Sweepstakes Update

I’ve had a number of people ask me what’s going on around the state with internet sweepstakes. Below, I set out what I know, but there’s so much going on in this area that I’m sure I’m missing something. Please add to the knowledge base by posting a comment if you know more.

New games. Sweepstakes operators have moved to new software that is designed to fall outside the scope of G.S. 14-306.4. There are at least two basic strategies:

• Pre-reveal systems. Some operators are using systems that reveal the result of the sweepstakes on the screen before any game simulation appears. (Players often look away during the reveal, or may cover up the area of the screen where the reveal takes place.) These operators contend that because the reveal takes place before the game simulation appears, the sweepstakes is not conducted “through the use of an entertaining display,” and so is not covered by G.S. 14-306.4(b). This local NBC story addresses this approach and notes that Attorney General Roy Cooper takes the position that pre-reveal systems are unlawful.
• Games of skill. Other operators have focused on the language in the statute that defines a “sweepstakes” as a system for distributing prizes “based upon chance,” G.S. 14-306.4(a)(5), and defines an “entertaining display” as involving a game “not dependent on skill or dexterity,” G.S. 14-306.4(a)(3). These operators use new games designed to incorporate an element of skill. According to some reports that I have heard, the amount of skill required is typically rather modest. For example, a player may confront a slot-machine style display showing lemon-lemon-cherry, and will be required to spin the third reel until it displays a lemon, at which point the player may claim any prize associated with his or her entry. I would be interested to learn more about the skill elements involved in these games.

Criminal prosecutions. Criminal prosecutions under G.S. 14-306.4 began as a trickle. They still aren’t a flood, but there have been enough that I no longer try to keep track of every case. There have been several convictions at the district court level, including at least three in Tarboro and one in Waynesville. Most, if not all, of the convictions have been appealed to Superior Court. There have also been quite a few acquittals in district court. At least some of the acquittals have been based on the defendants’ arguments concerning the legality of pre-reveal systems or games of skill.

Civil injunctions. Sweepstakes operators have sued a number of local governments and local law enforcement agencies across the state, seeking injunctions against enforcement of G.S. 14-306.4 against their machines. Most of these cases have been dismissed or have resulted in the denial of an injunction – examples include Wilmington, Sanford, and Sylva. However, about two weeks ago, a sweepstakes operator in Onslow County won an injunction against the sheriff. The court apparently concluded that the Gift Surplus sweepstakes system requires skill and dexterity and so is outside the scope of G.S. 14-306.4. The Jacksonville Daily News has the story here. Whether that ruling will have any effect statewide is likely to be litigated, just as the statewide effect of the Guilford County injunction was litigated during the last sweepstakes controversy.

Privilege licenses. Finally, although not directly relevant to the criminal law issues, it is worth noting that many towns established privilege license fees for sweepstakes operations. The state supreme court ruled that some of these taxes were too high, as my colleague and tax law expert Chris McLaughlin noted here. A few others were repealed after G.S. 14-306.4 was upheld. There are two recent developments to note. First, some sweepstakes operators who closed down under threat of prosecution have started trying to recover fees they previously paid. The Smoky Mountain News reports on this phenomenon here. Second, as more new sweepstakes businesses open up using software designed to fall outside the scope of G.S. 14-306.4, some towns that had repealed their fees or stopped collecting them are once again imposing privilege license fees. The Smoky Mountain News also has this story, here.

Again, if there have been important developments in this area that I’ve missed above, please let me know or post a comment.