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Gift Surplus, LLC v. State ex rel. Cooper

Court of Appeals of North Carolina

October 15, 2019

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, Defendants.

          Heard in the Court of Appeals 23 May 2019

          Appeal by Defendants from judgment entered 2 February 2018 by Judge Ebern T. Watson III in Onslow County No. 13 CVS 3705 Superior Court.

          Fox Rothschild LLP, by Elizabeth Brooks Scherer, Kip David Nelson, and Troy D. Shelton; George B. Hyler, Jr.; and Grace, Tisdale, & Clifton, P.A., by Michael A. Grace, for plaintiffs-appellees.

          Attorney General Joshua H. Stein, by Solicitor General Matthew W. Sawchak, Deputy Solicitor General James W. Doggett, and Assistant Solicitor General Kenzie M. Rakes, for defendants-appellants.

          MURPHY, JUDGE.

         Plaintiffs-Appellees Gift Surplus, LLC and Sandhill Amusements, Inc. ("Gift Surplus") sued the State, ex rel. Governor Roy Cooper, et al. ("the State") seeking a permanent injunction that would bar state law enforcement from enforcing State gambling and sweepstakes laws against the operators of Gift Surplus's sweepstakes kiosks. In a bench trial, the Superior Court concluded Gift Surplus's kiosks do not violate the State's prohibition of sweepstakes run through the use of an "electronic display" and permanently enjoined the State from enforcing these laws against Gift Surplus. Because we conclude Gift Surplus's kiosks operate sweepstakes through an entertaining display in violation of N.C. G.S. § 14-306.4, we reverse and vacate the trial court's injunction.

         BACKGROUND

         Gift Surplus has been embroiled in this legal battle with the State over its sweepstakes since 2013, when it sued the Sherriff of Onslow County seeking a declaration that its sweepstakes did not violate the State's gambling laws or its ban on video sweepstakes. After the Onslow County Sherriff's Department seized kiosks loaded with Gift Surplus's sweepstakes games, Plaintiffs received a preliminary injunction barring law enforcement from enforcing state laws that the State contended prohibit the implementation and operation of the sweepstakes. However, that preliminary injunction was overturned by our Supreme Court, which held Gift Surplus's sweepstakes violated N.C. G.S. § 14-306.4. Sandhill Amusements, Inc. v. Miller, 368 N.C. 91, 773 S.E.2d 55 (2015) (adopting then-Judge Ervin's dissent in Sandhill Amusements, Inc. v. Sheriff of Onslow Cnty., 236 N.C.App. 340, 762 S.E.2d 666 (2014)).

         After the case had been sent back to the trial court, Gift Surplus made adjustments to its sweepstakes games, amended its Complaint, and again placed its games into operation around the State. One such adjustment is a "double nudge" feature that allows players to nudge the game reels as many as two times in order to move them into alignment and win a prize. Other additions included a "winner every time" feature that made 100% of spins winnable, albeit only for a prize of several cents on 75% of spins, and a "final ticket" feature that allowed prizes lost through incorrect nudging to be won back in later turns. Finally, Gift Surplus removed a "governor" feature that had prevented players from winning large prizes in quick succession.

         At the second trial in this matter, in 2017, Gift Surplus sought and received a declaration that its sweepstakes do not violate the State's ban on video sweepstakes, codified in N.C. G.S. § 14-306.4. In its unchallenged Findings of Fact, the trial court found that Gift Surplus's kiosks run "video games[.]" These video games are used as a "promotional sweepstakes system" to reveal a potential prize to the playing customer. Based on its Findings of Fact, the trial court concluded: "[p]romotional sweepstakes are legal and lawful in North Carolina" so long as they comport with the applicable state and federal laws; "Plaintiff Gift Surplus'[s] proprietary sweepstakes system comports with all of the regulatory scheme of N.C. G.S. § 14-306.4[;]" and that Gift Surplus is "entitled to permanent injunctive relief, as requested in their . . . Complaint." Having reached those conclusions, the trial court entered a permanent injunction barring the State and its agents from enforcing the criminal law prohibiting electronic sweepstakes against Gift Surplus. The State filed timely notice of appeal.

         ANALYSIS

         Both arguments on appeal challenge the legal conclusions drawn from the trial court's factual findings and the trial court's order, judgment, and decree of a permanent injunction. The State's ultimate contention on appeal is that the trial court erred in permanently enjoining State law enforcement from enforcing the State's ban on certain electronic sweepstakes against "persons who operate or place into operation any equipment associated with . . . Gift Surplus'[s] sweepstakes system[.]" The State argues the trial court erred in granting Gift Surplus a permanent injunction because Gift Surplus's sweepstakes violate (1) the State's ban on video sweepstakes and, in the alternative, (2) the State's separate ban on gambling operations. We agree that Gift Surplus's sweepstakes do not comply with the State's prohibition of certain video sweepstakes and, as a result, need not reach the second argument on appeal.

         The State argues "Gift Surplus's sweepstakes violate section 14-306.4 of the General Statutes." In contrast, the trial court concluded "Gift Surplus'[s] proprietary sweepstakes system comports with all of the regulatory scheme of N.C. G.S. § 14- 306.4." "Conclusions of law are reviewed de novo and are subject to full review." State v. Biber, 365 N.C. 162, 168, 712 S.E.2d 874, 878 (2011). After careful review, we hold Gift Surplus's sweepstakes system does not comport with N.C. G.S. § 14-306.4.

         In relevant part, N.C. G.S. § 14-306.4 states, "[I]t shall be unlawful for any person to operate, or place into operation, an electronic machine or device to . . . [c]onduct a sweepstakes through the use of an entertaining display, including the entry process or the reveal of a prize." N.C. G.S. § 14-306.4(b), (b)(1) (2017). A sweepstakes is "any game, advertising scheme or plan, or other promotion, which, with or without payment of any consideration, a person may enter to win or become eligible to receive any prize, the determination of which is based upon chance." Id. at (a)(5). An entertaining display is "visual information, capable of being seen by a sweepstakes entrant, that takes the form of actual game play, or simulated game play, such as, by way of illustration and not exclusion: [video poker, video bingo, video lotto games, video games of chance, etc.]" Id. at (a)(3) (emphasis added). There is no dispute that Gift Surplus's game is a sweepstakes. At issue is whether Gift Surplus's sweepstakes are conducted through "an entertaining display" in violation of N.C. G.S. § 14-306.4.

         Both in their briefs and in oral argument the parties to this appeal focused on the issue of whether chance or skill predominates in the current iteration of Gift Surplus's sweepstakes. This is likely because our sweepstakes statute explicitly use games of chance as an illustration of an improper electronic display and also because the distinction between games of chance and games of skill has received considerable attention from our appellate courts. See, e.g., N.C. G.S. § 14-306.4(a)(3); Sandhill Amusements, Inc. v. Miller, 368 N.C. 91, 773 S.E.2d 55 (2015); State v. Gupton, 30 N.C. 271 (1848); Crazie Overstock Promotions, LLC, v. State, 830 S.E.2d 871 ( N.C. Ct. App. 2019). However, we need not decide whether these sweepstakes are chance or skill-based in order to hold that they violate N.C. G.S. § 14-306.4.

         The sweepstakes statute explicitly proscribes sweepstakes conducted through electronic display, which is "visual information, capable of being seen by a sweepstakes entrant, that takes the form of actual game play, or simulated game play[.]" N.C. G.S. § 14-306.4(a)(3). From there, the statute goes on to set out "by way of illustration and not exclusion" a non-exhaustive list of specific games that fit the definition of "electronic display."[1] Gift Surplus mischaracterizes this statutory scheme in arguing a sweepstakes game "falls within the 'entertaining display' prohibition only when the 'video game is not dependent on skill or dexterity while revealing a prize as the result of an entry into a sweepstakes.'" Regardless of whether it is dependent on skill or dexterity, a sweepstakes falls within the entertaining display prohibition simply if it is "visual information, capable of being seen by a sweepstakes entrant, that takes the form of actual game play, or simulated game play[.]" N.C. G.S. § 14-306.4(a)(3).

         The sweepstakes in question are run through standalone kiosks that display a video game resembling a reel-spinning slot machine. These kiosks undisputedly display visual information capable of being seen by a sweepstakes entrant. At trial, one of Gift Surplus's expert witnesses went as far as to testify that an individual with "a visual disability" would not be able to win the video game. This is because doing so requires the participant to be able to see the visual information displayed by the kiosks. Furthermore, this visual information takes the form of game play-the entrant's spinning and nudging of virtual reels. Gift Surplus's sweepstakes are run through the use of an "entertaining display." As such, regardless of whether skill or chance predominates over the games at issue, Gift Surplus's kiosks violate N.C. G.S. § 14-306.4 and the trial court's conclusion to the contrary must be reversed.

         Having reversed the trial court's conclusion that Gift Surplus's sweepstakes do not violate N.C. G.S. § 14-306.4, we vacate the permanent injunction against the State and its "officers, agents, servants, and employees, and any person in active concert or participation with any of the Defendants or any of their officers, agents, servants, and employees[.]" As a result, we need not reach the State's argument that the sweepstakes are also illegal independent of the video sweepstakes statute because they violate the separate ban on gambling operations codified in N.C. G.S. § 14-292. The trial court did not make specific findings or conclusions regarding the gambling operations statute; the permanent injunction was entirely based upon the sweepstakes' compliance with N.C. G.S. § 14-306.4.

         CONCLUSION

         The trial court erred in concluding Gift Surplus's sweepstakes do not violate N.C. G.S. § 14-306.4 because the sweepstakes in question are run through the use of an entertaining display. We reverse ...


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