Court Strikes Down Internet Sweepstakes Ban

In a post here, Jeff updated you on the dueling superior court decisions on whether G.S.14-306.4—the internet sweepstakes ban—is constitutional or not. The Court of Appeals recently resolved the conflict, holding, over a dissent, that the statute is an unconstitutionally overbroad regulation of free speech. So at least for now, internet sweepstakes operations are good to go.

The court’s decision came in a pair of cases, Hest Technologies, Inc. v. North Carolina and Sandhill Amusements v. North Carolina, both issued on March 6, 2012. Hest is the Guilford County case; Sandhill is the Wake County case. Since the court delivered its analysis in Hest, here are the facts of that case, as described by the court. Hest and the other plaintiffs sell long-distance telephone time and high-speed internet service in internet cafes, business centers, convenience stores, and other establishments. All have developed their own proprietary sweepstakes management software, which they use to conduct promotional sweepstakes to market their products. When customers make a qualifying purchase, they receive one or more sweepstakes entries. Alternatively, people may enter the sweepstakes without purchasing any products, if they complete entry forms available at retail locations. Free entries are treated the same as entries accompanying a purchase. The result of each entry has been predetermined by the sweepstakes software before disbursement. A player who has received a sweepstakes entry only can reveal this predetermined result by connecting to a computer terminal loaded with the sweepstakes software. Once connected, the player can choose either an “instant reveal,” through which the results are immediately displayed on a computer screen or to have the results revealed through a video game played on the terminal. The method by which the result is revealed does not affect the outcome. Customers retain the value of any purchased prepaid phone or internet time, regardless of the sweepstakes outcome.

The Hest plaintiffs brought an action in Guilford County superior court alleging that G.S. 14-306.4 was an unconstitutional regulation of protected free speech. The trial court invalidated G.S. 14-306.4(a)(3)(i) as unconstitutionally overbroad but upheld the remainder of the statute. G.S. 14-306.4(a)(3)(i) identified “[a]ny . . . video game not dependent on skill or dexterity that is played while revealing a prize as the result of an entry into a sweepstakes” as a type of “entertaining display” covered by the statute. Both sides appealed. The plaintiffs argued that the trial judge erred by declaring only that G.S. 14-306.4(a)(3)(i) is overbroad; according to the plaintiffs, the entire statute was unconstitutional. For their part, the defendants argued that the statute is constitutional.

The court of appeals agreed with the plaintiffs. The court began its analysis by rejecting the defendants’ argument that the statute regulates only conduct, holding instead that it regulates speech. The court noted that “the creation and dissemination of information are speech within the meaning of the First Amendment” and that “video games are entitled to full First Amendment protections.” It concluded:

[B]anning the dissemination of sweepstakes results through entertaining displays cannot be characterized as merely a regulation of conduct. Instead, that portion of N.C. Gen. Stat. § 14-306.4 which forbids “the reveal of a prize” by means of an entertaining display directly regulates protected speech under the First Amendment. This necessitates reviewing the statute under established First Amendment doctrine.

Turning to the issue of overbreadth, the court noted that the statute prohibits the plaintiffs from revealing sweepstakes results by means of an entertaining display, defined as “visual information, capable of being seen by a sweepstakes entrant, that takes the form of actual game play, or simulated game play.” It noted that while the statute provides a list of examples of entertaining displays, these examples do not limit the definition of that term. It continued:

This definition necessarily encompasses all forms of video games, from the simplest simulation to a much more complex game requiring substantial amounts of interactive gameplay by the player, and thus, operates as a categorical ban on all video games for the purposes of communicating a sweepstakes result. As a result, regardless of the types of games the General Assembly intended to regulate, the statute is constitutionally overbroad, as its plain language “sweeps within its ambit . . . the practice of a protected constitutional right.”

(footnote omitted). The court thus held that “the portion of N.C. Gen. Stat. § 14-306.4 which criminalizes the dissemination of a sweepstakes result through the use of an entertaining display must be declared void, as it is unconstitutionally overbroad.”

Having disposed on Hest on this basis, the court dealt with Sandhill quickly. Citing Hest, it reversed—again with a dissent–the ruling of the Wake County superior court judge that had upheld the constitutionality of the statute.

What’s next? I’ve been told (but I’ve not yet confirmed) that the State will appeal to the N.C. Supreme Court. But at least for now, the internet sweepstakes companies are still in business.