On October 17, 2012, the Supreme Court of North Carolina heard oral argument in two cases concerning the legality of sweepstakes cafés – Hest Technologies, Inc. v. State ex rel. Perdue and Sandhill Amusements v. State. These two cases challenge the constitutionality of North Carolina General Statute §14-306.4 (2011) as an infringement on First Amendment freedom of speech rights of sweepstakes companies doing business in the state.
The decision in Sandhill hinges on the resolution of Hest Technologies, both of which were appealed to the Supreme Court of North Carolina. Hest Technologies involves Texas and Oklahoma corporations authorized to provide long distance telephone and Internet service in Internet cafés. Each plaintiff makes their own sweepstakes software that predetermines whether the entries purchased by customers are winners, either in the form of an instant reveal or having the results revealed through a video game.
Sweepstakes cafés became popular in North Carolina in 2007 after video poker machines were outlawed in the state. Sweepstakes customers buy long distance telephone or internet time, which is converted to a sweepstakes entry. These entries are then connected to a computer terminal on which sweepstakes software has been loaded. These games are based on the idea that the players are buying the Internet or phone time, and the sweepstakes game itself is just an extra incentive to their purchase.
In 2008, the plaintiffs filed a declaratory judgment action seeking a declaration that its sweepstakes systems in North Carolina did not violate gaming or gambling laws in the state, and also sought injunctive relief from enforcement of those laws against the sweepstakes systems. Hest Technologies, Inc. v. State ex rel. Perdue, 725 S.E.2d 10 (N.C. App. 2012)
In 2010 however, the General Assembly enacted the current gambling statute, N.C. Gen. Stat. §14-306.4, which states:
“It shall be unlawful for any person to operate . . . an electronic machine or device to do either of the following: 1. Conduct a sweepstakes through the use of an entertaining display, including the entry process or the reveal of a prize. 2. Promote a sweepstakes that is conducted through the use of an entertaining display, including the entry process or the reveal of a prize.”
The sweepstakes cafés fall directly into the regulation of this statute, and the plaintiffs alleged the statute was an unconstitutional regulation of their First Amendment right to freedom of speech. The Court of Appeals ruled in favor of the plaintiffs, stating that the statute in its entirety is an unconstitutionally overbroad regulation of free speech because banning the announcement of sweepstakes results through entertaining displays cannot be merely a regulation of conduct – it also regulates protected speech. According to the Court of Appeals opinion, the statute is also overbroad because it does not limit the definition of entertaining display and bans all visual information, which includes all forms of video games. Sandhill was decided in accord with Hest Technologies at the Court of Appeals level.
What Effects could a NC Supreme Court Reversal have on the Sweepstakes Industry?
Prior to these decisions, sweepstakes companies either adapted their software, went to court, or ignored the ban, risking criminal prosecution for violating the law. Because of the Court of Appeals decision, the sweepstakes cafés currently doing business in North Carolina have continued to do so, at least until the verdict comes back from the Supreme Court. A recent Wall Street Journal articled predicted that a reversal of the Court of Appeals holding could potentially destroy the sweepstakes industry in North Carolina, which is estimated to produce sales between $4.6 billion and $13 billion before payouts.
Are Sweepstakes Games Actually Gambling or an Added Incentive?
Sweepstakes systems have been accused of being a ruse for illegal gambling that is taking money away from “sanctioned gambling enterprises,” including both lotteries and casinos on the Eastern Band of the Cherokee reservation. Opponents to the cafés say they foster the same gambling problems and addictions as video poker machines did. Opponents also claim that the sweepstakes are being used to get around antigambling laws and regulations. Little of the phone and Internet time purchased at the cafés is used, and some sources estimate this use at than 10 percent.
Much like a casino, customers are encouraged to spend more money in the hopes of getting a higher payout. The machines are also played for their entertainment value rather than for their Internet or phone use. Addiction specialists have noted that the increased prevalence of the games makes it difficult for problem gamblers to avoid the “bright graphics and repetitive game play.” The North Carolina Problem Gambling Hotline issued a report that 41.7 percent of callers asked for help with video poker, a number that has increased steadily since video sweepstakes became popular. People who develop issues with the sweepstakes machines also show symptoms common to other types of gambling problems, including depression.
In contrast, sweepstakes boosters are adamant that no gambling is occurring because the prize or lack thereof is predetermined. Proponents have likened these games to the McDonald’s Monopoly game, which is played by peeling off stickers on food packaging. The customer first buys the food, and is given a chance to win a prize because of their purchase; they are not buying the food to gamble for a shot at winning a free hamburger or ice cream. Likewise, the customers at sweepstakes cafés have bought the Internet and telephone time first and foremost, and are given a sweepstakes entry for their purchase as an added bonus. The games are simply games of chance, and operating a sweepstakes café is not the same as operating a gambling business. These proponents argue that entertainment value does not make the sweepstakes games any less protected speech, but challengers note a stark difference between the McDonald’s games and sweepstakes cafés: “You’re not going to stay at that McDonald’s location and buy Big Mac after Big Mac after Big Mac to keep playing that sweepstakes.”
The Many Faces of the Sweepstakes Industry
SweepsCoach (also known as PromoGames), a California consulting company that develops and supplies sweepstakes software nationwide, is one of the companies infiltrating North Carolina markets for sweepstakes cafés. These companies do not see the sweepstakes as games of chance, but as a surefire way for the house to always win. SweepsCoach admits on its website that the sweepstakes machines “have the look and feel of slot machines and other casino gaming devices” but are “legal in most states.” SweepsCoach states that “the house always wins” in the long run and that “everyday people spend millions of dollars playing sweepstakes games.” The website offers onsite installation and hands-on training for the sweepstakes machines, displays a gallery of options for terminals a business could install, and calls its growth “explosive.” The packages SweepsCoach offers to entrepreneurs range from $8,000 to $33,000 and the standard revenue split is 75/25 percent between entrepreneur and SweepsCoach.
SweepsCoach and other like companies have had a substantial impact on North Carolina as one of the biggest markets for the games, with Charlotte leading the way as the most competitive city in the United State, according to a SweepsCoach consultant. Gastonia has opened nearly 50 sweepstakes and Internet cafés since May. Pocca Marshall, a manager of a sweepstakes center in Gastonia, said the business provides services other than the games and cash prizes, and that many customers use the purchased Internet time to conduct other personal business.
Established sweepstakes cafés with a number of machines and large crowds could make up to $5,000 to $8,000 a month per machine, which could help cities in economic trouble. Marshall believes companies like hers are providing much needed jobs in a hard hit area. However, with most sweepstakes spots existing as one or two machines in a convenience store, it would take a considerable amount of effort and risk to make those high figures per machine.
One man in Gastonia, Stephen Gamaras, has gambled on opening a more substantial sweepstakes business called PlayersCasino, a self-proclaimed entertainment venue, complete with a bar, televisions to watch the games, and space for a live band. PlayersCasino is modeled off Las Vegas-style establishments, and can hold up to 165 people. Gamaras sinks $14,000 annually into 25 sweepstakes machines in the hopes of winning big in the future, which may come to fruition if the Supreme Court upholds the Court of Appeals and rules the anti-sweepstakes statute unconstitutional.
The fate of sweepstakes cafés in North Carolina could be decided in as little as three months. In the meantime, various internet cafés will continue to operate, taking the risk that their investment may not pay off if the Court of Appeals decision is reversed. Both Hest Technologies and Sandhill are being watched around the nation to see if North Carolina will open itself to expansion of the sweepstakes industry and if the rulings could be applied in other states. Regardless of how the Supreme Court rules, in many circumstances the sweepstakes businesses will not go away simply because there is too much money to be made. The problems North Carolina went through with underground video poker operations will likely repeat themselves, this time with hefty out-of-state corporate backing. As the SweepsCoach consultant told The Gaston Gazette, “How could you just remove that, especially from a place like North Carolina where it’s so firmly entrenched?”