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Print articlePlacanica - No Nail in Anyone's Coffin but the National Courts are Still in a Hole
March, 2007 - Sebastian McMichael
Introduction
The ECJ's decision in Placanica has quite rightly generated a lot of comment in this publication and in the press more generally. As the dust settles three views have emerged as to the potential impact of the judgement.
On the one hand, certain organisations are hoping that the European Commission will take from the ruling "courage", "resolve" and "fortitude" to press ahead with its efforts to open the market- in effect, a political solution backed up by possible enforcement action against recalcitrant Member States.
Then there are those which view the ECJ's ruling as putting a "final nail in the coffin of the state-monopoly model in the gambling sector…". Against this are those commentators who, on a close analysis of the judgement, have suggested that the ECJ's judgement in fact consolidates and enhances the practise of restricted markets.
The Commission Solution
It is unlikely that the European Commission can be relied on to achieve, either politically or legally, a pan-European gambling market. The Commission has, of course, kept a firm eye on the gambling sector from the early 1990s and has recently noted that (based on a 2006 study commissioned by it) the laws and regulations of the Member States, while pursuing broadly similar aims (namely, safeguarding public interest objectives), vary considerably and often lead to unlawful barriers to the freedom to provide services and the freedom of establishment. However on a political level, the Commission appears to consider (quite realistically) that the likelihood of any legislative liberalisation is remote. Jean Bergevin, Head of the Services Unit at the Internal market DG, is reported as stating, as recently as January 2007, that "the Member States frankly don't want us sticking our noses in at all and certainly don't want an internal market for on-line gambling" and has seemingly suggested that the industry lobbies harder to gain the necessary political momentum.
On the legal front, the Commission is considering possible court action against a number of Member States for unlawful restriction of the supply of certain gambling services, including sports betting services. However, the Commission's press releases are at pains to emphasise that any potential action "does not touch upon the existence of monopolies as such…[N]or does it have any implications for the liberalisation of the market for gambling services generally, or for the entitlement of Member States to seek to protect the general interest, so long as this is done in a manner consistent with EU law i.e. that any measures are necessary, proportionate and non-discriminatory".
The Commission's beef is that the Member States in question appear to be invoking public interest grounds to restrict access to betting services offered by non-nationals, while encouraging such state-run activities in order to obtain revenue.
However, generally, the Commission appears rather pessimistic about the use of court action to achieve market opening; Bergevin remarking that: " I'd give it even odds on whether the courts will help the betting industry or close the market further. Whatever happens you should never place all your trust on what judges think".
The ECJ's Decision
So in Placanica, did the ECJ help the betting industry or did it close the market further?
To a large extent the ECJ follows its previous rulings in Schindler, Läärä, Zenatti, and Gambelli. However, the judgement is stronger in certain respects.
In Gambelli the ECJ ultimately left it for the national court to decide whether the Italian tender rules were discriminatory against non-Italian operators. However, in Placanica the ECJ simply decides that, independent of the question of discrimination, the blanket exclusion of companies quoted on the regulated markets goes beyond what is necessary in order to achieve, what the ECJ considered to be, the legitimate objective of preventing operators active in the betting and gaming sector from being involved in criminal or fraudulent activities. The ECJ's robust approach clearly provides support to operators looking to challenge national concession regimes.
Following from this, the ECJ the details what then has to be done in Italy so that operators are not denied their EC rights: revoke and distribute the old licences or award by public tender "an adequate number of new licences". In the meantime, in the absence of a procedure for the award of licenses that is open to operators who have previously been unlawfully barred, operators cannot be sanctioned in Italy for operating without a licence. So far so clear.
However, with what it gives with one hand, the ECJ takes with the other. It considers whether a Member State can justifiably introduce a licensing system, which restricts the number of licences that can be granted to a defined amount. Here, the ECJ re-affirms its ruling in Zenatti and Gambelli that restrictions on the number of operators can in principle be justified, to the extent the restrictions reflect a concern to bring about a genuine reduction of gambling opportunities and to limit the activities in that sector in a consistent and systematic manner. The ECJ notes that the principal aim of the Italian legislation is to increase tax revenue and the Court confirms its consistent jurisprudence that this aim cannot justify a restriction to the freedom of establishment/to provide services.
However, the ECJ does recognise another objective- that of preventing the use of betting and gambling activities for criminal or fraudulent purposes by channelling them into controllable systems. Viewed from that perspective, the ECJ remarks that "it is possible [my italics] that a policy of controlled expansion in the betting and gaming sector may be entirely consistent with the [legitimate] objective of drawing players away from clandestine betting and gaming": and further, that a licensing system "may", at least where illegal activities constitute a significant proportion of the total turnover figure for the betting and gaming sector, "constitute an efficient mechanism enabling operators active in the betting and gaming sector to be controlled with a view to preventing the exploitation of those activities for criminal or fraudulent purposes."
This indeed is fairly novel, or at least can be interpreted as such. In Zenatti, both the Advocate General and the ECJ recognised that a Member State could permissibly decide not to ban outright a gaming activity, but rather introduce a restricted licensing system so long as it reflects a concern to bring about a genuine reduction in gambling opportunities. Conceptually it is rather difficult to reconcile "controlled expansion" with a reduction in gambling opportunities- it almost provides a Member State with the necessary terminology to cloak what otherwise could be viewed as protectionist or revenue raising measures.
It remains to be seen how "possible" it is for a Member State to justify such a policy before the national courts and before the ECJ, particularly should the Commission proceed with its infringement actions or should a national court refer the matter to the ECJ for guidance.
It also remains to be seen how the ECJ's comments can be reconciled with those in Gambelli, that "[I]n 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 that would otherwise restrict the freedom of establishment/to provide services. It appears to be a question of degree- the ECJ has always recognised 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."
In addition, in Zenatti, the ECJ noted "such a limitation is acceptable only if, from the outset, it reflects a concern to bring about a genuine diminution in gambling opportunities…" The clear impression from Placanica is that the justification was proffered almost as an after-thought. The cynic may wonder whether the ECJ is, almost without precedent, offering a helping hand to those Member States currently defending their regulatory systems before the Commission.
The ECJ clearly states that it is for the national court to decide whether, in limiting the number of operators, the national legislation genuinely contributes to a permissible objective, while at the same time stating that a specific assessment by a Member State that the number of licences awarded is "sufficient" for its territory cannot of itself justify obstacles to freedom of establishment/freedom to provide services. This is somewhat confusing, but the end result is that the national court is in the unenviable position of carrying out a detailed (economic) assessment in the light of national political objectives and the principle of proportionality, which it is unlikely to feel comfortable in doing. Interestingly the ECJ notes that "as regards the limitation of the total number of such licences, the Court does not have sufficient facts before it to be able to assess that limitation...", which could be construed as a clear invitation to a national court to put the facts together and refer the matter to the ECJ for further guidance. Certainly, so long as there are doubts as to the compatibility of national law with EC law, and in the light of the criminal sanctions applicable in the domestic systems (where Gambelli remains the leading case), it can be expected that a national court may well look to "pass the buck" to the ECJ rather than decide the issue itself.
Final Thoughts
The ECJ's ruling comes in the context of a "preliminary reference" from a national court under Article 234 of the EC Treaty. Under Article 234 the ECJ is asked to assist the national court in the correct interpretation of EC law and it is then for the national court to apply the ECJ's interpretation to the facts before it. While it is well known that the ECJ has used preliminary references on occasions to, in effect, judicially legislate (particularly at the time of legislative stasis), the ECJ is ruling within the confines of a type of judicial straightjacket. This can entail a considerable amount of "reading between the lines" which makes it difficult for the national courts and for operators to apply bright-line rules. The ECJ may adopt a more rigorous approach when examining national concession systems should the Commission proceed in its infringement actions.
On balance, the ECJ's ruling in Placanica probably offers more comfort to a Member State looking to insulate its national market from competition than operators looking to expand across the EU. The ECJ once again shows a great deal of deference to governmental policy objectives in relation to gaming and appears to expand the possible justifications that can be asserted to justify what would otherwise be unlawful restrictions.
Sebastian McMichael is a solicitor specialising in EC and competition law with UK commercial law firm Shepherd and Wedderburn LLP.
The ECJ's decision in Placanica has quite rightly generated a lot of comment in this publication and in the press more generally. As the dust settles three views have emerged as to the potential impact of the judgement.
On the one hand, certain organisations are hoping that the European Commission will take from the ruling "courage", "resolve" and "fortitude" to press ahead with its efforts to open the market- in effect, a political solution backed up by possible enforcement action against recalcitrant Member States.
Then there are those which view the ECJ's ruling as putting a "final nail in the coffin of the state-monopoly model in the gambling sector…". Against this are those commentators who, on a close analysis of the judgement, have suggested that the ECJ's judgement in fact consolidates and enhances the practise of restricted markets.
The Commission Solution
It is unlikely that the European Commission can be relied on to achieve, either politically or legally, a pan-European gambling market. The Commission has, of course, kept a firm eye on the gambling sector from the early 1990s and has recently noted that (based on a 2006 study commissioned by it) the laws and regulations of the Member States, while pursuing broadly similar aims (namely, safeguarding public interest objectives), vary considerably and often lead to unlawful barriers to the freedom to provide services and the freedom of establishment. However on a political level, the Commission appears to consider (quite realistically) that the likelihood of any legislative liberalisation is remote. Jean Bergevin, Head of the Services Unit at the Internal market DG, is reported as stating, as recently as January 2007, that "the Member States frankly don't want us sticking our noses in at all and certainly don't want an internal market for on-line gambling" and has seemingly suggested that the industry lobbies harder to gain the necessary political momentum.
On the legal front, the Commission is considering possible court action against a number of Member States for unlawful restriction of the supply of certain gambling services, including sports betting services. However, the Commission's press releases are at pains to emphasise that any potential action "does not touch upon the existence of monopolies as such…[N]or does it have any implications for the liberalisation of the market for gambling services generally, or for the entitlement of Member States to seek to protect the general interest, so long as this is done in a manner consistent with EU law i.e. that any measures are necessary, proportionate and non-discriminatory".
The Commission's beef is that the Member States in question appear to be invoking public interest grounds to restrict access to betting services offered by non-nationals, while encouraging such state-run activities in order to obtain revenue.
However, generally, the Commission appears rather pessimistic about the use of court action to achieve market opening; Bergevin remarking that: " I'd give it even odds on whether the courts will help the betting industry or close the market further. Whatever happens you should never place all your trust on what judges think".
The ECJ's Decision
So in Placanica, did the ECJ help the betting industry or did it close the market further?
To a large extent the ECJ follows its previous rulings in Schindler, Läärä, Zenatti, and Gambelli. However, the judgement is stronger in certain respects.
In Gambelli the ECJ ultimately left it for the national court to decide whether the Italian tender rules were discriminatory against non-Italian operators. However, in Placanica the ECJ simply decides that, independent of the question of discrimination, the blanket exclusion of companies quoted on the regulated markets goes beyond what is necessary in order to achieve, what the ECJ considered to be, the legitimate objective of preventing operators active in the betting and gaming sector from being involved in criminal or fraudulent activities. The ECJ's robust approach clearly provides support to operators looking to challenge national concession regimes.
Following from this, the ECJ the details what then has to be done in Italy so that operators are not denied their EC rights: revoke and distribute the old licences or award by public tender "an adequate number of new licences". In the meantime, in the absence of a procedure for the award of licenses that is open to operators who have previously been unlawfully barred, operators cannot be sanctioned in Italy for operating without a licence. So far so clear.
However, with what it gives with one hand, the ECJ takes with the other. It considers whether a Member State can justifiably introduce a licensing system, which restricts the number of licences that can be granted to a defined amount. Here, the ECJ re-affirms its ruling in Zenatti and Gambelli that restrictions on the number of operators can in principle be justified, to the extent the restrictions reflect a concern to bring about a genuine reduction of gambling opportunities and to limit the activities in that sector in a consistent and systematic manner. The ECJ notes that the principal aim of the Italian legislation is to increase tax revenue and the Court confirms its consistent jurisprudence that this aim cannot justify a restriction to the freedom of establishment/to provide services.
However, the ECJ does recognise another objective- that of preventing the use of betting and gambling activities for criminal or fraudulent purposes by channelling them into controllable systems. Viewed from that perspective, the ECJ remarks that "it is possible [my italics] that a policy of controlled expansion in the betting and gaming sector may be entirely consistent with the [legitimate] objective of drawing players away from clandestine betting and gaming": and further, that a licensing system "may", at least where illegal activities constitute a significant proportion of the total turnover figure for the betting and gaming sector, "constitute an efficient mechanism enabling operators active in the betting and gaming sector to be controlled with a view to preventing the exploitation of those activities for criminal or fraudulent purposes."
This indeed is fairly novel, or at least can be interpreted as such. In Zenatti, both the Advocate General and the ECJ recognised that a Member State could permissibly decide not to ban outright a gaming activity, but rather introduce a restricted licensing system so long as it reflects a concern to bring about a genuine reduction in gambling opportunities. Conceptually it is rather difficult to reconcile "controlled expansion" with a reduction in gambling opportunities- it almost provides a Member State with the necessary terminology to cloak what otherwise could be viewed as protectionist or revenue raising measures.
It remains to be seen how "possible" it is for a Member State to justify such a policy before the national courts and before the ECJ, particularly should the Commission proceed with its infringement actions or should a national court refer the matter to the ECJ for guidance.
It also remains to be seen how the ECJ's comments can be reconciled with those in Gambelli, that "[I]n 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 that would otherwise restrict the freedom of establishment/to provide services. It appears to be a question of degree- the ECJ has always recognised 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."
In addition, in Zenatti, the ECJ noted "such a limitation is acceptable only if, from the outset, it reflects a concern to bring about a genuine diminution in gambling opportunities…" The clear impression from Placanica is that the justification was proffered almost as an after-thought. The cynic may wonder whether the ECJ is, almost without precedent, offering a helping hand to those Member States currently defending their regulatory systems before the Commission.
The ECJ clearly states that it is for the national court to decide whether, in limiting the number of operators, the national legislation genuinely contributes to a permissible objective, while at the same time stating that a specific assessment by a Member State that the number of licences awarded is "sufficient" for its territory cannot of itself justify obstacles to freedom of establishment/freedom to provide services. This is somewhat confusing, but the end result is that the national court is in the unenviable position of carrying out a detailed (economic) assessment in the light of national political objectives and the principle of proportionality, which it is unlikely to feel comfortable in doing. Interestingly the ECJ notes that "as regards the limitation of the total number of such licences, the Court does not have sufficient facts before it to be able to assess that limitation...", which could be construed as a clear invitation to a national court to put the facts together and refer the matter to the ECJ for further guidance. Certainly, so long as there are doubts as to the compatibility of national law with EC law, and in the light of the criminal sanctions applicable in the domestic systems (where Gambelli remains the leading case), it can be expected that a national court may well look to "pass the buck" to the ECJ rather than decide the issue itself.
Final Thoughts
The ECJ's ruling comes in the context of a "preliminary reference" from a national court under Article 234 of the EC Treaty. Under Article 234 the ECJ is asked to assist the national court in the correct interpretation of EC law and it is then for the national court to apply the ECJ's interpretation to the facts before it. While it is well known that the ECJ has used preliminary references on occasions to, in effect, judicially legislate (particularly at the time of legislative stasis), the ECJ is ruling within the confines of a type of judicial straightjacket. This can entail a considerable amount of "reading between the lines" which makes it difficult for the national courts and for operators to apply bright-line rules. The ECJ may adopt a more rigorous approach when examining national concession systems should the Commission proceed in its infringement actions.
On balance, the ECJ's ruling in Placanica probably offers more comfort to a Member State looking to insulate its national market from competition than operators looking to expand across the EU. The ECJ once again shows a great deal of deference to governmental policy objectives in relation to gaming and appears to expand the possible justifications that can be asserted to justify what would otherwise be unlawful restrictions.
Sebastian McMichael is a solicitor specialising in EC and competition law with UK commercial law firm Shepherd and Wedderburn LLP.
