Probably the most high profile and newsworthy UK gambling case in 2012 was Camelot's challenge to the Health Lottery. The matter ended in the High Court, which was critical of Camelot's approach and which unhesitatingly upheld the legality of the Health Lottery Scheme.We have been advisers to the Health Lottery since its inception.

Background

The Health Lottery was launched in October 2011. It was established as a multiple society lottery scheme designed to maximise the scale of prizes and proceeds whilst staying within the statutory limits. The scheme comprises an External Lottery Manager (ELM) providing lottery services to 51 large societies. Initially, The Health Lottery ELM Limited was established (THL). Subsequently, 51 Community Interest Companies (CICs) were set up. The CICs were entirely independent of each other (although they each had the same three directors) and the objective of each CIC was to raise money for good causes, specifically health projects, in different regions of the UK by promoting a lottery. Each CIC outsourced the management and day to day conduct of its lottery to THL. In addition, the People's Health Trust was set up as a registered charity to receive the lottery funds collected by each of the CICs and channel those funds to the specific health projects chosen by the CICs for their respective geographical areas. Following a hearing before its Regulatory Panel, the Gambling Commission licensed THL to act as an external lottery manager and each CIC was granted a lottery operating licence.

The Structure

This multiple society lottery scheme had to operate within the limits imposed by the Gambling Act 2005 (the Act). The reason why it was regarded as strategically clever was that it did so in an entirely legal but creative manner, such that it was able to truly compete in prize terms with the scale of the National Lottery. Specifically, section 99 of the Act imposed certain mandatory conditions on the lottery operating licences of the CICs. These conditions provided that the proceeds of the lottery promoted by each CIC (proceeds being the total amount accrued from the sale of lottery tickets) must not exceed £4 million and the aggregate proceeds in a calendar year must not exceed £10 million. A further condition was that the maximum prize should not be more than £25,000 or, if more, 10 percent of the proceeds. The result of these conditions was that the available prize fund would be relatively low when compared with the National Lottery, making it more likely that people would participate in the National Lottery, rather than the Health Lottery. This would adversely affect the Health Lottery's ability to raise money for good health related causes.

However, the structure used for the Health Lottery mitigated this problem. Each week, at least one CIC would promote the lottery, with additional CICs joining in as more tickets were sold. This prevented any CIC from exceeding the £4 million threshold for a single lottery.When a CIC sold at least £1 million tickets, sales would be frozen and a second CIC would take over the promotion. Once the second CIC reached £1 million in ticket sales, a third CIC would come on board, and so on until sales were exhausted or the time for the draw had arrived. Not only was the £4 million threshold not exceeded but it also meant that the Health Lottery could offer substantial prizes.

Camelot's Response

Camelot wrote to the Gambling Commission on a number of occasions claiming that the Health Lottery did not comply with the requirements of the Act and asking that it both review how the lottery worked in practice and revoke the licences granted to the CICs and THL. Camelot had two key arguments. One was that although the scheme might technically comply with the financial limits in section 99, in practice the limits were exceeded. The structure of the lottery was simply a device to avoid the section 99 limits and so, in Camelot's opinion, was illegal. Camelot's second argument related to section 19 of the Act. Section 65 of the Act allowed the Commission to grant lottery operating licences only to "non-commercial entities", defined in section 19 as an entity with "any noncommercial purpose other than that of private gain". Each CIC was paying THL to promote its lottery on its behalf. Camelot argued that this meant that each CIC was, in fact, established for a commercial purpose (helping THL to make a profit) and so each CIC was ineligible to hold a lottery operating licence.

In response, the Gambling Commission initially declined to review the Health Lottery. The Commission's view was that it had exercised its discretion to grant licences to THL and the CICs in full compliance with its statutory obligations to ensure that gambling is conducted in a fair and open way. The Health Lottery might be exploiting a loophole in the Act, but any perceived loophole should be filled by Parliament via legislation and not by the Gambling Commission.

Camelot sought judicial review to quash the Gambling Commission's decision not to review the licences and to obtain an order requiring the Commission to undertake a review.

Judicial Review

In a clear and relatively brief judgment, the High Court refused Camelot's application to proceed with its judicial review claim. It criticised Camelot for delay. The court said that Camelot should have brought these proceedings within three months of becoming aware of the facts giving grounds for the claim. The evidence had shown that Camelot had known of the relevant facts since at least the date of the launch of the Health Lottery (February 2011) but it had chosen not to bring proceedings until March 2012. Camelot asked the court to exercise its discretion and extend the time in which a claim could be made. The court refused to do so, stating that Camelot had "not been candid" about when it had first appreciated that it had grounds for judicial review. During the proceedings a letter had come to light in which Camelot had raised the Health Lottery with the National Lottery Commission. This showed that it had relevant knowledge about the Health Lottery earlier than Camelot had claimed. Camelot had not disclosed this letter to the court.

The High Court went on to say that, despite the delay, it might be minded to rule in favour of Camelot if it was satisfied that the Health Lottery in fact operated outside the requirements of the Act and was therefore illegal. The court conducted a review of the structure of the Health Lottery and the terms of sections 99 and 19 of the Act and concluded that it was entirely satisfied that the lottery complied with the Act and was legal. With regard section 19, the court was satisfied that merely paying THL for their services did not turn the CICs into commercial entities incapable of holding a licence. Furthermore, on the question of the financial limits in section 99, the court found that the CICs were entirely separate legal entities and so, contrary to Camelot's claims, it would not be appropriate to aggregate their proceeds for the purposes of assessing whether the limits in section 99 had been exceeded. The court agreed with the Gambling Commission that the lottery may be exploiting a loophole in the law but it was a political question whether that loophole needed to be filled. In its judgment, when granting the licences, the Commission properly exercised its discretion and acted lawfully.

Comment

Whilst the legality of the Health Lottery is beyond doubt, the broader question remains whether lottery structures technically compliant with the Act but, in practice, arguably avoidant should be permitted. The Gambling Commission described the Health Lottery as "the gambling equivalent of a tax avoidance scheme that exploits loopholes in the legislation". In the area of tax, it has long been an established principle that everyone is entitled to manage their affairs to pay the least tax possible. Recently, that principle has come under fire (Starbucks and Amazon are cases in point). This case mirrors those issues. Is technical compliance with the Act enough or are gambling operators required to comply with the unwritten 'spirit' of the Act? It remains to be seen whether the government will take action following this decision. In the meantime, the judgment makes interesting reading and is available here.