BILL ANALYSIS                                                                                                                                                                                                    Ó






                                                       Bill No:  AB  
          1439
          
                 SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
                           Senator Lou Correa, Chair
                           2013-2014 Regular Session
                                 Staff Analysis



          AB 1439  Author:  Salas
          As Amended:  June 16, 2014
          Hearing Date:  June 24, 2014
          Consultant:  Paul Donahue


                                     SUBJECT  

              Unfair business practices: Contests and sweepstakes

                                   DESCRIPTION
           
          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)Designates as prohibited unfair business practices the  
            following acts undertaken by a person in the operation of  
            a contest or sweepstakes:

             a)   Using or offering for 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:

               i)     Directly or indirectly implements the  
                 predetermination of sweepstakes cash,  
                 cash-equivalent prizes, or other prizes of value, or  


               ii)    Otherwise connects a sweepstakes player or  
                 participant with sweepstakes cash, cash-equivalent  
                 prizes, or other prizes of value.






          AB 1439 (Salas) continued                                 
          PageB


          2)Defines "sweepstakes" as 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, including laws governing lotteries and slot  
            machines.

          3)Declares that the above prohibitions shall not legalize  
            any activity that is currently illegal pursuant to laws  
            prohibiting slot machines, lotteries, or unlicensed  
            gambling.

          4)Declares that the prohibitions in the bill shall not  
            render unlawful otherwise lawful games and methods used  
            by a licensed gambling enterprise, and shall not restrict  
            operations of the California State Lottery.

                                   EXISTING LAW
           
          1)Prohibits false advertising, unfair competition and  
            unlawful business practices, specifically prohibiting  
            certain acts or practices undertaken by a person in the  
            operation of a contest, including misrepresenting the  
            odds of winning a prize or failing to award and  
            distribute all prizes, providing for civil penalties and  
            other remedies.<1> 

          2)Outlaws use of a "slot machine or device," which "may be  
            operated, and by reason of ... hazard or chance or of  
            other outcome of operation unpredictable by [the user],  
            the user may receive or become entitled to receive ...  
            [an] additional chance or right to use the slot machine  
            or device" or a "token, or memorandum ... which may be  
            exchanged for any money, credit, allowance, or thing of  
            value." <2>



          -------------------------
          <1> See Bus. & Prof. Code §§ 17200, et seq., 17500, et seq.

          <2> Penal Code § 330b (d)











          AB 1439 (Salas) continued                                 
          PageC


          3)Prohibits lotteries,<3> with exceptions for the  
            California State Lottery, bingo for charitable purposes,  
            and charitable raffles conducted by a non-profit,  
            tax-exempt organizations.

                                    BACKGROUND
           
           Purpose of the bill  : According to the author, a loophole in  
          the law has permitted internet gambling sweepstakes to  
          operate in a "gray area" and evade law enforcement. The  
          author states that these Internet sweepstakes are thinly  
          veiled gambling operations, and the law must be updated to  
          prohibit these activities and provide authorities with  
          necessary enforcement tools to regain local control of the  
          public safety issues that arise because of illegal Internet  
          gambling sweepstakes. 

           The author further states that local business owners have  
          voiced concerns about the negative consequences of these  
          business activities, which have been proliferating in the  
          state, 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 gaming  
          cafes attract. The author states that AB 1439 will close  
          the loophole that has allowed these illegal cafes to  
          operate. 

           What is an Internet sweepstakes café  ? Before the days of  
          ubiquitous broadband Internet access via mobile cellular  
          networks, an Internet café provided Internet access to the  
          public, usually for a fee. These businesses usually  
          provided snacks and drinks, hence the café in the name.  
          Nowadays, many such businesses often promote the sale of  
          their products (e.g., computer time, Internet access or  
          telephone cards) by offering a sweepstakes giveaway that  
          allows customers to ascertain their winnings, if any, by  
          playing specialized game programs on the businesses' own  
          computer terminals. Often these programs simulate casino  
          slot machines or other gambling games. 

           Are these Internet sweepstakes operating illegal lotteries  ?  
          As noted above, lotteries are illegal in California, except  
          -------------------------
          <3> A lottery is defined as any scheme for the disposal or  
          distribution of property by chance among people who have  
          paid any valuable consideration for the chance of obtaining  
          such property, with the understanding or agreement that it  
          is distributed by chance, whether it is called a lottery,  
          raffle or gift enterprise. (Penal Code § 319)







          AB 1439 (Salas) continued                                 
          PageD


          for the State Lottery.<4>  Sweepstakes or business  
          promotions, on the other hand, are legal and are regularly  
          utilized by companies to increase sales. Typical examples  
          include McDonald's Monopoly, Burger King's "Be the King"  
          sweepstakes, and the My Coke Rewards sweepstakes. Under  
          California law, these sweepstakes and promotions are legal  
          as long as there is a legitimate free method for customers  
          and non-customers to enter the contest or sweepstakes.<5>  
          The differences between a contest or sweepstakes and an  
          illegal lottery are that, in a lottery, there is a  
          disposition of money or other property on a contingency  
          determined by chance to a person who has paid money for the  
          chance of winning a prize.<6> As long as there is a  
          legitimate free method of entry into the sweepstakes or  
          promotion, the consideration element is absent, and the  
          "sweepstakes" is not an illegal lottery. Thus, it would  
          appear that most Internet cafes are not operating illegal  
          lotteries under California law.

           Are these Internet sweepstakes cafes operating illegal slot  
          machines  ? Proponents of AB 1439 note that under the  
          sweepstakes software systems used by Internet café  
          operators on their computer networks and terminals, upon  
          the payment of money (such as the purchase of Internet time  
          or a phone card), patrons can activate computer sweepstakes  
          games on the terminals and, based on "chance" or "other  
          outcome of operation unpredictable by" the patron, win cash  
          prizes - which appears to describe an illegal slot  
          -------------------------
          <4> Penal Code § 319; Cal. Const. art. IV, § 19 (a)

          <5> Regal Petroleum California Gasoline Retailers v. Regal  
          Petroleum Corp. (1958) 50 Cal.2d 844

          <6> Regal Petroleum, 50 Cal.2d 844, 853-854 ["one who has  
          hazarded something of value upon the chance"]










          AB 1439 (Salas) continued                                 
          PageE


          machine.<7>

           Recent law enforcement actions and corresponding  
          litigation  : In December 2012 the Attorney General's Bureau  
          of Gambling Control issued a law enforcement advisory  
          stating that Internet cafés that offer the type of  
          sweepstakes described above are illegal gambling  
          operations. Among other things, the Bureau said that it  
          "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."<8>

          Some jurisdictions in the state have filed civil actions  
          under the Unfair Competition law seeking to enjoin several  
          Internet café businesses from continuing to engage in  
          practices that allegedly violated the gambling prohibitions  
          on unlawful lotteries and/or slot machines or devices.  
          Defendants in consolidated Kern County cases recently  
          appealed from trial court orders granting the preliminary  
          injunctions against their businesses.

          The reviewing appellate court upheld the injunctions,  
          holding that an unlawful slot machine was involved in each  
          of the defendants' businesses. Among other things the court  
          in the Grewal<9>case said that the customers in the  
          Internet cafés may become entitled to win prizes under the  
          software systems implementing defendants' computer  
          sweepstakes games based on "hazard or chance or of other  
          outcome of operation unpredictable" to the user? Thus, the  
          -------------------------
          <7> "A device operated, and by reason of ... hazard or  
          chance or of other outcome of operation unpredictable by  
          [the user], the user may receive ?[a prize or another  
          chance to play]. See Penal Code § 330b.

          <8> Bureau of Gambling Control Law Enforcement Advisory,  
          Number 11, December 5, 2012
          <9> People v. Grewal (2014) 224 Cal.App.4th 527












          AB 1439 (Salas) continued                                 
          PageF


          court agreed that the "chance" <10> element of illegal slot  
          machine law is satisfied. Since customers playing the  
          computer sweepstakes games can exert no influence over the  
          outcome of their sweepstakes entries by means of skill,  
          judgment or how well they play the game, it follows that we  
          are dealing with systems that are based on chance or  
          luck.<11> 

          The defendants in the Grewal case have petitioned the  
          California Supreme Court for review (or de-publication of  
          the opinion) because it reached a result that is in  
          conflict with an earlier slot machine case involving the  
          State Lottery.<12> The differences between the cases  
          involve the description of the manner in which the chance  
          element must be realized in order to constitute a slot  
          machine or device under Penal Code § 330b. Among other  
          things, Grewal held that the element of chance is to be  
          determined from the user's perspective, and it is  
          immaterial that the machine itself did not determine the  
          element of chance. Thus, an illegal slot machine is found  
          whenever "upon the payment of money (i.e., the purchase of  
          phone cards or Internet time), patrons can activate  
          computer sweepstakes games on the terminals, and based on  
          'chance' or 'other outcome of operation unpredictable by'  
          -------------------------
          <10> Under California gambling law, "chance" means that  
          "winning and losing depend on luck and fortune rather than,  
          or at least more than, judgment and skill." (Hotel  
          Employees & Restaurant Employees Internat. Union v. Davis  
          (1999) 21 Cal.4th 585)

          <11> Furthermore, the court stated that, by describing  
          their promotional giveaways as sweepstakes, the Internet  
          café defendants effectively admitted to the chance element  
          because a sweepstakes is, by definition, "any procedure for  
          the distribution of anything of value by lot or by chance  
          that is not unlawful under other provisions of law?." [See  
          Bus. & Prof. Code, § 17539.5(a)(12)]

          <12> Trinkle v. California State Lottery (2003) 105  
          Cal.App.4th 1401











          AB 1439 (Salas) continued                                 
          PageG


          the patron, win cash prizes." <13>  

          Opponents take issue with this line of reasoning, alleging  
          that it will even make lottery vending machines illegal  
          again because, upon the payment of money (for the ticket),  
          the machine dispenses the ticket, and based on chance or  
          other outcome of operation unpredictable to the patron, the  
          patron reveals the secret contents and wins cash prizes.  
          Opponents suggest that the State Lottery's "Hot Spot" game  
          is clearly illegal under this interpretation, because the  
          results are revealed on a computer terminal, the patron  
          wins cash prizes, and the result is unpredictable to the  
          patron. They contend that these California State  
          Lottery-operated computer terminals are now illegal slot  
          machines under Grewal.

           Amending sweepstakes law  : The author and supporters believe  
          that Internet sweepstakes cafés are by their very nature an  
          abuse of sweepstakes as a legitimate means to promote the  
          sale of goods and services. Thus, AB 1439 adds provisions  
          to false advertising, unfair competition and unlawful  
          business practices laws that prohibit a person from  
          operating a gambling-themed or simulated gambling  
          electronic video monitor in a business that gives cash or  
          other prizes of value. In so doing, the Attorney General,  
          district attorneys and city attorneys have an additional  
          predicate act to form a basis on which they can commence  
          civil lawsuits to seek penalties and other relief against  
          Internet café operators. The author and supporters contend  
          that 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 utilize a sweepstakes prize experience - without  
          regard to whether or not the operations are using illegal  
          slot machines. 

          Opponents to AB 1439 object to this approach, and believe  
          that this bill criminalizes sweepstakes unfairly. They  
          contend that the bill would prevent legitimate businesses  
          -------------------------
          <13> 224 Cal.App.4th at pp. 540-541. The California Supreme  
          Court has the Grewal case under submission, and on June 12,  
          2014, it extended the time until July 17, 2014 to decide  
          whether to grant or deny review, or grant or deny the  
          de-publication request. It can act on the request any time  
          prior to July 17. 





          AB 1439 (Salas) continued                                 
          PageH


          from utilizing lawful method of sweepstakes marketing to  
          promote the sale of products and services. As noted above,  
          opponents contend that Grewal case has already transformed  
          their legitimate business promotional activity from a legal  
          sweepstakes, where a standard desktop computer revealed a  
          pre-determined prize, to a legal sweepstakes that would be  
          lawful if not delivered on a computer, but is now illegal  
          because it is delivered on a computer, as that computer now  
          constitutes an illegal slot machine.

                            PRIOR/RELATED LEGISLATION
           
          AB 1691 (Jones-Sawyer), 2013-2014 Session. Would have  
          allowed professional sports franchises to operate game-day  
          charitable raffles in which 50% of the proceeds go to the  
          ticket holder and 50% of the proceeds go to the local  
          charities designated by the professional sports team for  
          that particular event or to the professional sports team's  
          own charitable foundation. (Held in Assembly Appropriations  
          Committee)

           SUPPORT:   

          Agua Caliente Band of Cahuilla Indians
          Association for Los Angeles Deputy Sheriffs
          Association of California Cities Allied with Public Safety
          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 and University Police Chiefs Association
          California Contract Cities Association
          California District Attorneys Association
          California Narcotic Officers Association
          California Police Chiefs Association 
          California State Sheriff's 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 Fairfield
          City of Hayward





          AB 1439 (Salas) continued                                 
          PageI


          City of Hesperia
          City of McFarland
          City of Oakland
          City of Sacramento
          City of Southgate
          City of Tulare
          City of Vacaville
          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
          League of California Cities
          Los Angeles Police Protective League
          Oakland Metropolitan Chamber of Commerce
          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
          San Mateo County Police Chiefs and Sheriff Association
          Solano County District Attorney
          Southern California Tribal Chairmen's Association, Inc.
          Viejas Band of Kumeyaay Indians
          Yocha Dehe Wintun Nation

           OPPOSE:   

          Prepaid Telconnect, Inc.
          Wild Poker Tour

           FISCAL COMMITTEE:   Senate Appropriations Committee


                                   **********