Third time unlucky: Competition Appeal Tribunal finds that assistance to National Lottery is not a subsidy and refuses challenge

The Competition Appeal Tribunal (“CAT”) has issued its ruling in the case of The New Lottery Company Ltd and Others v The Gambling Commission, finding that the Gambling Commission (the “Commission”) had not given Camelot, as operator of the National Lottery, a subsidy within the meaning of the Subsidy Control Act 2022 (“SCA”).

This is the third decision in a challenge brought under the SCA, and the third time that the CAT has found no subsidy to be present. In the first challenge, Durham Company v Durham County Council, there was no subsidy because there was no transfer of resources between entities. In the second, Weis v Greater Manchester Combined Authority, there was no subsidy because the Combined Authority had acted on a commercial basis. This third challenge, which is the first to be issued by the new President of the CAT, Mrs Justice Bacon, finds once again that no subsidy arises because the Commission’s decision under challenge had been taken on a “commercial market operator” basis.

The challenge

The New Lottery Company (“NLC”) is part of the group that operates the Health Lottery (which was one of the appellants here) and was a competitor for the National Lottery licence awarded to the Allwyn group (which subsequently acquired Camelot). It alleged that the Commission, which is responsible for issuing the statutory licence to run the National Lottery franchise under the National Lottery etc Act 1993, had provided a subsidy to Camelot (under its previous licence) by permitting Camelot to spend approximately £70 million out of National Lottery funds on the marketing and promotion of the National Lottery. Since that subsidy had been provided without complying with the various statutory duties imposed by the SCA, NLC alleged, the Commission had given it unlawfully.

What is a “subsidy”?

The SCA defines a subsidy, for the purposes of the regulatory regime that it lays out, as “financial assistance” (which may be any decision that transfers value from one person to another, including – as per section 2(2) – the “forgoing of revenue that is otherwise due” to a public authority), that meets the following four tests:

• It is given by a public authority out of public resources;
• It confers an economic advantage on one or more enterprises;
• It is specific to that enterprise or those enterprises; and
• It has, or is capable of having, an effect on competition or investment within the UK or on international trade and investment.

Where a subsidy arises, the public authority must identify a lawful means of giving that subsidy. Where the authority intends to give it other than under a streamlined route, a scheme, or as “de minimis” minimal financial assistance, it can only do so where it has satisfied itself that doing so is consistent with the subsidy control principles.

In this case, the parties were not in dispute that the Commission was a public authority and Camelot was an enterprise (a person offering goods or services on a market). There was also no dispute that the Commission had not considered the subsidy control principles, since it did not consider that it had given any subsidy.

The CAT’s decision

The CAT therefore had to decide whether the allocation of National Lottery funds for advertising purposes met the other tests for a subsidy: was the money “public resources”, did it confer an economic advantage on Camelot, was that benefit “specific” and did it have the potential to distort market conditions?

The CAT addressed the economic advantage question first. The Commission argued that the allocation satisfied the “Commercial Market Operator” principle: that is, because it gave the money to Camelot on a “commercial” basis, Camelot received nothing from a public authority that it would not also reasonably expect to receive from a commercial operator in the Commission’s position.

The CAT accepted that there was no “market” for the provision of marketing funds to support the National Lottery and that the Commission was pursuing public policy objectives in doing so, but nonetheless decided that the decision was one which had “a commercial character” because the purpose and intended effect was to maximise the sale of lottery tickets in a way that aligned to both parties’ commercial incentives. The CAT compared this to any other scenario where a franchisor and franchisee made a joint investment in marketing their shared product to customers. It was not, on that basis, clear “that the relevant transaction would not have been entered into[on the same terms] by any rational market operator”, and so no “advantage” for the purposes of the SCA had been proven, and there was no “subsidy”.

Although the CAT did not need to consider the other parts of the statutory test, it did so.

First, as to whether any benefit was provided from public resources, the CAT rejected the Commission’s argument that diverting money that was due to be paid to the National Lottery distribution fund to be spent instead on marketing was not given “out of public resources” since (in essence) the money was diverted before it had become “due” and was not therefore “foregone” in the language of section 2(2) of the SCA.

All that mattered, the CAT decided, was the difference between what had happened and the relevant benchmark scenario (the “but for” test). Since the relevant benchmark was the amount of revenue that would have been due to be paid by Camelot into the Commission’s distribution fund had the Commission not taken the contested decision, the difference was a sum that had been forgone in Camelot’s favour.

The CAT also rejected the Commission’s argument that the assistance was not “specific” within the meaning of the SCA because the benefit was inherent to the structure of the National Lottery licence arrangement. Section 4(2) of the SCA states that assistance “is not to be regarded as being specific if the distinction in the treatment of enterprises is justified by principles inherent to the design of the arrangements of which that financial assistance is part”. In other words, the Commission argued that Camelot had been treated the same way as any other holder of a monopoly licence would have been treated, and the benefit was only specific because of the way that the monopoly worked.

The CAT was blunt in its approach to this argument, stating that:

“The effect of section 4(2) [SCA] is…not that any financial assistance that has an objective aligned with the overall purpose of the relevant regime cannot be regarded as specific. That would be to confuse the identification of a measure as a subsidy under s. 2(1) of the SCA with the subsidy control principles which must be considered by the public authority if it is giving a subsidy.”

The assistance was clearly specific. Moreover, the benefit was clearly not “inherent” to the design of the licence arrangements since, had it been, the Commission would not have had any discretion to exercise in allowing the funds to be diverted as they had been.

Timing of a challenge to a subsidy

The CAT also provided some useful guidance on the time limits that apply where a person seeks to challenge the giving of a subsidy under Part 5 of the SCA. Section 71 imposes (through amendments to the CAT rules) a time limit of one month beginning with the “relevant date” which is the earliest of:

1. the authority responding to a pre-action information request,
2. the date on which the authority publishes a post-award referral report, or
3. the date on which the authority publishes details of the subsidy on the subsidy control database (or, where it had no obligation to do so, the date on which the person bringing the challenge knew or ought to have known about the making of the subsidy decision).

The CAT noted that the Act does not expressly set out a time limit that applies “where the public authority does not consider that it has made a subsidy decision and there is therefore no entry in the subsidy database”.

The CAT nevertheless ruled that the above provisions “make it plain that subsidy challenges are required to proceed on a tight timetable” and therefore, by analogy with the provisions that the SCA does make, held that proceedings should normally be issued within one month of the date on which the applicant was or should have been aware of the decision, unless within that one month period a request is made for the provision of information, in which case the proceedings should normally be issued within a month of the information being provided. The CAT held that NLC were not entitled to delay simply because the Commission had never started the statutory clock.

Key takeaways

This marks the third time that a challenge to an alleged subsidy has been refused on the basis that the assistance under challenge did not satisfy at least one part of the statutory test and therefore did not qualify as a subsidy at all. Three more challenges remain live: one to a subsidy given (explicitly as a subsidy) by the Welsh Ministers to Cardiff Airport, one to a subsidy given by Ofgem in exercise of a statutory duty, and one concerning grants by Durham County Council that was originally brought (incorrectly) as a competition law challenge but which has subsequently been brought under the SCA.

However, in a regulatory regime that remains in its infancy, each decision from the CAT nonetheless brings useful guidance as to the interpretation of the SCA. From New Lottery the most significant such pointers are:

• EU State aid case law remains “strongly persuasive” when interpreting the SCA, though not binding, unless the SCA and/or statutory guidance makes clear that a material departure from State aid was intended.
• The burden of establishing that a given decision amounts to a subsidy rests on the person bringing a challenge.
• Though the commercial market operator rule is an objective test, the person bringing a challenge must “show clearly that the transaction would not have been entered into by any rational market operator” and that the beneficiary “would manifestly have been unable to obtain comparable terms from a private operator in the same situation” (our emphasis).
• An authority acting as a commercial market operator will not ignore the benefit to the recipient as long as the authority itself receives a commercial benefit and the benefit to the recipient will be relevant insofar as it goes to what the fair “share” of commercial incentives is between the parties.
• It is a “matter of judgment” as to what econometric analysis is appropriate when reaching decisions on a commercial market operator basis.
• Section 4(2) of the SCA does not exclude the possibility of a subsidy anywhere where the specific nature of the benefit arises from the design of the subsidy itself but rather relates to situations where the design of a public policy changes what falls to be considered as the “benchmark” rather than the position of one or more enterprises against the benchmark.
• Whether an authority will be held to have forgone revenue otherwise due, for the purposes of financial assistance being present, will depend on how the authority’s decision directly changes what the public purse has received compared to what it would have received without that decision having been taken (setting aside questions of “Laffer curve” style indirect effects on revenue).
• A person seeking to challenge something that they allege is a subsidy (but which the authority giving it does not consider to be one) has one month to bring their challenge from the date on which they became aware, or ought to have become aware, of it. That can be extended by making a pre-action information request under section 76 of the SCA, in which case the deadline is one month from the authority’s response.

If you would like to discuss how this decision might affect your organisation, or the subsidy control regime more generally, please contact Jamie Dunne, Charles Livingstone, or your usual Brodies contact.