BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1439
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          ASSEMBLY THIRD READING
          AB 1439 (Salas, et al.)
          As Amended  March 24, 2014
          Majority vote

           GOVERNMENTAL ORGANIZATION 18-0  BUSINESS & PROFESSIONS 14-0     
           
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          |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                      |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
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           APPROPRIATIONS       16-0                                       
           
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          |Ayes:|Gatto, Bigelow,           |     |                          |
          |     |Bocanegra, Bradford, Ian  |     |                          |
          |     |Calderon, Campos, Eggman, |     |                          |
          |     |Gomez, Holden, Jones,     |     |                          |
          |     |Linder, Pan, Quirk,       |     |                          |
          |     |Ridley-Thomas, Wagner,    |     |                          |
          |     |Weber                     |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
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           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  








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            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  








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          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  








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          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  








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          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 










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