In a unanimous decision, the California Supreme Court upheld an injunction against the operators of Internet cafes that offered “sweepstakes” games the Court said were in violation of state anti-gambling laws.

The dispute began when the District Attorney of Kern County filed civil actions against five operators of local Internet cafes. While the sweepstakes systems differed slightly among the defendants, each business sold a product—either Internet time or telephone cards—and provided along with it the opportunity to play sweepstakes games that offered substantial cash prizes.

Customers could obtain an instant win sweepstakes card or play games at a computer terminal to reveal the result. If they selected the computer terminal, they swiped a card or entered a number and then made a choice between playing various slot machine or casino-style games. The sweepstakes operated as an integrated whole, with a third party supplying the software. Connected to terminals at the businesses, the software predetermined the result of each game, with neither employees at the business nor customers exercising any control.

But did the games run afoul of California state law?

The District Attorney argued they violated the anti-gambling provision of Section 330b of the Penal Code. A trial court agreed and granted a preliminary injunction prohibiting the defendants from operating any type of sweepstakes, slot machine, or lottery game. An appellate panel affirmed and the defendants appealed to the state’s highest court.

Section 330b(a) makes it unlawful to possess “any slot machine or device,” while Section 330b(d) defines the term as “a machine, apparatus, or device that is adapted, or may readily be converted, for use in a way that, as a result of the insertion of any piece of money or coin or other object, or by any other means, the machine or device is caused to operate or may be operated, and by reason of any element of hazard or chance or of other outcome of operation unpredictable to him or her, the user may receive or become entitled to receive any piece of money, credit, allowance, or thing of value, or additional chance or right to use the slot machine or device, or any check, slug, token, or memorandum, whether of value or otherwise, which may be exchanged for any money, credit allowance, or thing of value, or which may be given in trade, irrespective of whether it may apart from any element of hazard or chance or unpredictable outcome of operation, also sell, deliver, or present some merchandise, indication of weight, entertainment, or other thing of value.”

The California Supreme Court found that the defendants’ machines met each element of the definition.

First, the court rejected the defendants’ argument that their machines did not require the insertion of a coin or similar object for the games to operate.

“[T]he insertion of a PIN … or the swiping of a magnetic card at the computer terminal in order to activate or access the sweepstakes games and thereby use points received upon paying money at the register (ostensibly to purchase a product) plainly came within the broad scope of the statute,” the court wrote. “The statute expressly includes the catchall phrase ‘by any other means.’ Even though a coin, money or object was not inserted into a slot, the games were commenced by other means analogous thereto which effectively accomplished the same result and, therefore, this element is satisfied.”

As for the so-called “chance element” found in the definition, the court explained that 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.’” The defendants argued that because their machines did not generate the element of chance at the time the customer operated them—as the element of chance had already been generated by the software system—customers playing the games merely received the next result in a previously arranged, sequential order.

But the court disagreed. Each defendant’s system of software, servers, and computer terminals “plainly operated” together as a single apparatus. The Legislature could not have intended that a business could operate slot machines merely by inserting software created elsewhere that presets the result, the court opined.

The fact that consumers could obtain an immediate result without playing at the terminal did not negate the elements that made the computer games illegal slot machines, the court added.

“The fact that users need not swipe a card or enter a number into the computer terminal and then play a casino-style game in order to obtain a result, does not make the system any less of a slot machine when they do swipe the card or enter the number and do play the casino-style game,” the court 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.”

Two additional circumstances prompted the court’s conclusion. “[W]e think it significant that these systems are specifically designed to cultivate the impression that the user may receive a reward ‘by reason of any element of hazard or chance or of other outcome of operation unpredictable by him or her,’” the court said. In addition, it was clear the defendants’ customers were not just buying Internet or telephone time. “[C]ustomers who ostensibly bought Internet time seemed to spend more time playing the games than using the Internet.”

The court also dismissed concerns that a prohibition of the games would impact national sweepstakes promotions, an argument it called “beyond the scope of this case.”

To read the opinion in People v. Grewal, click here.

Why it Matters: Last year the Legislature amended California’s Business and Professions Code to prohibit sweepstakes like those at issue. The combination of the updated statute and the Grewal decision makes clear that such sweepstakes games are unlawful pursuant to California’s anti-gambling law.