Court upholds law banning video sweepstakes gambling

The North Carolina Supreme Court issued a pair of rulings today that uphold North Carolina's ban on video sweepstakes. 

Although the long-term effect of the cases are unclear, in the short-run they appear uphold statutes banning a form of gambling that has spread throughout the state despite three different laws aimed at curbing it.

"The General Assembly has chosen, through N.C.G.S. § 14-306.4, to address a specific type of sweepstakes operation that exploits a loophole in the state‟s gambling laws but presents the same social evils as gambling, while deciding that the majority of sweepstakes operations (which do not pose the same risks) are legitimate marketing tools. This policy decision is within the legislature‟s purview, and we decline to weigh in on that decision other than to conclude that it is constitutional because there is a rational basis for it," Supreme Court Justice Robin Hudson wrote for the court. 

Although the state law could be subject to challenges in federal courts, if the Supreme Court's ruling today holds it would effectively outlaw sweepstakes gambling in the state.  

Chase Brooks, who is in the sweepstakes business and heads the Internet Based Sweepstakes Operators trade group, says he is "disappointed" by the decision. But, he adds, operators will look for new ways to program their games so they can stay open.

“We are certainly disappointed in the ruling from the North Carolina Supreme Court," Brooks wrote in an e-mail. "We maintain that video sweepstake games are no different than traditional sweepstake games offered by restaurant chains, soft-drink companies and publishing houses. The operators and software companies will now look at the law and our operating systems to see how we can adjust our computer programs and business models to continue operations. We will look at morphing into whatever we need to be under the rule of law to continue our business.”

A lawyer for International Internet Technologies, one of the companies that challenged the North Carolina law, said his client was disappointed.

"While we are studying the North Carolina Supreme Court’s decision, we are disappointed in the result. Our client, of course, intends to fully comply with the law, as it has done in the past," said Adam Charnes, a partner with Kilpatrick Townsend who worked for IIT.

Law enforcement officials welcomed the ruling.

"I stood with law enforcement to push for a ban on this kind of gambling and our lawyers have argued for years for the right to enforce it. The Supreme Court got this one right," Attorney General Roy Cooper said.

It is unclear when the state will begin enforcing the law again. Pam Walker, a spokeswoman for the Department of Crime Control and Public Safety, said lawyers for her department will have to consult with Cooper's office. The state's division of Alcohol Law Enforcement, which is part of the department, is the state agency given the task of enforcing gambling laws in conjunction with local sheriffs and police. ALE was a defendant in both the cases the supreme court ruled on today.

Noelle Talley, a spokeswoman for Cooper, said lawyers in the AG's office will review the ruling and "will be determining how to advise law enforcement about enforcing the law."

Lawmakers, too, said they were pleased.

“I’m pleased every member of the Supreme Court chose to uphold the law the General Assembly passed overwhelmingly with bipartisan support,” Senate President Pro Tempore Phil Berger said. “Now that the question is settled, I expect our law enforcement officials will begin enforcing the law.”

North Carolina has struggled to get rid of various sorts of video gaming over the past decade. In 2006, lawmakers voted to outlaw stand-alone video poker machines. That ban took full effect in July of 2007, and soon afterward video sweepstakes games came into the state.

To use a sweepstakes machine, patrons typically buy a product like phone or Internet time. In exchange for that purchase, they're given entries into a sweepstakes. Players find out whether they won or lost money through "entertaining displays" that mimic gambling games. Lawmakers have twice tried to ban those sweepstakes games, but courts have repeatedly blocked full enforcement of the law.

In the most recent cases, a three-judge state Court of Appeals panel ruled North Carolina's law tramples of free speech rights because it regulates the displays rather than the underlying games.

The state Supreme Court reversed that decision. In their opinion, the justices wrote that the state was not banning speech but rather outlawing games that "cleverly avoid the traditional definition of gambling." Whether players are actually betting is irrelevant, Hudson wrote.

"While one can question whether these systems meet the traditional definition of gambling—because plaintiffs have ostensibly separated the consideration or “bet” element from the game of chance feature by offering “free” sweepstakes entries—it is clear that the General Assembly considered these sweepstakes systems to be the functional equivalent of gambling, thus presenting the same social evils as those it identified in traditional forms of gambling," Hudson wrote in the Hest ruling. In a separate case, known as Sandhills Amusements v State of North Carolina, the court merely reversed the Court of Appeals decision without comment, citing its writing in Hest. 

It is unclear what the General Assembly or local law enforcement will do in response to this ruling.

There are no official estimates of how much money is involved in industry, but estimates by insiders place the total gross revenue somewhere near $1 billion in North Carolina alone. The legal stalemate of the last six years has allowed the industry to grow unchecked by state law. And while some cities and towns charge franchise taxes on sweepstakes businesses, many are completely untaxed and unregulated. Industry insiders say the legal free-for-all has allowed stand-alone games that are illegal under current law to creep back into the state and go unnoticed among the raft of sweepstakes terminals. 

Gov. Bev Perdue said this year she would like to legalize and "tax the heck out" of the games, and there have been various legalization schemes floated at the General Assembly. However, none have passed as lawmakers waited to see how the courts would rule. Those decisions will now be in the hands of Gov. Pat McCrory, a Republican who takes office Jan. 5, and GOP lawmakers who control both the House and Senate. 

"Governor-elect McCrory respects the Supreme Court's decision, which upholds the law passed in 2010. Law enforcement can now begin to enforce the law with clarity. He looks forward to reviewing this issue in greater detail," said Ricky Diaz, a spokesman for McCrory.