R (on the application of Camelot UK Lotteries Limited) v The Gambling Commission

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

Camelot UK Lotteries Limited ("Camelot") has had its claim for judicial review of the Gambling Commission (the "Commission") dismissed. The claim related to the decision of the Commission to grant multiple lottery operating licences in respect of the Health Lottery owned by Richard Desmond. The claim was dismissed both on the basis that the Court held that it had been brought out of time and also because the Court considered that it had no real prospect of success.

Background

Camelot holds the exclusive licence to operate a national lottery under the National Lottery Act 1993. The Health Lottery is the latest iteration of arrangements to establish connected lotteries to circumvent the financial limits under lottery legislation. Some 16 years ago, in R v Royal Borough of Kensington and Chelsea (ex p Blennerhasset) transcript 19 July 1996 ("Blennerhasset"), Mr Justice Hidden held similar arrangements to be unlawful.

The Health Lottery operates with 51 community interest companies ("CICs"), that is companies established under section 26 of the Companies (Audit, Investigations and Community Enterprise) Act 2004. Each CIC ostensibly runs a separate lottery but with each lottery under the common management of The Health Lottery ELM Limited ("THL"), an external lottery manager (an "ELM") as defined in section 98(2)(c) of the Gambling Act 2005 (the "2005 Act"). .

Each of the CICs has as its objective raising money for health projects for an area allocated to it. Each CIC is in fact named "Health" with some distinct upbeat word appended, so we have for example "HealthAble" for Cumbria and Northumberland, "HealthPerfect" for Cornwall and "HealthCourage" for Hertfordshire and Bedfordshire. Each CIC has the same directors and the same registered office.

The Gambling Commission issued lottery operating licences to the CICs and the ELM and the Health Lottery was formally launched on 29 September 2011. Proceedings were issued by Camelot on 22 March 2012.

The claim

The Court had to decide four issues.

1. Whether the claim had been brought in time.
2. Whether the CICs were non-commercial societies as was required under the 2005 Act.
3. Whether the various lotteries promoted by the CICs should be treated as multiple lotteries or a single lottery when it came to considering the restrictions on proceeds and prizes for lotteries under the 2005 Act.
4. Whether the Commission acted lawfully as regards the extent of the review it undertook in relation to the Health Lottery.

Timing

Under CPR 54.5, any claim for judicial review must be brought promptly and in any event within three months of when the grounds for it arose. In this case, the grounds most obviously arose when the licences were granted in September 2010. In February 2011, Mr Desmond acquired THL and announced the launch of the Health Lottery which took place some seven months later on 29 September 2011. Consequently, a claim issued on 22 March 2012 was potentially significantly out of time.

Under CPR 3.1(2)(a) the Court has a discretion to extend any time period under the rules including the time period for bringing a judicial review. However, Stanley Burnton LJ, giving the leading judgment, considered that Camelot had been armed with the relevant facts as far back as February 2011 and saw no reason to grant an extension. He was also concerned with what he considered to be a lack of candour on the part of Camelot.

On its face, this reasoning seems sensible. The time limits in proceedings for judicial review are strict and Camelot's claim appears to have been brought outside them.

However, this approach could present a problem if the underlying legal grounds of the challenge were strong since the Health Lottery would be permitted to continue even though the legal basis for it may be flawed. Imagine if a competitor established a rival scheme in identical terms but that someone challenged it (this time with the claim being brought promptly) and the award of licences struck down. It would seem highly anomalous for the Health Lottery to be allowed to continue and all rivals debarred. As the judge noted:

"The Court should be very slow indeed to countenance continuing illegality. I should similarly be reluctant to refuse all relief if I had concluded that the Commission had incorrectly construed the applicable provisions of the Act and was or might be countenancing such illegality."

Accordingly, the decision in respect of timing was intimately tied up with the judge's assessment of the substantive merits of the claim.

Non-commercial societies

Section 98 of the 2005 Act provides that lottery operating licences can be issued solely to a non-commercial society, a local authority or an ELM. Since the CICs were neither local authorities nor ELMs, licences could be validly issued to them only if they constituted non-commercial societies.

Under section 19 of the 2005 Act, a society is non-commercial if it is established and conducted:

"(a) for charitable purposes;

(b) for the purpose of enabling participation in, or of supporting, sport, athletics or a cultural activity; or

(c) for any other non-commercial purpose other than that of private gain."

Camelot contended that the CICs did not come within any of these categories and so did not constitute non-commercial societies. The Commission and THL argued that they came within the third category. (In this regard, it is not clear why it was not argued that they came within the first category. The CICs were not registered charities, but the entity to which they would remit the proceeds of the lottery, the People's Health Trust, which then distributed the money for the promotion of health in each of the local areas to which the CICs were designated, was a registered charity. On that basis it would seem at least arguable that the CICs were established and conducted for charitable purposes.)

In respect of the private gain test, the judge's analysis was brisk. He said:

"Section 19 focuses on the non-commercial society, and not on those who work for it or who are employed by it or contracted by it to provide services of any kind."

In the judge's view, provided the CIC made no profit, what it paid its officers, employees or contractors, including any ELM, was irrelevant. He noted that other provisions in the 2005 Act ensured that the costs incurred in any lottery were reasonable.

But nowhere does it say that the only non commercial purpose or the only private gain which are material in this assessment are those of the society itself. It seems that if a society were to be established or conducted for any non commercial purpose or for the private gain of any person, this would prevent it from being a non commercial society.

In the case of the Health Lottery, it would seem at least arguable that the CICs were established and/or conducted as part of a scheme to make private gain for the ELM. It is true that it may also be said that the CICs were established and/or conducted as well for another purpose, that is to raise money for the promotion of health. In such a situation where there are multiple potential purposes, the Court may have to decide how significant each one needs to be for the society to fall outside the provision. But the judge did not even start to analyse this. Instead he said:

"I do not think that Parliament could have intended the legality of a lottery … to depend on what was in the mind of those conceiving of a scheme rather than the provisions of the scheme and the facts as to its operation in practice."

It is hard to see how that can be correct. For a society to be a non commercial society under the 2005 Act depends in part on the purpose for which it was established and is conducted. That surely requires an analysis of what was in the mind of those conceiving (and operating) the scheme.

Moreover, the explanatory notes for section 19 state:

"To illustrate, genuine societies that are set up to provide a child with medical care or sports sponsorship are likely to be non-commercial societies under this section."

This would seem to support the view that the type of society which the legislator had in mind as a non commercial society was one established and conducted first and last for a specific charitable or other similar non commercial purpose, not one which was a component part of a broader commercial money making scheme.

Multiple lotteries

Section 99 of the 2005 Act requires that the Commission ensures that any lottery operating licence issued to a non commercial society shall include conditions to achieve the requirement that the proceeds of any lottery do not exceed £2m and the aggregate of all lotteries promoted in any calendar year by the society do not exceed £10m. Camelot contended that for the purposes of these provisions, the lotteries run by the CICs should be considered to be a single lottery. If this were correct, these financial limits would be exceeded by the Health Lottery and the CICs would be acting unlawfully.

Once again, the judge's analysis was brief. He concluded simply that since the CICs were separate legal entities and the absence of any fraud, there was "there is no legal basis for aggregating the proceeds".

However, in Blennerhasset (which was not referred to at all by Stanley Burnton LJ) Mr Justice Hidden held that in examining lotteries which are run in a connected manner, one had to look at the reality of the arrangement not merely its form. In Blennerhasset lotteries run by different legal entities were held to be in reality one lottery for the purposes of the legislation (albeit the preceding legislation to the 2005 Act). This required a close examination of the facts including the manner in which the lotteries were promoted and operated.

It might be that on the facts, Stanley Burnton LJ would have held that the Health Lottery constitutes different lotteries (although the promotion and operation of the lotteries is essentially identical). But he did not appear even to ask the question. He simply concluded that since they were promoted by different legal entities, they must be different. That appears to be contrary to the persuasive (if not binding) authority in Blennerhasset.

The review

In June 2012, the Commission commenced a review of the Health Lottery to determine whether further conditions should be added to the CICs' licences. The review was limited to the marketing and point of sale activities of the Health Lottery. Camelot applied to amend its claim to include a complaint that the Commission had erred by not including within the review broader questions regarding whether the Health Lottery was in reality a single unlawful lottery, the control and accountability of the CICs and the purposes for which the CICs were established.

But the judge held that the ambit of any review was within the broad discretion of the Commission and that the Court would not intervene. It is no doubt correct that the Commission did have a broad discretion here provided that its understanding of the underlying legal principles when determining the scope of the review was accurate. However, although the Court endorsed that understanding, for the reasons set out above, it appears questionable whether it was right to do so.

Conclusion

It is not known whether Camelot proposes to appeal this decision. It would appear that there is a significant basis for challenging the reasoning of the judge as regards the underlying legality of the Health Lottery. However, it may be that the claim will still be held to have been brought out of time.

In the meantime, arrangements for lotteries in this form may be considered to be lawful. That means that before long, Camelot may be facing even more competition to rival the National Lottery. This may not only be unwelcome news to Camelot but also to the Government and the public at large. Under the National Lottery, at least 28% of the proceeds must go to the good causes and an additional 12% goes in lottery tax. Under the Health Lottery, only 20% need go to the good causes (in fact 20.34% of the proceeds are remitted to the good causes) and there is no tax levied on it.

In July 2011, the Commission wrote to the Department of Culture, Media and Sport stating

"We are therefore writing to advise the Department that if the government wants to preserve the lottery proceeds limits and/or avoid the unintended consequences outlined above it may need to impose mandatory conditions or take other action to reinforce the proceeds limits and reduce the risk that these lotteries establish a successful precedent for avoiding the proceeds limits. The Commission warned the Health Lottery, when licensing it as an ELM, that if they managed to devise a scheme that was technically compliant but nonetheless in reality, breached the proceeds limits, the Department might take steps to block the loophole, so any action on your part should not come as a surprise to them."

The "mandatory conditions" referred to are any conditions which the Secretary of State can - pursuant to section 78 of the 2005 Act - by regulations require specifically to be applied to licences within a specified description. Section 78 provides expressly that such conditions can be applied to licences issued prior to the making of the regulations.

The Secretary of State may seek to make such regulations effectively to curtail the collective operations of the Health Lottery and thus protecting the National Lottery with its greater remittances to good causes and the Treasury, although any such regulations would be likely to be met with consternation and perhaps litigation on the part of the Health Lottery. It remains to be seen whether he will be prepared to do so.