Magazine   Gambling | Government

“It Ain’t Over ‘Til It’s Over”

A few days before last Christmas, opponents of gambling in North Carolina breathed a sigh of relief when the State Court of Appeals issued its opinion in McCracken and Amick, Inc. v. Perdue, upholding a 2006 law that banned all video gaming machines other than those operated by the Eastern Band of Cherokee Indians on tribal land. The appeals court’s unanimous decision overturned an order issued by a Wake County Superior Court judge that said that the law was null and void because the state could not ban video gaming machines in the rest of North Carolina if at the same time it allowed video poker machines on the Cherokee reservation pursuant to the federal Indian Gaming Regulatory Act.

The Charlotte Observer welcomed the Court of Appeals decision, saying that a different ruling upholding the lower court decision “might have led to video poker machines— described by law enforcement officials as the crack cocaine of gambling because of its rapid addictive attractions—in every county in North Carolina.” A quick look around the state, however, reveals there are video gambling machines operating openly throughout North Carolina. These devices are generally referred to as “sweepstakes machines,” and come in the form of stand-alone touch screen terminals resembling arcade video game machines and ordinary desktop computer terminals linked to special servers.   At least for now, sweepstakes machines and the “sweepstakes games” they offer are being allowed to operate outside the scope of the statewide ban on video gaming machines and North Carolina’s general ban on gambling and non-state run lotteries.

As baseball legend Lawrence Peter “Yogi” Berra once said, “It ain’t over ‘til it’s over.” And with sweepstakes machines spreading like wildfire across North Carolina, the fight over statewide video gambling is far from over.

“You Can Observe a Lot by Watching”

The malapropisms and strange logic of Yogi Berra are appropriate for explaining sweepstakes machines and their presence in North Carolina in spite of the state’s gambling laws. Yogi said “you can observe a lot by watching,” and state policy makers could observe (and even learn) a lot by simply watching how these machines operate. Sweepstakes machines have popped up just about everywhere, including local convenience stores, bars, “Internet cafes,” “business centers,” and even stand-alone sweepstakes parlors. Convenience stores and bars typically have up to four machines, but stand-alone facilities can have many more. An Internet sweepstakes parlor a few miles from the state capital building on South Saunders Street in Raleigh features smoking and no smoking rooms and over 70 computer terminals.

A friend of mine and I visited a convenience store in Maggie Valley this past January to see how these sweepstakes machine games operate. The store clerk said that to play the machines, I would need to buy a “phone card” from him at the store counter. I told him I wanted two $5 phone cards, and the clerk ran two $5 bills thorough a machine behind the counter, which printed out two receipts. Each receipt listed a 1-800 telephone number and contained five different 10-digit PINs, with each PIN worth $1 and five minutes of telephone time that expired in one month. The store clerk put $5 in credits on two of the four video terminals located in a separate room at the back of the store.

The machines are set up to look and operate like video poker or slot machines. The first touch screen allowed us to choose from a number of video games including slot games, poker and keno. My friend, who in the past had been an avid player at the Cherokee casino, said that the games available for play were exactly like the video gambling games found at Cherokee in prior years. While I tried to decipher the single set of “Lucky Sweepstakes Phone Card Sweepstakes Rules” posted over the machines, he started playing the video poker games, wagering portions of his $5 credit for a chance to win a jackpot prize that increased or decreased depending on the amounts he risked. Sweepstakes machines in western North Carolina have offered jackpots as high as $10,000. My friend’s credit amounts started dwindling as he made 25-cent wagers, and the machine made sounds and flashed bright images on the screen. “Just like the video poker machines in Cherokee,” my friend said. He finally “won” 25-cents on a hand of poker, switched to a keno game, and when his credits dropped to 25-cents, he cashed out. He received a voucher from the machine for his meager winnings. I never wagered any amount on my machine, cashed out on my untouched $5 in credits, and received a similar voucher.

I showed the clerk my $5 voucher, and admitted that I never wagered anything. The clerk said that was ok, opened up the cash register and gave me back a $5 bill. I also asked him for a copy of the sweepstakes rules and told him I wanted to get a free play on the machine without buying a phone card. He said he couldn’t give me a copy of the official rules and that the free play option “didn’t work.” After leaving, I realized the store’s objective was obviously to sell the sweepstakes games rather than “phone cards,” as I was able to receive 25 minutes of free phone time by simply cashing out without actually playing any games.

About two weeks later, I played the Internet sweepstakes games at the South Saunders Street parlor in Raleigh. The strip shopping center where the facility is located serves as a virtual casino with different businesses (including a trinket shop and “yard sale” store) offering various types of sweepstakes machines. The Internet sweepstakes parlor is housed in a separate building behind the businesses in front. Upon entering, I had to provide the attendant with my driver’s license, and my license number served as my ID number for playing the games. The attendant explained that a registered customer gets 100 free sweepstakes credits, and 10 minutes of free Internet time each day that they show up to play, and that the Internet time could be used only on one of the parlor’s computers. I gave the attendant an additional $2 for 200 more in credits (and 20 more minutes of Internet time).

The games offered on the computer terminal were essentially the same as those offered on the machines in Maggie Valley, but there were more of them and they appeared to be newer games. A player plays using sweepstakes credits, with 100 credits equal to one dollar in value. Several of the available games offered jackpots of over $13,000 if you made the highest possible wager of 650 credits. I lost credits on a few hands of video poker, but then got on a roll playing the “Money Bunny” slot game and had 200 in credits when the power went out and shut all the machines down.

I returned to the sweepstakes parlor a few weeks later, and all I had to do to play was show the attendant my license. I received 100 free sweepstakes credits for showing up to play that day, and since my account still had 200 credits from the last time I played, I started out with 300 credits. I paid the attendant $5 more, and played a number of different games for about 30 minutes. Whenever my winnings went over $1, I used the winnings to purchase more sweepstakes credits on the terminal so I could keep playing. I seemed to do better when I wagered the lowest allowed amount of 25-cents, and I finally quit playing when my sweepstakes credits went below 100. I then asked the attendant to explain how to access my 90 minutes of Internet time, and she used her own account to explain the process. She said that many customers like her never use any of their accrued Internet time, and showed me that her account had thousands of Internet minutes available.

An older gentleman seated near me won $500 while I was playing, and he was still playing when I left. Serious players like that make sweepstakes machines a significant source of income for businesses offering the games. The attendant told me that on typical nights there are easily 25 people waiting in line to get a machine at the South Saunders parlor, and almost all of the computer terminals were occupied on the afternoons that I played. Reports indicate that there now may be twice as many Internet sweepstakes parlors as movie theatres in Durham.

“Like Déjà Vu All Over Again”

The video gambling industry has been compared to the monster in a teen slasher flick series— it doesn’t matter how many times you think you’ve killed him, he just comes back in a more ridiculous form in an even cheesier sequel. Almost as soon as the statewide ban on video gaming machines went into effect in July 2007, video gambling machine manufacturers began flooding North Carolina with sweepstakes machines. In order to deal with the ban, the gambling industry simply reprogrammed their video poker machines to operate as sweepstakes machines, by offering a method of free play. The industry was empowered by an April 2008 ruling by Guilford County Superior Court Judge John Craig in Hest Technologies, Inc. v. State, that said the sweepstakes systems at issue were not illegal under the slot machine and video gaming machine bans found at N.C. Gen. Stat. §§ 14-306 and 14-306.1A.

The North Carolina legislature responded by banning “server-based electronic game promotions” through new legislation that became effective on December 1, 2008. The statute defines “server-based electronic game promotions” as a system (1) with a database containing a pool of entries “with each entry associated with a prize value,” (2) whereby participants purchase or otherwise obtain a prepaid card, (3) and also obtain one or more entries, (4) which are “revealed” at a point of sale terminal or at a game terminal simulating a slot machine or video gaming machine.

To get around the new statute banning “server-based electronic game promotions,” the video gambling industry eliminated the use of prepaid cards in their sweepstakes systems and substituted the use of an ID number. In a second round of the Hest Technologies case, Judge Craig again ruled in favor of the sweepstakes machine manufacturer, saying in his December, 2008 order that the system at issue “does not violate N.C. Gen. Stat. §14-306.3, nor could any law enforcement official reasonably believe otherwise, as the Hest system does not simulate a game ordinarily played on a slot machine . . . or a video gaming machine,” and “does not use a database that contains a pool of sweepstakes entries with each entry associated with a prize value.” In a separate matter, Wake County Superior Court Judge Paul Ridgeway determined in a June 2009 order that the plaintiff sweepstakes machine distributor’s system was “not a server-based electronic game promotion,” and restrained the State from taking any enforcement action against the plaintiffs. While the Guilford and Wake County rulings do not directly apply to other judicial districts in North Carolina, Richard Drucker, a professor at the UNC School of Government, says that local law enforcement agencies have nevertheless taken note of the rulings and are now reluctant to force the issue of the legality of sweepstakes machines.

For North Carolina legislators fighting to stop gambling machines, this nightmare scenario is, as Yogi says, “like déjà vu all over again.” The Senate and House each introduced bills last year that attempt to expand the reach of the statutes defining illegal slot and video gaming machines to include sweepstakes machines. Both bills remained in committee, possibly because of concerns that the bills were too inclusive and might prohibit all ordinary promotional sweepstakes, such as those offered by soft drink bottlers. House Speaker Joe Hackney predicts that the General Assembly will address the issue again in the 2010 short session. Hackney believes that sweepstakes machines are illegal and “not what the legislature intended.”

“Our Similarities are Different”

Observers say that playing the sweepstakes machines “looks like gambling and feels like gambling,” which seems to be an incredibly understated assessment once one has actually played the games. But the sweepstakes machine industry says that these games are nothing more than legal sweepstakes that may be played for free and that the machines only simulate games of chance, because the winner is predetermined and is not determined by the machines themselves. The industry argues that the poker hands and turning slots displayed on the machines are promotional devices only, designed to get people to buy phone or Internet time. But one sweepstakes parlor operator in Asheville agrees with my friend that the games are essentially the same as those offered at the Cherokee casino: “The only difference is ours are sweepstakes and they have phone cards. Other than that, they are the same.”

For the time being, North Carolina trial courts seem to be buying the gambling industry’s convoluted argument that (as Yogi would put it) “our similarities are different,” and these machines are somehow different from banned gambling devices. In ruling for the sweepstakes machine industry, the judges in Wake and Guilford County appear to have focused on whether the machines could be considered to differ in any technical respect from the description of the illegal systems found in the applicable statutes. Their limited approach has created a game for legislators where the odds are stacked wildly in favor of the gambling industry—legislators must precisely describe an illegal gambling device through a statute, and the gambling industry can win every time by simply tweaking its machines to avoid the technical description found in the statute.

Given the overall nature and operation of these sweepstakes machines and games, are these trial courts correct in finding they are just legal sweepstakes, no different from instant win sweepstakes offered by traditional retailers? Or are these games and devices operating as a form of illegal gambling? Gambling and lotteries (with the exception of the state-run lottery and certain bingo and raffle games) are prohibited in North Carolina. N.C. Gen. Stat. §14-292 defines gambling as operating or playing or betting on “any game of chance at which any money, property or thing of value is bet.” North Carolina courts have defined a lottery “as any scheme for the distribution of prizes by lot or chance, by which one, on paying money or giving anything of value to another, obtains a token which entitles him to receive a larger or smaller value, or nothing, as some formula of chance may determine.” The character and substance of an activity, and not its form, determines whether the activity is an illegal game of chance. For that reason, North Carolina courts are supposed to “strip the transaction of all its thin and false apparel and consider it in its very nakedness [and] look to the substance and not to the form of [the transaction] in order to disclose its real elements.”

Games of chance include any games where the winners are selected by a random process (and not by skill), including via a random drawing, seeded winning game cards, or pre-selected winning numbers. Prohibited games of chance have three basic components: chance, consideration (paying or risking something of value to play), and a prize (anything of value that goes beyond that which is offered to every player). For a game of chance to be legal, one of the three elements must be removed. A “sweepstakes” (as opposed to a lottery or gambling), is a game of chance or promotion where the element of consideration is eliminated, generally by offering a free alternate method of entry (an “AMOE”) into the random drawing or game.

The sweepstakes machines at issue in North Carolina are clearly “games of chance” that offer prizes. Arguments by the gambling industry that sweepstakes machine games are not games of chance because the particular machine, or the system “readers” displaying the games, do not actually determine the winner, are without any legal basis. North Carolina courts have stated that “a game of chance” is a game “determined entirely or in part by lot or mere luck,” and when presented squarely with the issue, other state courts have held that the element of chance is satisfied in sweepstakes machine systems at the point of sale when the entries are purchased, even though the “readers” themselves do not assign value to the entries.

Sweepstakes machine games do appear to offer free AMOEs, although requests for them are not always honored and those AMOEs that are actually available may be legally insufficient. Even a well-structured AMOE, however, will not necessarily eliminate a gambling violation for a game of chance. A number of states, including North Carolina, have drawn a distinction between games offered in connection with the promotion or sale of a product or service, and those in which no product or service is really being promoted, or the product or service is incidental to the game of chance. Courts and attorney generals have specifically reached this conclusion in phone card cases, finding that a gambling violation may be found despite the existence of an AMOE in situations where the telephone card products were rarely used or were deemed to be merely ancillary to the sale of the chance.

The North Carolina Court of Appeals has held that where the pre-paid telephone cards can be considered a genuine product and the associated sweepstakes can be considered a valid promotional tool designed to increase the sale of the product, the game at issue will not be deemed to violate North Carolina’s lottery laws. In American Treasures, Inc. v. State, the phone card seller was selling phone cards that each contained a game piece with a scratch off area that revealed whether the customer had won a prize. While the court agreed with the State that there are situations where “it is clear that the product being ‘sold’ is merely ancillary and incidental to the accompanying game of chance,” it found that in this particular case, the sale of the phone cards was “not a mere subterfuge to engage in an illegal lottery scheme, whereby consideration is paid merely to engage in a game of chance.”

It must be noted, however, that no gambling device was alleged to be involved with the sweepstakes in American Treasures. Where pre-paid calling cards have used gaming devices similar to slot machines in promoting the cards and accompanying sweepstakes, courts in other states have consistently ruled that the game of chance is not a legal sweepstakes, but rather illegal gambling. For example, in Sun Light Prepaid Phonecard Co., Inc. v. State of South Carolina, the seller of pre-paid phone cards sought the return of its calling/instant win cards and electronic dispensers that had been seized as illegal gambling devices, although free game pieces were available upon request. In denying the seller’s request, the South Carolina Supreme Court concluded that the game at issue was a game of chance and that the phone time being sold was “mere surplusage to the game piece,” so the phone card itself was a gambling device. The court ruled that the phone card machine was also an illegal gambling device, noting that the machine had a gambling themed video screen and celebratory music when winning cards were dispensed.

A number of other courts have said that phone card sweepstakes are illegal because consumers were found not to be paying for the calling card, but rather for the chance to win. In making this determination, courts have noted that players did not attach any importance to the telephone cards and that the main purpose of the promotion was to promote the game of chance, and not the sale of the phone cards. Some courts have also distinguished sweepstakes machines (which provide permanent games with high stakes and a high payout rate), from a traditional promotional sweepstakes (which is temporary and has low stakes and low pay-out rates of one-half of one percent).

In Barber v. Jefferson County Racing Assoc., Inc., the Supreme Court of Alabama addressed a sweepstakes system very similar to the one found at the Internet parlor in Raleigh and held that the system constituted a slot machine under Alabama law. The “MegaSweeps” system at issue offered sales of Internet access in conjunction with chances to win cash prizes, and consisted of point of sale terminals (where customers purchased Internet time and redeemed any revealed winnings), computer terminals (that provided Internet access), readers (that revealed sweepstakes entries through the playing of slot machine games) and computer servers (that connected the system together). Using reasoning similar to the trial court in Guilford County, the trial court in Barber ruled that the machines at issue were not slot machines or gambling devices under Alabama law because the readers were “dumb terminals,” with no element of chance present and no consideration being paid to use the readers.

Looking past the strained reasoning of the trial court, the Alabama Supreme Court found that it was immaterial that the readers did not in themselves assign values to sweepstakes entries and that the element of chance was as much a feature in the MegaSweeps system as in any stand-alone slot machine. The Barber court noted that the fact that a substantial number, if not the majority, of customers pay to play the readers, rather than to acquire (or in addition to acquiring) Internet time, and that “customers purchased additional cybertime—with the accompanying entries – even though they already had huge quantities of unused cybertime on their accounts.” The court also refuted the system owners’ argument that the system could not be a gambling device because the Internet time was being sold at fair market value, holding that the opportunity for free plays (through an AMOE) did not negate the element of consideration. Finally, the Barber court said that the MegaSweeps game was easily distinguished from a traditional instant cash promotion run by a soft drink company, because the MegaSweeps game was a permanent, high stakes game that involved the use of an alleged gambling device.

“If you don’t know where you’re going, you’ll wind up somewhere else.”

Yogi said that too, and with legislators and trial judges unsure of where they are going on the legality of sweepstakes machines, North Carolina has wound up “somewhere else,” suffering from the negative effects of these devices. Gambling addiction experts say that sweepstakes machines are just as bad as the old video poker machines. Gary Gray, director of the N.C. Council on Problem Gambling, reports that about 90 percent of the new attendees to Gamblers Anonymous meetings say they are hooked on playing at “Internet cafes.”  The call logs for Gray’s Greensboro-based gambling help line show that three-quarters of his calls over the first eight months of 2009 were related to sweepstakes games.

Meanwhile, local government officials and law enforcement officers are struggling to contain the spread of these machines until steps are “taken in Raleigh to correct the problem.” To fill the gap left by state government, towns are attempting to regulate sweepstakes machines under zoning laws or by placing special taxes on sweepstakes establishments. Ironically, in an effort to legitimize the games and integrate them into the state economy, the sweepstakes machine industry is also asking the state to step in and tax and regulate the games.

In giving directions to his house, Yogi supposedly said, “When you get to a fork in the road, take it.” He meant that in his neighborhood, you could take either direction at the fork in the road and still get to the house. North Carolina is at a fork in the road towards eliminating sweepstakes machines, and can either take the judicial road (by forcing the issue in the appellate courts) or the legislative road (by enacting additional legislation). It should take both.

North Carolina law has long held that courts are required to look to the substance and not the form of a game of chance in determining whether it is illegal. When faced with the issue, appellate courts in other states have focused on the substance of sweepstakes machines, and have consistently ruled that they are gambling devices offering illegal games of chance. A close look at the sweepstakes machine promotions operating in North Carolina makes clear that the phone and Internet time being sold is actually “a mere subterfuge to engage in an illegal lottery scheme, whereby consideration is paid merely to engage in a game of chance.” Under North Carolina law, sweepstakes machine games are not legal sweepstakes promotions, but are instead illegal games of chance, operating in violation of the existing statewide ban on slot and video gaming machines and the general ban on gambling and non-state run lotteries. North Carolina’s higher courts should be compelled to make this clear.

At the same time, the General Assembly should proceed down the legislative road toward banning sweepstakes machines and design new legislation that clarifies existing law by providing that an illegal gambling device or slot machine is simply any device used in the advancement of unlawful gambling activity or an unlawful lottery.  The legislation could also revise the general ban on gambling to clarify that an offense may occur in circumstances where a game of chance is offered in connection with the sale of a product or service, if the product or service being promoted is only ancillary and incidental to the accompanying game of chance.

The battle over video gambling devices in North Carolina “ain’t” over. But it might just be, if North Carolina legislators clarify the current gambling statutes and law enforcement officials put the issue of the legality of sweepstakes machines squarely before the state’s appellate courts.


Receive Our Legislative Alerts