In recent years, thousands of “Internet sweepstakes cafes” have sprung up in storefronts, gas stations and convenience stores in more than a dozen states. Carefully designed to take advantage of state sweepstakes laws and to avoid state antigambling laws and gambling licensing restrictions, Internet sweepstakes cafes are estimated to earn more than $10 billion a year with games that closely mimic the experience of traditional slot and video poker machines. The cafes advertise and sell a product — usually Internet time or long-distance telephone minutes — that the gambler does not actually want. Along with that unwanted product, the customer receives a supposed bonus of “entries” in the Internet sweepstakes. With those entries, the customer can participate in Internet-based games at the cafe’s specially-programmed personal computers. Based on a random allocation of winning and losing entries, the customer may or may not win cash prizes through those games. According to the cafes that are reaping unregulated profits, this elaborate masquerade is not gambling, but a sweepstakes. According to every appellate court that has decided a case involving similar games, it is incontestably gambling.
Nevertheless, through aggressive litigation tactics and high-powered lobbying at state legislatures, the cafes have managed to forestall effective law enforcement against them in many jurisdictions. The result is that many neighborhoods now house gambling venues that are free of the legal restraints that Americans have traditionally demanded for gambling businesses.
For more information on Internet Sweepstakes Cafes, download the AGA white paper on the subject.
Status (as of 10/24/13)
On March 7, 2014, the Fifth District Court of Appeal unanimously affirmed that ruling in People v. Grewal, Nos. F065450, et al. The appellate court stressed that the customers' experience of Internet sweepstakes games is that they are playing a game of chance, so the game represents illegal slot machine gambling under California law even though the sequence of winning and losing plays is predetermined by gaming software.
In late 2012, the California Bureau of Gaming Control issued an Advisory that state law prohibits “so-called ‘Internet café’s’ that sell Internet time or phone cards in conjunction with a ‘promotional sweepstakes.’” In response to the state Advisory, several local governments adopted ordinances or took enforcement measures to shut down local cafes. Sacramento police raided and closed two cafes and charged the business manager at each location with operating an illegal gambling business. Even before the state Advisory issued, Kern County (Bakersfield) prosecutors sued to stop sweepstakes operators in nine location, and a Kern County judge granted an injunction against them. State v. Collom, No. S-1500-CV-276960.
In a headline-grabbing sweep in March, federal and Florida state agents arrested fifty-seven people associated with more than forty Internet sweepstakes cafes in that state operated by the Allied Veterans of the World & Affiliates, which purports to be a charity. The sweep, called Operation Reveal the Deal, also netted the principal of an Oklahoma business that provides software to the operation. Those arrested included three officials of Allied Veterans, the president and vice president of the Jacksonville Fraternal Order of Police, and a former president of the Jacksonville Bar Association who was described by authorities as the mastermind of a scheme to milk profits from the supposedly charitable gambling sites. Of roughly $300 million taken in by Allied Veterans, according to public accounts, two percent went to charity.
Those arrested were charged with multiple felony counts of illegal gambling, operating illegal slot machines, money laundering, fraud and racketeering. By court order, 292 bank accounts holding more than $64 million were frozen. By mid-October 2013, six individuals had accepted plea deals in the case and one who went to trial – a lawyer who helped design the cafés’ business structure – was convicted by a jury on more than 100 counts of illegal gambling and racketeering. The sweep inflicted a political casualty, as well. Florida Lieutenant Governor Jennifer Carroll resigned from office the day after law enforcement agents interviewed her in connection with the investigation. Her public relations firm worked for Allied Veterans in 2009 and 2010, while she served in the state legislature.
Though Internet sweepstakes cafes have been banned by a number of local governments (the city of Tampa and Hillsborough, Polk, Pasco, and Pinellas counties), more than 1,000 now operate in the state. In its 2013 session, the Florida legislature will consider legislation to regulate the cafes.
DeKalb County prosecutors have leveled racketeering charges against three people who operate eight “Big Dawg” locations that offer Internet sweepstakes. The criminal charges allege that the games are illegal because (i) that Big Dawg makes no effort to advertise services and products other than sweepstakes game, (ii) that Big Dawg’s sweepstakes run perpetually, unlike the sweepstakes promotions of other companies, and (iii) Big Dawg’s revenues almost entirely come from sweepstakes, not other services or products.
In March 2013, the Mississippi Legislature adopted a new law declaring that Internet sweepstakes cafes represent illegal gambling activity in that state. The new Mississippi law bars any person from offering a “simulated gambling program” on an “electronic video monitor” in return for direct or indirect consideration “including consideration associated with a product, service or activity other than the simulated gambling program.” House Bill 974 (March 6, 2013).
In February, a New Jersey resident was sentenced to probation for operating Internet sweepstakes cafés in Pequannock and Parsippany. After concluding that Chester Ward had operated illegal casino resorts, the Morris County Superior Court also imposed a forfeiture of $89,000 in cash and 87 computers.
In June 2013, the New York legislature adopted broad new legislation providing that anyone operating an Internet sweepstakes machine is guilty of a Class E felony.
Internet café owners in this state pursued a novel legal strategy: to claim that their businesses are engaging in protected First Amendment speech that cannot be shut down under state anti-gambling laws. Because the state statute at issue barred the promotion of sweepstakes that employ an “entertaining display,” sweepstakes advocates claimed a constitutional right to link those displays to sweepstakes games. A divided panel of the North Carolina Court of Appeals accepted this argument in March 2012, but on December 14, the North Carolina Supreme Court unanimously reversed that decision and reinstated the state anti-sweepstakes law. Holding that the statute “primarily regulates noncommunicative conduct rather than protected speech,” Justice Robin Hudson ruled that the café operators could not “’skillfully disguise’ conduct with a façade of speech to gain First Amendment protection.” Ironically, Texas recently arrested the senior executives of the company that is challenging the North Carolina prohibition. The defendants face charges of felony gambling, money laundering, and organized criminal activity.
Based on the Supreme Court ruling, a number of local law enforcement agencies have begun to shut down North Carolina’s Internet sweepstakes cafés. In Waynesboro, the manager of a café was convicted in Morris County District Court of violating the state law, though he promptly appealed his conviction. State v. James Locker, (Morris County District Court). Some café operators are arguing in court that the state statute does not reach machines that have been modified to comply with the state law. On that theory, two defendants have been acquitted in district court cases in both Catawba and Macon Counties, and a lawsuit in Macon County seeks an injunction declaring that specific machines do not violate the North Carolina statute. Until there is a further definitive ruling from an authoritative state court, these disputes are likely to continue.
In early June, Ohio Governor John Kasich signed into law new legislation (HB 7), which will impose a ceiling of $10 on the payouts that can be made by Internet sweepstakes cafes. The new requirement, which took effect in October, is expected to force the shutdown of the more than eight hundred Internet sweepstakes cafes in the state. The cafes mounted a referendum drive to repeal the law but failed to collect the necessary signatures. A coalition of political, law enforcement and business groups that includes the Fraternal Order of Police of Ohio, the Buckeye State Sheriffs' Association, County Commissioners Association of Ohio and the Ohio Council of Retail Merchants supported House Bill 7. The state’s action followed an investigative report by the Columbus Dispatch reported that a majority of the cafes in Ohio flouted a requirement that they provide full business information to the state attorney general, while barely 20 percent of the Ohio cafes identified the people who own and operate them.
In March, the Ohio Court of Appeals affirmed criminal convictions against cafe operators in City of Cleveland v. Thorne, No. 2010-CRB-04521 (8th Dist., March 22, 2013). The appellate court impatiently rejected the defendants’ claim that their customers truly bought Internet time or other business services, and thus paid no consideration to gamble. The computer games at the cafe, the court added, represented a “patently obvious gambling scheme.” In October, two corporations and three individuals who supplied software to Internet sweepstakes cafes in Cuyahoga County pled guilty to criminal racketeering and gambling charges and agreed to cease operations in Ohio.
A federal trial court upheld Pennsylvania’s ban on Internet sweepstakes cafés in early October. Judge Robert D. Mariani of the Middle District of Pennsylvania refused to enter a preliminary injunction against the statute, which was adopted on June 30. He rejected the claim that the law violated the First Amendment rights of café owners. Intervening in support of the statute were three Pennsylvania casinos: Mohegan Sun at Pocono Downs, Sands Bethworks Gaming, LLC, and Greenwood Gaming and Entertainment, Inc., d/b/a Parx Casino. Telesweeps of Butler Valley, Inc. v. Kelly, No. 3:12-CV-1374 (M.D. Pa.) (October 10, 2012).
States have longstanding policies that gambling businesses must be specifically authorized, strictly regulated to protect consumers, kept free of crime and fairly taxed to contribute resources for the public good. In recent years, thousands of “Internet Sweepstakes Cafes” with estimated annual revenues exceeding $10 billion have sprung up in more than a dozen states in total circumvention of state antigambling laws and gambling license requirements. After making very little investment, these rogue businesses spread quickly and become entrenched, posing a threat to existing state-licensed businesses and the thousands of jobs they create.
Although they often claim otherwise, Internet sweepstakes cafes sell games that involve prize, consideration and chance and, thus, are engaged in the business of gambling. In the vast majority of communities where they operate, cafes lack regulation of (1) the integrity of the owners and operators, (2) the fairness of the games, (3) the exclusion of customers too young to gamble, and (4) their location, including the proximity to schools or churches. They do not educate customers about responsible gaming or contribute funds to combat problem gambling. In addition, neither the cafes nor the software companies that support them pay state or local gaming taxes. To the contrary, their largely unreported profits may siphon revenues from state-authorized businesses.
The American Gaming Association believes that strict regulation to protect consumers is the cornerstone of gambling policy and should apply to all forms of gambling. Responsible public policy should prohibit Internet sweepstakes cafes, as numerous states have done.