Request By:
Howard Keith Hall
Pike County Attorney
Opinion
Opinion By: Jack Conway, Attorney General; Tad Thomas, Assistant Deputy Attorney General
Opinion of the Attorney General
On December 15, 2009, Mr. Howard Keith Hall, Pike County Attorney, requested an Opinion of the Attorney General pursuant to KRS 15.020, asking about "the legality of a phone card sweepstakes machine" that one of his constituents would like to put into operation in Kentucky. We requested that Mr. Hall submit a brochure describing the machine in question, and Mr. Hall complied.
Background
KRS 528.080 makes it a crime to possess a gambling device. KRS 528.010(4) defines "gambling device, " and provides in relevant part:
(4) "Gambling device" means?
The machine in the brochure sent by Mr. Hall is a Pot of Gold Phone Card Sweepstakes Machine ("Pot of Gold machine" ). 1 The name of the machine displayed on the cabinet is "Lucky Sweepstakes, with "prepaid phone cards" written below and to the right in much smaller lettering. It features a prominent video screen showing twelve games available for play. A picture of a phone is on each side of the video screen, and in comparatively small cursive writing below the screen is written "One Dollar Gives You 5 Minutes Anytime, Anywhere in the Continental US." The relevant features in the brochure are listed as follows:
. You insert money and immediately a phone card is printed which gives you pin codes for 15 minutes per dollar inserted. You insert $ 20 you get 300 minutes of phone card time.
. You also get FREE credits to play the game, you insert $ 20 you get 80 credits.
. Games are: Jacks or better, Shamrock 7's, Deuces Wild, Joker Poker, Hi Roller Jacks, Super Gold 21, Triple Sevens, Gold Row Bonus, Spin Ball Bonus, Respin 7's, Super Pick Lotto, Super Double Up, Touch Easy Keno, and Super Ball.
The brochure does not specify what happens if the customer wins, although Mr. Hall claimed in his letter that "if a customer wins a game, points are added to the calling card, which he can then use as a calling card or be cashed in at the store," and we assume that Mr. Hall's description of the reward structure is roughly correct. 2 The issue in the present case is whether the Pot of Gold machine is whether it is a machine designed primarily for the purpose of gambling under KRS 528.010(4)(b). We are of the opinion that it is.
Discussion
The elements of KRS 528.010(4)(b) determining when a machine is a gambling device are that it is: (1) designed and manufactured primarily for use in connection with gambling, and (2) may deliver money or property (3) as a result of the application of an element of chance. It is presumably not disputed that the Pot of Gold machine may deliver money or property as a result of the application of an element of chance; the only issue is whether it is made primarily for use in connection with gambling. The primary purpose of the machine may be said to turn on whether it is designed to sell phone cards, and the accompanying game of chance is only an incidental promotion, or whether the phone card sale is merely incidental to the accompanying game of chance. Kentucky precedent, cases from other jurisdictions, and the substance of the transaction involved all tend to point to the conclusion that the phone card sale is incidental to the game of chance, and thus the Pot of Gold machine is an illegal gambling device in Kentucky.
Kentucky authorities on the status of machines like the Pot of Gold machine are sparse and dated, but favor treating it as an illegal gambling device. A series of Kentucky cases in the early 20th century dealt with slot machines that cost a nickel and produced five cents worth of gum along with a chance to win other prizes, and found them to be illegal gambling devices despite receiving roughly fair consideration for the amount spent. 3 What Kentucky precedent there is on this issue points against allowing machines that offer inexpensive products in addition to a game of chance for prizes. 4
While not persuasive, statutes and cases from other jurisdictions can provide guidance in cases of first impression.
Knuckles v. Com., 2010 WL 2470850 at 3 (Ky. June 17, 2010). Mr. Hall notes in his letter that similar machines have been approved in North Carolina. The case approving them is
American Treasures, Inc. v. State, 617 S.E.2d 346 (N.C.App. 2005). In American Treasures, the North Carolina Court of Appeals approved of a machine that sold pre-paid two-minute phone cards for one dollar each. Attached to each phone card was a promotional game piece with a scratch-off area, which varied but generally provided two chances for the purchaser to win cash prizes of up to $ 50,000, or prizes such as a Corvette. Id. at 348. The American Treasures court reasoned that an advertising promotion directed at increasing sales of a legitimate product or service would be permissible, while a product being sold that is merely ancillary and incidental to the accompanying game of chance would be impermissible. Id. at 350-351. The court concluded that the "price paid for and the value received from the pre-paid phone cards is sufficiently commensurate to support the determination that the sale of the product is not a mere subterfuge to engage in an illegal lottery scheme." Id. at 351.
Although we understand the court's conception of the determination of the gambling purpose of a machine in terms of whether the product sold is merely incidental to the accompanying game of chance, we find the American Treasures court's decision to be inconsistent with the decisions of almost every other state that has ruled upon the topic, and inconsistent with its own reasoning given the facts. A series of cases in various states in the early 2000's dealt with similar phone card sweepstakes machines. The details varied slightly from state to state, but most commonly offered a one or two minute phone card plus either a game piece or an opportunity to play a video game of chance, with prizes typically of up to $ 500, although sometimes more. In almost all of these cases, the phone card sweepstakes machines were found to be illegal gambling machines. 5
We are also of the opinion that the ruling in American Treasures is inconsistent with its own reasoning based on the facts presented in the case. The court may be right in that the rate per minute may be fair consideration, but each individual phone card sold lasted only two minutes. We find it implausible that consumers would want to stockpile and use two-minute phone cards, as if a consumer wanted to make a phone call longer than two minutes, a new number from a different card would have to be entered, making it impossible to have an uninterrupted conversation of any length. These cards have been marketed as "emergency" phone cards, but one would have to hope that any emergency arising could be dealt with effectively in under two minutes. There is also explicit evidence in one of the cases that the cards were regarded by the customers as incidental, and thrown away. 6 We think that such machines offering two-minute phone cards for one dollar would more clearly be incidental to the accompanying game of chance than the American Treasures court found, and thus such machines would qualify as illegal gambling machines under the American Treasures ruling.
The Pot of Gold machines at issue may present a stronger case that independent consideration has been offered than in the prior cases, since it offers 15 minutes of phone time per dollar spent. However, the apparent increased consideration may be mitigated by depreciation in the phone card market, as most phone cards available currently charge rates well under ten cents per minute in the continental U.S. The issue for purposes of determining consideration is whether consumers would treat the cards as incidental and discard them, as had been done with the two-minute phone cards, or whether the customers would keep the cards and use them, and we find that difficult to determine without further evidence.
While the consideration purchased in a Pot of Gold machine is greater than those machines held to be gambling devices in other states, the substance of the transaction involved in the Pot of Gold machine indicates that the phone cards are incidental to the game of chance attached. "It is familiar law that it is the duty of courts to look to the substance rather to than the form of a transaction,"
Collins v. Kentucky Tax Commission, 261 S.W.2d 303 (Ky. 1953), and "no trick, device, or subterfuge should or will be permitted to defeat the operation of the law against gambling. .. courts will look through the shadow and veil of dissimulation to the substance."
Commonwealth v. Bowman, 102 S.W.2d 382 (Ky. 1936). The substance of the Pot of Gold machine is best revealed in its cabinet design. It represents itself as primarily a "Lucky Sweepstakes" machine, with "prepaid phone cards" below the title in much smaller lettering, and the most prominent feature on the machine is the screen displaying the video games of chance that can be played for prizes. The amount of phone time purchasable is only listed in small lettering under the screen, and the pictures of phones on each side of the screen are clearly secondary to the display of the gambling features. The Pot of Gold machine, while arguably a phone card machine with a promotion in form, in substance represents itself as a gambling machine, with the phone cards as only incidental to the games of chance.
Kentucky precedent, the vast majority of cases in other jurisdictions, and the substance of the transaction involved all point toward the conclusion that the Pot of Gold machine is a machine designed primarily for use in accordance with gambling. Accordingly, it is the opinion of this Office that the Pot of Gold machine, and machines substantially similar to it, should be considered illegal gambling devices under KRS 528.010(4).
Footnotes
Footnotes
1 The brochure is viewable at http://www.slotsdirect.com/sweepstakes/html.
2 The brochure does mention that "these are redemption games," although what that means is unspecified.
3 Allen v. Commonwealth, 198 S.W. 896 (Ky. 1917); Welch v. Commonwealth, 200 S.W. 371 (Ky. 1918); Commonwealth v. Gritten, 200 S.W. 884 (Ky. 1918).
4 Recently, we have opined that the Kentucky Lottery Corporation has the power to authorize video lottery terminals on racetracks, consistent with Kentucky Constitution § 226 and KRS 154A.063. OAG 09-004. Video lottery terminals would ordinarily fit the definition of gambling device in KRS 528.010(4), but are exempt because KRS 154A.010(3) specifies that "'lottery' means any game of chance approved by the corporation and operated pursuant to this chapter." OAG 09-004 at 9. The Kentucky Lottery Corporation may thus operate any game of chance not forbidden by statute or constitutional provision. However, there is no Kentucky precedent for a private person to operate any gambling device inconsistent with KRS 528.
5 See Midwestern Enterprises v. Stejenheim, 625 N.W.2d 234 (N.D. 2001); Sun Light Prepaid Phonecard Co,. Inc. v. State, 600 S.E.2d 61 (S.C. 2004); Mississippi Gaming Com'n v. Six Electronic Video Gambling Devices, 702 So.2d 321 (Miss. App. 2001); Black North Associates, Inc. v. Kelly, 281 A.D.2d 974 (N.Y.A.D. 2001); People ex rel. Lockyer v. Pacific Gaming Technologies, 98 Cal.Rptr.2d 400 (Cal. App 2 Dist. 2000); Diamond Game Enterprises v. Howland, 1999 WL 397743 (D. Or. 1999); Azzurro v. State, 2001 WL 323498 (Ark. App. 2001); Katmandu, Inc. v. Liquor Control Com'n, 2002 WL 31750261 (Ohio App. 10 Dist. 2002). The only cases where phone card sweepstakes machines have been found to be legal in states with restrictions on gambling machines that are similar to Kentucky's are American Treasures, supra, and Mississippi Gaming Com'n v. Treasured Arts, 699 So.2d 936 (Miss. 1997) (holding a phone card game offering a scratch-and-win game piece legal). However, Treasured Arts was subsequently distinguished by Mississippi Gaming Com'n v. Six Electronic Video Gambling Devices, supra (holding a phone card video slot machine game illegal), and Six Electronic Video Gambling Devices is more similar to the present case.
6 See Midwestern Enterprises, 625 N.W.2d at 238 ("At four of the North Dakota locations with the Lucky Strike devices, personnel reported the phone cards were often discarded. Discarded phone cards were placed in a basket and were available free for the taking. Despite this ready availability of two-minute phone cards, people continued to put their dollars into the Lucky Strike devices. Since phone cards were available free for the taking, it is logical to conclude people paid their dollars for a chance to win cash.")