Zona de Azar Brazil – Brazil: The Challenges and Restrictions of Brazilian State Licenses
Brazil- June 05, 2024 www.zonadeazar.com Exclusively for the Legal Space column , Caio de Souza Loureiro , partner at TozziniFreire Advogados and consultant on gaming and betting regulation in Brazil, analyzes the problems faced by companies that obtained licenses in a state of the country when, in fact, they wish to operate Throughout the national territory.
The federative issue in relation to the lottery sector – including sports betting and online games, which, by law, are considered types of lotteries in Brazil – is already old, as contradictory rules sometimes allowed exploitation by the State, sometimes maintained exclusive provision for the Union.
In 2020, the Federal Supreme Court, in the joint judgment of three different actions, established that, under the 1988 Constitution, there is no Union monopoly, and States can provide lottery services. The Federal Supreme Court’s decision also established two relevant premises: (a) States can only provide lottery services in their respective territories; (b) legislative competence is still exclusive to the Union, so that States cannot provide lottery modalities that are not provided for in federal legislation.
Following the judgment, some States began procedures for the delegation of lotteries and sports betting. Since then, there has been a discussion about the legitimacy of state lotteries that do not establish limitations on offers outside their respective territories. In this aspect, especially in relation to the authorizations issued by Loterj, there is a discussion between Rio de Janeiro and the Union, and between Rio de Janeiro and Paraná, the latter at the judicial level. Loterj also filed a lawsuit to order ANATEL (National Telecommunications Agency) to take down betting sites that are not authorized in the State.
This discussion brings up two points of regulation (and the STF decision). The first point is the possible extrapolation of the STF’s decision, which determines that States can only offer in their territory, which becomes especially important in the scenario of sports betting on online games, as, in the virtual environment, the geographic control of access is more difficult and challenges States to provide mechanisms that intend to restrict access by users outside their territories. The other point is the existence of “protection” given by Law 14,790/2023 to betting and online gaming houses operating in the country, which cannot suffer sanctions or restrictions until the end of the Federal Government’s regulation, in deadline to be determined by the Ministry of Finance – this deadline, according to the recent Ordinance 827/2024, is December 31, 2024. Under these terms, States cannot take measures against these companies, if they have not been authorized by them to operate in the country.
Another relevant point in the dispute between the Union and States was inaugurated by Law 14,790/2024, which, in its art.35-A, established rules for state lotteries. In § 2, art. 35-A prohibits the same company from operating more than one concession in more than one State. In practice, any lottery company, betting house or online gaming operator that has already been authorized or obtained a concession cannot have any more, in the same State or another. This restriction seems inappropriate to me, as, ultimately, it sacrifices the competitiveness of tenders or authorizations granted by the States, which will have fewer capable companies, since obtaining a concession or authorization prevents the company from participating in new opportunities. Clearly, the restriction intends to reduce competition from the federal lottery operator, which will have the benefit of competing with operators with very limited operations, as they are restricted to just one operation. At this point, it seems to me that there has been an extrapolation of the Union’s legislative competence, which compromises the competitive environment and, more than that, violates the autonomy of the States, in violation of the federative pact.
In view of this, seven States (São Paulo, Rio de Janeiro, Minas Gerais, Acre, Piauí, Paraná, Mato Grosso do Sul) and the Federal District presented a Direct Action of Unconstitutionality (ADI) against this restriction – and also against the restriction on advertising outside the territory of each State, provided for in § 4 of the same art. 35-A. In this action, the States and the Federal District maintain that the two provisions violate the Brazilian Constitution, as they: (a) offend free enterprise and free competition; (b) violate the federative pact, by imposing limitations on the autonomy and competence of States to provide lottery services.
In a decision, Minister Luiz Fux, rapporteur of the ADI, determined that there will be an early judgment on the merits of the action, which, in practice, will make it faster for the STF to define the issue, which should put an end to the discussion on the legitimacy of the two legal provisions. The tendency, based on the precedents of the STF itself, is for the action to be judged valid, with the declaration of unconstitutionality of the two provisions, which will bring greater legal certainty.
The issue of the dispute involving territoriality, however, will take longer to be resolved, and will probably only be resolved through a new decision by the STF, which establishes the exact limits of its previous decision – which determined the breaking of the Union’s monopoly. The expectation is that the STF will reiterate the limitation of state operations to the limits of the territory of each State, without which there will be eternal competition between the States, something that is not favorable even for them – and, not by chance, Paraná is already litigating in court with Rio due to the lack of limitations established in the Rio lottery.
The important thing, however, is to highlight that, even in this scenario, there are no risks for companies that want to obtain authorization from the Ministry of Finance due to this judicial discussion. The only concern is that, without control over territoriality, an operator could end up being a competitor on a national level, even having only obtained a state authorization. In other words, an operator may be competitively relevant nationally if, based on an authorization or concession from a State, the operator offers its products across the entire state territory, even though it only has authorization or concession from a single State.
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