Hest Techs., Inc. v. State ex rel. Perdue

Decision Date06 March 2012
Docket NumberNo. COA11–459.,COA11–459.
Citation725 S.E.2d 10
CourtNorth Carolina Court of Appeals
PartiesHEST TECHNOLOGIES, INC. and International Internet Technologies, LLC, Plaintiffs 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 Enforcement Division John Ledford, in his official capacity, Defendants.


Held Unconstitutional

N.C. Gen.Stat. § 14–306.4 Appeal by plaintiffs and defendants from order entered 30 November 2010 by Judge John O. Craig, III in Guilford County Superior Court. Heard in the Court of Appeals 25 October 2011.

Kilpatrick Townsend & Stockton LLP, Winston–Salem, by Adam H. Charnes, Richard S. Gottlieb, and Richard D. Dietz; Grace, Tisdale & Clifton, P.A., Winston–Salem, by Michael A. Grace and Christopher R. Clifton, for plaintiff International Intent Technologies, LLC.

Smith Moore Leatherwood LLP, by Richard A. Coughlin, Greensboro, and Elizabeth B. Scherer, Raleigh, for plaintiff Hest Technologies, Inc.

Attorney General Roy Cooper, by Assistant Solicitor General John F. Maddrey, and Special Deputy Attorney General Hal F. Askins, for defendants.


Both parties appeal the trial court's order which invalidated N.C. Gen.Stat. § 14–306.4(a)(3)(i) as unconstitutionally overbroad and upheld the constitutionality of the remainder of that statute. We affirm in part and reverse in part.

I. Background

Plaintiff Hest Technologies, Inc. (Hest) is a Texas corporation authorized to transact business in North Carolina. Plaintiff International Internet Technologies, LLC (IIT) is an Oklahoma corporation also authorized to transact business in North Carolina. Hest and IIT (collectively plaintiffs) sell long-distance telephone time and high-speed internet service in internet cafes, business centers, convenience stores, and other retail establishments in North Carolina.

In addition, each plaintiff has developed their own proprietary sweepstakes management software. Plaintiffs use this software to conduct promotional sweepstakes as a means of marketing their products at the point of sale. When plaintiffs' customers make a qualifying purchase of plaintiffs' products, they receive one or more sweepstakes entries. Alternatively, individuals may enter plaintiffs' sweepstakes without purchasing any of plaintiffs' products by completing entry forms that are available at each retail location. Free entries are not treated any differently than entries accompanying a purchase.

The result of each sweepstakes entry has been predetermined by the sweepstakes software prior to disbursement. A player who has received a sweepstakes entry can only reveal this predetermined result by connecting to a computer terminal on which the sweepstakes software has been loaded. Once connected, the player has the option of either (1) choosing an “instant reveal,” whereby the results of the sweepstakes entry are immediately displayed on a computer screen; or (2) having the results revealed through a video game played on the computer terminal. The method by which the result is revealed does not affect the outcome of the sweepstakes. Moreover, customers retain the value of the purchased prepaid phone or internet time, regardless of the outcome of the sweepstakes.

On 4 March 2008, plaintiffs initiated a declaratory judgment action against defendants in Guilford County Superior Court. Plaintiffs sought a declaration that its promotional sweepstakes did not violate any North Carolina gaming or gambling laws which were in effect at that time. Plaintiffs also sought injunctive relief to prevent defendants from attempting to enforce those laws against plaintiffs' sweepstakes systems. On 16 April 2008, the trial court temporarily enjoined defendants from any enforcement actions against plaintiffs. After the injunction was entered, plaintiffs continued to conduct their promotional sweepstakes.

On 20 July 2010, the North Carolina General Assembly enacted House Bill 80. This legislation amended the North Carolina General Statutes to include a provision which prohibited conducting or promoting any sweepstakes which prohibited conducting or promoting any sweepstakes which utilized an “entertaining display.” 2010 N.C. Sess. Laws 103 (codified as amended at N.C. Gen.Stat. § 14–306.4 (2011)). Plaintiffs' sweepstakes systems fell squarely within the ambit of the new N.C. Gen.Stat. § 14–306.4.

In response to the enactment of House Bill 80, plaintiffs amended their original complaint to include an allegation that N.C. Gen.Stat. § 14–306.4 was, inter alia, an unconstitutional regulation of plaintiffs' protected First Amendment speech. On 11 October 2010, defendants filed a motion to dismiss plaintiffs' complaint for failure to state a claim upon which relief could be granted pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. Defendants' motion argued that N.C. Gen.Stat. § 14–306.4 was “constitutional in all respects” and that plaintiffs' sweepstakes operations were in violation of that law. On 5 November 2010, plaintiffs filed a motion for summary judgment on their First Amendment claims.

On 18 November 2010, the trial court conducted a hearing on the parties' respective motions. On 30 November 2010, the trial court entered an “Order and Final Judgment” which held that N.C. Gen.Stat. § 14–306.4(a)(3)(i) was unconstitutionally overbroad under the United States and North Carolina constitutions. In addition, the trial court upheld the constitutionality of the remainder of the statute and dissolved the preliminary injunction preventing enforcement of the gambling laws against owners and operators of plaintiffs' sweepstakes systems. Plaintiffs and defendants each appeal.

II. Constitutionality of N.C. Gen.Stat. § 14–306.4

Both parties contend that the trial court erred in assessing the constitutionality of N.C. Gen.Stat. § 14–306.4. Defendants argue that the trial court erred by concluding that N.C. Gen.Stat. § 14–306.4(a)(3)(i) was unconstitutionally overbroad. Plaintiffs, in turn, argue that the trial court erred by failing to conclude that the entire statute was unconstitutional. We agree with plaintiffs and conclude that the entirety of N.C. Gen.Stat. § 14–306.4 is an unconstitutionally overbroad regulation of free speech.

A. Regulation of Speech

Defendants first argue that N.C. Gen.Stat. § 14–306.4 does not implicate the First Amendment because it does not actually regulate any speech, protected or otherwise. Instead, defendants contend, and the dissent agrees, that the statute only regulates plaintiffs'conduct.1

N.C. Gen.Stat. § 14–306.4 states, in relevant part:

Notwithstanding any other provision of this Part, it shall be unlawful for any person to operate, or place into operation, an electronic machine or device to do either of the following:

(1) Conduct a sweepstakes through the use of an entertaining display, including the entry process or the reveal of a prize.

(2) Promote a sweepstakes that is conducted through the use of an entertaining display, including the entry process or the reveal of a prize.

N.C. Gen.Stat. § 14–306.4(b) (2011). Defendants are correct that this statute attempts to regulate some conduct. Specifically, the statute attempts to regulate the use of an electronic machine or device in conjunction with a sweepstakes. However, the broad manner in which the statute attempts to regulate this conduct is problematic.

While it is true that plaintiffs are free to allow anyone to play their video games so long as the video games are not used to conduct or promote sweepstakes, it is equally true that plaintiffs remain free to conduct or promote sweepstakes so long as they do not involve the use of plaintiffs' video games. N.C. Gen.Stat. § 14–306.4 does not forbid the conducting or promotion of sweepstakes provided that the result of the sweepstakes entry is conveyed through any method other than an entertaining display. For example, if the sweepstakes conducted by plaintiffs were exactly the same in all respects, except that the results were conveyed by means of a scratch off ticket, a motion picture, a cartoon, or a simple verbal acknowledgment, the sweepstakes would be permitted by North Carolina law. Ultimately, North Carolina law permits players to learn the results of their sweepstakes entries by using the exact same computer terminals which display plaintiffs' video games, so long as the result is conveyed by words displayed on the monitor, rather than by an entertaining display. Thus, it is the specific method of disseminating sweepstakes results through an entertaining display that is criminalized by N.C. Gen.Stat. § 14–306.4.

The United States Supreme Court has stated that “the creation and dissemination of information are speech within the meaning of the First Amendment.” Sorrell v. IMS Health Inc., ––– U.S. ––––, ––––, 131 S.Ct. 2653, 2667, 180 L.Ed.2d 544, 558 (2011). Moreover, that Court has also recently made clear that video games are entitled to full First Amendment protections:

Like the protected books, plays, and movies that preceded them, video games communicate ideas—and even social messages—through many familiar literary devices (such as characters, dialogue, plot, and music) and through features distinctive to the medium (such as the player's interaction with the virtual world). That suffices to confer First Amendment protection.

Brown v. Entm't Merchs. Ass'n, ––– U.S. ––––, ––––, 131 S.Ct. 2729, 2733, 180 L.Ed.2d 708, 714 (2011).

In light of these holdings, banning the dissemination of sweepstakes results through entertaining displays cannot be characterized as merely a regulation of conduct. Instead, that portion of N.C. Gen.Stat. § 14–306.4 which forbids “the reveal of a prize” by means of an entertaining display directly regulates protected speech under...

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4 cases
  • Hest Techs., Inc. v. State
    • United States
    • North Carolina Supreme Court
    • December 14, 2012
    ...TEXT STARTS HERE 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 Super......
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    • U.S. District Court — Middle District of Pennsylvania
    • October 10, 2012
    ...court decision in which the state court found a similar statute unconstitutional on First Amendment grounds. Hest Tech., Inc. v. North Carolina, 725 S.E.2d 10 (N.C. Ct. App. 2012). The statute sets forth, in relevant part:Notwithstanding any other provision of this Part, it shall be unlawfu......
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    • Massachusetts Superior Court
    • December 17, 2012
    ...to Section 5B in all material respects was an unconstitutional regulation of protected speech, and to enjoin the state from enforcement. Id. at 12. As Commonwealth in this case has done, the State argued that the statute regulated conduct, not expression. Id. at 12-13. The majority found th......
  • Smith v. City of Fayetteville
    • United States
    • North Carolina Court of Appeals
    • May 1, 2012
    ...display” are prohibited, this ban was recently held by this Court to be unconstitutional. See Hest Technologies, Inc. v. State ex rel. Perdue, ––– N.C.App. ––––, ––––, 725 S.E.2d 10, 14 (2012) (“[T]he portion of N.C. Gen.Stat. § 14–306.4 which criminalizes the dissemination of a sweepstakes......

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