Internet Sweepstakes Update

I’ve blogged before about the General Assembly’s latest effort to eradicate internet sweepstakes. Because G.S. 14-306.4 went into effect yesterday, I’ve had lots of questions about the law. (I even made a brief television appearance — apparently, my 15 minutes seconds of fame.)

My colleague Chris McLaughlin posted about the controversy in this area yesterday on the School of Government’s excellent local government law blog. I’ve pasted relevant portions of his post below, followed by a few additional thoughts of my own. (His area of expertise is local government taxation; I’ve edited out the tax-specific parts of his analysis, but if you want to see the whole post, it’s here.)

Just like Cinderella’s magic, internet sweepstakes businesses were supposed to disappear at the stroke of midnight last night when a new criminal ban took effect. Not sure about what’s happening in your neighborhood, but the internet sweepstakes place I pass while commuting to work was open for business as usual this morning. A split decision issued last week by a judge in Guilford County is the likely reason that all internet sweepstakes businesses haven’t yet turned into pumpkins.

. . .

Several sweepstakes operators challenged the new law before Guilford County Superior Court Judge Craig, who had previously ruled that existing slot machine and gambling bans did not apply to internet sweepstakes. The operators claimed that the definition of “entertaining display” was too broad and therefore the new law violated the First Amendment.

Last week Judge Craig issued what appears to be a split decision. Originally he outlined his reasoning in an email to the parties and on late Tuesday he issued his final ruling.

In a nutshell, Judge Craig held that the state may ban sweepstakes that use the games described in the first eight categories of “entertaining displays,” lettered a through h above. The judge views these games, which he called the “illicit eight,” as traditional gambling that can be banned without violating the First Amendment. But the judge also held that the ban on category h of “entertaining displays” is overly broad and violates the First Amendment.

As a result, Judge Craig’s order holds that sweepstakes computers that run any of the “illicit eight” games are now illegal, but sweepstakes computers that run any other games remain legal.

It’s not entirely clear which sweepstakes games would fall under category h and therefore not be illegal under Judge Craig’s ruling. A digital pirate digging up digital treasure chests? Digital balloons popping to reveal prize amounts? I think such displays and other arcade-type games would remain legal, but I’m not certain.

That’s not the only aspect of Judge Craig’s ruling that leaves me a bit befuddled.

In last week’s email, Judge Craig wrote that sweepstakes games other than “the illicit eight” may continue to operate “so long as they do not violate any other portions of the law. By way of example, they may be seized and the operators charged if probable cause can be demonstrated that the prizes are being secretly redeemed for cash by the establishments that operate them.”

Isn’t that the whole point? All internet sweepstakes operators redeem sweepstakes points and prizes for cash. That’s why the sweepstakes are so popular—and why lots of people want to ban them. Is Judge Craig suggesting that sweepstakes can only be operated if they do not pay out in cash? If so, that ruling would turn these businesses into pumpkins immediately. The judge’s formal order makes no reference to the redemption of prizes for cash, so we can only speculate as to what he meant in his email last week.

I’ll leave it to First Amendment experts to provide a detailed critique of the distinctions Judge Craig draws between the “illicit eight” and category h. But in my view Judge Craig’s reliance on the state’s traditional authority to regulate gambling doesn’t support such a distinction. All of the games are sweepstakes, regardless of what type of “entertaining display” is used to reveal whether the sweepstakes entries are winners. I don’t understand why the use of a fake video slot machine to reveal those entries is gambling but the use of a digital pirate digging up treasure chests is not. Seems to me that either all video sweepstakes are gambling or all are not, regardless of the type of display used to reveal sweepstakes entries.

Perhaps the most important question of all concerns the reach of Judge Craig’s ruling. Technically an order by a Superior Court judge binds only the parties to the original dispute, meaning the state agencies named as defendants are prohibited from prosecuting internet sweepstakes run by plaintiffs HEST Technologies and International Internet Technologies that use games other than the “illicit eight.” Theoretically the order has no effect on local law enforcement agencies or on internet sweepstakes run by other companies.

What’s more, other trial court judges are not bound by Judge Craig’s ruling. Case in point: earlier this week a Superior Court judge in Wake County dismissed a First Amendment challenge to the new law raised by a sweepstakes operator that was not a party to the Guilford County litigation.

But at least in the short term Judge Craig’s ruling is likely to be honored by law enforcement across the state, as was his 2008 order enjoining the prosecution of the same plaintiffs under then-existing video gambling laws. The N.C. Sheriffs’ Association is expecting written advice and guidance on the issue from the N.C. Attorney General’s Office shortly. The Attorney General’s response should give us a good indication of how, if at all, local law enforcement agencies will be enforcing the new law.

. . .

The bottom line is that nobody yet knows how this story will end. Cinderella and her sweepstakes friends may yet turn into pumpkins, but many more plot twists remain. Stay tuned.

For those interested in the Wake County order, it’s here. The News and Observer’s story from this morning is available here; it, too, indicates that an opinion from the Attorney General will be forthcoming. If and when that becomes available, I’ll post it. (Update: here it is.) I’ll be very interested in how this plays out, including whether there will be an effort to coordinate a test case or cases, or whether litigation will unfold organically, with each local jurisdiction making its own decision about whether and whom to prosecute. As far as I know, there hasn’t been a single arrest yet under the new statute, though an industry spokesman estimated that as many as 60% of sweepstakes businesses remain open, often with slightly different software designed to comply with (skirt?) the new law.

14 comments on “Internet Sweepstakes Update

  1. Have there been any developments in the past 4 months or so? I still see sweepstakes operating around Guilford county…

    • Hest Technologies, Inc., et al v State of North Carolina, ex rel is currently still in the NC Court of Appeals. As usual, nothing moves fast in the judicial system. It appears 8/24/11 is the latest deadline for briefs to be filed. It is ridiculous how a rogue superior court judge can create a state wide nightmare.

      • Can anyone explain to me how these “sweepstakes” are legal. When you ride by any hour of the day, and the parking lot is full,sadly full of addicted gamblers, anyone can tell it is not just sweepstakes. How can these businesses operate legally, and have parking lots full of people when NC can creat no real jobs for any unemployed or the parking lot full of “sweepstakes players!”

        • This is creating jobs. And the reason these games are legal is because, you are not “actually” gambling. You are buying “Internet Time”, not placing money into the machine. The “Sweepstakes” buy your “Internet Time” that you have, back from you. Another response to your job statement. When these places are shut down, there will be thousands MORE Un-Employed people(“AGAIN”), out looking for jobs.

    • IF you have not heard or read already, “ALL” Sweepstakes businesses must be closed by 1/3/2013. But, with in two weeks of closing, they are most likely going to be able to keep operating. The Internet Based games will most likely be the only games available.

    • what is the status of the sweepstakes operationstoday?

  2. The games at all of these establishments are beyond rigged, and un regulated. The odds change when ever and however the owners would like to change them. Folks, beware of the criminal element that is present at these locations. Since most of our state leaders are too corrupt to remove these money making ventures that share back end revenue to their pockets….Just quit going, you have little to no chance of winning and risk your money and safety to make these owners and their bought and paid for politicians rich beyond belief!!!!

  3. To start with, IF Your tired of North Carolina. MOVE! Second, I know for a FACT that the machines in some places are NOT rigged OR changed by the owner/owners. The Rich Beyond Belief is an under statement. IF you want to point fingers, point them at the CASINO they have in NC, and the lottery, and scratch offs, that I would be willing to bet, that even YOU Play. And the machines I know of ARE Regulated. Taxes are paid through the Sweepstakes business Owner AND the company the Business owner goes through. Can not disagree with you on the corrupt part. That is why they live in bigger houses, drive bigger cars, and eat bigger meals. The places I know of, there are winners at them every shift. People who want to Slander a Business OR a person, NEED to do there Homework prior to making statements!!!!

  4. I will go along with the games are rigged, and controlled by owners, and many thousands of dollars are involved. I do hope they are banned completely. I personally have played the games and know what I am talking about. I have seen hundreds of dollars paid in cash many times, and no record is made of any transactions. Most of the people who frequent these parlors are not working folks, and many welfare dollars, are not turning over into the economy. The main clients that play the machines, are mostly poor, and unemployed people. The myth about creating jobs is not even close to the rip offs of illegal revenues, that are lost. It is absolutely illegal gambling , and ALL machines need to be removed . SC was smart enough to realize this in the past and got rid of a nightmare, banning the machines.

    • SC smart for banning them? That was stupid. SC and NC need to get with the times and the law needs to be changed about gambling in these states. There is so much revenue they are missing out on that other states have finally realized and have started getting casino’s in their states because the people who want to gamble was taking their money to the other states around them and giving it to them instead of their own state. People can also gamble online in their own homes and who’s collecting taxes on that? When were these laws written in the 50’s? The internet sweepstakes places were a source of entertainment for people, I used to go all the time and I’m not on welfare or food stamps and I would mainly see retiree’s at these places enjoying their retirement. It was a social setting for the older community to get out and meet their friends. I don’t know how you would know the clients that you saw were poor or unemployed did you go up and ask them? With your comment about no record being made, if you won more than $599 they made you fill out a tax form, I know because I had to. I don’t know why there is such a law, I’ve heard because gambling is unethical, my question is why are there titty bars on every corner? Is that ethical? Men going to these places staring at naked women having bad thoughts, drinking then driving home. That’s the most degrading thing I have ever seen, why don’t you worry about that? Men giving naked women money for a lap dance? I don’t like being controlled by a Government who takes bribes, don’t pay their taxes and get caught cheating on their wives constantly, ethical? There aren’t jobs being created in this country because they have all gone to foreign countries because our Government charges businesses too much tax, so if this is one way to bring jobs and revenue to this area year round then the law about gambling in these states need to change. Casinos would bring in tourists year round instead of “seasonal” and hundreds of people would get work from security, dealers, cleaning people. Hotels and restaurants would go up giving more people employment. I don’t get it.

      • I get it…… The government doesn’t want to share the profits. They want it all!! They were not banned till the lottery came…. Exactly one month before. They were legal till then. I agree with everything you say. So many people have lost love ones and don’t drink, so they go to see friends and not to be alone. I know, I’ve seen it. Some people have been found Not Guilty, but law enforcement says they will keep forcing the law? If they are not guilty, what are they enforcing? I know, anything to make the attorney general, Roy Cooper, happy. When he is doing things he shouldn’t. Remember this when it is time for election. Also remember your district attorney’s too!! Preying on the poor, I thought that is what the state is doing with the lottery.

  5. My husband and I retired here in 2005 from Michigan, we use to go to the casino there and always enjoyed it. I was so happy to have the sweepstates here in N.C. I enjoy going while he’s at the golf course and have won many times. The sweepstates have created many jobs and a nice tax base for the state. It’s harmless fun and I do not think the main clients are unemployed and poor. I also do not think the machines are rigged as I have seen lots of winners and of course people also lose, that’s what it’s all about. Why, close a business and send employees to the unemployment line and lose tax money the state needs. If you don’t like it , don’t go but let those of us who enjoy it, have fun.

    • I agree with you 100%…if the state and or goverment cain’t take 1/2 of it then they do not want you or anyone else to enjoy it…I see people driving mercedes/ BMW’s etc and not all are on welfare in them good grief….I bet the one’s saying this mess are the one’s playing the lottery and buying scratch off tickets daily…what is the difference…i think they should be banned first…at least NC wins at sweepstakes…do you ever see us win a huge powerball check?…gasp i bet not…wake up if you ban sweepstakes…ban the lottery and ban the stupid scracth off crap…it is all the same trying to gamble at a chance to win …just the government controls the lottery and scracth offs…they are the winners then!!

      • I agree with you Dolly. The sweepstakes people need to get the wording of the lottery put in their definition so that it will not be considered gambling since the lottery isn’t, and they should go to all the bingo halls and get the wording for their definitions of how they are allowed to operate a game of chance. The law is so outdated especially with having computeres in most households. Do these people who want to keep this law also have rotary phones and black and white tv’s? LOL It’s all about control, but they are controlling the revenue they are losing every day by keeping this law and they are controlling to keep people unemployed, keeping people dependent on the Government for welfare and food stamps and Medicaid. That’s what this Government wants, they want people to be dependent on them so they can control people by keeping people down. The Politicians in these states really need to look at how to bring in revenue and employ people instead what they can not do.