In the Baden-Wuerttemberg case,the plaintiff, a UK-based company,organised a website whereelectronic products in demand(like iPhones and tablets) were'auctioned' on a countdown basis(a clock was counting theremaining time until the auctionwas supposed to end). In order tobe able to place a bid for a product,the participant/customer had topurchase 'bidding points' (a virtualright to bid), and depending on thepurchased amount, pay an auctionfee of EUR 0.60 up to EUR 0.75 fora bidding point (Gebotspunkt). So,the operator generates most of itsturnover not directly from theauction price (in practice,markedly below the street price, soparticipants are eager to recover'sunk costs' and stake even morebidding points), but from auctionfees, selling bidding points. Inauction games, participants areusually not reimbursed for usedbidding points (or other forms ofauction fees).

If a participant uses a biddingpoint, the current bid price of theoffered product increases by EUR0.01 (a 'penny,' correctly a cent).The use also extends the durationof the auction for up to 20 secondsor longer. The participant whoplaces the last bid wins the auctionand can acquire the product.

In a letter dated 31 August 2011,the Regional Authority inKarlsruhe (RegierungspräsidiumKarlsruhe), the central gamblingauthority for the State of Baden-Wuerttemberg, informed theoperator that this activityconstituted illegal gambling. Theoperator objected and argued thatthe auction was not a game ofchance, but a competition,suggesting that the outcomedepended on the skill of theparticipants. A participant caninfluence the competitors for aproduct by the election of his username, the choice of auctions, the

date of his bids, the number of hisbids or the pattern of bidding.

Nevertheless, the RegionalAuthority insisted that the auctionsoffered were illegal gamblingwithin the meaning of section 3 ofthe Interstate Treaty on Gamblingand issued a prohibition order,dated 14 November 2011. Theoperator filed an action against thisprohibition order and requested itscancellation. The plaintiff arguedthat bidding for a product does notdepend on chance, as each bidderhad the opportunity to influencethe course of the bid and outcomeof the auction through their ownactions. So it should be regarded asa kind of strategy game. Thecharges for the bidding points weremerely a participation fee.

The Administrative Court ofKarlsruhe dismissed thesearguments and held that the onlineauctions were indeed illegalgambling1. Although the cost ofbidding was only EUR 0.60 to EUR0.75, there was no de minimisthreshold2. As the whole systemwas aimed at inducing multiplebids, the sum of several bids wasrelevant. The bidding points werealso not a participation fee, but aconsideration for gambling. Onlyby staking a bidding point is thecustomer able to participate in theauction and to acquire a chance towin the auction. The winner of theauction is decided by hazard. Evenif an above-average sophisticatedbidder (under German gaminglaw, only the average participant isrelevant) might use his biddingpoints in a successful manner, theoutcome of the auction stilldepends on uncertain future events(whether another participantstakes a further bid). Theunpredictable behaviour of otherparticipants is random. Thisrandomness cannot bedistinguished from the general riskof living3.

According to the Administrative

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ONLINE AUCTIONS

The legality of online pennyauctions in GermanyOnline auction games (often calledpenny auctions) have become verypopular in Germany and areoffered in a plethora of types(variations of eBay, unique bidauctions, reverse auctions etc.). Ina recent decision, theAdministrative Court of Appeal ofBaden-Wuerttemberg held thatauction games may be regardedas illegal gambling and couldtherefore be prohibited by thecompetent authority. In olderdecisions, civil courts already haddecided that contracts between apenny auction operator and acustomer might be null and void.Martin Arendts, of Arendts Anwälte,explains the relevant case law andits consequences.

World Online Gambling Law Report - August 2013

game. A genuinely moral oreconomic purpose was lacking.The court of appeal also points tothe fact that a successful bidder wasin practice winning at the expenseof the other participants. As aproduct can be won well below thenormal price (theoretically withonly one bidding point), thepurpose of seriously buying aproduct stays on the sideline.According to the court of appeal,the decision whether a game is agame of chance has to be seenfrom an economic point of view. Asuccess in the auction ispredominantly determined bychance. It is typical for a game ofchance that the winnings (valuableassets) are higher than the stake.Finally, the court of appeal heldthat under the current gamblinglaw (Amended Interstate Treaty onGambling, effective 1 July 2012)penny auctions were notapprovable. The court points to thehigh frequency and the fact thatcustomers were incited to stakefurther bids (and the risksassociated with 'robots,' biddingsoftware).

How auction fees, paid forbidding rights, are assessed by civillaw is also highly disputed byGerman courts. The District Courtof Kiel held that a contract forbetting rights was perfectly legaland dismissed an action of anunsuccessful bidder, asking for arefund8. On the other hand, theDistrict Court of Bochum arguedthat such a contract wasindeterminate and in any casecontra bonos mores (section 138par. 1 German Civil Code)9. Thecourt pointed to the fact that thecontractual system was nottransparent. Most participantswould lose money withoutreceiving a fair equivalent. In mypoint of view, it is quite likely thatthe civil court will follow the newadministrative court decisions.

Martin Arendts, M.B.L.-HSG Attorney-at-LawArendts Anwältegaminglaw@anlageanwalt.de

1. Verwaltungsgericht Karlsruhe, decisionof 15 November 2012, file no. 3 K331/11, ZfWG 2013, 57.2. Against Rotsch/Heissler, Internet-’Auktionen’ als strafbares Glücksspielgem. § 284 StGB?, ZIS 2010, 403 etseq., 211, which argued in favour of a deminimis threshold of EUR 20.3. Against Rotsch/Heissler, ZIS 2010,403 et seq., 214.4. Quoting Fritsche/Frahm, Zahlen schonfürs Bieten - Internetauktionen mitkostenpflichtigen Gebotsrechten, WRP2008, 22 et seq., 33.5. Diesbach/Mayer, Was ist zufällig aneiner Auktion?, ZfWG 2013, 67 et seq.6. Verwaltungsgerichtshof Baden-Württemberg, decision of 23 May 2013,file no. 6 S 88/13.7. Quoting van der Hoff/Hoffmann, DerEinsatz von kostenpflichtigen Gebotenbei Countdown-Auktionen - Kauf, Spiel,Glück?, ZGS 2011, 67 et seq.8. Amtsgericht Kiel, decision of 16December 2011, file no. 113 C 151/11,ZfWG 2013, 70.9. Amtsgericht Bochum, decision of 8May 2008, file no. 44 C 13/08.

ONLINE AUCTIONS

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Court of Karlsruhe, the auctionalso has to be characterised as agame (of no genuinely moral oreconomic purpose). A bidder in aclassic auction was not risking anycosts, if his bids were notsuccessful. In penny auctions, aserious formation of prices was notvisible. According to the court, theauctions of the plaintiff wereoffering playful attractions andamusement value and weretherefore regarded as games4.

The operator appealed this firstinstance decision, which washeavily criticised in the legalliterature as having looked only atthe isolated case (possible furtherbids by a competitor), ignoring theoverall view (the final successfulbid)5. The auction fee for thebidding point could also not beregarded as a consideration forgambling.

The operator won the appeal. TheAdministrative Court of Appeal ofBaden-Wuerttemberg cancelled theprohibition order with effect forthe future6. The court of appealargued that the Regional Authorityabused its discretion as there wasno consistent administrativepractice.

Although the state had to pay thecosts of the legal procedure, thedecision might prove to be apyrrhic victory for penny auctionoperators. With regard to thematerial legal points of the case,the court of appeal clearly followedthe line of arguments of the firstinstance decision. So, newprohibition orders against pennyauction operators might be upheldby the courts.

The court of appeal reaffirmed inits decision that the onlineauctions, offered by the plaintiff,were indeed a game of chance. Theoutcome predominantly dependson chance and not on the skill ofthe participants7. Even in an overallview the participants were stakingthe risks of a loss, typical for a

How auctionfees, paid forbiddingrights, areassessed bycivil law isalso highlydisputed byGermancourts. TheDistrict Courtof Kiel heldthat acontract forbetting rightswas perfectlylegal anddismissed anaction of anunsuccessfulbidder,asking for arefund.