Court of Appeals Allows Sweepstakes Preliminary Injunction to Stand

On Friday, a panel of the court of appeals decided an interesting electronic sweepstakes case. The case is Sandhill Amusements, Inc. v. Sheriff of Onslow Co. It generally upheld a preliminary injunction against the Onslow County Sheriff and the District Attorney, barring them from enforcing the electronic sweepstakes statute against certain businesses. [Update: although the DA is named in the case caption, I am informed that the plaintiffs dismissed the case as to the DA, and the DA was not enjoined.]

Facts. After officers visited a business that featured several sweepstakes kiosks, the Onlsow County Sheriff and the District Attorney wrote a letter to the president of Sandhill Amusements, informing him of their opinion that the kiosks were unlawful, and stating that they could be seized as evidence and their owners could be charged criminally.

Civil suit. That prompted Sandhills and another company to sue the sheriff and the district attorney, in their official capacities. The plaintiffs sought a declaration that the kiosks were lawful and an injunction against the enforcement of the electronic sweepstakes statute, G.S. 14-306.4, and related laws against owners and operators of the kiosks.

Evidence. A superior court judge held a hearing on the plaintiffs’ request for a preliminary injunction. It appears that the kiosks work as follows: a patron approaches a kiosk and uses the kiosk to purchase gift cards. The cards may be redeemed for merchandise on the Gift Surplus website. As a promotional incentive, the patron receives a certain amount of sweepstakes entries for each dollar spent. A limited number of free entries are also available.

The patron may then use the entries to attempt to win cash prizes in one of five “game themes” that are available on the kiosk. It sounds as though the patron surrenders the sweepstakes entries, selects a game theme, and then learns the maximum potential prize that he or she can win in that game. That amount could be zero, or it could be, for example, $5. The patron is then presented with the appearance of three slot machine reels, two of which match and one of which does not (e.g., cherry-cherry-lemon). In order to win the prize, the patron must use the touchscreen to rotate the non-matching reel to match the others (e.g., cherry-cherry-cherry). If the patron correctly matches the symbols, the patron wins the prize. An expert witness testifying for the plaintiffs concluded that the matching requirement rendered the games ones of skill or dexterity, rather than chance. The plaintiffs argued that this took the kiosks outside the purview of G.S. 14-306.4.

Trial court’s ruling. The trial court ruled that the kiosks did not violate the electronic sweepstakes statute or other gambling laws and entered a preliminary injunction against the enforcement of those statutes against the plaintiffs or business that used their kiosks. The injunction was limited to the parties and to Onslow County businesses that used four or fewer kiosks.

The appeal. The Onslow County Sheriff appealed. Judge Hunter, joined by Judge Elmore, mostly affirmed.

First, they considered the sheriff’s claim that sovereign immunity justified an interlocutory appeal and barred the suit. The majority agreed that the sheriff was entitled to raise the sovereign immunity defense through an interlocutory appeal. However, it concluded that the defense did not bar the suit: although “sovereign immunity acts as a bar to Plaintiffs’ ability to seek redress through monetary damages,” the “declaratory judgment procedure is the only method by which Plaintiffs have recourse to protect their property interests in the kiosks,” so sovereign immunity cannot trump that procedure.

Then the majority considered whether the preliminary injunction was an appropriate subject of an interlocutory appeal. Such appeals are allowed when necessary to protect a party’s substantial right. The majority stated that generally, an injunction against enforcing the law affects a substantial right, and concluded that the trial judge’s ruling was such an injunction to the extent that it declared the kiosks “lawful” and “valid,” findings that could “cast doubt upon every prosecution by the State throughout North Carolina.” However, the majority determined that those findings were not a necessary part of the trial court’s ruling. The standard for a preliminary injunction is simply that the plaintiff demonstrates a likelihood of success on the merits, and the judge’s order found that standard satisfied even without the statements about lawfulness and validity. The court of appeals therefore struck those findings, and ruled that without them, the preliminary injunction does not affect the sheriff’s substantial rights. The court emphasized the limited scope of the injunction: it is limited to Onslow County businesses with four or fewer machines, and doesn’t affect non-parties. Therefore, the court reasoned, “Sheriff Brown was not enjoined from enforcing the criminal laws of North Carolina by the remainder of the trial court’s preliminary injunction; Sheriff Brown was enjoined from enforcing certain criminal laws against parties to the litigation until the resolution of this case.”

The dissent. Judge Ervin dissented. He agreed with the majority’s disposition of the sovereign immunity issue, but would have ruled (1) that the preliminary injunction does affect the sheriff’s substantial rights and so is reviewable in its entirety, and (2) that the plaintiffs failed to demonstrate a likelihood of success on the merits, so the preliminary injunction should be reversed.

As to the first issue, Judge Ervin wrote, “[a]s I read the relevant decisions, this Court has recognized that the entry of a preliminary injunction precluding a state or local agency from enforcing the law affects a substantial right and is immediately appealable.” He found no support in the case law for the majority’s exception for a temporary injunction that is limited in scope.

As to the second issue, Judge Ervin thought that the trial judge erred in agreeing with the plaintiffs’ expert that the kiosks present games of skill and dexterity. He reasoned that even if there is some element of skill in the games, chance predominates: “As was the case with the video poker game at issue in [a previous case], the machines and equipment at issue here only permitted a predetermined number of winners. For that reason, a player who plays after the predetermined number of winners has been reached will be unable to win a prize no matter how much skill or dexterity he or she exhibits. In addition, use of the equipment at issue here will result in the playing of certain games in which the player will be unable to win anything of value regardless of the skill or dexterity that he or she displays.”

Where does this leave us? For now, in Onslow County, the injunction is still in place, and is limited in scope as noted by the majority opinion. Outside Onslow County, the injunction appears to have no effect: the court of appeals emphasized its lack of applicability outside the county.

Going forward, the Sheriff could appeal further based on the dissent, or could simply let the litigation play out in superior court and appeal any permanent injunction that is entered. As to the prospects of any such future appeal, it may be worth noting that the only judge on the court of appeals who reached the merits was Judge Ervin – and he concluded that the plaintiffs were not likely to prevail on the merits, i.e., that the kiosks likely violate the electronic sweepstakes statute. As always, stay tuned.