News: CJ Exclusives

Court Rules Phone Card Not Lottery

Card offered inexepensive long-distance minutes with a scratch-off

What’s a lottery? That’s the question the N.C. Court of Appeals addressed recently in a case involving inexpensive long-distance calling cards that also came with a scratch-and-win promotion. The court ruled that because the phone cards, though providing only for two minutes of calling time each, were competitive in the market, the promotion did not amount to an illegal lottery, as the state had contended.

Treasured Arts is a company that sells prepaid long-distance phone cards, with its sales usually coming through convenience stores. The company offers cards that offer two minutes of time for $1, a market niche it selected because of a perceived lack of competition. In what it contends is a promotional scheme, Treasured Arts’ calling cards also come with a game piece. Purchasers of the card can win a prize, or not, based upon what’s under a scratch -off portion of the game piece. The top prize is $50,000.

The State of North Carolina did not agree that Treasured Arts’ inclusion of a game piece was mere marketing. Rather, it regarded the scheme as an illegal lottery and decided to take action against the company. The state did not bring criminal charges against Treasured Arts, though. Instead, state Alcohol Law Enforcement officers informed stores selling the phone cards they would lose their licenses to sell alcohol unless they stopped carrying the allegedly illegal cards.

When Treasured Arts learned of the threats against convenience stores, it filed a lawsuit against the state. In March 2002, a Superior Court judge granted a preliminary injunction barring the state from saying the phone cards were illegal or interfering with the alcohol license of the stores that sold them. A different judge made the injunction permanent in early 2004. The state then appealed.

Like the two Superior Court judges, the Court of Appeals found that what Treasured Arts was doing amounted to marketing, and not an offer of a lottery or other game of chance.

“We agree 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,” Judge Ann Marie Calabria wrote for the appeals court.

“…However, the evidence before the trial court and on appeal indicates without contradiction that plaintiff’s phone card provides the purchaser with a long-distance rate that is not merely competitive, but one of the best in the industry. This fact certainly supports the proposition that the average consumer would purchase the pre-paid phone card in order to take advantage of plaintiff’s proffered rate. Thus, based on the record evidence, plaintiff’s pre-paid phone card is sufficiently compatible with the price being charged and has sufficient value and utility to support the conclusion that it, and not the associated game of chance, is the object being purchased.”

The court also noted Treasured Arts was offering free game pieces to patrons who sent in a self-addressed stamped-envelope, which is not something lotteries do.

In addition, the state argued on appeal that the issue of the legality of Treasured Arts’ promotional scheme should be determined in criminal court and not via an injunction. The Court of Appeals rejected this claim, noting that the state was not likely to actually bring criminal charges but rather was trying to end the sale of the phone cards by simply threatening to revoke stores’ alcohol licenses.

“The evidence at trial illustrates the sale of 120 cards only produces approximately sixteen dollars of income to the store. That relatively meager profit would not justify a convenience store carrying plaintiff’s product and risking the loss of revenue from its alcohol license. Accordingly, without seeking a declaratory judgment, plaintiff would be unable to effectively protect its property rights.”

The case is American Treasures, Inc. v. State, (04-1065).

Michael Lowrey is associate editor of Carolina Journal.