European Union: Gambling in the Internal Market Post Gambelli

Gambling in Europe is still largely dominated by statelicensed monopolies regulated by restrictive national legislations. Regulation of gambling and restrictions to the provision of gambling services at national level are usually justified by reasons of public order, such as preventing illegal gaming and fighting organised crime and money laundering, protecting the consumers (minors and incapacitated persons), etc.

There is no EU secondary legislation in this field, although gambling services are, nevertheless, covered by the EC Treaty under the freedom to provide services (ex article 49¹). There is no doubt that gambling is an economic activity, but nowadays gambling is excluded from the scope of application of the E-Commerce Directive art. 1.5² and, at least temporarily, of the proposal for a Services Directive³ art. 18.1.b. This status quo, however, may not be stable, particularly following the judgment of the European Court of Justice ("ECJ") in the Gambelli case.

For many years, European gambling monopolies seemed to enjoy an enviable market position protected by national regulations and legitimated by the ECJ. The ECJ questioned on a number of occasions, by means of preliminary rulings, whether national rules restricting cross border provisions of gambling services were compatible with the EC Treaty, had concluded that the restrictions were justified for public policy reasons.

In the Schindler,⁴ Läärä⁵ or Zenatti⁶ cases, the ECJ considered that national restrictions (for example: license or concessional systems where the number of operators in the territory is limited), were justified because of the special nature and features of the services and overriding public interest considerations (for example, prevention of fraud, limitation of gambling opportunities, etc.). In that context, the ECJ observed that national systems should be assessed only by reference to the objectives pursued by the national authorities of the Member State concerned, and the level of protection they want to provide. If the system is effective to ensure the fulfilment of the public policy objectives pursued, any national restrictions could lawfully be an exception to the community freedoms.

Nevertheless, the ECJ already remarked that the restrictions should not be discriminatory. It also added that the fact that taxes on lotteries/bets are an important contributor for financing good causes and/or public interest activities, the so-called re-allocation of funds, could not be considered objective justifications for the restrictions.

The increasing phenomenon of online gambling services introduced new elements in the analysis of this industry and, for the first time, in the Gambelli case⁷ the ECJ suggested that national restrictive rules might infringe the EC Treaty.

The Gambelli case was the first online gambling case submitted to the ECJ’s jurisdiction. The case affected Italy where the organization of sporting events is reserved to companies holding a public concession. Gambelli was an individual acting as an intermediate, who ran a data center for a UK established bookmaker Stanley International Betting. Criminal proceedings were brought against Gambelli. The national court submitted a question for a preliminary ruling before the ECJ asking whether the Italian rules impeded the freedom to provide services.

Although the Advocate-General Alber⁸ concluded in his Opinion that the Italian rules at stake were discriminatory and failed to be justified on grounds of general interest and as a consequence, they infringed the freedom to provide services, the conclusion of the ECJ was not so clear-cut.⁹

The ECJ recognized, on the one hand, that prohibiting — by means of criminal penalties — individuals in Italy to participate in betting games organized in Member States — other than the country where the bettor is established — constitutes a restriction on the freedom to provide services. On the other hand, the ECJ recognized that the same conclusion applied to intermediaries who facilitate the provision of betting services on sporting events organised by a supplier, such as Stanley, established in a different Member Sate other than that in which the intermediaries pursue their activity.¹⁰ However, despite those conclusions, the ECJ referred the case back to the national court, stating that the national court was the competent authority to decide whether the rules could be justified and proportionate.

Nevertheless, to set the national analysis within the right framework, the ECJ indicated a number of principles which national restrictive rules must comply with to be legitimate. According to the ECJ, any national restrictions which impede the exercise of the freedom to provide services must be suitable to achieve their policy objectives and both proportionate and non-discriminatory. In particular,

• Measures must be justified by reasons of public order; the test to be applied is that of "imperative requirements of general interest," and so, the restrictions must be the result of a consistent and systematic policy that is, genuine diminution of gambling opportunities. While national restrictions may be justifiable where they seek to protect consumers, they must still be applied in a consistent manner.¹¹

• The restrictions must not be discriminatory; in the case, it was almost impossible for foreign operators to obtain a license because concessional rules imposed that the holder should have an establishment on Italian soil.

• The restrictions must be proportional and necessary to achieve the policy objectives; in the case, the ECJ considered that, given that criminal penalties of up to one year of imprisonment were imposed, the restriction went beyond what is necessary to combat fraud, specially because:

It might that the ECJ was implicitly upholding that the application of the rule of origin (or "internal market principle") by concluding that control in the country of origin should be enough to control the legality of the gaming activities in other Member States.¹² However, the mere reference to the principle shows the relevance given to it at least for the analysis of the principles of necessity and proportionality of the restrictions.

Following Gambelli, Member States can not invoke public policy reasons to justify preventing cross border provision of gambling services, while the actual objective is to protect national markets from foreign competition. Moreover, the ECJ believed that national courts would follow those principles and that this would reduce the margin of discretion of the national courts when deciding on similar cases.

However, more than one year after Gambelli, the result is in balance unsatisfactory. All the more because, despite being an improvement for the provision of cross-border gambling services, the effects of the judgment on national courts are still limited.

In this sense, it is quite revealing that the Gambelli case is still pending before the national court in Italy, that in an identical case, a new question for a preliminary ruling has been submitted before the ECJ in relation to provision of egaming services in Italy, the Placanica case;¹³ and that the Gambelli requirements seem to be applied in a very diverging manner at the national level.¹⁴ In extremis, national restrictions to the freedom to provide services could be considered justified if there are overriding public interests. The margin of interpretation is still ample.

However, it seems that the gap opened by the ECJ is significant and there is no turning back. Thus, also in November 2003, in the Lindman case,¹⁵ in the field of income tax, the ECJ ruled that article 49 EC Treaty prohibited a Member State to treat as taxable income winnings from games of chance organised in other Member States, whereas winnings from games of chance conducted in the Member State in question are not taxable.

The traditional European gambling industry based on protected national monopolies is nowadays on the verge of dramatic changes; in particular, the unstoppable growth of internet gambling and multi-national lotteries; take-overs and mergers; the effects of enlargement of the European Union and the new markets; the increasing presence of European cross-border operators, like Intralot (Greece), Lottomatica (Italy) and Novamedia (The Netherlands),¹⁶ as well as other more complex questions regarding the sovereignty of States and the relations with non EU Members.¹⁷

Following the developments of the courts and industry concerns about national rules in Denmark, Germany, Italy and the Netherlands, the European Commission has already noted that legislative action might be necessary to avoid future distortions of the internal market. In particular, in the context of the First Report on the transposition and application of the E-commerce Directive, the Commission raised the possibility that the scope of the Directive should be broadened to include online gambling, stating that "it will initiate the appropriate action to deal with these complaints and in addition to launch a study to provide the information required to examine the need for and scope of a possible new community initiative."¹⁸

Moreover, in February 2005, the European Commission appointed the Swiss Institute of Comparative Law to undertake an analysis of the various existing laws regulating gaming activities across the EU. This analysis will focus on the regulatory and economic state of the gambling industry in each Member State as well as a prognosis of how these markets will change over the next six years. A preliminary report is expected to be published in June 2005 and a final report is meant to be published by the end of November 2005.

Any subsequent legislative proposal on this field would be the result of a complex debate between the diverging interests of the EU, national monopolies and private operators; the balance between the defence and promotion of the freedom to provide services in the internal market, the loss of revenues or jobs in the industry and the need to combat fraud and money laundering, prevent gambling addiction and protect consumers.

2005 and 2006 will be decisive years for the gambling industry because of the publication of the Report on gambling and the second review of the E-commerce Directive as well as the debate of the proposal for a Services Directive in the European Parliament. The legitimacy of the State monopolies is under scrutiny and the private operators will fiercely play their cards. It seems not unreasonable to think that a far reaching process of liberalization of the gambling market is in process.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Mayer Brown is a combination of two limited liability partnerships: one named Mayer Brown LLP, established in Illinois, USA; and one named Mayer Brown International LLP, incorporated in England.