States fight over online lotteries

Lottery agents who have gone online met with some bad luck in the courts recently. In order to protect their own lotteries, some states tend to bar lotteries conducted by other states.

This results in huge losses to the states whose lotteries are prohibited at the gates and also to the agents of those states. There is an element of monopoly, protectionism and apparent infringement of the freedom of trade between the states. The Supreme Court has dealt with such battles between the states several times.

Those were cases in which the conventional lotteries were involved. Earlier this month, the issue erupted once again, in the context of online and Internet lotteries, which are new forms of the games of chance. In this case, M/s Tashi Delek Gaming Solutions Ltd vs State of Karnataka, the lottery agents from Sikkim and Meghalaya won partial victory against the Karnataka government.

The Karnataka government, which is a "lottery playing state", last year declared itself a zone free from online and Internet lotteries. It issued a notification under the Lotteries Regulation Act 1998, prohibiting the sale of all computerised and online lottery tickets marketed and operated through vending machines, terminals, electronic machines and through Internet.

The states of Sikkim and Meghalaya, along with their agents, moved the Karnataka High Court challenging the notification arguing that since Karnataka itself was organising lotteries, it could not bar the entry of lotteries from other states. The Karnataka government replied that it had imposed total prohibition on all online lotteries and there was no discrimination against any state.

The constitutional issue that arose in this case was whether the agents could move the high court. The high court ruled that the agents could not move a writ petition because it was a matter between the states. Therefore, the states themselves must move the Supreme Court under Article 131 of the Constitution.

The agents had no independent legal right to move the high court, it was ruled. Therefore, the agents appealed to the Supreme Court. According to the apex court, if the aggrieved state governments intended to sue the Karnataka government independently, the Supreme Court alone would have been the appropriate forum. But the lottery agents were not busybodies. They have a cause of action as they had invested huge amounts, taken loans they would suffer penal consequences if their obligations are not fulfilled.

Therefore, their writ petitions were maintainable. The Supreme Court asked the high court to give high priority to the case of the lottery agents and decide the rest of the issues as fast as possible.

This judgement is a significant triumph not only for firms that act as trading agents of one state in other states, but also manufacturers, transporters and even employees. Article 131, in short, says that when there is a dispute between the states or between the Union and the states, only the Supreme Court has jurisdiction to hear it.

The high court's role is barred. However, stretching this rule too far would be harmful to inter-state trade and commerce.

In Union of India vs State of Rajasthan (1984), the Supreme Court dealt with a similar dispute and it said that only disputes directly involving the states and the Union should be referred to the Supreme Court. It explained: "Any dispute which may arise between a state in the capacity of an employer in a factory, a manufacturer of goods subject to excise duty, a holder of a permit to run stage carriages, a trader or businessman carrying on business not incidental to the ordinary functions of government, a consumer of railway services, etc like any other private party on the one hand and the Union of India on the other, cannot be construed as a dispute arising between the state and the Union, attracting Article 131 of the Constitution."

A Constitution bench of the Supreme Court, in State of Bihar vs Union of India (1970), said that though disputes between states and the Union should normally be settled by the Supreme Court under Article 131, there are exceptions. If a private party, be it a citizen or a firm or a corporation, along with the state either jointly or in the alternative is impleaded, then the dispute can be taken to other courts. In the lottery case, the Karnataka High Court failed to take into consideration the status of the agents who had contractual obligations with their governments, coupled with their own individual rights.

They were not mere strangers who had no standing before the high court. Thus, the Supreme Court ruled that their writ petitions were maintainable in the high court. This ruling will benefit not only lottery agents, but also other inter-state agents and traders.