Los Angeles Business Journal

Sweepstakes Not Such Safe a Bet?

GAMBLING: Sheriff may pull plug on games at Internet cafés. By Alfred Lee Monday, September 23, 2013
Bellflower’s I-Biz, a café that runs a sweepstakes promotion.

Bellflower’s I-Biz, a café that runs a sweepstakes promotion. Photo by Ringo Chiu.

“To the extent there is a sense that the client has found a loophole, then I would suggest that is a legislative matter,” he said.

Gambling operations?

Law enforcement officials aren’t buying that logic. In December, the California Attorney General’s Office issued an advisory stating that it believed Internet cafés and business centers running sweepstakes contests were illegal gambling operations. The AG’s Office cited a 2000 case that found vending machines dispending prepaid telephone cards with a sweepstakes feature to be unlawful gambling devices. The advisory, combined with the growing popularity of such establishments, triggered a wave of enforcement actions.

In March, the Los Angeles Sheriff’s Department raided five Internet cafés in Lancaster, seizing 150 computers and $5,000 in cash. In July, Sheriff’s deputies acting separately in Carson raided three Internet cafés in the city after undercover investigations, said Sgt. Charles Cabarrubias. Sheriff’s investigators in Compton raided LB Net last month, seizing all 30 computers. LB Net, which opened last year, restocked and reopened after the raid, but then closed this month to avoid another seizure. LB Net’s attorney would not give any information on what kind of revenue or profits it generated and declined to say who its owner was.

The Sheriff’s actions were initiated at the station level, a spokesman said, and were not part of a broader department-wide crackdown.

In South Gate, a city of 94,000 that straddles the 710 Freeway east of South Los Angeles, officials adopted the 45-day moratorium last month, saying the South Gate Police Department initiated an investigation into three businesses, leading to one search warrant and one criminal prosecution. The moratorium can be renewed for another year and a half. City Attorney Salinas conceded that Internet cafés were not a pervasive problem. He said the sweepstakes cafés had all opened in the last year.

A spokesman for the Los Angeles Police Department, in an email, confirmed that it was investigating “illegal gaming operations popping up under the guise of Internet cafés.” He said an investigation was ongoing, but that the department would not comment further.

A spokesman for Los Angeles City Attorney Mike Feuer said the office was aware of “similar fact patterns” in the city, but had not yet filed any cases.

Similar Internet café sweepstakes have popped up across the country with one study estimating the niche industry generates $10 billion a year.

Pushing back

LB Net and I-Biz filed a lawsuit in Los Angeles Superior Court this month against Sheriff Leroy Baca seeking a judge’s declaration that they are not in violation of state gambling laws. A Sheriff’s spokesman said the department would fight the lawsuit. Internet cafés in Bakersfield and Oceanside have also filed challenges, although they have lost at the state court level and are now fighting in appellate court. One victory has been in Hayward, where last month Internet cafés represented by Weston succeeded in overturning a moratorium.

Dennis M.P. Ehling, an attorney specializing in gaming laws at the Century City office of Blank Rome, said businesses are allowed to run sweepstakes contests, but the repeated volume of purchases and the similarity to slot machines at these storefront business centers is problematic. The argument that results are pre-determined may not be persuasive, he said, because they are still unpredictable from the user’s perspective. And, he added, customers may buy much more Internet time than they can possibly use, making it seem like they are mainly paying to play the sweepstakes.

That Internet cafés have become the primary vehicle for sweepstakes operations is due largely to the nature of the “game”: Gambling simulation software runs on computers, and since an operator needs multiple computers running the software to draw customers, an Internet café is the logical primary business to enter to maximize the utility of all the machines.

“They’re operating around a fringe of gambling law and trying to carve a niche, but I don’t think they do it successfully,” Ehling said.

Page 2 of 2

Next