On New Year’s Eve, the North Carolina Court of Appeals issued an opinion in No Limit Games, LLC v. Sheriff of Robeson County, __ N.C. App. __, __ S.E.2d __, 2024 WL 5250431 (Dec. 31, 2024). The case represents the latest development in the long-running battle over electronic sweepstakes games in North Carolina. This post provides a brief history of the issue, summarizes the recent opinion, and discusses the evolving sweepstakes industry and legal efforts to address it.
History: from video poker to sweepstakes. As I wrote in this prior post, North Carolina banned slot machines in 1937. G.S. 14-306. That was seemingly sufficient until the electronic age, when video poker machines began to appear in the state’s gas stations and convenience stores. Things came to a head in 1999, when South Carolina banned such machines. The General Assembly worried that all the machines in South Carolina would simply move across the state line into North Carolina, so in 2000, it enacted former G.S. 14-306.1, prohibiting new “video gaming machines” but permitting those already in operation to remain. S.L. 2000-151. In 2006, the General Assembly decided that it had been too lenient. It repealed G.S. 14-306.1 and enacted G.S. 14-306.1A, banning all video gaming machines. See S.L. 2006-6. Litigation ensued, with several manufacturers arguing successfully that they were neither “slot machines” nor “video gaming machines” as those terms were defined in the General Statutes.
In 2008, the General Assembly enacted G.S. 14-306.3, banning certain “server-based electronic game promotions,” which was more or less how the manufacturers had described their operations in court. S.L. 2008-122. But the manufacturers were able to modify their machines, or the software run on the machines, to fall outside the scope of G.S. 14-306.3, so they again, in some cases, obtained injunctive relief. (Not all manufacturers were successful in court, with the results depending both on the details of each manufacturer’s gaming system and on the statutory interpretation adopted by each presiding judge.)
The predominant business model came to involve operators selling a product – such as phone time, internet time, or gift certificates to an online store – and providing customers with sweepstakes entries purportedly as a marketing tool or promotional incentive. The purported product often went unused, while customers could redeem their sweepstakes entries on site at a video terminal that showed a simulated game of chance, and could redeem any winnings immediately. In 2010, the legislature responded by enacting G.S. 14-306.4, which makes it unlawful to operate a machine that conducts a sweepstakes “through the use of an entertaining display, including the entry process or the reveal of a prize.” S.L. 2010-103. An entertaining display was defined to include anything “that takes the form of actual game play, or simulated game play,” meaning poker, bingo, craps, slot-machine style matching of symbols, or “[a]ny 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.” Id. Sweepstakes operators immediately turned to the courts, sometimes challenging the constitutionality of the law, and at other times seeking declaratory or injunctive relief in the form of rulings that their specific offerings did not violate the law.
Decisions by the state appellate and federal courts. The following is intended to be a complete chronological list of published state appellate and federal court decisions concerning G.S. 14-306.4. If I’m missing any cases, I hope that readers will let me know. I realize that there have been many trial court orders regarding the statute, but I have not tried to list those.
- Hest Technologies, Inc. v. State ex rel. Perdue, 366 N.C. 289 (2012) (the plaintiffs sold prepaid phone or internet time, giving customers sweepstakes entries upon purchase; the results of the entries could be revealed at “game station terminals” on site and any winnings could be claimed immediately; the plaintiffs brought a First Amendment challenge to the statute, contending that it unlawfully limited how the plaintiffs could communicate whether customers’ entries were winners or not; the court concluded that the law “primarily regulates noncommunicative conduct rather than protected speech,” that the law is not overbroad, and that any incidental burden on speech is justified by the legislature’s desire to “combat[] the social ills of gambling and gambling-like activities”)
- Sandhill Amusements, Inc. v. State, 366 N.C. 323 (2012) (decided the same day as Hest Technologies and on the same basis)
- Sandhill Amusements, Inc. v. Sheriff of Onslow County, 368 N.C. 91 (2015) (the plaintiffs operated retail locations where they sold gift certificates to an online store; for each dollar spent, the customer obtained a certain number of sweepstakes entries; the customer could reveal the results of the entries on site through a machine equipped with an electronic display; the display showed three reels similar to those on a slot machine; when the reels stopped, they would show two matching symbols and allow the player to “nudge” the third reel from a non-matching symbol to a matching symbol and thereupon reveal the prize; the plaintiffs sought declaratory and injunctive relief allowing them to operate, but the court concluded that despite the nudge, the games in question were “not dependent on skill or dexterity” and that chance remained the “dominating element” in determining a player’s potential winnings; therefore the operation violated the statute)
- State v. Spruill, 237 N.C. App. 383 (2015) (affirming criminal convictions under the statute despite defendants’ argument that the result of the sweepstakes was revealed to the player before the gameplay began as well as at the end, and stating “[t]hat the sweepstakes is conducted at the beginning of a game versus its conclusion makes no significant difference”)
- Crazie Overstock Promotions, LLC v. State, 377 N.C. 391 (2021 (the plaintiff operated retail locations where it sold gift certificates to its online store and provided gift certificate buyers with “games points” that could be used to play what appeared to be a game of chance potentially resulting in the issuance of “reward points”; the “reward points” could be converted into “dexterity points” if the player stopped a simulated stopwatch reasonably close to a certain time, and the dexterity points could then be redeemed for cash; the plaintiff sought to enjoin enforcement of the statute against its operations, arguing that the “dexterity test” meant that the game was mainly one of skill, not chance; the court disagreed, concluding that the rewards points have potential economic value and that the issuance of rewards points was purely a result of a game of chance, and further that the whole process viewed together still left “the amount of a player’s winnings . . . primarily dependent upon chance rather than skill or dexterity”; the court opined that the game at issue was gambling dressed up as a marketing technique and “represents the type of gaming enterprise that the General Assembly intended to prohibit”)
- Gift Surplus, LLC v. Cooper, 380 N.C. 1 (2022) (the plaintiffs operated retail locations where it sold credits that could be used to buy products from its online store and provided credit buyers with sweepstakes entries that could be activated immediately at kiosks; the kiosks showed reels similar to a slot machine and required the players to “nudge” two of the reels into alignment in order to be eligible to win; the primary difference between this system and the one deemed unlawful by the court in 2015 was that the previous system required a single nudge while the new system required a double nudge; the plaintiff sought a declaratory judgement and inunction deeming its revised operations lawful; the court ruled otherwise, determining that the modifications “do not fundamentally alter the character of plaintiffs’ game” and that only a “minimal” level of skill was involved, with chance still predominating)
- Gift Surplus, LLC v. North Carolina ex rel. Cooper, 605 F.Supp.3d 711 (M.D.N.C. 2022) (after the Supreme Court of North Carolina issued the opinion summarized immediately above, the same plaintiffs sued in federal court, claiming that G.S. 14-306.4 violates the First Amendment and is unconstitutionally vague; the court disagreed, concluding that the statute “regulates nonexpressive conduct and not speech” and is not unconstitutionally vague; these holdings generally aligned with the state supreme court’s ruling a decade earlier in Hest Technologies)
- Fun Arcade, LLC v. City of Hickory, 290 N.C. App. 10 (2023) (the plaintiffs operated retail establishments hosting video machines, including machines that offered a game called Ocean Fish King; players bought gaming e-credits, then wagered the credits on shots taken at various ocean creatures, winning if they hit and destroyed the creatures; the plaintiffs contended that the games were skill-based because some aiming was required, and sought declaratory and injunctive relief allowing them to operate; the defendants responded that chance predominated because there were so many creatures on the screen at any time that it was almost impossible to miss hitting a creature, and there was no way to know how many hits were required to destroy a creature, making the game essentially one of luck; the court of appeals agreed with the defendants, ruling that although “players must have some measure of dexterity to use the joystick [to aim at the fish], a player cannot know beforehand how many hits are necessary to destroy fish and, thus, cannot strategically optimize a favorable return on credits,” rendering the game “predominantly one of chance”)
New case. The plaintiff in the No Limit Games case “hold[s] itself out as selling consumer merchandise through its website,” youbux.com. (Readers may be interested in checking out the website to assess how serious the plaintiff appears to be about its online retail sales business.) Putatively to market its online store, the plaintiff operates promotional video sweepstakes, which are run through “computer kiosks, generally placed in retail establishments owned by third parties.” When a customer spends one dollar on a youbux.com gift certificate, the customer receives 100 sweepstakes entries. The customer can reveal whether the entries are winners in two ways: via an unadorned instant reveal, or by going through a simulated game that requires the player to “nudge” a reel in order to claim any prize, similar to the system described in the Crazie Overstock case. If the entries are not winners, the customer is given an opportunity to recoup the same number of entries by playing a game similar to the classic kids’ Simon game. If the customer can complete 14 rounds of the game, the customer receives new sweepstakes entries.
The plaintiff sued, seeking injunctive and declaratory relief allowing it to operate its kiosks without being prosecuted under G.S. 14-306.4. A superior court judge found that because sweepstakes participants receive the same prize whether they redeem their entries through simulated game play or though the instant reveal, chance plays no role in the game play and the kiosks do not violate the statute; he therefore granted a preliminary injunction.
The defendants – various state and local law enforcement officials – appealed, and the reviewing court reversed. It reasoned that although the value of the sweepstakes entries was determined prior to the game play, as in all the promotional sweepstakes operations discussed in this post, the result of the sweepstakes was nonetheless revealed through what appeared to be a game, making the kiosks entertaining displays in violation of the statute. The nudge feature did not turn the games into games of skill under Crazie Overstock. The second chance Simon game did not turn the games into games of skill because it appeared to be an “impossible task” as most players completed fewer than seven rounds of the game.
Although all the appellate decisions summarized above were unanimous, this one was not. Judge Griffin dissented, reasoning that the nudge feature and the second chance Simon game combined to make skill predominate over chance. He further opined that the instant reveal option meant that the sweepstakes was not necessarily conducted through an entertaining display.
Discussion. By my count, No Limit Games is at least the ninth consecutive legal defeat in North Carolina for individuals or businesses operating video sweepstakes. Admittedly, sweepstakes operators have sometimes been successful in the lower courts, but they have never prevailed in the end. From what I have read, the situation in other states is much the same. This article in Forbes collects many cases from states across the country finding various types of video sweepstakes promotions to violate assorted state gambling laws.
Nonetheless, I doubt that No Limit Games will be the last case in this area. The business appears to be too profitable for operators simply to give up. Although there is no authoritative single source for statistics on the size of the market, this article by a self-proclaimed “leading advisory firm in the global gaming industry” asserts that “sweepstakes and social casinos,” which include the types of operations discussed in this post, have seen “player participation rising by more than 30% year-over-year” with a projected market size of over “$7 billion globally by the end of 2024.”
One interesting development in the industry is a move towards purely virtual operations. Rather than operating physical locations with the associated overhead and visibility to law enforcement, some sweepstakes operators have begun to offer their games virtually. This might present some jurisdictional issues. For example, if an operator based in Oklahoma runs an online sweepstakes business and a customer in North Carolina participates in the sweepstakes, could the operator be prosecuted here?
The continued growth of video sweepstakes is not without opposition. From the outset, some have opposed these operations because they target low-income consumers. Law enforcement professionals have observed that these businesses may attract criminal activity. And competing commercial interests have taken notice. The American Gaming Association recently issued this two-page statement about brick-and-mortar video sweepstakes as well as the online equivalent. It argues in part that “unscrupulous operators have used ‘skill’ as an artifice to flood jurisdictions with unregulated slot machines.” That followed this 2014 white paper estimating that sweepstakes businesses earn $10 billion per year and criticizing them as unregulated gambling.
The number of charges for violations of G.S. 14-306.4 appears to be growing over time. Data from the Administrative Office of the Courts shows that 59 charges were brought in 2023, up from 32 just two years prior. It is my understanding that there is considerable local variation in the appetite of law enforcement agencies and prosecutors to pursue video sweepstakes operators. The steady flow of authority from the appellate courts may encourage more jurisdictions to act.
As I mentioned, I doubt that No Limit Games will be the last sweepstakes case we see. When there are future developments, you can read about them here. In the meantime, happy new year to all!