553 F.3d 292 (4th Cir. 2009), 07-2032, WV Ass'n of Club Owners and Fraternal Services, Inc. v. Musgrave

Docket Nº:07-2032.
Citation:553 F.3d 292
Party Name:WV ASSOCIATION OF CLUB OWNERS AND FRATERNAL SERVICES, INCORPORATED, Plaintiff-Appellee, v. John C. MUSGRAVE, in his official capacity as Director of the State Lottery, Defendant-Appellant, and West Virginia Lottery Commission, Defendant.
Case Date:January 13, 2009
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

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553 F.3d 292 (4th Cir. 2009)



John C. MUSGRAVE, in his official capacity as Director of the State Lottery, Defendant-Appellant,


West Virginia Lottery Commission, Defendant.

No. 07-2032.

United States Court of Appeals, Fourth Circuit.

January 13, 2009

Argued: Oct. 29, 2008.

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[Copyrighted Material Omitted]

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Before WILKINSON and DUNCAN, Circuit Judges, and RICHARD D. BENNETT, United States District Judge for the District of Maryland, sitting by designation.

Reversed by published opinion. Judge WILKINSON wrote the opinion, in which Judge DUNCAN and Judge BENNETT joined.


WILKINSON, Circuit Judge:

Plaintiff, the West Virginia Association of Club Owners and Fraternal Services, Inc., brought this suit on behalf of its members which include certain clubs, restaurants, convenience stores, and fraternal organizations with alcohol licenses who are also state-licensed limited video lottery retailers. Plaintiff sought invalidation of West Virginia's restrictions on limited video lottery advertising as a violation of the First and Fourteenth Amendments of the United States Constitution. The district court granted plaintiff's motion for a preliminary injunction and enjoined enforcement of the advertising restrictions in all of their applications.

On the circumstances presented here, we must reverse. The Supreme Court has cautioned that we not casually invalidate state legislation on facial grounds, see Washington State Grange v. Washington State Republican Party, __ U.S. __, 128 S.Ct. 1184, 170 L.Ed.2d 151 (2008), for the simple reason that such challenges " often rest on speculation" and " run contrary to the fundamental principle of judicial restraint." Id. at 1191. In this particular context, we think that caution is especially advisable. The state has a longstanding and substantial interest in regulating the implementation and promotion of its own lottery. It has done so by attempting to raise revenues necessary for education and infrastructure without magnifying the social maladies often associated with gambling addictions. It is this interest in a balanced approach to lottery promotion that would be eviscerated by the wholesale invalidation of West Virginia's advertising restrictions.



West Virginia has a long history of regulating lotteries within its borders. From the time the state first entered the Union in 1863, up until 1984, the West Virginia Constitution banned all lotteries. In 1984, the Constitution was amended to create a narrow exception to the ban. As amended, Article VI, § 36 of the West Virginia Constitution provides:

" The legislature shall have no power to authorize lotteries ... for any purpose, and shall pass laws to prohibit the sale

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of lottery ... tickets in this State; except that the legislature may authorize lotteries which are regulated, controlled, owned and operated by the State of West Virginia in the manner provided by general law ..."

W. Va. Const. Art. VI, § 36. Soon after the amendment was ratified, the West Virginia legislature passed the State Lottery Act, W. Va.Code § 29-22-1 et seq. , which created a Lottery Commission to conduct a state lottery to raise revenue for the state. Over time, the lottery expanded, but West Virginia courts ensured that all lotteries within the state were authorized, " regulated, controlled, owned, and operated" by the state in accordance with the West Virginia Constitution. See Club Ass'n of W. Va., Inc. v. Wise (Club Ass'n I), 156 F.Supp.2d 599, 604-09 (S.D.W.Va.2001).

This case concerns West Virginia's limited video lottery. Video lottery machines were first allowed by the Lottery Commission at a racetrack that entered into a contract with the Commission to operate privately owned video lottery machines. The West Virginia Supreme Court of Appeals invalidated this video lottery as violating W.Va. Const. Art. VI, § 36 because it was not specifically authorized by the state. See W. Va. ex rel. Mountaineer Park, Inc. v. Polan, 190 W.Va. 276, 438 S.E.2d 308, 318 (1993). In response, the state legislature passed the Racetrack Video Lottery Act (the " RVLA" ), W. Va.Code § § 29-22A-1 et seq. , in 1994 to legalize video lotteries at racetracks in an effort to save the ailing racing industry and the jobs and tourism revenues that it provided for the state. See W. Va.Code § 29-22A-2(e).

At the same time, thousands of video gaming machines were being operated illegally in private establishments other than racetracks. These " gray" machines went largely unregulated because they were only prima facie illegal and consequently it was difficult to enforce the restrictions against them. According to a government commissioned report, the number of illegal " gray" machines reached 13,524 by 2001. To combat the problem of " gray" machines and to capitalize on video lottery revenues at a time of budgetary pressure, Governor Robert Wise proposed legalizing, restricting, and regulating video gaming machines in his 2001 State of the State Address. He specifically wanted to use video lottery revenues to fund education and infrastructure in West Virginia. Following the Governor's suggestion, and after extensive debate, the legislature passed the Limited Video Lottery Act (the " LVLA" ), W. Va.Code § § 29-22B-101 et seq. , in April 2001 during a special session. See Club Ass'n I, 156 F.Supp.2d at 606-08 (detailing history).

The LVLA raises revenue for the state. Based on a sliding scale determined by daily revenues, the LVLA allocates thirty to fifty percent of gross profits to the Lottery Commission for distribution to municipalities and the State Excess Lottery Revenue Fund. See W. Va.Code § 29-22B-1408. The LVLA also distributes two percent of gross terminal income to the Lottery Commission for its costs. See W. Va.Code § 29-22B-1408(a)(1). A portion of this two percent goes directly to the compulsive gambling treatment fund created by the state. Id. In fiscal year 2004, the state received almost $242 million in revenue from the limited video lottery. 512 F.Supp.2d at 435.

The LVLA legalizes and regulates the video lottery by providing a licensing scheme for video lottery machines that is administered by the Lottery Commission. See W. Va.Code § 29-22B-402. A brief overview of the LVLA demonstrates that it closely regulates the video lottery. First, it allows the Lottery Commission to

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distribute non-transferable licenses for only 9,000 terminals for use in restricted access adult-only facilities, W. Va.Code § 29-22B-1101(a), id. at § 29-22B-203(2); it allows individual retailers to have only five video lottery terminals on their premises, id. at § 29-22B-1101(c); and it prohibits two retailers from locating in the same building or within 150 feet of each other, id. at § 29-22B-1202.1 The LVLA also requires retailers to provide phone numbers for state-approved providers of gambling treatment and support services, and to post a sign that reads: " CAUTION: Gambling and playing this machine can be hazardous to your health, your finances, and your future." Id. at § 29-22B-1112. Additionally, the Act prohibits retailers from providing access to ATMs and from accepting credit cards or debit cards as payment for playing the video lottery machine. Id. at § 29-22B-702(10). Finally, the LVLA prohibits people under twenty-one years old from playing the video lottery machines and subjects retailers to civil penalties if they allow underage participation. Id. at § 29-22B-1602(a) to (b).

The LVLA also attempts to curb the use of illegal " gray" video lottery machines by making restrictions on video gambling machines easier to enforce than they previously were. The LVLA makes unlicensed video gambling machines per se illegal, subject to seizure, and subject to criminal penalties. See W. Va.Code § 29-22B-1801; id. at § 29-22B-1703 to -1705.

In addition, and similar to the RVLA, the LVLA provides specific legislative findings that the limited video lottery is a " lottery" within the meaning of W.Va. Const. Art. VI, § 36 and that the state has constitutional authority to establish a lottery that is " regulated, controlled, owned and operated" by the state. See W. Va.Code § 29-22B-201. The legislative findings declare that the state can " control, own and operate a video lottery by possessing a proprietary interest in the main logic boards ... memory chips ... and software ... necessary for the video lottery system to be operated." 2 Id. at § 29-22B-202(1). Based on these legislative findings, the West Virginia Supreme Court of Appeals held that both the RVLA and LVLA satisfy the state ownership and control requirements of W.Va. Const. Art. VI, § 36. See West Virginia ex rel. Cities of Charleston and Huntington v. West Virginia Economic Development Authority, 214 W.Va. 277, 588 S.E.2d 655, 670 (2003).

The RVLA and LVLA differ on the important matter at issue in this case: the LVLA regulates video lottery advertising more strictly than the RVLA does.3 The LVLA prohibits the Lottery Commission

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and limited video lottery retailers from conducting " video lottery advertising or promotional activities." See W. Va.Code § 29-22B-702(13); id. at § 29-22B-404; see also W. Va.Code R. § 179-5-33.2; id. at § 179-5-33.1 (prohibiting licensed operators from advertising). Advertising is defined as " a media advertisement, an outdoor sign, or a sign inside the licensee's premises that may be seen from the outside of the premises, that conveys to the average reader or hearer that limited video lottery gaming is available at the retail establishment or from the licensed operator." W. Va.Code R. §...

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