that can only be got by the holders of public licenses). But since they were actually unable to get it because of the law, many national courts were concerned that such exclusion was in contrast with the EC principles and raised prejudicial questions before the ECJ.

By addressing such cases, the Court developed a more and more in-depth analysis on the consequences determined by Italian law on the EC principles. Moving from a “soft approach”, like in Zenatti (Case C-67/98, Questore di Verona v Diego Zenatti, judgment of 21 October 1999), in Placanica (Joined Cases C338/04, C359/04 and C360/04, Placanica and Others, jugdment of 6 March 2007) it ran a “hard” scrutiny.

In its first decision, rendered in 1999 (Zenatti), the ECJ argued that restrictions to the market access, such as those provided by Italian law, might be justified by imperative requirements in the general interest and applied its ruling under Schindler, even though that decision addressed a total prohibition. According to the Court, the enactment of more restrictive laws for the same purpose in other States does not affect testing suitability and proportionality; since there is no harmonization in this respect, in fact, each State can determine the level of protection to ensure within its borders.

The Court also examined some of the imperative requirements in the general interest evoked by the Italian Government and pointed out that “the financing of social activities through a levy on the proceeds of authorised games must constitute only an incidental beneficial consequence and not the real justification for the restrictive policy adopted”.

Indeed, “the restrictions must in any event reflect a concern to bring about a genuine diminution of gambling opportunities”, in order to ensure consumer protection and the maintaining of public order. The ECJ concluded that it was for the national court to determine whether the disputed restrictions were suitable and not disproportionate to pursue the aimed objectives.

In the wake of some amendments to the legal framework provided by Finance Law no. 388/2000, another prejudicial question was raised before the ECJ. This case involved the British bookmaker Stanley, that had established a widespread organization of agencies in Italy. Moreover, in Gambelli (Case C243/01, Gambelli and Others, judgment of 6 November 2003) the point at issue was whether the regulation of betting on sporting events affected the freedom of establishment, in addiction to the freedom to provide services.

First of all, the ECJ acknowledged that Italian law on betting, as amended, constitued however a restriction on the freedom of establishment as well as on the freedom to provide services.

It quotetd its ruling in Schindler and Zenatti, where the Court had accepted that restrictions on gaming activities might be justified by imperative requirements in the general interest, such as consumer protection and the prevention of both fraud and incitement to squander on gaming.

Thus, Gambelli worked out the so called “hypocrisy test”, that national judges should have to carry out in order to assess the compliance of such restrictions with the EC law. According to the Court, “restrictions based on such grounds and on the need to preserve public order must also be suitable for achieving those objectives, inasmuch as they must serve to limit betting activities in a consistent and systematic manner (emphasis is added)”.

Such hyporcrisy test entails that “in so far as the authorities of a Member State incite and encourage consumers to participate in lotteries, games of chance and betting to the financial benefit of the public purse, the authorities of that State cannot invoke public order concerns relating to the need to reduce opportunities for betting in order to justify measures such as those at issue in the main proceedings”.

Like in Zenatti, the ECJ held that it was for the national court to decide whether such criteria were met by Italian law. Notwithstanding this decision seemed to discourage Italian courts from keeping on applying the disputed rules (and, most notably, the criminal penalties provided by Article 4 of Law 401/1989), a few months later the Italian Supreme Court of Cassation in Gesualdi (Case no. 23273/2004) ruled that the national measures complied with the ECJ case law. Gesualdi pointed out that the provisions barring the access to the Italian market of betting services to listed companies had been removed in 2002; additionally, it found that the remaining restrictions to the market were aimed at the protection of public order, regardless of the increase in the opportunities for betting.

Despite these developments, the companies operating in Italy by means of intermediaries objected that the rules governing betting conflicted with Article 43 EC and Article 49 EC, since the licences issued in 2000 were automatically renewed for additional six years between 2005 and 2006 and no new licence would have been awarded until their expiration.

In the light of above, the companies which had been excluded from the Italian market of betting would not have been able to access it until 2012; and the intermediaries operating on behalf of them would have been prosecuted for illegal practice of gambling under Article 4 of Law no. 401. Thus, many courts dissented from the ruling in Gesualdi, by not applying the criminal penalties established under Law no. 401; accordingly, and another question was referred to the ECJ.

In Placanica the Italian law underwent an in-depth scrutiny that involved, one by one, all the aspects whose compliance with EC law could be challenged. At the outset, the ECJ held that

“it is possible that a policy of controlled expansion in the betting and gaming sector may be entirely consistent with the objective of drawing players away from clandestine betting and gaming – and, as such, activities which are prohibited – to activities which are authorised and regulated. […] Independently of the question whether the exclusion of companies quoted on the regulated markets applies, in fact, in the same way to operators established in Italy and to those from other Member States, that blanket exclusion goes beyond what is necessary in order to achieve the objective of preventing operators active in the betting and gaming sector from being involved in criminal or fraudulent activities. […] As regards the consequences flowing from the unlawful nature of the exclusion of a certain number of operators from tender procedures for the award of existing licences, it is for the national legal order to lay down detailed procedural rules to ensure the protection of the rights which those operators derive by direct effect of Community law, provided, however, that those detailed rules are not less favourable than those governing similar domestic situations (principle of equivalence) and that they do not make it excessively difficult or impossible in practice to exercise the rights conferred by Community law (principle of effectiveness)”.

Accordingly, the Court found that:

“The case-law has also made it quite clear that a Member State may not apply a criminal penalty for failure to complete an administrative formality where such completion has been refused or rendered impossible by the Member State concerned, in infringement of Community law. […] DTC operators linked to a company organising bets which is quoted on the regulated markets and which is established in another Member State, had no way of being able to obtain the licences or police authorisation required under Italian legislation because, contrary to Community law, Italy makes the grant of police authorisations subject to possession of a licence and, at the time of the last tender procedure in the case which is the subject of the main proceedings, had refused to award licences to companies quoted on the regulated markets. In consequence, Italy cannot apply criminal penalties to persons such as the defendants in the main proceedings for pursuing the organised activity of collecting bets without a licence or a police authorisation”.

At last, the Italian Supreme Court of Cassation complied with ECJ ruling in Placanica: in its decision no. 16928/2007, for the first time the Court conceded that domestic law conflicted with EC principles and stated that lower courts must refrain from applying criminal penalties to the intermediaries operating on behalf of those companies that had been unlawfully excluded from the tender procedures.

E-gambling websites: recent developments in the EJC case law

Another important case addressed by the European Court of Justice in 2009 (Case C-42/07, Liga Portuguesa de Futebol Profissional and Bwin International Ltd v Departamento de Jogos da Santa Casa da Misericórdia de Lisboa, judgment of 8 September 2009) shows as the cross-border provision of gambling services has further expanded thanks to Internet sites.

By concluding a sponsorship agreement, the online gambling company Bet & Win, located in Gibraltar, became the main institutional sponsor of the First Football Division in Portugal. Notwithstanding, Portuguese law reserves the organization of games of chances, also via the Internet, to Santa Casa, a “legal person in the public administrative interest” holding a monopoly since 1783. Due to the violation of such monopoly, fines were imposed to both the Liga Portuguesa and the Bwin, which challenged the compliance of Portuguese law with EC principles.

In the wake of the remarks pointed out by the General Advocate, the ECJ focused on the additional risks connected with the provision of gambling services on the Internet. Most of them are determined by the lack of contact between consumers and operators, which can give rise to an increase in frauds, for example.

On such grounds, the Court ruled that consumer protection and the maintaining of public order might justify the measures provided by Portuguese law. As the Court said in Zenatti, the lack of harmonization allows Member States to determine the appropriate degree of protection, it being immaterial that another State has enacted measures more or less restrictive in comparison to others.

A similar judgment has recently been delivered by the ECJ in two cases (Case C-203/08, Sporting Exchange v. Minster van Justitie and Case C-258/08, Ladbrokes Betting & Gaming Ltd, Ladbrokes International Ltd v. Stichting de Nationale Sporttotalisator, judgments of 3 June 2010) where in the main proceedings the compliance with EC principles of the Dutch law on games of chance had been disputed. It provides that only one licence is granted for each category of games of chance and prescribes a general prohibition for their unauthorized organization and promotion.

The Dutch company De Lotto has a monopoly on the market of betting. Two British companies whishing to provide such services via the Internet on the Dutch market applied to the Minister of Justice for a license, but their requests were denied.

Both in Sporting Exchange and in Ladbrokes the ECJ upheld that “Article 49 EC must be interpreted as not precluding legislation of a Member State […] under which exclusive rights to organise and promote games of chance are conferred on a single operator, and which prohibits any other operator, including an operator established in another Member State, from offering via the internet services within the scope of that regime in the territory of the first Member State”.

Other recent cases could illustrate the same features shown above, but this is only the first chapter…

Conclusions (what the courts don’t say but we could say in the light of above)

As the Court pointed out many times, the Internet gaming industry has not been the subject of harmonization within the European Union. Therefore, States are not obliged to recognize the licenses or authorizations issued by other EC States to national operators in order to allow them to provide gambling services.

However, in the light of the issues focused above it should be clear that harmonization is not a simple option anymore: till now, the EJC has replaced national courts in evaluating the conflicts with EC principles arising from gambling regulation, but this task cannot be discharge for any legislation: common rules are needed.

It’s time that rules governing such market start to be thinked in connection with the rules of the Internet, in a way that is consistent with and not harmful to the principles under national Constitutions. The next steps are up to EC institutions. Regulating online gambling is more than a bet!

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About Author

Marco is PhD Candidate in Constitutional and European Law at the University of Verona and a Lawyer specialized in Criminal Law and Media Law. In 2010 he got his degree in Law (cum laude) from Bocconi University of Milan. During the Spring semester of 2010 he was visiting student at the University of Richmond School of Law. He is also past editor of the Bocconi School of Law Student-Edited Papers (2009-2010). His main interests include Information and Communication Law, Internet Law, Entertainment Law and Public Law.

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