Sweepstakes makers gamble on court OK
Posted October 13, 2012
Updated October 15, 2012
Raleigh, N.C. — When North Carolina lawmakers passed a 2010 law banning video sweepstakes machines, California-based SweepsCoach pulled out of the Tar Heel State.
"We may have been the only company that did that," said James Mecham, the company's managing director. "We left our operators hanging. That was painful."
Other companies merely adapted their software, went to court and/or ignored the ban entirely. In the two years since, game rooms that at one time hid under the guise of copy centers or were tucked away in the back of convenience stores exploded into storefronts across the state. The troubled theater in Roanoke Rapids has now been dubbed the Royal Palace Theatre and, in addition to country and blues concerts, plays home to 250 machines.
The future of the industry in North Carolina, which according to one estimate earns $10 billion a year nationwide, will be at stake Wednesday during oral arguments before the state Supreme Court. Two cases – Sandhill Amusements, et al. v. State of North Carolina and HEST Technologies Inc., et al v. State of North Carolina – challenge the validity of North Carolina's ban. Originally, Superior Court judges in Wake and Guilford counties offered conflicting verdicts. Since then, the state Court of Appeals has ruled that the state law unconstitutionally tramples on free speech rights.
Mecham said his company has just begun to service clients in North Carolina again and is unsure what would happen if the state Supreme Court upheld the state statute banning them.
"I think a lot of other people would probably keep going because that's what happened last time," he said.
Is it gambling?
Sweepstakes games began coming into the state as a ban on stand-alone video poker machines took full effect in 2007. They are based in the conceit that players are really buying a product, typically phone or Internet time, and gaining entries to a sweepstakes as an inducement. The games, sweepstakes machines makers say, merely reveal whether a player has won the sweepstakes. Playing the game doesn't affect the outcome, and a player could find out if they won anything all at once rather than dealing with what lawyers describe as an "entertaining display."
Those who make the games acknowledge that very little of the phone or Internet time that is purportedly bought – less than 10 percent by some informal estimates – gets used.
"Just a couple of days ago, I won a Quarter Pounder with Cheese at McDonald's," Mecham said, describing how he pulled an instant game tab off a fish sandwich. "If I didn't finish my Filet-O-Fish, does that mean I was gambling?"
Just because people don't use their phone or Internet time doesn't mean the sweepstakes isn't legitimate, he said.
"It means we did a really, really good job of promoting that product," Mecham said.
To David Stewart, a Washington, D.C.-based lawyer, that explanation sounds like the latest dodge in a long history of people trying to circumvent state gambling laws.
"That's interesting, huh?" Stewart said of Mecham's remark. "They want the product so much they don't even use it? It's actually difficult to take seriously. That's not what they're selling."
Stewart wrote a white paper for the American Gaming Association, a trade group for the commercial casino industry. He says there is little doubt that sweepstakes machines are sapping revenue from state lotteries, casinos like the one run by the Eastern Band of Cherokees and other sanctioned gambling enterprises.
He argues that no appellate court that has ever looked at sweepstakes machines has ruled that they are not gambling devices. In North Carolina, he said, the Court of Appeals focused on a section of the law that dealt with how prizes are displayed rather than the fundamentals of the games themselves.
"After your state's (North Carolina's) rulings, all the Internet sweepstakes people are claiming they're just defending free speech," he said. "I think that it was a fundamentally wrong-headed ruling, which was reached because the statute itself was not well done."
A Florida court, Stewart said, has already dismissed the free speech argument, and other states like Pennsylvania have laws that address sweepstakes in a much more straightforward manner.
What's a game, what is gambling?
North Carolina's legislative history on the issue is somewhat tortured. The 2010 law was legislators' second attempt to ban sweepstakes games. The legislation tiptoes around sweepstakes due to pressure from restaurant chains, soda bottlers and others who don't want to lose the ability to offer games like the one in which Mecham won a hamburger. In briefs filed with the state Supreme Court, the plaintiffs in both the HEST case and the Sandhill Amusements case argue that their games are no different from the McDonald's sweepstakes. State law, they argue, merely criminalizes how the prizes are revealed, an infringement on free speech.
"Moreover, the statute targets only video games – all other forms of electronic sweepstakes, such as those using pictures or movies on the computer screens instead of video games, are perfectly legal in North Carolina," lawyers wrote on behalf of HEST and its co-plaintiff, IIT.
Lawyers for the state argue that the state is within its rights to ban what it sees as gambling.
"Here, the General Assembly has declared as a matter of public policy that operating or placing into operation an electronic machine to conduct or promote electronic sweepstakes is a form of illegal gambling in North Carolina when the sweepstakes are conducted using an entertaining display. The General Assembly found that such electronic sweepstakes systems utilizing video poker machines and other similar simulated game play create the same encouragement of vice and dissipation as other forms of gambling, in particular video poker, by encouraging repeated play, even when allegedly used as a marketing technique.
"Thus, because the General Assembly enacted N.C.G.S. § 14-306.4 to protect North Carolina citizens from the 'vice' and 'dissipation' associated with sweepstakes gaming, N.C.G.S. § 14-306.4 was within the scope of the State’s police power," lawyers for the Attorney General's office wrote.
Republican lawmakers, who now control the House and Senate, have offered little comment on the court cases, saying only that they would wait for the state Supreme Court's ruling before taking further action.
Vice versus virtues
North Carolina's public policy debate over the past five years has been a push and pull between that description of sweepstakes as a "vice" and the purported economic benefits. Spaces in strip malls that would otherwise be vacant have been rented, local bars make a few extra bucks and local companies like Sandhill Amusements, a Pinehurst company, and Figure Eight Technologies in Greenville are making money producing the games.
"It (sweepstakes games) was an addition, something extra," said Patrick Vota, a manager with Arkansas-based HSV, which runs what is now called the Royal Palace Theatre, in Roanoke Rapids.
The company is leasing the theater from the city for two years with an option to buy. Vota said the bulk of the theater's income – he couldn't say what percentage – will come from a series of concerts that launched last week.
"Taking this thing out of the mothballs, (sweepstakes) gave us some aspects it didn't have," he said. Those aspects include a steady stream of income for project that has saddled the city with debt and has has been a subject of ridicule due to its initial dysfunctional association with Randy Parton, Dolly Parton's brother.
Mixed in with images of artists coming for concerts, the theater's website displays pictures of a happy gambler, advertising it is "Open 24 Hours" and offering $5 of free time, a bag of chips and soda for each $20 of time purchased.
Critics point to the fact that the industry is now largely unregulated. Some city governments have imposed licensing fees on the businesses – those fees are the subject a case the Supreme Court is due to hear in December – but the state is largely missing out on the revenue.
Some addiction specialists say the prevalence of the games make them hard to avoid for problem gamblers, and the bright graphics and repetitive game play hook some players. An annual report issued in July from North Carolina's Problem Gambling Help Line shows that 41.7 percent of callers were asking for help with what they described as "video poker." That number has steadily climbed since 2007, when video sweepstakes machines exploded onto the scene.
The purchases, or bets, involve relatively small amounts of money, but they can add up, said Brian Kongsvik, help line director for the Florida Council on Compulsive Gambling.
"Yes, it is a smaller amount of money. But it is all relative. These places seem to be attracting lower-income individuals, at least here," Kongsvik said. People who develop problems around the sweepstakes machines show symptoms similar to those with other types of gambling problems, such as depression, he said.
Florida has more casinos than North Carolina, as well as other betting venues such as dog tracks. Still, he said, calls regarding sweepstakes machines make up about 7 percent of the calls to the Florida helpline.
"We call it convenience gambling," Kongsvik said. Before sweepstakes, gamblers had to drive somewhere, typically out of town, in order to play. "Now they're right there in your neighborhood."
The owners of some sweepstakes makers and distributors will say the unregulated environment allows for non-server-based games to hide among the purportedly legal sweepstakes machines. Purveyors of games with names like Pot-o-Gold and 8 Liner often don't bother with the sweepstakes mechanism.
Elsewhere, legal cases have been considerably less accommodating to the sweepstakes industry. In August, the Fifth U.S. Circuit Court of Appeals ruled that a pair of Texas defendants were involved in "illegal gambling" due to their work in the sweepstakes business.
"We conclude ... that the main purpose and function of Davis' and Clark's Internet cafes was to induce people to play the sweepstakes and that the Internet time sold by the cafes – albeit at fair market value – was not the primary subject of the transaction but instead mere subterfuge," Judge Edward C. Prado wrote for the court on Aug. 1. Later that month, state investigators and local law enforcement arrested officials with HEST Technologies – the same company involved in the North Carolina case.
"The defendants face felony gambling, money laundering and organized criminal activity charges," says a news release from the Texas Attorney General's Office. "HEST’s promotional materials claim the corporation develops 'sweepstakes promotional systems.'"
According to the felony charges filed against the defendants, however, HEST’s so-called “sweepstakes" systems constitute illegal gambling devices. As a result, the defendants face organized criminal activity charges for conspiring to violate state laws that prohibit gambling.
It's unclear what, if any, impact the Texas case will have on deliberations in North Carolina. Those interviewed for this story say the North Carolina cases are being watched around the country, both to see if the state will open further to sweepstakes games and to see whether the legal rulings here can be applied elsewhere.