N.C. Court of Appeals rules that lawsuit to declare sweepstakes scheme legal can proceed – T & A Amusements, LLC V. McCrory

T & A Amusements, LLC V. McCrory. Lawsuits for injunctive relief as to legality of an activity are not barred by sovereign immunity where there is a threat of enforcement.

Basically, a few sweepstakes promoters sued to figure out if their scheme was a legal way around contest and promotion regulations in the state. The state argued sovereign immunity barred the claim or that it was otherwise non-justiciable.

The scheme is this: Plaintiff Crazie Overstock sells merchandise online. They also sell gift certificates for that merchandise in retail stores. The gift certificates come with “game points” that can be spent to play “reward games” in the retail store. Those games can net the player “reward points” which can be used for tries at a “dexterity test.” The dexterity test can yield “dexterity points,” which can be redeemed for cash.

More simply, customers could buy gift cards for the website that were really just a means to provide “free” game points to be used in the store. Then, customers would play games of chance in the store. If they did well on the game of chance, they could play what could be called a game of skill. If they did well at the game of skill, they got cash.

Even more simply: Customers paid for a chance to play a game of skill which could net them cash prizes.

One of the Crazie Overstock distributors went to the local police department to demonstrate the technology to show them it falls outside of the state’s gambling and sweepstakes statutes. The police, however, were not convinced, and ordered the distributor to shut down. Plaintiffs then filed suit seeking a declaration that the program does not violate the law.

Defendants responded with motions to dismiss arguing that they are entitled to sovereign immunity, and the complaint failed to state a claim. The trial court granted those motions.

Sovereign immunity prevents a state from being sued in its own courts unless it has consented to being sued or waived the immunity. There is a limited exception for a declaratory or injunctive relief action against state action that exceeds the state’s authority or invades personal rights.

The court of appeals, relying on state supreme court precedent in Sandhill v. Sheriff of Onslow County, concluded sovereign immunity does not bar the claim. In situations like this one, the only real recourse for an affected party is a suit for injunctive and declaratory relief. And, while best practice would be to specifically plead in the complaint a particular waiver of sovereign immunity, and in this case plaintiffs alleged only that “defendants are not entitled to sovereign immunity,” the court found that this lack of particularity does not doom the complaint.

The court of appeals was also unconvinced by the argument that plaintiffs failed to state a claim:

We have addressed on several prior occasions the issue of whether justiciable controversies existed under the Declaratory Judgment Act where plaintiffs alleged that law enforcement agencies were improperly seeking to prohibit them from offering promotional rewards programs. Most recently, in Sandhill Amusements — as discussed above — a disagreement existed between the plaintiffs and the sheriff, the district attorney, and ALE regarding the legality of the kiosks that Gift Surplus licensed and Sandhill distributed to retail stores. Sandhill Amusements, 236 N.C. App. at 356, 762 S.E.2d at 678. The controversy culminated in the sheriff and district attorney sending the owner of Sandhill a letter threatening enforcement action. Id.

The majority in this Court held that a justiciable controversy existed given that the plaintiffs’ allegations centered on “whether the kiosks at issue were illegal and the uncertainty concerning the legality of these kiosks ultimately impacts Plaintiffs’ ability to operate a business going forward.” Id. at 357, 762 S.E.2d at 678. …

officers have threatened criminal enforcement action against establishments offering this promotion, and such threats impede Plaintiffs’ ability to license and distribute the program. Therefore, the uncertainty as to whether the CO Rewards Program violates North Carolina’s gambling and sweepstakes statutes “impacts Plaintiffs’ ability to operate a business going forward.” Sandhill Amusements, 236 N.C. App. at 357, 762 S.E.2d at 678. Accordingly, we conclude that because Plaintiffs have presented a justiciable controversy, the trial court erred in granting Defendants’ motions to dismiss on the ground of nonjusticiability.

The lesson: sometimes it actually does pay to ask permission rather than to beg forgiveness.