The law may "hinder the free movement of goods," the Luxembourg-based European Court of Justice said in a statement. Germany must ensure that its system doesn’t hurt bottlers in other countries, it said. The ruling may force lawmakers to change the legislation, allowing manufacturers such as Rexam Plc, the world’s largest maker of beverage cans, to boost sales.

Beer, mineral water and soft drinks sold in recyclable packages carry a mandatory deposit of as much as 50 euro cents ($0.66) in Germany, three times the rate for refillable bottles. The country doesn’t have a nationwide system to recover deposits, meaning stores are only required to give a refund for packaging that they sold. As a result, most retailers abandoned disposable packages after the law took effect Jan. 1, 2003.

"We’ve been forced out of the market because of the strange implementation of the rules," said Anders Linde, director of environmental affairs at London-based Rexam. "Now Germany is forced to have a system that allows cans to come back into the market."

Plunge in Sales

The deposit law caused sales of beverage cans in Germany to plunge last year to 500 million from 7.5 billion in 2002, Linde said in an interview. Almost 60 percent of imported drinks in Germany use non-refillable bottles, according to Apeal, a Brussels-based group representing the steel packaging industry.

Rexam shares traded at 450.5 pence, down 0.4 percent, at 2:32 p.m. in London.

The court didn’t prohibit Germany from imposing a nationwide deposit on non-reusable drink containers, which may boost the sales of recycling equipment makers such as Norway’s Tomra Systems ASA, said Preben Rasch-Olsen, an analyst at Svenska Handelsbanken AB’s unit in Oslo. He rates the Tomra stock an "accumulate".

Shares in Tomra, which makes machines that automates recycling of empty cans and bottles at stores, rose as much as 1.8 kroner, or 5.4 percent, to 35.1 kroner, and traded at 34.4 kroner as of 3:35 p.m. in Oslo.

"It’s a significant ruling in that the court has stated that the German system is in principle OK, but that you need to have a well functioning and efficient return system, and that’s up to the member state to take care of," said Holger Wissel, a partner at Clifford Chance Puender in Dusseldorf.

New Legislation

The German Cabinet proposed new rules on Nov. 3 to simplify the system. If approved, retailers will have to take back all cans and bottles of the types they sell. Retailers would also charge a flat-rate deposit of 25 cents on non-reusable cans and bottles between 100 milliliters and 3 liters containing beer, alcopops, mineral water or soft drinks.

"What the German authorities are planning goes in the right direction," Gregor Kreuzhuber, the commission’s spokesman for industrial affairs, said after the ruling. "A material-specific take-back obligation is the way forward."

Germany’s Deputy Environment Minister Rainer Baake said the court decision had given a clear signal to the Upper House of Parliament about the need for a nationwide return system.

The revised draft law on deposits, to be voted on by the upper house Dec. 17, "takes into account the objections of the EU and the European Court of Justice" to the existing regulations, Baake said in the statement.

Satisfactory Solution

Today’s European court ruling is in response to two cases.

One follows a complaint from mineral water producers, which are required to refill their bottles at the source. The European Commission, the EU’s executive arm, said the German system discriminates against importers of mineral water because it’s too expensive to export refillable bottles and then return them to the source. The EU executive then sued Germany. The case number is C-463/01 Commission v Germany.

"We are going to work hand in hand with the German authorities to find a solution that on the one hand is environmentally friendly and on the other doesn’t hamper the single market and discriminate against importers of mineral water," Kreuzhuber said. "It should be possible to find a satisfactory solution for everybody".

The other case involves an Austrian drinks maker, S. Spitz Co., which complained that the German law restricted imports. The Stuttgart Administrative Court referred the case to the EU tribunal to determine whether the national measure breaks EU law.

The case number is C-309/02 Radlberger Getraenkegesellschaft mbH & Co. and S. Spitz Kg v Land Baden-Wuerttemberg.