Gift Surplus, LLC v. State ex rel. Cooper

CourtUnited States District Courts. 4th Circuit. Middle District of North Carolina
PartiesGIFT SURPLUS, LLC, and NO LIMIT GAMES LLC, Plaintiffs, v. STATE OF NORTH CAROLINA ex rel. ROY COOPER, GOVERNOR, in his official capacity, et al., Defendants.
Docket Number1:22-CV-148
Decision Date07 June 2022

Catherine C. Eagles, District Judge.

The plaintiff Gift Surplus operates a video sweepstakes that is illegal under North Carolina law, and the plaintiff No Limit Games develops and sells software for video sweepstakes. After years of state-court litigation contesting whether North Carolina law prohibited Gift Surplus' sweepstakes the plaintiffs now challenge the constitutionality of the state law making it a crime to operate certain video sweepstakes, including the one offered by Gift Surplus. They contend that the statute on its face violates the First Amendment and is unconstitutionally vague under the Fourteenth Amendment's Due Process Clause.

The Court has subject matter jurisdiction, and the plaintiffs' claims are not precluded by the state court litigation. The North Carolina statute does not violate the First Amendment because it regulates nonexpressive conduct and not speech. Nor is the law unconstitutionally vague; the statute's prohibitions are very broad and prohibit most video sweepstakes, but they are clear

I. The Plaintiffs

There are two plaintiffs in this suit-Gift Surplus and No Limit Games. Gift Surplus operates an online retail store, Doc. 31 at ¶ 19, which it promotes with a video sweepstakes. Id. at ¶¶ 26, 47. Customers can buy gift cards from a kiosk, typically placed inside another business establishment, to redeem at Gift Surplus' online store. Id. at ¶¶ 48-50, 55. The purchase comes with the opportunity to enter a video sweepstakes by playing a video game that is a “simulated, but fake, gambling experience, ” and potentially winning a prize. Id. at ¶¶ 54-56, 59, 65. It is also possible to enter the sweepstakes and play the game without buying a gift card. Id. at ¶¶ 57, 69. The video sweepstakes in its current form is illegal under North Carolina law. See Gift Surplus, LLC v. State ex rel Cooper, 380 N.C. 1, 15, 868 S.E.2d 20, 30 (2022) (hereinafter Gift Surplus I); see also discussion infra at 7.

No Limit Games develops and sells software for video-sweepstakes promotions. Doc. 31 at ¶¶ 9-10. Its customers are e-commerce businesses that operate in North Carolina and use promotional sweepstakes to attract customers to their e-commerce platforms. Id. at ¶¶ 9, 28.

II. The Statute

In 2010, the North Carolina General Assembly enacted the statute at issue, N.C. Gen. Stat. § 14-306.4, [i]n response to . . . perceived loopholes, ” in its laws that banned all video gaming machines offering games of chance, such as video poker. Gift Surplus I, 380 N.C. at 3-4. In passing the law, the state legislature noted that “companies have developed electronic machines and devices to gamble through pretextual sweepstakes, ” and that “such electronic sweepstakes systems . . . create the same encouragement of vice and dissipation as other forms of gambling . . . by encouraging repeated play, even when allegedly used as a marketing technique.” Act of July 20, 2010, N.C. Sess. Law 2010103, pmbl.

Section 14-306.4 makes it unlawful, inter alia, “for any person to operate, or place into operation, an electronic machine or device” to [c]onduct a sweepstakes through the use of an entertaining display, including the entry process or the reveal of a prize.” § 14-306.4(b). The statute “prohibits the operation of sweepstakes conducted through video games of chance, ” Gift Surplus I, 380 N.C. at 2, and is intended “to prohibit any mechanism that seeks to avoid [its] application . . . through the use of any subterfuge or pretense whatsoever.” § 14-306.4(c).

The scope of the statute is governed by its relevant terms. An “electronic machine” is “a mechanically, electrically or electronically operated machine or device, . . . . that is intended to be used by a sweepstakes entrant, that uses energy, and that is capable of displaying information on a screen or other mechanism.” § 14-306.4(a)(1). A “sweepstakes” is “any game, advertising scheme or plan, or other promotion, which, with or without payment of any consideration, a person may enter to win or become eligible to receive any prize, the determination of which is based upon chance.” § 14-306(a)(5). And, as is relevant here, an “entertaining display” is “visual information, capable of being seen by a sweepstakes entrant, that takes the form of actual game play, or simulated game play, ” which includes any “video game not dependent on skill or dexterity that is played while revealing a prize as the result of an entry into a sweepstakes.” § 14-306.4(a)(3).

Interpreting § 14-306.4, the North Carolina Supreme Court has held that a “sweepstakes conducted through the use of an entertaining display” is only prohibited “when the electronic display takes the form of actual game play, or simulated game play where the game in question is not dependent on skill or dexterity.” Gift Surplus I, 380 N.C. at 9 (cleaned up). If a video-sweepstakes participant plays a video game of chance “while revealing a prize as the result of an entry into a sweepstakes, ” then the video sweepstakes is unlawful. § 14-306.4(a)(3)(i).

To determine whether a video game used in the operation of a video sweepstakes is one of chance or one of skill or dexterity, the North Carolina Supreme Court consistently applies the “predominant-factor” test. See Gift Surplus I, 380 N.C. at 11-12; Crazie Overstock Promotions, LLC v. State, 377 N.C. 391, 403, 858 S.E.2d 581, 589 (2021); Sandhill Amusements, Inc. v. Miller, 368 N.C. 91, 91, 773 S.E.2d 55, 56 (2015) (per curiam) (adopting dissent's reasoning in Sandhill Amusements, Inc. v. Sheriffof Onslow Cnty., 236 N.C.App. 340, 369-70, 762 S.E.2d 666, 685-86 (2014) (Ervin, J., dissenting)); see also State v. Stroupe, 238 N.C. 34, 38, 76 S.E.2d. 313, 316-17 (1953) (discussing the test to determine if a type of a game of pool is a game of chance). In the context of § 14-306.4, the “predominant-factor” test asks “whether, viewed in its entirety, the results produced by [the electronic gaming device] in terms of whether the player wins or loses and the relative amount of the player's winnings or losses varies primarily with the vagaries of chance or the extent of the player's skill and dexterity.” Crazie Overstock, 377 N.C. at 403; see also Gift Surplus I, 380 N.C. at 10.

III. State Court Litigation

Section 14-306.4 has been the subject of state-court litigation since its enactment, some by Gift Surplus, one of the plaintiffs here, and some by other video-sweepstakes operators. The earliest case, brought by a litigant who is not a party to this case, concerned the First Amendment, and later challenges were directed to whether particular video sweepstakes violated the statute.

Soon after the state legislature enacted § 14-306.4, video-sweepstakes operators challenged the statute under the First Amendment, contending the video games used to announce sweepstakes results on their machines were protected speech. See Hest Techs., Inc. v. State ex rel. Perdue, 366 N.C. 289, 296, 749 S.E.2d 429, 434-35 (2012), cert. denied, 517 U.S. 822 (2013). In 2012, the North Carolina Supreme Court held that the statute did not violate the First Amendment, determining that the statute primarily regulated noncommunicative conduct-operating, or placing into operation, an electronic machine to run a video sweepstakes-rather than protected speech. Id.

The court also held that even if it determined the statute burdened some speech, the statute would not violate the First Amendment under the four-factor test from United States v. O'Brien, 391 U.S. 367 (1968). Hest, 366 N.C. at 300-01. First, North Carolina had the constitutional police power to regulate health, safety, and welfare concerns presented by gambling-like operations. Id. at 301. Second, North Carolina had an important and substantial interest in combatting the social ills of gambling-like activities. Id. Third, that interest was unrelated to suppression of free expression, which was clear since the statute only banned video games when used as a conduit for sweepstakes. Id. And fourth, the restriction on any speech was no greater than necessary since the statute only regulated video sweepstakes that encouraged addictive, gambling-like play through video display. Id.

In 2013, Gift Surplus and another company sought a declaratory judgment that § 14-306.4 did not prohibit the specific video sweepstakes offered by Gift Surplus, as well as injunctive relief blocking enforcement of the statute against its game kiosks. See Sandhill Amusements, Inc. v. Sheriff of Onslow Cnty., No. 13-CVS-3705, 2013 WL 9982034, at *2 (N.C. Super. Ct. Nov. 4, 2013); see also Gift Surplus I, 380 N.C. at 5. The trial court granted a preliminary injunction blocking enforcement of the statute, Sandhill Amusements, 2013 WL 9982034, at *2 -4, and a divided panel of the North Carolina Court of Appeals affirmed. Sandhill Amusements, 236 N.C.App. at 353-54. In 2015, the North Carolina Supreme Court reversed and remanded, adopting the dissenting opinion in the court of appeals, which reasoned the plaintiffs were unlikely to succeed on the merits because chance predominated over skill in the game used as part of the sweepstakes. Sandhill Amusements, 368 N.C. at 91 (adopting dissent's reasoning in Sandhill Amusements, 236 N.C.App. at 369-70 (Ervin, J., dissenting)).

After remand, Gift Surplus modified its game and amended its complaint, again seeking injunctive relief and a declaratory judgment that its revised sweepstakes did not violate the law. See Gift Surplus, LLC v. State, No 13-CVS-3705, ...

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