Lord Pannick QC, representing the National Lottery operator Camelot, said there was evidence that officials at the commission had doubts about the Health Lottery. Its chair had described it as "the gambling equivalent of a tax-avoidance scheme", he said.
"It is plain that the commission has had continuous and considerable concerns about the legality of the scheme. The only reasonable and lawful response is a statutory review."
The court heard that the commission had decided in June that it would conduct a statutory review in relation to marketing and promotion of the Health Lottery. "Camelot welcomes that but believes it has not gone far enough," said Pannick.
"We are concerned that the commission is not reviewing the issues of control and accountability, and the extent to which the 51 individual lotteries operate individually of each other and the Health Lottery."
Camelot is asking the court for a judicial review of the Gambling Commission’s decision to grant licences to the Health Lottery, which was started last October by the media owner Richard Desmond and gives part of the proceeds to health charities.
The operator believes the Health Lottery is unlawful and is attempting to commercialise society lottery on a scale and in a way that breaks both the sprit and the letter of statute and regulation.
The commission argues that Camelot left it too late to apply for a judicial review because it should have acted within three months of the licences being granted between September 2010 and August 2011. James Goudie QC, for the commission, told the court: "Camelot is hopelessly and irretrievably out of time."
Pannick told the court that the commission’s chief executive, Jenny Williams, had said that the structure was a clear attempt to circumvent existing regulations.
He also referred to a letter dated 20 June from Philip Graf, the commission’s chair, to John Penrose, a minister at the Department for Culture, Media and Sport, in which Graf says the scheme would be "on the borders of technical legality – the gambling equivalent of a tax-avoidance scheme that exploits loopholes in the legislation".
Pannick said Graf had indicated in the letter that the commission would be likely to advise the DCMS that if the government wanted to preserve the lottery proceeds limits set out in the Gambling Act and protect the National Lottery, it would need to impose mandatory conditions or take action to reinforce the proceeds limits.
The proceeds limits say that the National Lottery is obliged to give a bigger percentage of its revenue to the exchequer and good causes than other UK lotteries.
Pannick said the commission had failed even after nine months to resolve one of its own concerns about the legality of the scheme, which is whether the 51 community interest companies are independent of each other and of the Health Lottery.
"The commission says its task is not to protect the National Lottery," he said. "But it has failed to understand that it is its task to enforce the limits on the size of society lotteries imposed by parliament for one reason – being, of course, to protect the National Lottery."
The case is a ‘rolled-up’ hearing, meaning that if the judges decide the judicial review application should be allowed, the full hearing will follow immediately.
The hearing continues.