N.C. Appeals Court Strikes Sweepstakes Ban

Special Report - March 8, 2012
A divided panel of the North Carolina Court of Appeals ruled on March 3 that a 2010 law aimed at banning sweepstakes video gambling in the state is “overly broad” and “must be invalidated.” The state appeals court issued a 2 to 1 decision in two lawsuits challenging the law, Hest Technologies v. State of North Carolina, and Sandhill Amusements vs. State of North Carolina. The ban on sweepstakes gambling, which the General Assembly enacted in the summer of 2010, prohibits conducting or promoting sweepstakes activities that involve gambling. The legislation was prompted by a proliferation of sweepstakes cafes and parlors across North Carolina that have essentially set up video poker casinos that require players to purchase phone or Internet time in order to gain access to the games of chance.

 In November 2010, Guilford County Judge John O. Craig struck down one portion of the sweepstakes ban, specifically the section banning “Any other video game not dependent on skill or dexterity that is played while revealing a prize as the result of an entry into a sweepstakes,” which he deemed overbroad and in violation of the First Amendment.  The State appealed Judge Craig’s decision to the N.C. Court of Appeals. In its March 3 decision, the Court of Appeals found that the 2010 law “which criminalizes the dissemination of a sweepstakes result through the use of entertaining display, must be declared void, as it is unconstitutionally overbroad.” Differing from the trial court, the appeals court concluded that the entire statute (as opposed to a specific section) “regulates constitutionally protected speech” and is therefore unconstitutional.  The appeals court decision found that the trial court’s order striking only a portion of the law “was not sufficient” and that the “trial court erred by only invalidating the single example of an entertaining display…Instead, the entire statute must be invalidated.”

“Specifically, the portion of the statute which forbids revealing a sweepstakes result by means of an entertaining display acts as a regulation of plaintiffs’ right to communicate the results of an otherwise lawful sweepstakes by means of a specific category of protected speech,” the majority opinion concludes. “While this Court has recognized, and we agree, that ‘it is the legislature’s prerogative to establish the conditions under which bingo, lotteries or other games of chance are not to be permitted’…the portion of the statute at issue in the instant case regulates solely how a sweepstakes result is communicated, rather than the circumstances under which the sweepstakes are permitted. The General Assembly cannot, under the guise of regulating sweepstakes, categorically forbid sweepstakes operators from conveying the results of otherwise legal sweepstakes in a constitutionally protected manner.”

In his dissent from the majority opinion, Judge Robert C. Hunter disagreed with the majority’s conclusion that the statute unconstitutionally regulates speech, and argued that the “statute regulates conduct, rather than speech.” He explained that the statute “does not prohibit plaintiffs from conducting or promoting their sweepstakes through the use of a video game. Plaintiffs are free to allow anyone to play their video games, so long as the video games are not used to conduct or promote a sweepstakes. Because the statute merely regulates conduct and not speech, it is not subject to strict scrutiny…Rather the law is subject to a rational basis review, whereby the law need only be rationally related to the State’s police powers.” Judge Hunter also noted that one of the General Assembly’s “stated purposes in enacting [the statute] was to protect the morals of the inhabitants of our State from the ‘vice and dissipation’ that is brought by the ‘repeated play’ of sweepstakes due to the ‘use of simulated game play,’ similar to video poker… The protection of the morals of our State’s inhabitants is a legitimate government purpose.”

Attorney Chris Derrick, whose practice in Asheville specializes in sweepstakes and promotions laws, analyzed the appeals court opinions in the Hest and Sandhill decisions for the N.C. Family Policy Council. “The issue on appeal before the Court of Appeals in Hest Technologies and Sandhill was whether the ‘electronic sweepstakes’ statute was unconstitutionally overbroad, and not specifically whether the games were ‘otherwise legal sweepstakes.’  When appellate courts in other states have directly addressed the legality of these types of ‘electronic sweepstakes,’ they have consistently ruled that these games are not legal sweepstakes and instead are illegal games of chance,” Derrick wrote. “Although it hasn’t ruled on this specific question, the NC Court of Appeals stated in a prior opinion that certain promotions and devices will be illegal if they are a “mere subterfuge to engage in an illegal lottery scheme, whereby consideration is paid merely to engage in a game of chance,” and when “it is clear that the product being ‘sold’ is merely ancillary and incidental to the accompanying game of chance.” 

Derrick continued, “If the facts relating to the actual play and operation of these ‘electronic sweepstakes’ games are analyzed using the criteria the Court of Appeals has previously set forth, it becomes abundantly clear that the games are a subterfuge to engage in an illegal lottery scheme where the games of chance, and not the phone card or internet time being sold, are the items truly being purchased.  In other words, whether or not [the statute] as drafted is constitutional, the ‘electronic sweepstakes’ the statute seeks to outlaw violate North Carolina’s other long established gambling and anti-lottery laws, and are not ‘otherwise legal sweepstakes.’”   

Related resources:
Competing Gambling Bills Filed - March 9, 2011
Bill Filed To Broaden Sweepstakes Ban - January 28, 2011
It Ain’t Over Til It’s Over: Video Gambling Returns to North Carolina - FNC- April 2010

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