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Fifth Appellate District Affirms Preliminary Injunctions Prohibiting Internet “Sweepstakes” Café Operations

Businesses that sell computer “time” in exchange for entries into on-line sweepstakes games likely violate California’s antigambling laws, the Fifth District Court of Appeal held last week.  In People v. Grewal (CON F065450/F065451/F065689), the Court upheld three preliminary injunctions that prohibit “sweepstakes” operations at Internet café businesses in Kern County.  The injunctions were previously granted to the Kern County District Attorney against specific businesses. Read the full opinion here.

The opinion offers additional legal support for the many cities and counties in California enacting ordinances prohibiting – or heavily regulating – Internet cafés offering sweepstakes games.  The businesses give customers “credits” toward playing the on-line games in exchange for purchasing “time” on computer terminals.  If a customer wins, they typically receive their cash prize at the counter.  Most of the games resemble casino-style slot machines.   The California Attorney General and Bureau of Gambling Control consider such businesses to be illegal gambling operations.

The Kern County District Attorney sought the injunctions under California’s unfair competition laws, which prohibit unlawful, unfair, or fraudulent business practices.  (Cal. Bus. & Prof. Code, § 17200 et seq.)  The Fifth Appellate District held that the Internet café’s networks of terminals, software, and servers delivering the sweepstakes games likely amount to an unlawful slot machine under California Penal Code section 330b.  The Court found that: i) entering a PIN number or swiping a card is similar to dropping a coin into a slot; ii) like a slot machine, the sweepstakes games do not depend on skill; and iii) the games award cash prizes at random, just like slot machines.  The Court noted that “if it looks like a duck, walks like a duck, and sounds like a duck, it is a duck.”

The preliminary injunctions prohibit the sweepstakes operations until a full trial on the merits.  However, because the Court conducted a full and independent review of the allegation that the games are illegal slot machines, an appeal to the California Supreme Court by the defendants is less likely.  

The Los Angeles City Attorney filed a lawsuit this year against a software developer providing sweepstakes games to local businesses.  Additionally, California Assembly Bill 1439, which would  make sweepstakes operations illegal, was introduced in January.