State supreme court deems sweepstakes illegal – for now

Court decision leaves some wiggle room

by Brett Freeman

The fate of Internet sweepstakes games appears to be sealed following a unanimous decision by the N.C. Supreme Court declaring a 2010 state law that bans the games as constitutional.

The ruling makes no concessions or provisions for Internet sweepstakes games already in operation, meaning that when the court opinion takes effect Jan. 3, existing games will be illegal.

Two sweepstakes companies, Hest Technologies and International Internet Technologies asked the court on Dec. 18 to temporarily stay the decision while they await response from an appeal to the U.S. Supreme Court. The requested stay, the companies argued, would only be for two-three weeks.

The argument stated:

“…Without a stay of this Court’s judgment, Plaintiffs’ First Amendment rights could be violated, their businesses may permanently close, and thousands of North Carolina employees may lose their jobs.”

That request was denied Dec. 19.

The ruling could be the final salvo in a battle between the state and the gaming industry that began in 2006, when video poker and other types of electronic games were banned in North Carolina.

Back-and-forth battle

The gaming industry responded to the legislation with Internet sweepstakes games, which had a similar interface, similar odds and payouts, but were technically not gambling. The state responded by banning games that simulate video poker and slots games in 2008.

The gaming industry switched to different types of video games to reveal sweepstakes winners that don’t simulate such games, prompting the legislature to ban all Internet sweepstakes games that use an “entertaining display” to reveal winning entries.

The back-and-forth continued until March of this year, when an appeals court found that operating Internet sweepstakes games amounted to an exercise of free speech, making the games legal. The Supreme Court decision last month reversed that ruling, finding that the 2010 law regulates conduct, not speech, and as such is constitutional.

Because Internet sweepstakes centers are unregulated, it is difficult to determine how many businesses will be affected and what economic effects the court’s decision will have. The impact on tax revenue is not likely to be significant. Internet sweepstakes games aren’t taxed in Lincoln County.

A federal law, the Internet Tax Freedom Act, prohibits local sales taxes on Internet access, which is the primary way sweepstakes centers make money. Gov. Bev Perdue proposed a bill earlier this year to impose a state tax on Internet sweepstakes businesses, but the effort ultimately went nowhere.

Sweepstakes vs. gambling

The difference between gambling and sweepstakes is subtle. With gambling, you pay to play. Not necessarily so with sweepstakes. Internet sweepstakes operators have said that they don’t sell sweepstakes entries, but rather Internet time, and give “free” sweepstakes entries to customers each time they bought more time. Customers could then use that Internet time to access the sweepstakes site via onsite computers – and only via onsite computers – to find out if they had won.

But the notion that Internet time is really what’s being sold doesn’t stand up to scrutiny. In its decision, the N.C. Supreme Court noted testimony in a similar case in Texas where, in a single week, less than $100 out of nearly $28,000 in Internet time sold was actually used.

Down but not out

Despite the ruling, this is not likely the last the courts will hear from the gaming industry.

Unlike rulings in similar cases in other states, including Texas and Pennsylvania, the N.C. Supreme Court did not find that Internet sweepstakes games constitute gambling, which potentially muddles the discussion.

Without that determination, which would have made Internet sweepstakes games illegal in any case, the gaming industry still has some wiggle room.

The law doesn’t prohibit sweepstakes games, it “bans the operation of electronic machines that conduct sweepstakes through the use of an ‘entertaining display,’” according to the Supreme Court decision. If the Internet sweepstakes software is updated to reveal sweepstakes results without an entertaining display, then the games are within the letter of the law.

Because the court ruled on the constitutionality of Internet sweepstakes games – specifically whether operating such games constitutes free speech – the plaintiffs in the case, Hest Technologies and International Internet Industries, could also appeal to the U.S. Supreme Court.

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