BILL ANALYSIS Ó AB 1439 Page 1 ASSEMBLY THIRD READING AB 1439 (Salas, et al.) As Amended March 24, 2014 Majority vote GOVERNMENTAL ORGANIZATION 18-0 BUSINESS & PROFESSIONS 14-0 ----------------------------------------------------------------- |Ayes:|Hall, Nestande, |Ayes:|Bonilla, Jones, | | |Achadjian, Bigelow, | |Bocanegra, Campos, | | |Campos, Chesbro, Cooley, | |Dickinson, Eggman, | | |Dababneh, Roger | |Gordon, Hagman, Holden, | | |Hernández, Jones, | |Maienschein, Mullin, | | |Jones-Sawyer, Levine, | |Skinner, Ting, Wilk | | |Medina, Perea, V. Manuel | | | | |Pérez, Salas, Waldron, | | | | |Wilk | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- APPROPRIATIONS 16-0 ----------------------------------------------------------------- |Ayes:|Gatto, Bigelow, | | | | |Bocanegra, Bradford, Ian | | | | |Calderon, Campos, Eggman, | | | | |Gomez, Holden, Jones, | | | | |Linder, Pan, Quirk, | | | | |Ridley-Thomas, Wagner, | | | | |Weber | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- 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 AB 1439 Page 2 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. FISCAL EFFECT : According to the Assembly Appropriations Committee, cost for this bill would be potentially significant (in excess of $150,000) costs to the Unfair Competition Law Fund resulting from the enhanced ability of the California Department of Justice to investigate and prosecute cases against operators of illegal sweepstakes. 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 AB 1439 Page 3 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. This bill 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 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 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 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 (Bureau), a Bureau in the Office of the Attorney General released a law enforcement advisory that concluded that Internet Cafés that AB 1439 Page 4 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 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 (DA) 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 AB 1439 Page 5 favor of Kern 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 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 DA'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 this bill will help to close the perceived loophole in law once and for all. Analysis Prepared by : Felipe Lopez / G.O. / (916) 319-2531 AB 1439 Page 6 FN: 0003632