Court Of Appeals Strikes Down Ban On Video Sweepstakes : Current Developments and Firm News
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Civil, Commercial and Complex Business Litigation

Court Of Appeals Strikes Down Ban On Video Sweepstakes

by Joshua Hiller on 03/07/12

Yesterday, in Hest Technologies, Inc. v. North Carolina the North Carolina Court of Appeals invalidated the state’s prohibition on video sweepstakes machines (N.C. Gen Stat § 14-306.4(a)(3)(i)).  A divided panel ruled that the law is an unconstitutionally overbroad regulation of free speech in violation of the First Amendment.

The Plaintiffs in Hest Technologies
developed sweepstakes management software to conduct promotional sweepstakes in consumer stores and convenience stores to market certain products. When the plaintiffs’ customers make a qualifying purchase of the plaintiffs’ products, they receive one or more sweepstakes entries.  Alternatively, individuals may enter the sweepstakes without a purchase by completing entry forms that are available at each retail location.

 

A three-judge panel ruled 2-to-1 to uphold the decision of the trial court judge invalidating a portion of the 2010 law.  The Court of Appeals even went one step further, striking down the law in its entirety.  This piece of legislation was aimed at the video gambling industry and followed on the heels of a 2007 law that prohibits video poker machines.   Specifically, the legislation amended the our state’s General Statutes to include a provision which prohibited conducting or promoting any sweepstakes which uses an “entertaining display.”

 

On appeal the State argued that the restrictions do not implicate First Amendment rights because they does not actually regulate speech, protected or otherwise.  Instead, the State contends that the law only regulates conduct.  The majority of the panel disagreed.  It held that the statute attempts to regulate the use of an electronic machine or device in conjunction with a sweepstakes, however, does so in such a broad manner that results in a prohibition that is constitutionally problematic.  The majority listed the examples of banned activities set forth in N.C. Gen. Stat. § 14-306(a)(3), and noted importantly that the restrictions do not limit the definition of entertaining display, and thus, the statute ultimately bans all “visual information . . . that takes the form of actual . . . or simulated game play.”

 

Writing for the majority, Judge Ann Marie Calabria cited a recent U.S. Supreme Court ruling that video games — like books and movies — are entitled to First Amendment protections:  “The General Assembly cannot, under the guise of regulating sweepstakes, categorically forbid sweepstakes operators from conveying the results of otherwise legal sweepstakes in a constitutionally protected manner.”


Judge Robert C. Hunter dissented, writing that the law should be upheld because it regulates conduct, not speech.  Under the law, he reasoned that the plaintiffs are still “free to allow anyone to play their video games so long as the video games are not used to conduct or promote sweepstakes.”

 

Because the decision was a split ruling, North Carolina’s Supreme Court is obligated to review the ruling.  The State Attorney General’s Office announced it plans to appeal the Court of Appeals’ decision.  Thus, the battle will continue.

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