With only seven U.S. states offering real-money online casino gaming (also known as “iGaming”), sweepstakes casinos have emerged to fill the void. Readily available on major app stores for download from anywhere in the U.S., these unregulated platforms — which originated offshore but have since steadily migrated onshore (with many of the major operators headquartered in the United States) — offer real money casino-style gambling (such as slots, roulette, blackjack, poker, and even sports betting) under the guise of a “sweepstakes” promotion (albeit, one which is perpetually run). This nascent industry has grown at an astonishing rate — with more than one million U.S.-based players — and this year expects to see $11.4 billion in player purchases and at least $4 billion in net revenue.

While these platforms claim to offer a “sweepstakes” like those occasionally offered by Publisher’s Clearinghouse and McDonald’s, they bear no similarity to those promotions. Rather than a limited-time offer intended to promote a separate, standalone product, these platforms continuously offer real money casino-style games of chance. The only product offered is casino games – there is no separate line of business being promoted. The purported “sweepstakes” aspect is no more than a sleight of hand – customers purportedly pay for one type of token to participate in the games (“Gold Coins”, which allow you to play the games for no real-world prizes) and are issued a “free” “bonus allotment” of Sweeps Coins, which allow you to participate in the same games for the opportunity to win a prize. The number of Sweeps Coins a purchaser receives is generally equivalent on a 1:1 basis to the number of dollars they spend to obtain them.

As detailed previously in Forbes, every relevant judicial decision (at least 15 by my count) which addresses a ‘casino-style’ sweepstakes game that awards users entries to play real money games of chance in an amount commensurate with dollars spent was found to be illegal gambling — even though free entries were also available without a product purchase.

Private civil lawsuits are time-consuming and uncertain

Despite their dubious legality, online sweepstakes casinos have continued to operate unimpeded in the United States. Efforts to rein in these unregulated platforms – which skirt state licensing requirements, offer no player protections, and siphon revenues from state governments – have largely been relegated to private class action lawsuits from aggrieved customers and the occasional cease-and-desist notice from a state regulatory agency.

But private civil lawsuits against online sweepstakes casinos — around 20 have been filed so far — could take years to litigate and have already been bogged down in early-stage motion practice over a wide spectrum of procedural issues (such as whether the case should be arbitrated, kept in federal court or remanded to state court, and, in some instances, whether the plaintiff even has standing to sue).

Even assuming a plaintiff can sidestep these roadblocks — many do not (with the recent dismissal by a Florida federal court highlighting the folly of placing all of your eggs in the civil litigation basket) — these cases will likely never get to a jury because the sweepstakes casino operator will invariably settle rather than risk a precedent-setting adverse judgment.

And if you live in California or Florida, you may be completely out of luck since there is case law in those states (see here and here) which bars private civil lawsuits to recover gambling losses — even where a plaintiff is an unknowing participant in illegal gambling. This leaves many aggrieved consumers without any meaningful recourse.

The State AG “toolbox” to combat illegal gambling

A more effective and efficient way to combat the proliferation of online sweepstakes casinos is through the vast civil enforcement powers of state attorneys general, who are typically authorized under state law to seek wide-ranging remedies such as injunctive relief, restitution, disgorgement of profits, sequestration of assets, dissolution of the business, and civil penalties to address fraudulent or illegal activity — all without being burdened by arbitration clauses or issues of standing that can doom private civil lawsuits. Importantly, state attorneys general can also pursue second-tier actors — such as banks and payment processors — which materially assist and/or aid and abet illegal gambling operations.

For example, in California, Sections 1703, 1704, and 1706 of the Business & Professions Code (commonly referred to as the “Unfair Competition Law”) authorize the Attorney General and other law enforcement officials (such as a district attorney, county attorney, or city attorney under specified circumstances) to sue in the name of the People of the State of California for injunctive relief, restitution, and mandatory civil penalties of up to $2,500 per violation to address unlawful business practices such as violations of the state’s anti-gambling laws.

The California Attorney General’s Office has used this civil enforcement mechanism on numerous occasions to combat illegal sweepstakes gambling, with one recent case culminating in a multi-million dollar judgment and an injunction against a Canadian-based software supplier which provided slot machine-style gambling games to Internet sweepstakes cafés throughout California. (Also included in the stipulated final judgment were two Florida corporations, a Nevada limited liability company, and the principals of all three entities — all of whom were sued by the California AG under a state-law aiding and abetting theory).

Likewise, in New York, Section 63(12) of the Executive Law empowers the Attorney General to seek injunctive relief, restitution, a disgorgement of profits, and damages against any business committing repeated fraudulent or illegal acts within New York’s borders. (A recent court decision holds that, in some cases, the Attorney General can even obtain a nationwide disgorgement of the wrongdoer’s net profits — giving the disgorgement remedy even more bite, especially against New York-based businesses that have a national customer base).

The New York Attorney General has previously invoked this statute to enjoin and seek restitution and damages from companies offering illegal gambling over the Internet, with one notable case — People ex rel. Vacco v. World Interactive Gaming Corp. — resulting in an injunction against an Antiguan-based casino and an order of restitution against its principals, officers, and directors — making them personally liable for the actions of the offshore entity.

Without question, an injunction requiring the operator to shut down the illegal gambling website (or to no longer do business within the state), combined with the forced payment of tens (or even hundreds) of millions of dollars to injured consumers and state treasuries in the form of restitution, disgorgement, and civil penalties — along with the prospect of joint and several liability for payment processors and individual liability for those involved in running the business — can serve as a powerful deterrent to other companies likewise skirting state anti-gambling laws. It can accomplish in just one case what dozens of cease-and-desist orders cannot possibly achieve in what is fast becoming an endless game of ‘whack-a-mole.’

Heightened vulnerability in California, Florida, and New York

While these civil enforcement remedies are available to state attorneys general in most states, three states in particular present an extraordinarily high risk to sweepstakes casino operators and their affiliates — California, Florida and New York. All three states have constitutionally-enshrined prohibitions limiting casino gambling and among the strictest and most prohibitive anti-gambling statutes in the entire country — with expansive ‘aiding-and-abetting’ provisions that can reach financial intermediaries such as banks and payment processors.

For example, in California, claims for aiding and abetting an illegal online lottery were held to be sufficiently stated against four payment processors that “had a direct stake in the success” of the gambling enterprise and had allowed their logos to be displayed on the operator’s website to lend it an “aura of respectability.” An even lower threshold exists in New York, where the criminal offense of “promoting gambling in the second degree” under Penal Law § 225.05 extends to any person who “knowingly advances or profits from” unlawful gambling activity — such as those involved in the “financial or recording phases.” And, in Florida, the criminal offense of aiding and abetting an illegal lottery applies not just to persons who set up, promote or conduct the lottery, but also to those “interested in” or “connected in any way” with the lottery — expansive language that briefly ensnared a prominent gaming attorney who issued legal opinions and provided myriad other services to Internet sweepstakes cafes.

California and Florida, in particular, have a strong financial incentive to pursue litigation against sweepstakes casinos. Both states risk losing billions of dollars in revenue-sharing payments under state-tribal gaming compacts which guarantee Native American tribes either total or substantial exclusivity over casino-style gaming. Depending on the language of the specific compact, each state’s continued right to receive those lucrative payments could be jeopardized in the event of any breach of tribal exclusivity. That actually happened in Florida nearly a decade ago when the state allowed commercial card rooms to encroach upon the Seminole Tribe’s exclusivity. At the very least, both California and Florida could experience a flattening (or even a reduction) of their land-based casino gambling revenue-sharing payments as online sweepstakes casinos continue to proliferate and expand in both states.

And, on top of that, California and Florida are the two most proactive states in tackling the ongoing problem of Internet sweepstakes cafés – the forerunner to online sweepstakes casinos (which employ a similar business model) – with both states enacting new laws a decade ago to prohibit these businesses (note: New York also passed a similar law in 2013) and stepping up law enforcement efforts in recent years to dismantle their operations. The California Attorney General’s Office has even created a “Sweepstakes Gambling Task Force” to “bring an end to illegal sweepstakes gambling operations in California.”

California courts apply the rule of “indirect consideration”

A threshold legal issue that must be addressed in the sweepstakes context — regardless of the jurisdiction — is the element of payment, also known as “consideration.” For context, many states’ anti-gambling laws define an illegal lottery as comprised of three essential elements: prize, chance, and consideration (i.e., payment). Sweepstakes (typically random drawings for prizes) possess two of the three characteristics of a lottery: chance and a prize. Therefore, to avoid classification as an illegal lottery, a sweepstakes promotion must not involve any consideration.

The case law in California on the issue of “consideration” is tailor-made for a legal challenge against online sweepstakes casinos. In several cases involving Internet sweepstakes cafés which provided customers with “sweepstakes points” to play casino-style games in an amount commensurate with the number of dollars spent purchasing products (i.e., 100 “sweepstakes points” for every dollar spent), California courts uniformly held that the consideration paid by the customer was in part for the chance to win a prize, rendering it illegal gambling — even though there were several ways to get free entries without purchasing a product. (As discussed in the next section, online sweepstakes casinos use a similar pricing structure — with the “sweeps coins” closely tracking the dollars spent on a nearly 1:1 basis).

For example, in People ex rel. Green v. Grewal, the defendants promoted the sale of Internet access time and other products with a “sweepstakes” giveaway, wherein the defendants provided customers with 100 “sweepstakes points” for each dollar spent, which could then be used to play ‘casino-style’ games of chance for cash prizes at computer terminals provided at defendants’ Internet cafés. (The “sweepstakes points” were redeemable at a rate of one dollar per 100 points — in other words, a 1:1 ratio of “money in” and “money out”). The defendants denied that the operation involved illegal gambling because they were only selling computer time, and that the sweepstakes games were “not gambling” but instead a “promotional game.”

In upholding a lower court’s injunction, the California Supreme Court determined that the computer sweepstakes games were illegal slot machines. Although consideration was not a required element under the slot machine law at issue, the Grewal Court stated that “even if consideration is necessary in slot machine cases, its existence will be found where a connection exists between purchasing a product and being given chances to win a prize.” Quoting several prior California appellate court decisions, the Supreme Court explained that “‘[o]nce the element[s] of chance [and prize]’ are added to a vending machine or device, it is reasonable to assume that ‘people are no longer paying just for the product regardless of the value given that product by the vender.’” “That is the case here as well,” the Court concluded, “since points are given to play the computer sweepstakes games on defendants’ terminals based on dollars spent in purchasing products – that is, the elements of chance and prize are added to the purchase.”

Likewise, in Lucky Bob’s Internet Café, LLC v. California Dep’t of Justice, a California federal district court found consideration to exist where customers were given 100 free entries to a “sweepstakes” for every $1 of purchased internet time and played casino-style games of chance to find out whether they won a prize. The fact that customers could also obtain free entries without a purchase did not change the result. Citing prior California appellate court rulings, the court held that “the consideration element is satisfied when some customers by chance receive more than what they paid for. . . . Once the elements of chance and prizes are added, the consideration paid is no longer solely for internet time. Paying for the chance to win money, rather than the use of Internet time, may be the customer’s main focus.”

Finally, in People ex rel. Lockyer v. Pacific Gaming Tech., the California Court of Appeals found consideration to exist where a vending machine which dispensed five-minute phone cards for $1 had a ‘slot machine-style’ sweepstakes feature which offered customers an opportunity to win a cash prize of up to $100. The appellate court reasoned that “[s]ince the machine also dispenses a chance to win the sweepstakes, it gives more than the merchandise—which means the sum deposited is not the ‘exact consideration’ for the telephone card.” “Once the element of chance is added”, the appellate court explained, “people are no longer paying just for the product regardless of the value given that product by the vendor.” The court concluded that because “[b]y the insertion of money and purely by chance . . ., the user may become entitled to receive prize money in addition to the telephone calling card,” the element of consideration is added and people are no longer paying just for the product.

California’s treatment of the consideration element is consistent with the approach taken in other states. For example, in Telesweeps of Butler Valley, Inc. v. Kelley, a Pennsylvania federal court held that the purchase of a long distance telephone card that comes with a commensurate number of free entries to participate in a ‘casino-style’ sweepstakes game constituted “indirect consideration” to participate in the sweepstakes, even though no purchase was necessary and alternative methods of free entry were available. In rejecting the defendant’s argument that the customer was simply paying for telephone time and not the sweepstakes entries, the Court declared that “plaintiff’s attempt to separate the consideration from the chance to win by inserting a step between the two elements is clever, but it merely elevates form over substance. At bottom, what Telesweeps is doing constitutes gambling.”

Sweeps coins correspond nearly 1:1 with dollars

Like the Internet cafés that once plagued California, online sweepstakes casinos attempt to separate the element of consideration from the real-money gambling by offering a two-tiered system of virtual coins. The first type of virtual currency – called “Gold Coins” – can be used to play ‘casino-style’ games (such as slots, roulette, blackjack and poker) in a “standard mode” with no potential for redeeming any prizes. The second type of virtual currency – called “Sweeps Coins” – can be used to play the same games in a “promotional sweepstakes mode,” where they carry real monetary value and can be redeemed for prizes and money. Players may switch or toggle between these two modes easily and as frequently as they would like.

While players can receive a limited number of Sweeps Coins (usually no more than 5) for free through mail-ins, giveaways and other promotions, by far the most common way to obtain Sweeps Coins beyond a nominal amount is by purchasing Gold Coins. Most coin purchase options presented to consumers are offered as a package that includes an allotment of Sweeps Coins with the purchase of Gold Coins. The more Gold Coins that a player purchases, the more Sweeps Coins the player also receives.

Critically, the number of Sweeps Coins corresponds with the amount of real money spent or won. That is because there is essentially a 1:1 correlation between the number of dollars spent and the number of Sweeps Coins provided in each purchase. So, for example, if someone spends $19.99 to buy 400,000 Gold Coins, they might get 21 Sweeps Coins; whereas if they spend $49.99 to buy 1,000,000 Gold Coins, they might get 52 Sweeps Coins. If they spend $99.99 to buy 2,000,000 Gold Coins, they might get 105 Sweeps Coins, and so on. (In virtually all cases, though, Sweeps Coins closely track the amount of real money spent).

The nearly 1:1 correlation between Sweeps Coins and dollars spent is so commonplace that one prominent sweepstakes affiliate admitted that it basically “gives you the same amount of free sweeps coins for your payment (like paying $30 for 30 free sweeps).”

The same rate of exchange applies when it’s time to cash out as well. Sweeps Coins are redeemable — following successful play — for cash at a conversion rate of 1:1 (with one Sweeps Coin being equivalent to $1). So, for example, 100 Sweeps Coins can be redeemed for $100.

This is the same construct that was used by the Internet sweepstakes cafés. Typically, for every $1 dollar spent on Internet access time, the Internet café customer would receive 100 sweepstakes points, which, following successful play, could be redeemed for cash at a value of one cent per point. In other words, $1 dollar in and $1 out. Just like the sweepstakes cafés, online sweepstakes casinos artificially separate the consideration from the chance to win real money by claiming that the payment is for a “product” (i.e., Gold Coins) and the sweepstakes entries (i.e., Sweeps Coins) are “free,” while conveniently providing the purchaser with an allotment of Sweeps Coins that is nearly equivalent in value to the Gold Coin purchase price.

That’s the very essence of “consideration” — and the trigger for a finding of illegal gambling — as Grewal, Lucky Bob’s Internet Café, Telesweeps, and countless other cases instruct.

But that is far from the only indicator of a gambling scheme.

Other indicia that the true purpose is gambling

In addition to the nearly 1:1 correlation between money spent and the number of Sweeps Coins received — a pricing structure which indicates that Gold Coins are merely a “cover” for the purchase of Sweeps Coins — there are several other factors which show that the true purpose of the sweepstakes is to promote gambling, as opposed to some other good or service:

1. ‘Casino-like’ environment

Numerous courts have indicated that a “casino-like” business model is anathema to a finding of a legitimate sweepstakes. As a Pennsylvania federal court observed in Telesweeps, “[f]or Plaintiff to argue that its sweepstakes is not gambling when it works to create a player experience which mimics casino-style games as closely as possible is too much for this Court to accept.” Likewise, in Texas v. Ysleta del sur Pueblo, a Texas federal court concluded that a sweepstakes operator’s “casino-like business model” was “clear and convincing evidence” that the “true purpose” of the defendant’s business “is to ‘create a place where people [are] comfortable staying . . . and playing the sweepstakes,’ and not to promote a . . . product.”

If a sweepstakes which mimics casino-style games was “too much” for one federal court to accept and constituted “clear and convincing” evidence of an illegal lottery in the view of another federal court, that should speak volumes as to the absurdity of an around-the-clock real-money online casino masquerading as a sweepstakes promotion.

As the California Court of Appeals appropriately observed in Lockyer v. Pacific Gaming Technologies, in referring to a slot machine-style sweepstakes promotion, “if it looks like a duck, walks like a duck, and sounds like a duck, it is a duck. And so it is with this duck.”

Indeed, as detailed previously in Forbes, every single judicial decision uncovered following a diligent search which addressed a ‘casino-themed’ sweepstakes involving a product purchase that came with a corresponding number of “free” entries to play games of chance for cash prizes was found to be illegal gambling. (I listed 15 cases, and provided links to each one).

By contrast, you’d be hard-pressed to find even one judicial decision from this century that has upheld a sweepstakes promotion which incorporates casino-style games of chance.

Moreover, in California, there is a public policy against ‘gambling-themed’ sweepstakes operations. In 2015, the Legislature amended Business & Professions Code section 17539.1 to prohibit sweepstakes that “simulate gambling” or involve “gambling-themed games,” and which are “intended to provide a vehicle for the establishment of places of ongoing gambling or gaming.” The Attorney General explained in a 2015 court filing that the new language “was intended to assure that gambling-themed sweepstakes operations would be prohibited under the Unfair Competition Act (Bus. & Prof. Code § 17200, et seq.) as unfair business practices.”

2. Perpetual duration

A traditional sweepstakes promotion “is a limited-term event designed to attract consumer attention to a product or a business, and ordinarily expires after a few weeks or months.” For sweepstakes casinos, on the other hand, the sweepstakes games run perpetually.

This distinction has been cited by courts and state attorneys general as a crucial factor in determining that a sweepstakes promotion was in fact a guise for illegal gambling. For example, in Barber v. Jefferson County Racing Assoc., the Alabama Supreme Court found that the perpetual duration of a slot machine-style sweepstakes promotion was indicative of its “true purpose,” which was to legitimize illegal gambling. As the Court explained, “the duration of ‘promotional sweepstakes occasionally offered by fast food chains, or in connection with candy, sodas, miscellaneous food or other established retail products,’ is typically ‘limited,’ as opposed to the duration of the MegaSweeps, which is indefinite.”

Further, both California and Florida amended their sweepstakes laws over a decade ago in response to the Internet café epidemic by restricting chance-based sweepstakes promotions to those run by for-profit commercial entities on a “limited and occasional basis” for marketing and advertising purposes incidental to the sale of a bona fide product or service and which “are not intended to provide a vehicle for the establishment of places of ongoing gambling or gaming.” (See here and here). This undercuts any suggestion that perpetual real money casino-themed sweepstakes games are permitted in either California or Florida.

3. High payout percentages

The typical payout percentage for a temporary promotional sweepstakes is “a trivial share of the revenue earned by the company.” For example, the grand prize for McDonald’s annual Monopoly-themed sweepstakes is usually about $1 million, which is a tiny fraction of the billions of dollars that McDonald’s earns each year. By contrast, online sweepstakes casinos claim to pay out in prize money between 80-96% of their revenues; notably, slot machines at commercial casinos typically pay out between 80 to 95 percent (depending on the state).

The highest courts of two states have pointed to the high payout percentage of a sweepstakes as indicative of a gambling scheme. In Barber, the Alabama Supreme Court noted that the 92% payout rate for MegaSweeps “coincides with the industry standard for casino-style slot machines, which ‘typically pay back 90% to 98% of all money played. By contrast, the typical payout percentage for a ‘temporary promotional sweepstakes’ is ‘one half of one percent.’”

Likewise, in Midwestern Enterprises, Inc. v. Stenehjem, the North Dakota Supreme Court addressed a telephone card vending machine that dispensed a two-minute telephone card, plus a chance to win up to $500 in cash for every dollar paid. The machine incorporated visual and audio “gambling features,” and randomly dispensed a chance for cash prizes with each dollar risked, with a pay-out rate of 65%. The Supreme Court characterized this “high payout rate” as “a distinguishing feature because it goes to the true purpose of the game.”

4. Restrictions on the ability to redeem prizes

Conditions designed to keep customers playing longer are indicative that the true purpose of the sweepstakes is to promote gambling, as opposed to a good or service. Unlike traditional sweepstakes where prizes can be claimed immediately, most sweepstakes casinos have a “minimum permitted redemption” threshold that limits a user’s ability to redeem prizes unless their Sweeps Coins balance is above a certain amount. In most cases, the withdrawal threshold is 50 Sweeps Coins or 100 Sweeps Coins. This forces consumers to continue playing and eventually lose their Sweeps Coins balance, causing them to make more purchases to replenish their Sweeps Coins in order to continue playing to try to scale up to that minimum.

This is further compounded by a “playthrough requirement,” which refers to the number of times that a user must play through his allotted Sweeps Coins before they are eligible for redemption. For example, if a user receives 100 Sweeps Coins and those Sweeps Coins have a playthrough requirement multiplier of 2x, a user must play games totaling 200 Sweeps Coins prior to those coins being eligible for redemption as a prize. Many sites have a 2x or greater playthrough requirement multiplier, with the discretion to increase the multiplier up to a maximum of 20x. This requires users to continue playing – even after a successful first spin – and increases the likelihood that they will gamble – and lose – all of their remaining Sweeps Coins, leading them to buy and wager more Sweeps Coins in an effort to try to satisfy both the playthrough requirement and a restarted minimum permitted redemption threshold.

One federal appeals court has declared that conditions designed to keep patrons playing longer are indicative of the ‘true purpose’ being the promotion of the sweepstakes, not the purported ‘product.’ In United States v. Davis, the Fifth Circuit found the evidence established that “the defendants’ true purpose for the cafés was to create a place where people would be comfortable staying for a long time, purchasing Internet time and playing the sweepstakes.” Thus, the Court concluded that “the main purpose and function” of the business “was to induce people to play the sweepstakes, and that the Internet time sold by the cafés—albeit at fair market value—was not the primary subject of the transaction, but instead mere subterfuge.”

5. Customers value sweepstakes entries more than the product

The degree to which customers valued the sweepstakes entries over the promoted product is also indicative of whether the “true purpose” of the transaction is to promote sweepstakes play. One critical area to focus on is customer play and transaction history after Sweeps Coins balances are depleted. For example, what typically happens when customers who have an abundance of Gold Coins in their accounts run out of Sweeps Coins following unsuccessful sweepstakes play? Do they go back to their stockpile of Gold Coins and play social casino games purely for entertainment value? Or do they seek to immediately replenish their Sweeps Coins balances – and continue playing real money casino-style games – by purchasing additional Gold Coin packages that come with a “bonus” allotment of Sweeps Coins?

If a significant percentage of users opted to replenish their depleted Sweeps Coin balances by purchasing additional Gold Coin packages – despite already having a large cache of Gold Coins in their accounts (even relatively small purchases can garner “hundreds of thousands” of Gold Coins) – that would be compelling evidence that consumers valued the sweepstakes entries (i.e., Sweeps Coins) more than the promoted product (i.e., Gold Coins), creating a reasonable inference that the Sweeps Coins were the “primary subject” of transaction.

This was the outcome in Barber v. Jefferson County Racing Assoc., where the Alabama Supreme Court found that the element of consideration was present in a sweepstakes game called “MegaSweeps” based on the undisputed evidence showing that the defendants’ customers “were lined up at all hours to use the readers [i.e., slot machine-style gaming devices]” and “purchased additional cybertime—with the accompanying entries—even though they already had large quantities of unused cybertime.” The Supreme Court concluded that these facts established that “a substantial number, if not a majority, of customers pay to play the readers, rather than to acquire, or in addition to acquiring, cybertime.”

While this type of account-level review would require some degree of fact-gathering and investigation – in contrast to other above-described factors that are evident on their face – these details are within the possession and control of the sweepstakes companies and can readily be subpoenaed and/or demanded through the civil litigation discovery process.

Grewal boosts California’s appeal as a first mover

The favorable case law on the crucial element of “consideration” makes California the clear-cut first choice for state-initiated litigation against online sweepstakes casinos. The California Supreme Court’s decision in Grewal articulated the analytical framework used in California for ascertaining the existence of consideration in a sweepstakes. Adopting the approach taken in two earlier California appellate decisions — Pacific Gaming Technologies and Trinkle v. Stroh — the California Supreme Court declared that consideration will be found “where a connection exists” between purchasing a product and being given chances to win a prize.

Applying this rule, both Grewal and Lucky Bob’s Internet Café found the existence of consideration in a casino-style sweepstakes where there was a close correlation between the amount of money spent on a product and the number of free entries received (i.e., 100 “sweepstakes points” for every $1 spent). This is a relatively low bar to clear — Telesweeps referred to it as “indirect consideration” — and is easily met here. Like the Internet cafés in those cases, sweepstakes casinos award users ‘free’ Sweeps Coins to play casino-style games of chance in an amount that correlates nearly 1:1 with the amount of money spent on a product.

In light of this established precedent, there is a high probability — if not a virtual certainty — that a California court presented with another perpetual casino-themed sweepstakes promotion featuring a close correlation between the amount of money spent and the number of free entries received would decide the “consideration” issue the exact same way as Grewal (issued by that state’s highest court) and Lucky Bob’s Internet Café. Any doubts about that should have been removed once and for all when the California Legislature amended Section 17539.1 of the Business & Professions Code in 2015 to prohibit perpetual gambling-themed sweepstakes. The law was clear prior to that legislative enactment. But it’s even clearer now.

The presence of consideration — an outcome mandated by Grewal and Section 17539.1 — would consequently trigger a finding that the sweepstakes casino operator has set up an illegal lottery in violation of Sections 320 and 321 of the California Penal Code since all three elements of a lottery — chance, prize, and consideration — would now be present.

California has multiple statutes banning casino-style gaming

In addition to the claim of an illegal lottery, the Attorney General could assert violations of the following Penal Code gambling prohibitions (as several civil plaintiffs have already done):

1. Section 330 (ban against specific casino-style games such as roulette and blackjack, and any banking game played with cards or dice);
2. Section 330b (ban against slot machines, which doesn’t require a showing of consideration (as Grewal confirms), but may nevertheless be a heavy lift due to the antiquated “machine, apparatus, or device” language in the statutory definition of “slot machine,” which seemingly precludes online or virtual slots from its scope, as a Maryland federal district court applying California law held in 2015. However, a more recent California federal decision cautions that the Maryland decision “has no precedential value”);
3. Section 337j (ban against operating or conducting a “controlled game” without a license. A “controlled game” is defined as “any game of chance”);
4. Section 337a(a)(3) (ban against receiving, holding, or forwarding any money staked, bet, or wagered upon the result of any contest or any “lot, chance, casualty, unknown, or contingent event whatsoever.”).

The abundance of statutory prohibitions aimed at casino-style gambling further tips the scales in favor of California as a potential launch point for litigation. Article IV, Section 19(e) of the California Constitution specifically forbids the legislature from authorizing casino-style games and requires it to enact laws prohibiting all such gaming. Among the prohibitions enacted by the California Legislature are those specifically relating to casino-style games (such as roulette, blackjack, and any banking game played with cards or dice), slot machines, and unlicensed games of chance. The games offered by many sweepstakes casino websites arguably fit within several of these broad categories, giving a prospective plaintiff (or state attorney general) several alternative legal theories that can be simultaneously pursued.

For example, courts have held that Section 337j’s ban against “controlled games” applies to online casino games. In Colvin v. Roblox Corp., a California federal court held that Section 337j “clearly applies” to an online gaming platform’s sale of virtual coins that were used to make wagers via online casinos, thereby facilitating illegal gambling. Likewise, in Ochoa v. Zeroo Gravity Games, a California federal court observed that “casino-style slot games” on a mobile device “would seem to fall squarely within” § 337j’s definition of a “controlled game.”

These anti-gambling laws are not rendered inapplicable by a sweepstakes operator’s compliance with state-law sweepstakes requirements (such as by offering free methods of entry). To the contrary, Section 17539.1(d) of the Bus. & Prof. Code states that “[n]othing in this section shall be deemed to render lawful any activity that is unlawful pursuant to other law, including, but not limited to, Section 320, 330a, 330b, 330.1, or 337j of the Penal Code.”

Virtual currency is not a consumer good in California

With its relatively low threshold for “consideration” and abundance of statutory prohibitions aimed at casino-style gambling, California was already shaping up to be a legal quagmire for sweepstakes casinos. To make matters worse, California law also rejects the fundamental premise for legality advanced by sweepstakes casino operators — namely, that a social casino digital coin is a “bona fide consumer good.” Every California court that has considered the issue (see here, here, and here) has held that virtual currency is not a consumer “good” or “service” because it is an intangible asset falling outside the scope of the Consumer Legal Remedies Act. Thus, the virtual “Gold Coins” that are being touted as the product promoted by the sweepstakes games are not even considered bona fide products under California law.

Payment processor liability in California

Additionally, California law offers at least two viable entry points for imposing civil liability on banks and payment processors. The first is “aiding and abetting” an illegal lottery in violation of Section 322 of the California Penal Code. While this is a difficult claim to establish — as it requires a showing of both “affirmative participation” and “guilty knowledge” — that high bar was cleared in Schulz v. Neovi Data Corp., where California’s Fourth District Court of Appeal held that the plaintiff stated viable “aiding and abetting” claims against four payment processors which accepted and processed internet payments for an illegal online lottery. The key allegation in that case was that the payment processors did more than just merely provide payment processing services — they also allegedly authorized the online lottery to “display their respective logos so that consumers could link directly to their sites to process credit card payments” under the perception that it “would lend an aura of respectability to the site” and make participation easier, thereby generating more revenue.

A second — and seemingly less arduous — path for pursuing civil remedies against banks and payment processors may be through Penal Code section 337a(a)(3), which prohibits any person from “receiving, holding, or forwarding” any money bet or wagered. A recent Ninth Circuit decision — United States v. Silveira — observed that Section 337a(a)(3) applies to “financial intermediaries” which receive funds from customers as a “conduit” for forwarding to the gambling business, perhaps setting the stage for its future invocation against banks and payment processing companies which work with illegal sweepstakes gambling businesses.

Restitution and civil penalties in California

While private citizens are barred from suing to recover their gambling losses as a matter of longstanding California public policy, the state attorney general, on the other hand, is specifically empowered by Sections 17203, 17204, and 1706 of the Unfair Competition Law to bring civil actions in the name of the People of the State of California to obtain permanent injunctive relief, restitution, and mandatory civil penalties of up to $2,500 per violation to address “unlawful business practices,” including violations of California’s anti-gambling laws.

The Attorney General has used this enforcement mechanism on numerous occasions against Internet sweepstakes gambling cafés, with one recent case yielding a $3.5 million judgment and permanent injunction against Pong Marketing & Promotions, a Canadian-based company which provided gambling software to sweepstakes cafés throughout California. The Second Amended Complaint — which includes claims for permanent injunctive relief, restitution and civil penalties under the UCL — provides the template that can be used against online sweepstakes casinos, but with the prospect of a much larger monetary recovery due to the online nature of the businesses and a mandatory civil penalty that is assessed “per violation.”

For some of the larger sweepstakes operators, the civil penalties alone could run in the eight, nine, or even ten figures in light of: (i) the likely number of victims (especially in the country’s most populous state with approximately 40 million residents), (ii) the length of time over which the actions occurred, (iii) the willfulness and repetition of the alleged misconduct, and (iv) each defendant’s assets, liabilities and net worth — all of which are factors that California courts must consider under UCL § 17206(b) in determining the appropriate civil penalty.

California’s potential national impact

In many ways, California is the ideal state for launching a governmental-backed legal challenge to the online sweepstakes casino industry. It checks all of the right boxes — (i) a constitutional ban on ‘casino-style’ gaming; (ii) multiple statutes prohibiting ‘casino-style’ gaming; (iii) a sweepstakes law that bans “gambling-themed” sweepstakes games and makes clear that even a technically compliant sweepstakes must still abide by California’s anti-gambling laws; (iv) a favorable judicial standard on the element of “consideration” — finding it to exist in cases where (like here) there is a correlation between money spent on a product and the number of ‘free’ sweepstakes entries received to play ‘casino-style’ games of chance; (v) over 60 tribal-state compacts that guarantee Native American tribes exclusivity over ‘casino-style’ gaming; and (vi) a state attorney general’s office with broad civil enforcement powers that have frequently been deployed against illegal sweepstakes gambling operations.

In light of these myriad factors — several of which are outcome determinative in my view — California is the very last place where a sweepstakes casino operator should want to test the legality of its business model in court. It won’t end well. At the same time, this is a unique opportunity for the California Attorney General’s Office — which created a “Sweepstakes Gambling Task Force” to “bring an end to illegal sweepstakes gambling operations in California” — to take the national lead on this issue. Through its years-long legal battles with Internet sweepstakes gambling cafés, the California Attorney General’s Office has played an instrumental role in helping to shape the law surrounding Internet sweepstakes gambling in California. And with those laws being among the most stringent in the entire country, there is both an immediate and long-term benefit to having those Internet sweepstakes café-era laws applied to online sweepstakes platforms and serve as persuasive authority for other states to use. That’s one reason why it makes sense for California to be a first mover on this issue.