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. AB 1439 Page 2 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 AB 1439 Page 3 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 AB 1439 Page 4 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 AB 1439 Page 5 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. AB 1439 Page 6 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 AB 1439 Page 7 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 AB 1439 Page 8 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 AB 1439 Page 9 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 AB 1439 Page 10 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 AB 1439 Page 11 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