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 **********