BILL ANALYSIS Ó
AB 1439
Page 1
Date of Hearing: April 23, 2014
ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION
Isadore Hall, Chair
AB 1439 (Salas, Bonta, and Frazier) - As Amended: March 24,
2014
SUBJECT : Sweepstakes
SUMMARY : Prohibits any person, when conducting a contest or
sweepstakes, from using an electronic video monitor to simulate
gambling or play gambling-themed games that offers the
opportunity to win sweepstakes cash, cash equivalent prizes, or
other prizes of value. Specifically, this bill :
1)Prohibits a person, in operation of a sweepstakes or contest.
from using or offering to use any method intended to be used
by a person interacting with an electronic video monitor to
simulate gambling or play gambling-themed games in a business
establishment that directly or indirectly implements the
predetermination of sweepstakes cash, cash-equivalent prizes,
or other prizes of value, or otherwise connects a sweepstakes
player or participant with sweepstakes cash, cash-equivalent
prizes, or other prizes of value.
2)Defines "sweepstakes" as a procedure, activity, or event, for
the distribution, donation, or sale of anything of value by
lot, chance, predetermined selections, or random selection
that is not unlawful under other provisions of law.
3)Specifies that nothing in this bill shall be deemed to render
lawful any activity that is unlawful pursuant to any other
law.
4)Specifies that nothing in this bill shall be deemed to render
unlawful or restrict otherwise lawful games and methods used
by a gambling enterprise licensed under the Gambling Control
Act or operations of the California State Lottery.
5)Clarifies that sweepstakes are bound to the same prohibitions
on unfair business practices as contests.
EXISTING LAW
1)Prohibits certain unfair acts or practices undertaken by, or
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omissions of, any person in the operation of a contest,
including, among other things:
a) Misrepresenting the odds of winning any prize or failing
to award and distribute all prizes;
b) Misrepresenting in any manner, the rules, terms, or
conditions of participation in a contest;
c) Failing to clearly and conspicuously disclose the exact
nature and approximate value of the prizes when offered.
d) Failing to award and distribute all prizes of the value
and type represented.
e) Representing directly or by implication that any
particular person has won any money, prize, thing, or other
value in a contest unless there has been a real contest in
which a meaningful percentage, which shall be at least a
majority, of the participants in such contests have failed
to win a prize, money, thing, or other value.
2)Prohibits a person to have in his or her possession or under
his or her control, any slot or card machine or mechanical
device, upon the result of action of which money or other
valuable thing is staked and which is operated, or played, by
placing or depositing any coins, checks, or other articles or
device, or as a result of the operation of which any
merchandise, money, or any other thing of value is won or
lost, when the result of operation of the machine or
mechanical device is dependent upon hazard or chance.
3)Makes it unlawful for any person to manufacture, repair, own,
store, possess, sell, rent, lease, let on shares, lend or give
away, transport, or expose for sale or lease, or to offer to
repair, sell, rent, lease, let on shares, lend or give away,
or permit the operation, placement, maintenance, or keeping
of, in any place, room, space, or building owned, leased, or
occupied, managed, or controlled by that person, any slot
machine or device, as defined.
4)Defines a "slot machine or device" as a machine, apparatus, or
device that is adapted, or may be readily be converted, for
use in a way that, as a result of the insertion of any piece
of money or coin or other object, or by any other means, the
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machine or device is caused to operate or may be operated, and
by reason of any element of hazard or chance or of other
outcome of operation unpredictable by him or her, the user may
receive or become entitled to receive any piece of money,
credit, allowance, or thing of value, or additional chance or
right to use the slot machine or device, or any check, slug,
token, or memorandum, whether of value or otherwise, which may
be exchanged for any money, credit, allowance, or thing of
value, or which may be given in trade, irrespective of whether
it may, apart from any element of hazard or chance or
unpredictable outcome of operation, also sell, deliver, or
present some merchandise, indication of weight, entertainment,
or other thing of value.
5)Prohibits lotteries, except for the California State Lottery,
bingo for charitable purposes, as specified, and raffles
conducted by a non-profit, tax-exempt organization for
charitable purposes, as specified.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of the bill : According to the author, a loophole in law
has permitted internet gambling sweepstakes to operate in a
"gray area" and evade law enforcement. These Internet
sweepstakes are thinly veiled gambling operations that establish
themselves in an economically depressed area, accrue hundreds of
thousands of dollars through online gambling, and close when
apprehended by law enforcement. Often, these illegal gambling
cafés will then re-open in a new location, threatening to
negatively impact another neighborhood in the community.
Recently, there has been a growing proliferation of these gaming
operations throughout the State.
The author further states that the law must be updated to
prohibit these activities and provide authorities with the
necessary enforcement tools to regain local control of the
public safety issues that arise because of illegal Internet
gambling sweepstakes. AB 1439 will close the loophole that has
allowed these illegal cafés to operate.
Internet Sweepstakes Cafés: "Internet Sweepstakes Cafés" also
known simply as Internet Cafés are business establishments that
give individuals the opportunity to win prizes with the purchase
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of some kind of product, usually in the form of telephone cards
or Internet access. They began appearing in Southern United
States in 2005, but have quickly expanded throughout the rest of
the nation, including the State of California.
Though the business model varies slightly, in general, Internet
Cafés are located in storefront strip malls and sometimes can be
found in gasoline stations and convenience stores. In some
cases, they can also be found as standalone establishments.
Numerous computers are placed in either tables or rows and can
number from just a few to over 100 computers.
Customers can purchase Internet or phone time that is added to a
magnetic striped card that is provided by the Internet Café.
With the purchase of Internet or phone time, the customer also
receives "entries" or "credits" into the Internet sweepstakes.
Though the number of entries per Internet or phone time
purchases can vary from establishment to establishment, it is
very common to receive 100 "credits" for every $1.00 of Internet
or phone time purchased.
After the purchase of credits, the customer can then head to one
of the computer screens to play several gambling-themed games
and place bets with the "credits" they have purchased.
Customers can purchase additional "credits" from the Internet
Café employee and almost always can purchase additional credits
directly at the computer. Customers who win prizes can cash in
any winnings, or use the winnings to purchase additional
"credits." According to the Bureau of Gambling Control, "cash
prizes ranging from $1.00 to as much as $4,000 are paid out
daily."
Bureau of Gambling Control: Law Enforcement Advisory: On
December 5, 2012, the California Bureau of Gambling, a Bureau in
the Office of the Attorney General released a law enforcement
advisory that concluded that Internet Cafés that offer the type
of sweepstakes described above to be illegal gambling
operations.
In this advisory the Bureau stated that, "[the Bureau] will
assist California law enforcement agencies working toward
prosecution or pursuing civil or administrative actions in
connection with Internet Café gambling operations. Assistance
may encompass advice, Bureau personnel and equipment, search and
arrest warrants examples, and other experienced assistance with
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enforcement operations."
Though the advisory was for informational purposes only and not
intended to be legal advice, it did present a clear message that
the types of "sweepstakes" that were being conducted at various
Internet Cafés were in fact illegal.
Legality of Internet Cafés : The proliferation of Internet Cafés
throughout California has resulted in dramatically different
interpretations as to the legality of such businesses between
law enforcement agencies and Internet café owners themselves.
While California law enforcement agencies have maintained that
such businesses are illegal, not surprisingly, Internet Café
owners have maintained that the business they operate are in
fact legal.
Law enforcement agencies have long maintained that Internet
Sweepstakes Cafés are engaged in practices that violate gambling
prohibitions that currently prohibit lotteries and unlawful slot
machines or devices. On the other hand, Internet Cafés argue
that their business establishments merely offer lawful
sweepstakes that promote the sale of their products and that
even though customers can reveal sweepstakes results by playing
a computer game, this does not satisfy the required statutory
elements of an unlawful slot machine.
Two years ago the differences in opinions finally headed to
court when the Kern County District Attorney's Office filed
lawsuits against three Internet Café businesses; I-zone Internet
Café, Oz Internet Café and Hub, and the A-Z Café. Kern County
Superior Court Judge William Palmer agreed with the DA's Office
that these types of sweepstakes were in fact illegal; Internet
Cafés immediately appealed that ruling.
On March 7, 2014, the Fifth Appellate District Court found in
favor of the County and once again ruled that Internet Cafés
that offer the type of sweepstakes described above were in fact
illegal under California law. In that ruling the court found:
"All the trappings and experiences involved in playing
traditional slot machines are actualized in one form or
another by the defendants' sweepstakes software systems and
networked computer terminals, since in each case points are
received upon making a purchase, a game program is
activated by the customer at a terminal, points are used or
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bet in selected increments, audio-visual scenes are played
out on the screen to create the feel and anticipation of a
slot machine or other gambling games, and prizes are
won...the mere fact that winnings are based on a
predetermined sequence of results programmed into the
software system, rather than on a randomly spinning wheel
(or the like), does not change the nature and character of
devices herein, which as integrated systems function as
slot machines."
Soon after the favorable ruling, the Kern County District
Attorney's Office sent a letter to all Internet Café operators
ordering them to "immediately cease and desist all gambling
activity including the so called sweepstakes," by March 21,
2014. By that date, all Internet Cafés in Kern County had shut
down except for one Internet Café that was no longer offering
sweepstakes.
Unfortunately while the cease and desist letter, combined with
the favorable ruling, initially seemed to shut down all Internet
Cafés in Kern County, less than one month later another Internet
Café was shut down by local authorities in Bakersfield. During
the raid, the owners of the Internet Café told authorities that
they thought they were operating legally because they were using
a different sweepstakes system. As this example shows, the
ruling of the Fifth Appellate District Court has not completely
shut down all Internet Cafés in California. It is believed that
AB 1439 will help to close the perceived loophole in law once
and for all.
The McDonalds Argument : When taken to court, many Internet Cafés
have argued that the sweepstakes they offer are no different
that the popular Monopoly game that is occasionally offered at
McDonalds. Various courts throughout the country have not
agreed with this characterization.
First, the look of both games are vastly different. Nowhere in
the Monopoly game is there an interaction by the customer with
any sort of gambling themed electronic device. For Internet
Cafés, the use of these gambling theme games is a critical
component of their business model.
Secondly, the duration of the sweepstakes is vastly different.
In traditional sweepstakes, the sweepstakes are for a
limited-term with a clear end date that is designed to bring
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attention to consumer products. In the case of McDonalds, this
seems to be in order to promote their hamburgers, shakes, fries
and the like. For Internet Cafés, the "sweepstakes" run
perpetually with no end in sight.
Third, the prizes being awarded are dramatically different. The
prizes that are offered by McDonalds are for the most part a
free hamburger, drink, or fries and represent a small amount of
the overall company's revenue. With Internet Cafés there are
huge daily cash prizes as previously noted by the California
Department of Justice.
Lastly, the McDonalds sweepstakes depend on the sale of a
product that is consumed by the customer. Unlike Internet
Cafés, which many times allow for the return of unused minutes,
McDonalds does not allow for the return of unused products. In
other words, McDonalds does not allow a customer to return half
of a consumed drink, hamburger, and/or fries for a 50% return on
their money.
Rules for the operation of sweepstakes : Current law defines a
"sweepstakes" as any procedure for distributing anything of
value by lot or chance. A sweepstakes must not violate any
provision of law, including the law that prohibits lotteries.
The main difference between a sweepstakes and a lottery is that
the lottery participants have paid or promised to pay a value
for the chance to win a prize. The main difference between a
sweepstakes and a contest are that the contest participants must
use at least some skill to win the prize and must pay some value
in the contest.
Sweepstakes are also prohibited from requiring a purchase in
order to enter the sweepstakes and the operator of sweepstakes
must treat entries that are associated with a purchase the same
as those that are not associated with a purchase. Solicitation
offering people in California with the opportunity to
participate in a sweepstakes must disclose the odds of receiving
each prize offered.
Any person who violates the provisions concerning the operation
of contests or sweepstakes is guilty of a misdemeanor, and may
be prosecuted by the Attorney General or by a district attorney.
They can also be enforced by civil court actions, which can be
filed by private parties, district attorneys, city attorneys,
county counsel, the Attorney General and other agencies of the
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State. Depending on the nature of the action, remedies may
include civil penalties of up to $2,500 for each violation. A
contest or sweepstakes which violates these provisions may also
be subject to an additional civil penalty of up to $2,500 for
each violation as an unlawful business practice.
It is important to note that even though Internet Cafés are
claiming to simply be offering lawful sweepstakes, various law
enforcement entities and individuals have claimed that these
sweepstakes are lotteries, which are prohibited by current law.
Elements of Lottery: According to California law, a lottery is
any scheme for the disposition of property by change among
persons who have paid any value for the chance of obtaining the
property, with the understanding that it will be disposed of by
chance. California law prohibits lotteries. A lottery consists
of three elements: (1) a prize, (2) consideration, and (3)
distribution of the prize by chance. In various court cases,
California courts have interpreted these elements broadly.
The first element, a prize, might be the easiest to describe and
includes but is not limited to money, property, or a trip. A
prize may also arise from the collection of fees themselves that
can be collected into a pool.
The second element is a payment of consideration by the
participant in order to be eligible to win a prize. In other
words, if an individual needs to purchase something in order to
be eligible to win a prize, the scheme is a lottery and thus
illegal under California law. Courts have used certain rules to
decide whether a scheme includes consideration because it is not
always clear. If a person is eligible to win a prize without
purchase, there is no consideration and the contest is therefore
legal. On the other hand if eligibility is limited to those who
have paid money, there is consideration and thus illegal.
Similarly, if some persons must pay in order to have a chance at
a prize while others do not, there is consideration and again
the scheme would be illegal. Internet Cafés have argued that the
type of sweepstakes they offer do not satisfy this second
element because the customer is purchasing Internet or phone
time and simply accepting the sweepstakes entries as a bonus.
However, courts have ruled that most customers are entirely
uninterested in the Internet and phone time and in fact the
customer is paying in order to be eligible to win; thus,
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satisfying the second element of a lottery.
The final element of a lottery is the distribution of the prize
by chance. The element of chance is present in a scheme even if
the game contains some element of skill, if chance is the
dominant factor in determining an outcome.
California law provides for three exceptions to the law
prohibiting lotteries; the California State Lottery, bingo for
charitable purposes and a raffle conducted by a non-profit,
tax-exempt organization for a charitable purpose is also
permissible.
Arguments in support : The California Tribal Business Alliance
(CTBA) writes in support of the bill claiming that Internet
Cafés are criminal gambling operations that pose as storefront
businesses with computers that run casino games. Designed to
operate under the guise of state sweepstakes laws, Internet
Cafés advertise and claim to sell a product, often telephone or
Internet time, so that customers can receive an "entry" into the
"sweepstakes." Customers redeem or reveal the outcome of the
"sweepstakes" using computers that depict casino-themed games,
such as video slots and video poker. Customers can win cash
prizes through the play of these games, which are paid at the
facility. AB 1439 would bring an end to the ambiguity in state
law that has allowed these Internet Cafés to operate illegally
by specifically prohibiting these activities under state
sweepstake laws. The bill would also provide state and local
authorities with the necessary enforcement tools to regain
control of the public safety issues that have arisen because of
illegal Internet Cafés.
Similarly, the California State Sheriff's Association argues
that current law requires the licensure of individuals and
establishments involved in gambling activities. However, there
has been a growing proliferation of Internet Cafés offering
gambling themed games and experiences that simulate the slot
machine games found in casinos and result in sweepstake cash,
cash equivalent prizes, other prizes of value, or otherwise
connects a sweepstakes participant with prizes of value. These
businesses often attract drugs and other illegal activities to
an area. AB 1439 will enhance the ability of law enforcement to
curb illegal gambling activities and associated crimes by
explicitly prohibiting a business from offering electronic video
monitor gambling simulations or gambling themed games that
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utilize a sweepstakes prize experience.
The Kern County District Attorney's Office also writes in
support stating that although the Appellate Court's ruling was
extremely favorable, we believe the amendments proposed in AB
1439 are still very relevant and necessary to the extent that
they would directly address the issue and would tend to prevent
the gaming industry from trying to circumvent the law by
adopting new variations of the sweepstake café business model.
Arguments in opposition : Prepaid Telconnect, Inc. writes in
opposition to the bill claiming that the bill seeks to prevent
their company from utilizing the lawful and completely
acceptable method of "sweepstakes marketing" to promote the sale
of their products and services. They argue that no member of
the committee would consider a long distance calling card an
unlawful or illegitimate product. Nor would any member consider
the practices of promotional sweepstakes marketing an unlawful
or illegitimate means of advertising.
They further argue that AB 1439 seeks to penalize and ban all
sweepstakes marketers regardless of the legitimacy of their
products or their rights as retailers to promote those products.
Penal codes already exist to address every complaint raised
about these businesses, their methods of operation and their
illegitimate products.
Double referral : Should AB 1439 successfully pass this
committee, the bill would then move to the Assembly Business,
Professions, and Consumer Affairs Committee for further
consideration.
REGISTERED SUPPORT / OPPOSITION :
Support
California Police Chiefs Association (Sponsor)
Agua Caliente Band of Cahuilla Indians
Association of California Cities Allied with Public Safety
Association for Los Angeles Deputy Sheriffs
Attorney General's Office, Kamala D. Harris
Bakersfield Downtown Business Association
Barona Band of Mission Indians
Bicycle Casino
California Association of Code Enforcement Officers
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California College and University Police Chiefs Association
California Contract Cities Association
California District Attorneys Association
California Narcotic Officers Association
California Statewide Law Enforcement Association
California State Sheriff's Association
California Tribal Business Alliance
City of Avenal
City of Bakersfield
City of Barstow
City of Concord
City of Delano
City of McFarland
City of Oakland
City of Tulare
City of Wasco
Commerce Casino
Communities of California Cardrooms
Habematolel Pomo of Upper Lake
Hawaiian Gardens
Hispanic Chamber of Commerce, Alameda County
Inaja-Cosmit Band of Mission Indians
Kern County Board of Supervisors
Kern County District Attorney's Office
League of California Cities
Los Angeles Police Protective League
Oakland Police Department
Pala Band of Mission Indians
Paskenta Band of Nomlaki Indians
Ramona Band of Cahuilla
Riverside Sheriff's Association
San Diego District Attorney's Office
San Mateo County Police Chiefs and Sheriff Association
Solano County District Attorney's Office
Southern California Tribal Chairmen's Association, Inc.
Viejas Band of Kumeyaay Indians
Yocha Dehe Wintun Nation
Opposition
Prepaid Telconnect, Inc.
Analysis Prepared by : Felipe Lopez / G. O. / (916) 319-2531
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