Hest Techs., Inc. v. State

Decision Date14 December 2012
Docket NumberNo. 169A11–2.,169A11–2.
Citation749 S.E.2d 429,366 N.C. 289
PartiesHEST TECHNOLOGIES, INC. and International Internet Technologies, LLC v. STATE of North Carolina ex rel. Beverly PERDUE, Governor, in her official capacity; North Carolina Department of Crime Control and Public Safety; Secretary of Crime Control and Public Safety Reuben Young, in his official capacity; Alcohol Law Enforcement Division; Director of Alcohol Law Enforcement Division John Ledford, in his official capacity.
CourtNorth Carolina Supreme Court


Appeal pursuant to N.C.G.S. § 7A–30(2) from the decision of a divided panel of the Court of Appeals, ––– N.C.App. ––––, 725 S.E.2d 10 (2012), affirming in part and reversing in part an order and final judgment entered on 30 November 2010 by Judge John O. Craig, III in Superior Court, Guilford County. Heard in the Supreme Court on 17 October 2012.

Kilpatrick Townsend & Stockton LLP, Winston–Salem, by Adam H. Charnes, Richard S. Gottlieb, and Richard D. Dietz, and Grace, Tisdale & Clifton, P.A., Winston–Salem, by Michael A. Grace and Christopher R. Clifton, for International Internet Technologies, LLC; and Smith Moore Leatherwood LLP, by Richard A. Coughlin, Greensboro and Elizabeth B. Scherer, Raleigh, for Hest Technologies, Inc., plaintiff-appellees.

Roy Cooper, Attorney General, by John F. Maddrey, Solicitor General, and Hal F. Askins, Special Deputy Attorney General, for defendant-appellants.

HUDSON, Justice.

[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.

State v. Lipkin, 169 N.C. 265, 271, 84 S.E. 340, 343 (1915).

In an effort to curtail the use of a perceived loophole in the State's gambling laws, the General Assembly passed N.C.G.S. § 14–306.4, which bans the operation of electronic machines that conduct sweepstakes through the use of an “entertaining display.” SeeN.C.G.S. § 14–306.4(b) (2011). Claiming an unconstitutional restriction on their freedom of speech, plaintiffs challenged the new law. The Court of Appeals declared the statute an overbroad restriction on protected speech and struck it down as unconstitutional. We conclude that this legislation regulates conduct and not protected speech and now reverse.

Since the founding of this nation, states have exercised the police power to regulate gambling. See, e.g., Calcutt v. McGeachy, 213 N.C. 1, 7, 195 S.E. 49, 52 (1938) (stating that “the Legislature under the police power vested in it has considered it necessary in suppressing and prohibiting gambling to enact laws from time to time to meet changing machines and devices tending to and fostering gambling”). State legislatures have weighed the social costs of gambling against the economic benefits and chosen different paths according to each legislature's conclusions. North Carolina's approach has evolved from a total ban on casino gaming and lotteries to authorization of a State-run education lottery and limited casino activity on Native American lands within the state. See Act of July 8, 2010, ch. 103, pmbl., 2009 N.C. Sess. Laws (Reg.Sess.2010) 408, 408.

As new technology has developed, the General Assembly has faced the advent of “video poker” and other forms of gambling involving computers and the Internet. In 2006 the General Assembly banned video poker and all other forms of electronic gambling. Since that time companies have developed systems that appear to sidestep traditional gambling restrictions by combining legal sweepstakes with video games that simulate a gambling environment, thus purportedly removing the “bet” or consideration element of gambling.1 Faced with the proliferation of these systems in North Carolina, and having concluded that these systems—while not fitting the traditional definition of gambling—give rise to the same concerns as traditional gambling, the General Assembly enacted N.C.G.S. § 14–306.3 in 2008 and N.C.G.S. § 14–306.4 in 2010 in an effort to ban them.

Originally, plaintiffs' systems used simulations of poker or traditional slot machine games to reveal the sweepstakes result; however, law enforcement officers around the state began to take action against establishments using plaintiffs' systems, treating the devices as illegal slot machines. On 4 March 2008, plaintiffs sought a declaration that their systems are legal and an injunction prohibiting defendants from taking adverse action against retailers selling their products, which had included seizing equipment, closing down shops, and initiating criminal prosecutions. That same day the trial court heard the matter and issued a temporary restraining order. The trial court held a second hearing on 14 March, and granted a preliminary injunction on 16 April 2008. On 18 July 2008, the General Assembly enacted Senate Bill 180, which made it unlawful to possess a game terminal that simulates slot machine games or games like video poker. Plaintiffs modified their systems to substitute gaming displays that did not involve simulations of traditional gambling games like slot machines or video poker. They sought a modification of the preliminary injunction to reflect these adjustments on 31 October 2008 and received such a modification on 5 December 2008.

On 8 July 2010, the General Assembly enacted House Bill 80, captioned “An Act to Ban the Use of Electronic Machines and Devices for Sweepstakes Purposes,” which is now codified as N.C.G.S. § 14–306.4. Ch. 103, 2009 N.C. Sess. Laws (Reg.Sess.2010), 408. The Preamble to the Session Law includes a statement of purpose underlying the new law. After briefly reviewing the history of gambling laws in the state and recent efforts to ban video poker and similar games, the General Assembly noted that “companies have developed electronic machines and devices to gamble through pretextual sweepstakes relationships with Internet service, telephone cards, and office supplies, among other products,” and that “such electronic sweepstakes systems utilizing video poker machines and other similar simulated game play 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.” Id., pmbl., at 408.

In relevant part, Chapter 103 of the 2010 Session Laws makes it unlawful to “operate, or place into operation, an electronic machine or device” to [c]onduct a sweepstakes through the use of an entertaining display.” Id., Sec. 1, at 409–10. An “electronic machine or device” is defined as “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.” Id., at 408. An “entertaining display” is defined as “visual information, capable of being seen by a sweepstakes entrant, that takes the form of actual game play, or simulated game play.” Id., at 409. The statute contains a nonexclusive list of examples of such displays, including, among others, “video poker” and “video bingo,” as well as a catch-all provision covering [a]ny other video game not dependent on skill or dexterity that is played while revealing a prize as the result of an entry into a sweepstakes.” Id.

Plaintiffs are companies that, according to their motion for a preliminary injunction, “market and sell prepaid products, primarily long-distance telephone and/or high-speed internet service.” As a promotion, plaintiffs have developed electronic sweepstakes systems. Sweepstakes participants obtain entries from a predetermined, finite pool of entries—some of which are associated with a prize value and some of which are not—either after a qualifying purchase of plaintiffs' products or at no charge upon request. 2 Participants receive a magnetic stripe card which allows them to access a game station terminal and stores the information related to their individual sweepstakes entries. At the terminal “the program reveals the content of the sweepstakes entry using different displays that simulate various game themes.” These simulated games do not determine, and cannot modify, the sweepstakes outcome or any prize that might be associated with a sweepstakes entry. Any prize amount won through the sweepstakes may be claimed in cash at the counter of the establishment or may be used at the game terminal to purchase more of the product in one-dollar increments, thereby enabling the customer to immediately receive more sweepstakes entries.

On 1 October 2010, after the General Assembly enacted the current version of N.C.G.S. § 14–306.4, plaintiffs filed an amended complaint challenging the constitutionality of the statute under the First Amendment to the United States Constitution and Article I, Section 14 of the North Carolina Constitution. On 30 November 2010, the trial court concluded that the law is constitutional in all aspects except for the catch-all provision found in N.C.G.S. § 14–306.4(a)(3)(i), which it declared overbroad. Based upon that...

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