High Stakes at the High Court

High Stakes at the High Court

- in Law and the Courts

The viability of the video sweepstakes industry in North Carolina was front and center before the state Supreme Court yesterday, as the justices heard argument in two separate cases challenging the constitutionality of the state’s 2010 ban of video sweepstakes machines.

That law prohibits the use of computers to conduct sweepstakes by means of an “entertaining display” – typically a video game. It’s that language that’s tripped up recent enforcement efforts in the state, especially since the U.S. Supreme Court held in 2011 that video games qualify as protected speech under the First Amendment.

The Court of Appeals ruled 2-1 in March that because the statute banned the use of protected forms of expression, it was constitutionally overbroad and void. “The General Assembly cannot, under the guise of regulating sweepstakes, categorically forbid sweepstakes operators from conveying the results of otherwise legal sweepstakes in a constitutionally protected manner,” Judge Ann Marie Calabria wrote in Hest Technologies v. N.C. Judge Linda McGee agreed.

But Judge Robert C. Hunter dissented, finding that the statute did not ban the use of video games or restrict any content, but rather only regulated conduct that the state had found to be pernicious. That dissent set up the appeal to the Supreme Court in the Hest case, as well as in a separate case brought by N.C.-based sweepstakes company Sandhill Amusements and others involving the same issue.

Gambling or not, it’s predatory

Storefront sweepstakes “cafes” and “business centers” have proliferated here and elsewhere in recent years, despite efforts to outlaw them.

Because those centers are unregulated, state officials could not confirm how many actually operate in North Carolina. According to estimates in one report released by the American Gaming Association in September, the state had more than 30 centers housing more than 1,000 video sweepstakes computers.

And those centers, if they’re like others around the country, are raking in the cash. James Mecham, the managing director of SweepsCoach, a California company that helps new sweepstakes businesses get off the ground, told Bloomberg Businessweek in February 2011 that one terminal in a thriving center might gross $1000 to $5000 a month. “A medium-size business with, say 100 machines would therefore gross around $250,000 per month, or in the ballpark of $3 million a year,” Mecham said. That adds up to an industry that’s grown to $10 billion in less than a decade.

They’re easy to spot with their neon “sweepstakes” signs flashing across front windows. And harmless, their operators say. Patrons come in to buy a product, a prepaid phone card for example, or a service like internet access. With that they get a free sweepstakes entry and can find out if they won the prize simply by asking a center manager, they say. Or, they can log on to computers there and play video games that simulate slots, poker or other games of chance to see if they won. And they can keep playing for more chances to win.

It’s not gambling, the operators add, claiming that prizes are predetermined and not subject to chance.

But whether that’s true — or whether that’s disclosed to customers — is irrelevant, critics say, since it’s the allure of more opportunities to win that seduces customers into repeat paying and playing.

And it’s marketed as gambling, said Les Bernal, executive director of the advocacy group Stop Predatory Gambling in Washington, D.C., especially in poor neighborhoods.

“These companies want to set up these mini-casinos on every street corner in low-income neighborhoods,” Bernal said. “They lure people with this idea that the pay-out is much better than the lottery or other types of gambling. And when they’re playing these online games, people are wagering a lot more quickly,” Bernal said.

“They put them in communities where people are less likely to question how the games work,” Bernal added. “People there see the games as a way to pay their bills at the end of the month.”

An informal survey by the Independent Weekly in Feb. 2010 bears that out, showing sweepstakes cafes springing up in low income, minority communities throughout the Triangle, “where people have little to spend and a lot to lose.”

Speech or conduct, ban or tax

Is it conduct or is it speech? That was the question for the court yesterday, and state Solicitor General John Maddrey wasted no time getting straight to that point. It’s conduct, he said, and the wording of the statute couldn’t be more clear: It’s unlawful to conduct or operate a sweepstakes through the use of video games.

So the law doesn’t ban the use of video games, or restrict their content, Justice Robin Hudson asked more than once, and it doesn’t prohibit otherwise lawful sweepstakes? Is it the combination of those activities that’s unlawful?

Yes, because the General Assembly had found that that combination of those activities amounted to “the same encouragement of vice and dissipation as other forms of gambling, by encouraging repeated play,” Maddrey said, quoting the prefatory language of the bill enacted in 2010.

But the games are entertainment, said Adam Charnes, the attorney for Texas-based Hest Technologies, and entertainment is protected speech.

And how customers learn if they’ve won a prize – whether by video game, scratch-off ticket, in person, or in a different language –is protected speech, added Kelly Daughtry, who represented Sandhill Amusements. Daughtry is the daughter and law firm partner of Republican legislator Leo Daughtry.

The state hopes to find support from federal courts in Florida and Pennsylvania which have recently rejected the free speech argument in similar battles over video sweepstakes laws, though involving statutes worded differently than North Carolina’s law.

Here, the Court of Appeals decision coupled with unbridled growth of these mini-casinos led the legislature this past summer to consider regulating and taxing them instead to generate revenue.

But objections from both conservatives, who view any type of gambling as a vice to be outlawed, and liberals, who consider a tax on revenues earned on the backs of low-income people already preyed upon by the sweepstakes operators an outrage, kept those proposals from gaining traction in a legislature already pressed for time.

That unlikely coalition might be reunited in the next legislative session, though, depending on how the Supreme Court rules.

It just might be the only time the two sides will agree on anything.

About the author

Sharon McCloskey, former Courts, Law and Democracy Reporter for N.C. Policy Watch, writes about the courts and decisions that impact North Carolina residents. McCloskey also wrote for Lawyers Weekly and practiced law for more than 20 years. Follow her online at sharonmccloskey.com or @sharonmccloskey.