BILL ANALYSIS Ó
AB 1439
Page 1
Date of Hearing: April 29, 2014
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Susan A. Bonilla, Chair
AB 1439 (Salas, Bonta, and Frazier) - As Amended: March 24,
2014
SUBJECT : Unfair business practices: contests and sweepstakes.
SUMMARY : Prohibits any person operating a contest or
sweepstakes from using an interactive electronic video monitor
to simulate gambling or play gambling-themed games in a business
establishment that implements the predetermination of cash,
cash-equivalents, or other prizes of value, or connects a player
or participant with cash or prizes. Specifically, this bill :
1)Prohibits any person operating a contest or sweepstakes from
using or offering for use an electronic video monitor that
simulates gambling or play gambling-themed games in a business
establishment that directly or indirectly implements the
predetermination of, or connects a sweepstakes player or
participant with, sweepstakes cash, cash-equivalent prizes, or
other prizes of value.
2)Prohibits any person operating a sweepstakes from committing,
by act or omission, various unfair acts or practices, as
specified.
3)Defines "sweepstakes" to mean "a procedure, activity, or
event, for the distribution, donation, or sale of anything of
value by lot, chance, predetermined selection, or random
selection that is not unlawful under other provisions of law",
as specified.
4)Declares that nothing in this bill shall be deemed to render
lawful any unlawful act, including but not limited to, the
operation of lotteries, slot or card machines, and controlled
game, as specified.
5)Declares 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.
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6)Declares that no reimbursement is required by this bill
because the only costs that may be incurred by a local agency
or school district will be incurred because this act creates a
new crime or infraction, eliminates a crime or infraction,
changes the penalty for a crime or infraction, or changes the
definition of a crime.
7)Makes other technical and clarifying amendments.
EXISTING LAW:
1)Regulates false advertising and specifically prohibits certain
unfair acts or practices undertaken by, or omissions of, a
person in the operation of a contest, including
misrepresenting the odds of winning a prize or failing to
award and distribute all prizes. Prohibits misrepresenting in
any manner, the rules, terms, or conditions of participation
in a contest, or failing to clearly and conspicuously disclose
the exact nature and approximate value of the prizes when
offered, or failing to award and distribute all prizes of
value. A violation of this provision is a misdemeanor.
(Business and Professions Code (BPC) Section 17539.1)
2)Defines a "lottery" as "any scheme for the disposal or
distribution of property by chance, among persons who have
paid or promised to pay any valuable consideration for the
chance of obtaining such property or a portion of it, or for
any share or any interest in such property, upon any
agreement, understanding, or expectation that it is to be
distributed or disposed of by lot or chance, whether called a
lottery, raffle, or gift enterprise, or by whatever name the
same may be known." (Penal Code (PEN) Section 319)
3)Declares that "every person who contrives, prepares, sets up,
proposes, or draws any lottery, is guilty of a misdemeanor."
(PEN 320)
4)Prohibits a person to have in his possession or under his or
her control, "any slot or card machine, contrivance, appliance
or mechanical device, upon the result of action of which money
or other valuable thing is staked or hazarded, and which is
operated, or played, by placing or depositing therein any
coins, checks, slugs, balls, or other articles or device, or
in any other manner and by means whereof, or as a result of
the operation of which any merchandise, money, representative
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or articles of value, checks, or tokens, redeemable in or
exchangeable for money or any other thing of value, is won or
lost, or taken from or obtained from the machine, when the
result of action or operation of the machine, contrivance,
appliance, or mechanical device is dependent upon hazard or
chance . . . ." (PEN 330(a))
5)Prohibits "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." (PEN 330(b))
6)Prohibits "any person to make, or permit the making of an
agreement with another person regarding any slot machine or
device, by which the user of the slot machine or device, as a
result of the element of hazard or chance or other
unpredictable outcome, may become entitled to receive money,
credit, allowance, or other thing of value or additional
chance or right to use the slot machine or device, or to
receive any check, slug, token, or memorandum entitling the
holder to receive money, credit, allowance, or other thing of
value." (PEN 330(b))
7)Defines a "slot machine or device" as "one that is, or may be,
used or operated in such a way that, as a result of the
insertion of any piece of money or coin or other object the
machine or device is caused to operate or may be operated or
played, mechanically, electrically, automatically, or
manually, and by reason of any element of hazard or chance,
the user may receive or become entitled to receive anything of
value . . . ." (PEN 330.1(f))
8)Prohibits any person as an owner, lessee, or employee to do
any of the following without having first procured all
federal, state, and local licenses required by law:
a) To deal, operate, carry on, conduct, maintain, or
expose for play in this state any controlled game;
b) To receive, directly or indirectly, any compensation
or reward or any percentage or share of the revenue, for
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keeping, running, or carrying on any controlled game;
c) To manufacture, distribute, or repair any gambling
equipment ... or to receive, directly or indirectly, any
compensation or reward for the manufacture, distribution,
or repair of any gambling equipment;
d) To knowingly permit any controlled game to be
conducted, operated, dealt, or carried on in any house or
building or other premises that he or she owns or leases;
and
e) Any person who violates, attempts to violate, or
conspires to violate this section shall be punished by
imprisonment in a county jail for not more than one year
or by a fine of not more than ten thousand dollars
($10,000), or by both imprisonment and fine. (PEN 337(j))
9)Permits Indian tribes to conduct and operate slot machines,
lottery games, banking, and percentage card games on Indian
land if the Governor and an Indian tribe reach an agreement on
a compact, the Legislature approves the compact, and the
federal government approves the compact. (California
Constitution, Article IV, Section 19)
10)Regulates the licensure of individuals and establishments
involved in gambling activities in California. Lotteries are
prohibited, except for the California State Lottery, bingo for
charitable purposes, and raffles conducted by a non-profit,
tax-exempt organization for charitable purposes, as specified.
(BPC 19800 et seq.)
FISCAL EFFECT : Unknown
COMMENTS :
1)Purpose of this bill . This bill would prohibit businesses
operating a contest or sweepstakes from using interactive
video screens that simulate gambling or gambling-themed games
for cash or other prizes of value. This bill is
author-sponsored.
2)Author's statement . According to the author, "Internet cafes
are setting up computers where customers can wager funds on
gambling-themed games. These businesses are usually decorated
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with casino themes, and the games offered simulate slot
machine-themed games found in casinos. The gambling is
offered under the guise of marketing internet time and
telephone time.
"A loophole in the law has permitted internet gambling
sweepstakes to operate in a 'gray area' and evade law
enforcement. These internet sweepstakes are thinly veiled
gambling operations. 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.
"Local business owners have voiced concern about the negative
consequences of these cafes, including many reports of
increased crime. As a result, nearby businesses are hurting
as their customers seek to avoid the crowd and crime that
these illegal gambling cafes attract. These illegal gambling
cafes are a threat to both public safety and local business.
"The pattern of these illegal gambling cafes has been to
establish themselves in an economically depressed area, accrue
hundreds of thousands of dollars through online gambling, and
close when apprehended by law enforcement. Often, the illegal
gambling cafes 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. AB 1439 will close
the loophole that has allowed these illegal cafes to operate."
3)Simulated gambling in Internet cafes . "Internet cafes" are
retail business establishments that sell computer use and
Internet access by the minute or hour, in addition to other
services such as copying, video and telephonic communication,
and refreshments.
To attract customers and promote the sale of Internet time, some
Internet cafes may offer "sweepstakes" to customers whenever
they make a purchase of Internet time or other services.
Sweepstakes are delivered through computer software on the
cafe's computer terminals and the person purchasing Internet
time receives sweepstakes points for each dollar spent.
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Typically, the customer is given a plastic card with a
magnetic strip, or other token of value loaded with
sweepstakes points, which is activated by an employee of the
cafe and accepted at the business's computer terminals.
When accessing a computer terminal, the customer is given the
option of using the terminal software with purchased Internet
time, or use sweepstakes points to play sweepstakes games. A
customer who chooses to play sweepstakes does not reduce the
amount of Internet time purchased. The computer terminal
displays the sweepstakes results to the customer in a format
that resembles a casino slot machine or other gambling machine
in the order in which the sweepstakes result was originally
produced or "stacked" by the business. Each time a customer
reveals the result of a sweepstakes entry, the next
sweepstakes entry in the stack is revealed from the
prearranged stack of predetermined entries. Customers are
given a chance to win cash prizes in various amounts ranging
from small sums to several thousand dollars, where each
sweepstakes has a finite number of entries and finite number
of winners and losers.
As a result, many customers of these Internet cafes find
themselves engaging, whether knowingly or unknowingly, in
games that effectively constitute illegal and unregulated
gambling. This bill would explicitly prohibit the operation
of such electronic sweepstakes games, the violation of which
would be a misdemeanor charge.
4)Elements of a Lottery . California law defines a lottery as
any scheme for the disposition of property by chance 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. A lottery consists of three elements: (1) a
prize, (2) consideration, and (3) distribution of the prize by
chance. California courts have interpreted these elements
broadly.
The first element, a prize, includes but is not limited to
money, property, or a trip. A prize may also arise from the
fees themselves in the form of a prize pool.
The second element of a lottery is payment of consideration by
the participant in order to be eligible to win a prize.
Courts have used certain rules to decide whether a scheme
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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 legal. However, if
eligibility is limited to those who have paid money, there is
consideration and the contest is illegal. Similarly, if some
persons must pay in order to have a chance at a prize while
others do not, there is still consideration and the contest
would be illegal.
The final element of a lottery is distribution of the prize by
chance. The element of chance is present in a scheme even if
the game contains some elements of skill, if chance is the
dominant factor in determining an outcome, according to
current caselaw.
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.
5)A California court has found that online sweepstakes are
gambling . Law enforcement agencies have maintained that
Internet cafes offering sweepstakes are engaged in practices
that violate gambling prohibitions against lotteries and
unlawful slot machines or devices. Not surprisingly, Internet
cafes argue that their businesses merely offer lawful
sweepstakes that promote the sale of their products and that
customers simply reveal sweepstakes results by playing a
simulated computer game, which does not satisfy the statutory
elements of an unlawful slot machine.
However, Internet sweepstakes have been found to constitute an
unlawful slot machine or device in the California Fifth
District Court of Appeals where sweepstakes software that
resembles a casino slot machine or other gambling machine
satisfies the statutory definition of an "apparatus or device
that is adapted" for use as a slot or other gambling machine.
Internet sweepstakes use a magnetic value card or token loaded
with sweepstakes points that operate the slot machine or
device, which is similar to the traditional operation of a
slot machine that accepts money or other coins of value.
Sweepstakes software entries are arranged in pre-determined
sequences that include no random number generation, and
therefore playing the game has no effect on the outcome of the
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sweepstakes, but rather merely reveals the pre-determined
result. However, the sweepstakes results appear unpredictable
and random from the perspective of the customer, because they
cannot exert any skill or judgment in how they play the game.
Whether the sweepstakes are shuffled to be pre-determined the
day before, or at the moment the player places a bet, it is
still a matter of chance whether a winning sweepstakes result
is the next available entry dealt. Therefore, Internet
sweepstakes include "chance" because they involve an element
of hazard or other outcome of operation that remains
unpredictable.
Customers who receive a winning sweepstakes entry receive
additional sweepstakes points on a magnetic value card or
token that can be used to continue playing, or receive other
prizes of value in exchange for sweepstake points, which
satisfies the statutory definition of a customer "receiving or
becoming entitled to receive any piece of money or thing of
value," as specified. (People v. Grewal, F065450 (Cal. Ct.
App. Mar. 7, 2014))
Unfortunately, the recent caselaw may not be a complete
solution to the problem. Some enterprising businesses may yet
be tempted to slightly modify their sweepstakes software in
order to claim that it no longer technically meets the
definition of an illegal slot machine or device, therefore
requiring a new court decision to prohibit the modification.
Instead, this bill would cast a broader net and prohibit any
contest or sweepstakes that use an interactive electronic
video monitor to simulate gambling or play gambling-themed
games for cash or prizes. AB 1439 is intended to close
loopholes that would allow Internet cafes to continue
operating sweepstakes while claiming the games did not meet
the statutory elements of a lottery.
6)Arguments in support . The California Police Chiefs
Association writes, "In the last year, these types of
activities have been causing public safety problems throughout
California. So-called Internet cafes have been operating what
amount to e-slot machines on an ever increasing basis. In
addition to amounting to illegal gambling devices, the
Internet cafes that are operating these games have become
magnets for related criminal activity. Our police chiefs have
reported that criminal activity in and around these locations
now include drug use and drug trafficking, violent criminal
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activity, car break-ins and related thefts and robberies as
well as prostitution-related crime.
"The problems have become so acute that last Fall, when the
California Police Chiefs Association reached out to member
Chiefs [to survey] their legislative priorities, Internet Cafe
gambling was identified by a substantial number of Chiefs as
requiring a Legislative solution."
The City of Concord writes, "AB 1439 would close a loophole in
the law to clearly define the illegality of gambling at
Internet cafes. The bill would add 'sweepstakes' to the list
of unfair business practices prohibited under state law,
permitting cities, counties and the Department of Justice to
bring civil lawsuits against the individuals at the center of
these activities."
7)Arguments in opposition . Prepaid Telconnect writes, "[AB
1439] seeks to prevent our company from utilizing the lawful
and completely acceptable method of 'sweepstakes marketing' to
promote the sale of our products and services. This method of
advertising and marketing allow us, the small business, the
opportunity of competing with companies like AT&T, Verizon and
WalMart, the big business."
"Due to a few small businesses entering the California market
under the guise of 'sweepstakes marketers' peddling subterfuge
products and services, 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."
8)Previous legislation . SB 1400 (Simitian), Chapter 749,
Statutes of 2008, prohibited sweepstakes solicitations from
representing that a person has been specially selected, unless
that representation is true and prohibits sweepstakes
solicitations from making various other misleading or false
representations. SB 1400 required the official rules for a
sweepstakes to disclose information about the date the final
winner will be determined and prohibited a sweepstakes
sponsor, as defined, from charging a fee as a condition of
receiving a monetary distribution or obtaining information
about a prize or sweepstakes.
SB 1780 (Peace), Chapter 280, Statutes of 1998, prohibited
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sweepstakes solicitation materials from representing that a
person is a prize winner unless that person has, in fact, won
a prize. This bill also required a prominent "no purchase is
necessary" statement, a copy of the official rules, and
prohibits disadvantaging individuals in the contest not making
a purchase.
9)Double-referral . This bill was referred to the Assembly
Committee on Governmental Organizations, where it was heard on
April 23, 2014 and passed on a (18-0) vote.
REGISTERED SUPPORT / OPPOSITION :
Support
California Police Chiefs Association (sponsor)
Agua Caliente Band of Cahuilla Indians Tribal Council
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
California College & University Police Chiefs Association
California Contract Cities Association
California District Attorneys Association
California League of Cities
California Narcotics Officers' Association
California Police Chiefs Association
California State Sheriffs' Association
California Statewide Law Enforcement 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 South Gate
City of Tulare
City of Wasco
Commerce Casino
Communities of California Cardrooms
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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
Los Angeles Police Protective League
Oakland Police Department
Oakland Metropolitan Chamber of Commerce
Pala Band of Mission Indians
Paskenta Band of Nomlaki Indians
Ramona Band of Cahuilla
Riverside Sheriffs' 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 : Girard Kelly / B.,P. & C.P. / (916)
319-3301