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.