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N.C. Supreme Court Outlaws Sweepstakes Video Gaming; Dec. 14 Ruling Says Games Are Not Protected By Free Speech

Posted On: 12/16/2012

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TAGS: video game, sweepstakes video gambling, sweepstakes video game, sweepstakes café, Internet café, North Carolina Supreme Court, N.C. Supreme Court sweepstakes ban, video sweepstakes gaming ban, constitutional free speech case, Hest Technologies Inc., International Internet Technologies, Sandhill Amusements, Spectrum Gaming Group, North Carolina video poker, sweepstakes operation

RALEIGH, NC -- The North Carolina Supreme Court has outlawed Internet sweepstakes gaming. In its ruling announced on Dec. 14, the N.C. Supreme Court reversed an appellate court decision that said the state's law which banned video sweepstakes gaming was overbroad and restricted free speech.

"Operating or placing into operation an electronic machine is clearly conduct, not speech," the high court's written opinion stated. "We conclude that the act of running a sweepstakes is conduct rather than speech, despite the fact that sweepstakes participants must be informed whether they have won or lost."

The size of North Carolina's sweepstakes videogame industry has been estimated at 1,000 locations generating more than $1 billion a year. In June, Gov. Bev Perdue proposed a tax on the devices, but the state's General Assembly adjourned without acting on a tax measure.

It is not clear now how long North Carolina's sweepstakes parlors can stay open before they have to close, reported the Hickory Daily Record. The newspaper said officials at the Attorney General's office are reviewing the ruling to determine how to advise law enforcement to go about enforcing the law.

If and when the law is enforced, about 15,000 North Carolinians employed by the industry will lose their jobs, some observers predicted. Towns that license sweepstakes cafés will lose a revenue source, too; business licenses for the parlors are almost always higher than the norm, and there are often added fees for each machine in a location.

The North Carolina General Assembly passed a law -- which went into effect in December 2010 -- that was supposed to ban sweepstakes video gambling. But the gaming industry continually and skillfully modified its software and equipment to stay a step ahead of the law.

In a temporary legal victory for the industry, the North Carolina Court of Appeals ruled on March 6, 2012, that the state's ban on Internet-based sweepstakes videogames is unconstitutional because it restricts free speech. The court added that the law's vague language improperly restricts amusement-only videogames. N.C. Attorney General Roy Cooper vowed to appeal to the Supreme Court, which led to the Dec. 14 decision against sweepstakes gaming. SEE STORY

The plaintiff, in their case before the state's high court maintained that videogames or their "entertaining displays" involved in the sweepstakes systems represent speech protected by the First Amendment.

The N.C. Supreme Court began hearing arguments on sweepstakes video gaming from state officials, game-maker Hest Technologies Inc., software-maker International Internet Technologies and operator Sandhill Amusements on Oct. 17 (the latter three being among the plaintiffs).

"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," the high court's written decision stated. The court defined gambling as traditionally understood to contain three elements: chance, consideration, and prize or reward.

A sweepstakes café is an establishment that offers games of chance with prizes in conjunction with other services like Internet access or telephone cards. Operators of these businesses run their games under conventional sweepstakes laws. This purportedly makes the electronic adaption legal because the winners are predetermined and the entries are offered in conjunction with the purchase of a product (i.e. Internet time or phonecard). The industry has argued that its sweepstakes games do not meet the three-pronged test for gambling: prize, chance and consideration -- an argument with which the N.C. court disagreed.

The decision by the N.C. Supreme Court is likely to resonate in other states where the legality of electronic sweepstakes games and the facilities in which they operate, are being fervently contested. The advocates and detractors of the new gaming concept have been going head-to-head in Florida, Ohio, Hawaii and South Carolina, among other states.

Spectrum Gaming Group, a New Jersey-based research firm, has listed 21 of the most important trends that the global casino industry needs to monitor in 2013. Number 7 on the list: Law enforcement in states will move faster to either eliminate or regulate Internet/sweepstakes cafés, recognizing them either as financially harmful or a revenue source. Observers expect that the North Carolina ban will prompt other states to act quickly on deciding the fate of electronic sweepstakes.