CA Supreme Court Closes Online Sweepstakes Loophole

The ruling of the Californian Supreme Court to outlaw Sweepstakes Cafes could have implications for the future of online gambling in the Golden State.

For almost a decade Internet cafes in California have been offering sweepstakes games to customers who do not have the funds or the means to travel to legal card rooms or casinos. Due to their popularity, “Sweepstakes Cafes” have grown in number throughout the state; but not everybody is happy with the service they provide – particularly the tribal casinos that are losing business to the unregulated venues.

The providers of the sweepstakes games argue that the activity is legal because, although their computers simulate casino games of chance, winners are predetermined and not selected randomly. They point to a 2003 ruling by the 3^rd District Court of Appeal to support their claims in which the court ruled that Scratchers vending machines do not fall under the definition of (illegal) slot machines because the sequence of winning tickets is predetermined.

However, pressure has been put on lawmakers to close this loophole, and last year Assemblyman Rudy Salas introduced legislation (AB 1439) to outlaw “Sweepstakes Cafes”. The legislation was passed, but some Sweepstakes Cafes remained open pending an appeal to the Supreme Court in a case first brought by the Kern County district attorney’s office against three cafe owners in 2012 – “People –v- Grewal”.

The Background to “People –v- Grewal”

“People –v- Grewal” was originally three separate appeals made by the owners of Internet cafes that had injunctions placed on them by the Kern County District Court in August 2012. The three appeals were consolidated and heard by the 5^th District Court of Appeal in March 2014.

The Court of Appeal upheld the injunctions and ruled that the computers used by the sweepstakes cafes are illegal because the gaming software was designed to replicate the feel and anticipation of a slot machine – a much different scenario than was provided by the “Scratchers verdict” in 2003.

The ruling had several consequences. The software developer and vendor – Figure 8 Technologies – was sued by the L.A. City Attorney for supplying illegal gaming systems and lotteries that masquerade as lawful promotional sweepstakes, and Assemblyman Salas used the Court of Appeal´s ruling as the basis for his legislation.

The Case Goes to the Supreme Court

Supported by the Internet Café Association of California, the three owners took their case to the Supreme Court – arguing that if the Court of Appeal´s verdict was accurate, then sweepstakes run by McDonalds and Coca-Cola would also be illegal in California.

The panel of seven judges at the Supreme Court hearing side-stepped the issue by saying that the similarity of sweepstake competitions run by national corporate entities was beyond the scope of the case, and the judges shot down comparisons with the lottery by saying that the lottery was a state-sanctioned operation.

The judges unanimously upheld the appellant court´s ruling that the café owners had violated California´s anti-gambling laws by selling Internet time to customers, who in return received credits to use in sweepstake games that resembled casino games. In her thirty-page opinion, Justice Ming W. Chin wrote:

When the user, by some means (here swiping a card or entering a number), causes the machine to operate, and then plays a game to learn the outcome, which is governed by chance, the user is playing a slot machine,

The Significance of the Verdict for Online Gambling in California

The significance of the Supreme Court verdict is that the appellant court´s definition of chance – that winning and losing depend on luck and fortune more than judgement or skill – was also upheld in the written opinion. Justice Chin wrote:

Since customers playing defendants‘ 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.

Although the passage of any online gambling legislation in California would – in theory – sanction online gambling and create a carve-out for games of pure chance such as roulette, blackjack or baccarat; such a recent, defined judgement may well fuel legal challenges to such legislation – particularly from parties opposed to online gambling, or from those who do not get the gambling legislation they want.

Much of the pressure put on lawmakers to close the sweepstakes loophole came from tribal casinos that were unhappy with their loss of revenue. Imagine how unhappy some tribal casinos would be if online gambling legislation was passed that resulted in the erosion of their potential income by allowing “bad actors” and racetracks.

There could be some long legal battles ahead!