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>
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<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
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<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
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<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
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<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
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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'
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<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
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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
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<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
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