Gift Surplus, LLC v. State

• Decision Date: 11 February 2022
• Docket Number: 363A14-4
• Citation: 868 S.E.2d 20,380 N.C. 1
• Parties: GIFT SURPLUS, LLC, and Sandhill Amusements, Inc., Plaintiffs, v. STATE of North Carolina, EX REL. Roy COOPER, Governor, in his official capacity, Branch Head of the Alcohol Law Enforcement Branch of the State Bureau of Investigation, Mark J. Senter, in his official capacity, Secretary of the North Carolina Department of Public Safety, Erik A. Hooks, in his official capacity, and Director of the North Carolina State Bureau of Investigation, Bob Schurmeier, in his official capacity.
• Court: North Carolina Supreme Court

380 N.C. 1

868 S.E.2d 20

GIFT SURPLUS, LLC, and Sandhill Amusements, Inc., Plaintiffs,

v.STATE of North Carolina, EX REL. Roy COOPER, Governor, in his official capacity, Branch Head of the Alcohol Law Enforcement Branch of the State Bureau of Investigation, Mark J. Senter, in his official capacity, Secretary of the North Carolina Department of Public Safety, Erik A. Hooks, in his official capacity, and Director of the North Carolina State Bureau of Investigation, Bob Schurmeier, in his official capacity.

No. 363A14-4

Supreme Court of North Carolina.

Filed February 11, 2022

Fox Rothschild LLP, by Elizabeth Brooks Scherer, Troy D. Shelton, Raleigh, and Kip D. Nelson, Greensboro; Hyler & Agan PLLC, Asheville, by George B. Hyler, Jr. ; and Grace, Tisdale, Clifton, P.A., Winston-Salem, by Michael A. Grace, for plaintiff-appellants.

Joshua Stein, Attorney General, by James W. Doggett, Deputy Solicitor General, Olga Vysotskaya de Brito, Special Deputy Attorney General, and Ryan Y. Park, Solicitor General, for the State.

Edmond W. Caldwell, Jr. and Matthew L. Boyatt, for North Carolina Sheriffs’ Association; Fred P. Baggett for North Carolina Association of Chiefs of Police; and Jim O'Neill for North Carolina Conference of District Attorneys, amici curiae.

HUDSON, Justice.

¶ 1 Gift Surplus, LLC, and Sandhill Amusements, Inc., (plaintiffs) sued Governor Roy Cooper and several state law enforcement officials (defendants) seeking a declaratory judgment that their operation of a sweepstakes through video game kiosks does not violate N.C.G.S. § 14-306.4, North Carolina's criminal prohibition on certain video sweepstakes. This case presents the third time plaintiffs have appeared before this Court seeking to avoid liability under North Carolina's ban on video sweepstakes. The question presented here is whether plaintiffs’ new game, as modified since plaintiffs last appeared before this Court, is not "dependent on skill or chance" and is thus criminalized by N.C.G.S. § 14-306.4 (2021), which prohibits the operation of sweepstakes conducted through video games of chance. As we held over one hundred years ago and reaffirmed when plaintiffs appeared before this Court challenging the video sweepstakes ban twelve years ago,

[n]o sooner is a lottery defined, and the definition applied to a given state of facts, than ingenuity is at work to evolve some scheme of evasion which is within the mischief, but not quite within the letter of the definition. But, in this way, it is not possible to escape the law's condemnation, for it will strip the transaction of all its thin and false apparel and consider it in its very nakedness. It will look to the substance and not to the form of it, in order to disclose its real elements and the pernicious tendencies which the law is seeking to prevent. The Court will inquire, not into the name, but into the game, however skillfully disguised, in order to ascertain if it is prohibited. It is the one playing at the game who is influenced by the hope enticingly held out, which is often false or disappointing, that he will, perhaps and by good luck, get something for nothing, or a great deal for a very little outlay. This is the lure that draws the credulous and unsuspecting into the deceptive scheme, and it is what the law denounces as wrong and demoralizing.

Hest Techs., Inc. v. State ex rel. Perdue , 366 N.C. 289, 289, 749 S.E.2d 429 (2012) (quoting State v. Lipkin , 169 N.C. 265, 271, 84 S.E. 340 (1915) ). After "inquir[ing], not into the name, but into the game, however skillfully disguised" of plaintiffs, we hold that chance predominates over skill in plaintiffs’ new game and, accordingly, that this game is a game of chance that violates the sweepstakes statute. Accordingly, we modify and affirm the decision of the Court of Appeals.

I. Background

¶ 2 This case follows from the North Carolina General Assembly's repeated efforts since 2006 to ban all video-gaming machines, including video poker and other video card games. Act of June 6, 2006, N.C. Sess. Law 2006-6, §§ 4, 12, 2006 N.C. Sess. Laws 4, 4–5, 7 (codified as amended at N.C.G.S. § 14-306.1A (2021) ). Since this first prohibition was enacted, owners of video-gaming machines have developed machines with various interactive operations, in apparent efforts to circumvent the ban. See Hest , 366 N.C. at 291, 749 S.E.2d 429. In response to these perceived loopholes, the General Assembly enacted Session Law 2010-103, "An Act to Ban the Use of Electronic Machines and Devices for Sweepstakes Purposes," codified at N.C.G.S. § 14-306.4. 2010 N.C. Sess. Laws Ch. 408. N.C.G.S. § 14-306.4 makes it illegal to "[c]onduct a sweepstakes through the use of an entertaining display." N.C.G.S. § 14-306.4(b).¹

¶ 3 Following enactment of the law, purveyors of video-game kiosks that were purportedly for sweepstakes challenged the law on First Amendment grounds. In Hest , this Court held that N.C.G.S. § 14-306.4 regulated conduct, with only incidental burdens on speech, and that the law was supported by a rational basis. 366 N.C. at 303, 749 S.E.2d 429. One of the plaintiffs here, Sandhill Amusements, was among a group of vendor-plaintiffs in a related case making the same First Amendment argument, which was rejected by this Court for the reasons stated in Hest . Sandhill Amusements, Inc. v. State , 366 N.C. 323, 324, 734 S.E.2d 570 (2012) (per curiam). Although the record shows Sandhill has a long history as a video-gaming company, in that lawsuit it argued it was a business that sold long-distance phone time, merely using video sweepstakes to promote its service.

¶ 4 In 2013, shortly after our decision in Hest , Sandhill began operating and distributing video-gaming kiosks for sweepstakes for plaintiff Gift Surplus. Gift Surplus operates an e-commerce website, www.giftsurplus.com, but does not maintain an inventory of the products it advertises and instead buys products as necessary to fill orders as a drop shipping business.

¶ 5 In its business arrangement with Sandhill, Gift Surplus designs sweepstakes kiosks that it licenses to third-party operators like Sandhill. Sandhill places the kiosks into operation in convenience stores and retail establishments across North Carolina. The establishments are predominantly patronized by low-income customers, who Gift Surplus has identified as its target demographic.

¶ 6 Gift Surplus's kiosks appear like large video-game machines that look akin to video slot machines. When players put money into the kiosks, they receive what appear to be paper receipts called "e-credits" that can be exchanged either for products on Gift Surplus's drop shipping website or to play Gift Surplus's phone games. Players also receive sweepstakes entries which can be used to immediately play games on the kiosks. The kiosks offer five similar games, all featuring reel-spinning video resembling a slot machine. When the game begins, the reels spin, but the three slots never come to a stop in a complete line. Instead, players always have to "nudge" the slots up or down so that three symbols align on the middle line. In the initial iteration of these games, players only had to nudge one symbol into place to win.

¶ 7 The game also limits the number of players who can win meaningful prizes. On 75% of turns, the player will never be able to play for the largest prize of $2400 and, under the original setup, could win nothing.

¶ 8 Gift Surplus and Sandhill subsequently filed the present lawsuit, seeking a declaratory judgment and preliminary and permanent injunctive relief initially against the Sheriff of Onslow County and then against the Governor and the present state defendants. A trial court judge issued a preliminary injunction for plaintiffs, which defendants appealed.

¶ 9 A divided panel of the Court of Appeals dismissed the appeal in Sandhill Amusements, Inc. v. Sheriff of Onslow Cty. , 236 N.C. App. 340, 762 S.E.2d 666 (2014), rev'd per curiam , Sandhill Amusements, Inc. v. Miller , 368 N.C. 91, 773 S.E.2d 55 (2015). Then-Judge Ervin dissented from the Court of Appeals majority, reasoning that plaintiffs could not show a likelihood of success on the merits at trial because chance predominated over skill in plaintiffs’ game and, accordingly, it violated N.C.G.S. § 14-306.4, so the preliminary injunction should have been denied. Id. at 369–70, 762 S.E.2d 666 (Ervin, J., dissenting). On appeal, this Court reversed the decision of the Court of Appeals and adopted the reasoning of Judge Ervin's dissenting opinion. Sandhill Amusements, Inc. v. Miller , 368 N.C. 91, 773 S.E.2d 55 (2015).

¶ 10 On remand to the trial court, Gift Surplus made two changes to its games. First, they added a "winner-every-time" modification, so that, on the 75% of turns on which users originally could not win any prize, retailers can set up the machine to award a token prize of a few cents. Second, Gift Surplus added a "double nudge" modification, so that instead of nudging one symbol to win, retailers could set up the machines to require players to nudge two symbols into place.

¶ 11 After a bench trial, the trial court held that the sweepstakes game is lawful, relying on the new modifications made since remand to conclude that, based on the amended complaint and with the modifications, skill predominates over chance in plaintiffs’ new game, unlike the game in Sandhill .

¶ 12 The trial court further concluded that the sale of Gift Surplus's "e-credits" was not a pretext for gambling. At trial, defendants presented evidence that the receipt-like e-credits are often thrown away rather than being redeemed in the online store or phone games. An officer in the Brunswick County Sheriff's Office testified that he visited an establishment and observed players at the kiosks throw e-credits away and, after searching the trash, found over $10,000 of unused e-credit receipts.

¶ 13 Defendants appealed the trial court's judgment to the Court of Appeals. At the Court of Appeals, the panel unanimously...