Are the slot-machine-style 'sweepstakes' games at internet cafes and cyber cafes legal in Colorado, or are they actually illegal gambling dressed up as a phone-card promotion?

Opinion 14-03: Sweepstakes cafes operate illegal gambling in Colorado, regardless of whether a phone card or internet time is sold alongside the slot-machine-style "reveals"

Plain-English summary

Sweepstakes cafes (also called internet cafes or cyber cafes when they offer this type of game) work like this: a customer "buys" a phone card, internet time, or coupon book, and each unit of product purchased comes with sweepstakes entries. To find out whether an entry is a winner, the customer sits at a terminal that looks, sounds, and behaves like a casino slot machine. Winning entries pay out cash credits. The cafe also offers a "no purchase necessary" path (a written request, a postcard, or a printed sheet) to keep up the legal fiction that customers are not paying to play. Across the country, courts have repeatedly seen through this. The Division of Gaming asked the Colorado AG to formally weigh in.

The AG concluded the activity is illegal gambling in Colorado. Three points control:

The sweepstakes statute does not save it. Section 6-1-802(10), C.R.S., excludes from the definition of "sweepstakes" anything that is "otherwise unlawful under other provisions of law." Even if a sweepstakes cafe technically complies with the sweepstakes formalities, those formalities do not insulate the activity from the criminal gambling statute.

It is gambling under § 18-10-102(2), C.R.S. The statute requires three elements: consideration, chance, and prize. Each is present:

• Consideration. Customers are paying to play, not paying for the phone card or internet time. The "product" is sold above market rates, customers do not actually use it, and the cafe is not run as a phone-card or internet-services business. Courts in Texas, North Dakota, Alabama, California, South Carolina, North Carolina, Hawaii, Mississippi, New York, and Pennsylvania have all looked through the form to the substance and found consideration. Colorado courts have indicated they would follow the same functionalist approach (Approximately Fifty-Nine Gambling Devices v. People ex rel. Burke; Sniezek v. Colo. Dep't of Revenue).
• Chance. The outcome is contingent on a pre-determined draw the customer cannot control. From the player's perspective, every reveal is random. Courts have held that pre-determining winners in batches does not defeat chance.
• Prize. Cash payouts (or credits redeemable for cash) clearly satisfy this element, and no operator has disputed that point.

Authorizing this activity would require a constitutional amendment. Article XVIII, Section 2 generally prohibits games of chance in Colorado. Section 9 carves out a narrow exception for limited gaming in Central City, Black Hawk, and Cripple Creek. Any expansion requires both a statewide vote and a local vote in the affected city, town, or county. The General Assembly cannot legalize this activity on its own.

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Colorado's gambling prohibition begins with the Constitution. Article XVIII, Section 2 prohibits lotteries and games of chance, with carved-out exceptions for non-profit bingo and the state-supervised lottery. Section 9, adopted in 1990 and expanded by amendment in 1992 and 2008, authorizes limited casino-style gaming only in Central City, Black Hawk, and Cripple Creek. Section 9(6)(a) requires both a statewide vote amending the constitution and a local vote of the affected city, town, or county for any expansion.

Colorado's criminal gambling statute, § 18-10-101 et seq., C.R.S., declares the General Assembly's policy "to restrain all persons from seeking profit from gambling activities" (§ 18-10-101(1)) and directs liberal construction to achieve that end (§ 18-10-101(2)). Section 18-10-102(2) defines gambling as "[r]isking any money, credit, deposit, or other thing of value for gain contingent in whole or in part upon lot, chance, the operation of a gambling device, or the happening or outcome of an event... over which the person taking a risk has no control." Three elements: consideration, chance, prize (Sniezek v. Colo. Dep't of Revenue, 113 P.3d 1280 (Colo. App. 2005)).

Colorado's sweepstakes statute, § 6-1-802(10), C.R.S., defines a sweepstakes only as a competition or selection process that is "not otherwise unlawful under other provisions of law." It applies, by its terms, only to direct-mail sweepstakes (§ 6-1-802(5), (9)), and § 6-1-803(16) makes clear that the prohibited practices "are in addition to and do not limit the types of unfair trade practices actionable at common law or under other civil and criminal statutes of this state."

By 2014, sweepstakes cafes had spread across many states. North Carolina (N.C. Gen. Stat. Ann. § 14-306.4(b)) and Massachusetts (Mass. Gen. Laws Ann. ch. 271, § 5B(b)) had passed targeted bans. North Dakota (Midwestern Enterprises), California (Lucky Bob's), and Alabama (Barber v. Jefferson County Racing Ass'n) had prosecuted operators under existing anti-gambling laws.

What the AG concluded at the time

The sweepstakes statute does not legalize this activity. Section 6-1-802(10), C.R.S., excludes from "sweepstakes" anything otherwise unlawful. The provision functions as a savings clause: even technically compliant sweepstakes machinery cannot rescue gambling. California (Cal. Bus. & Prof. Code § 17539.5(12)) and Alabama (Ala. Code § 8-19D-1(4)) have similar carveouts. The AG noted that no state appellate court has held that satisfying technical sweepstakes requirements legalizes sweepstakes-cafe activity.

Consideration. The form of the transaction is a customer paying for a product (phone card, internet time, coupons) and receiving sweepstakes entries as a "bonus." Courts examining the substance look at: whether the cafe markets the product, whether customers actually use the product, the price relative to the market for that product, and whether the cafe operates as a legitimate vendor. Davis (5th Cir.) found consideration where the phone cards cost more per minute than market price, customers did not value them, employees admitted as much, the cafe had no signs advertising phone cards, and no employee tried to sell them. Barber v. Jefferson Cnty. Racing Ass'n applied a "looking through the form to its substance" test under Alabama law. Midwestern Enterprises (N.D.) found consideration even when free phone cards were available, because customers kept paying for entries. Lockyer (Cal.) (and Trinkle v. Stroh) held that "once the elements of chance and prize are added to a vending machine, the consideration paid from the player-purchaser's perspective is no longer solely for the product."

Colorado would reach the same result. Approximately Fifty-Nine Gambling Devices v. People ex rel. Burke (1942) rejected the argument that having a "non-gambling mode" saved a pinball machine, applying instead a "reasonably intended use" test. Sniezek v. Colo. Dep't of Revenue (Colo. App. 2005) found consideration in an Ad-Tab machine that gave customers paper tickets with a coupon on one side and a cash-prize game on the other. The court was struck that customers did not know what product the coupon would buy and that the machine emphasized "win cash" over the merchandise. The cafe scenario fits the same pattern: customers do not actually use the phone cards or internet time, the establishment is not in the phone-card or internet-services business, and the marketing emphasis is on the casino-style reveal.

The AG also rejected the argument that the "no purchase necessary" alternative defeats consideration. Courts have uniformly held that limited free entries do not save a high-stakes, permanent operation. Midwestern Enterprises explained the distinction: a low-stakes, temporary promotional sweepstakes with a 0.5% payout that offers free play is different from a permanent operation with a 65% payout that also offers a token free-entry path.

Chance. The element turns on the player's perspective, not the operator's. From the player's view, every reveal is random. Courts have ruled that pre-determining winners in batches does not defeat chance (Telesweeps of Butler Valley; People v. Nasser; Barber v. Jefferson Cnty.). The Colorado statute confirms this by including outcomes "over which the person taking a risk has no control."

Prize. Cash payouts, or credits redeemable for cash, satisfy this element. No operator disputes it.

Constitutional amendment required. Because the activity is gambling, and because Section 9 limits gambling to Central City, Black Hawk, and Cripple Creek, authorizing it elsewhere would require a constitutional amendment. The AG cited its own prior Opinion 13-02 (online gambling) for the same conclusion, and Section 9(6)(a) for the dual statewide-and-local-vote procedure.

Common questions

Does this opinion outlaw all sweepstakes promotions in Colorado?
No. Traditional retail promotional sweepstakes (the McDonald's or Pepsi model, where consumers buy soda or fast food and receive a "bonus" sweepstakes entry) are different. The AG and the cited cases distinguish those promotions on multiple grounds: low payout rates, temporary timing, and the fact that the underlying product is genuinely the business of the seller. Sweepstakes cafes fail every part of that test.

Can a sweepstakes cafe escape the analysis by hosting the reveal software on a server outside Colorado?
No. Multiple cases (Telesweeps; Barber; Nasser) have held that the location of the reveal server does not change whether the in-cafe activity is gambling. The bet is placed at the player's location.

What if the cafe offers actual internet access along with the games?
That fact alone does not save the operation. Davis (5th Cir.) is particularly relevant: investigators found customers using only the games, not the internet service. The AG's Approximately Fifty-Nine Gambling Devices reasoning would also reach this scenario, the test is the "reasonably intended use" of the device.

What about customers who only use the free-entry path?
The free-entry path does not change the legal analysis for the operation as a whole. Courts have consistently treated the high-stakes payout structure of these operations as the substance of the activity, not the token free-entry option.

What law enforcement actions can be taken?
That is not the question this opinion addressed. The AG's role here was to interpret existing law for the Division of Gaming. District attorneys can prosecute under § 18-10-102 et seq., C.R.S., and equipment can be seized as gambling devices. Specific enforcement choices are made by local prosecutors.

Could the legislature legalize sweepstakes cafes by statute?
No. The AG was explicit that the activity could be authorized only by constitutional amendment, with both statewide and local-jurisdiction votes under Section 9(6).

Citations

Constitutional:

• Colo. Const. art. XVIII, § 2 (general gambling prohibition)
• Colo. Const. art. XVIII, § 9 (limited gaming, expansion procedure under § 9(6)(a))

Statutes:

• § 6-1-802(10), C.R.S. (sweepstakes definition with "not otherwise unlawful" carveout)
• § 18-10-101(1), (2), C.R.S. (criminal gambling policy)
• § 18-10-102(2), C.R.S. (gambling definition)
• N.C. Gen. Stat. Ann. § 14-306.4(b) (North Carolina sweepstakes-cafe ban)
• Mass. Gen. Laws Ann. ch. 271, § 5B(b) (Massachusetts sweepstakes-cafe ban)
• Cal. Bus. & Prof. Code § 17539.5(12); Ala. Code § 8-19D-1(4) (other state sweepstakes definitions)

Cases:

• Sniezek v. Colo. Dep't of Revenue, 113 P.3d 1280 (Colo. App. 2005)
• Approximately Fifty-Nine Gambling Devices v. People ex rel. Burke, 110 Colo. 82 (1942)
• United States v. Davis, 690 F.3d 330 (5th Cir. 2012)
• Midwestern Enterprises, Inc. v. Stenehjem, 625 N.W.2d 234 (N.D. 2001)
• Barber v. Jefferson Cnty. Racing Ass'n, Inc., 960 So.2d 599 (Ala. 2006)
• People ex rel. Lockyer v. Pac. Gaming Techs., 82 Cal. App. 4th 699 (2000)
• Trinkle v. Stroh, 60 Cal.App.4th 771 (3d Dist. 1997)
• Sun Light Prepaid Phonecard Co., Inc. v. State, 360 S.C. 49 (2004)

Prior AG opinions:

• Op. Att'y Gen. No. 13-02 (online gambling)

Source

• Landing page: https://coag.gov/attorney-general-opinions/
• Original PDF: https://coag.gov/app/uploads/2020/03/no-14-03.pdf

Original opinion text

John W. Suthers, Attorney General
Cynthia H. Coffman, Chief Deputy Attorney General
Daniel D. Domenico, Solicitor General

STATE OF COLORADO
DEPARTMENT OF LAW
Office of the Attorney General

Ralph L. Carr Colorado Judicial Center
1300 Broadway, 10th Floor
Denver, Colorado 80203
Phone (720) 508-6000

FORMAL OPINION OF JOHN W. SUTHERS, Attorney General
No. 14-03
October 9, 2014

This opinion, requested by Laura L. Manning, Director of the Division of Gaming of the Colorado Department of Revenue (the "Division"), addresses the legality under Colorado law of sweepstakes offered at internet cafes, cyber cafes, and other similar establishments ("sweepstakes cafes").

QUESTIONS PRESENTED AND SHORT ANSWERS

Question 1: Do the games offered for play at sweepstakes cafes in Colorado comply with Colorado's legal requirements for sweepstakes?

Answer 1: No. Section 6-1-802(10), C.R.S. expressly defines "Sweepstakes" to exclude any activity that is "otherwise unlawful under other provisions of law." Because games offered for play at sweepstakes cafes constitute illegal gambling activity, they do not qualify as a sweepstakes by definition.

Question 2: Do the games offered for play at sweepstakes cafes in Colorado constitute illegal gambling?

Answer 2: Yes. Under Colorado law, gambling activity is defined as "[R]isking any money, credit, deposit, or other thing of value for gain contingent in whole or in part upon lot, chance, the operation of a gambling device, or the happening or outcome of an event ... over which the person taking a risk has no control...." § 18-10-102(2), C.R.S. Colorado courts have not yet directly considered whether the activity offered at sweepstakes cafes would meet this standard. However, every state court that has directly considered this question has found that, under comparable definitions, the activity offered at sweepstakes cafes constitutes illegal gambling. Similarly, under existing Colorado law, the activity offered at sweepstakes cafes constitutes illegal gambling activity.

Question 3: Would an amendment to the Colorado constitution be required to authorize Internet-based or on-site server-based games offered for play at sweepstakes cafes in Colorado?

Answer 3: Yes. Because the activity engaged in at sweepstakes cafes constitutes gambling, such activity could only be authorized by constitutional amendment. Such activity would be an expansion of gambling beyond what is currently authorized by Article XVIII, Sections 2 and 9 of the Colorado Constitution.

BACKGROUND

Article XVIII, Section 2 of the Colorado Constitution ("Section 2") prohibits lotteries and other games of chance, except for non-profit bingo or lotto and a state-supervised lottery. Notwithstanding Section 2, in 1990, the voters approved Section 9, authorizing limited gaming in three locations in Colorado.

In 1992, the voters approved a referred amendment to Section 9 requiring a local vote in favor of limited gaming in any city, town, or county which is granted constitutional authority on or after November 3, 1992 to conduct such gaming. In 2008, the voters approved an initiated amendment to Section 9 which authorized local elections in the cities of Central, Black Hawk, and Cripple Creek to revise existing limits on the hours, types of games, and wager amounts involved in permissible limited gaming.

Under current Section 9, the use of slot machines, the card games of blackjack and poker, and the games of roulette and craps may lawfully occur only within the commercial districts of the cities of Central, Black Hawk, and Cripple Creek.

With respect to the expansion of limited gaming beyond that authorized in the original amendment, Section 9 imposes two requirements. First, an expansion must be approved by a statewide vote amending the constitution. Second, any such expansion must be approved by an affirmative vote of the majority of the electors of the city, town, or county in which limited gaming will occur. To date, only the cities of Central, Black Hawk, and Cripple Creek have been granted constitutional authority for limited gaming.

On December 13, 2013, the Colorado Attorney General issued Formal Opinion No. 13-02 which concluded unequivocally that an amendment to the Colorado Constitution would be required to authorize any on-line/Internet gambling in the state of Colorado.

The current questions to be addressed in this opinion regard the legality of the activity taking place at sweepstakes cafes, whether those games are Internet based or whether such activity utilizes on-site servers. Essentially, a sweepstakes cafe operates as follows: the cafe nominally sells a product, such as a telephone calling card or minutes of Internet time. See, e.g., United States v. Davis, 690 F.3d 330 (5th Cir. 2012) cert. denied, 133 S. Ct. 1283 (U.S. 2013) and cert. denied, 133 S. Ct. 1296 (U.S. 2013) (internet time); Midwestern Enterprises, Inc. v. Stenehjem, 625 N.W.2d 234 (N.D. 2001) (telephone cards). However, each unit of product purchased (e.g. each phone card) also includes an entry into a "sweepstakes." A pre-set fraction of these entries are pre-programmed as "winning entries." Davis, 690 F.3d at 333.

To reveal if a given sweepstakes entry is a "winner," customers have several options, such as asking the cafe staff to reveal their entry's status. See, e.g., Lucky Bob's Internet Cafe, LLC v. Cal. Dep't of Justice, 11-CV-148 BEN JMA, 2013 WL 1849270 (S.D. Cal. May 1, 2013). However, in what appears to be the vast majority of cases, patrons choose to reveal their entry's "winning" status via computer terminals that, to varying degrees, simulate, look, sound and operate like casino slot machines. See, e.g., People ex rel. Lockyer v. Pac. Gaming Techs., 82 Cal. App. 4th 699, 700-01 (2000) ("The VendaTel looks like a slot machine. It acts like a slot machine. It sounds like a slot machine... In our view, if it looks like a duck, walks like a duck, and sounds like a duck, it is a duck"). The "casino simulation" software that reveals the winning status may be housed on the local computer itself, or it may be housed on a remote terminal accessed via Internet connection. See, e.g., O2, Inc. v. Midwest Gaming, Inc., 485 F.Supp. 2d 757, 773 (W.D. Tex. 2007). At times, these terminals also provide the option to engage in other non-gaming programs, such as access to social networking websites or email. See Barber v. Jefferson Cnty. Racing Ass'n, Inc., 960 So.2d 599, 605 (Ala. 2006).

In either case, a sweepstakes cafe customer holding a winning sweepstakes entry is provided with a "credit" payout. This credit is redeemable for cash or for more "reveals" at the cafe's terminals. See, e.g., Trainer v. State, 930 So.2d 373, 376 (Miss. 2006).

Notably, sweepstakes cafes almost always provide procedures by which the sweepstakes can be entered without making a purchase (or using the reveal terminal). However, such "non-purchase" participants are generally limited to a very small number of entries per day. See, e.g., Midwestern Enterprises, Inc., 625 N.W.2d at 240.

In recent years, states have responded to this phenomenon in different ways. Some, such as North Carolina (N.C. Gen. Stat. Ann. § 14-306.4(b)) and Massachusetts (Mass. Gen. Laws Ann. ch. 271, § 5B(b)), have created statutory bans specifically aimed at these sweepstakes cafes. Others, such as North Dakota, California, and Alabama, have prosecuted these operators under existing anti-gambling laws similar to those currently in force in Colorado. As with much of gambling activity, this enterprise is constantly evolving. Accordingly, there are conceivable variations on this basic model.

ANALYSIS

I. Do the games offered for play at sweepstakes cafes in Colorado comply with Colorado's legal requirements for sweepstakes?

Section 6-1-802(10), C.R.S. defines "sweepstakes" as follows:

(10) "Sweepstakes" means any competition, giveaway, drawing, plan, or other selection process or other enterprise or promotion in which anything of value is awarded to participants by chance or random selection that is not otherwise unlawful under other provisions of law; except that "sweepstakes" shall not be construed to include any activity of licensees regulated under article 9 or article 47.1 of title 12, C.R.S., or part 2 of article 35 of title 24, C.R.S.

§ 6-1-802(10), C.R.S. (emphasis added). Further, section 6-1-803(16), C.R.S. provides that the prohibited practices associated with sweepstakes "are in addition to and do not limit the types of unfair trade practices actionable at common law or under other civil and criminal statutes of this state."

Thus, even if the activities of one of these cafes could arguably qualify as a "sweepstakes" under the above definition, it could still be illegal under other provisions of Colorado law. Notably, at least two other states' sweepstakes statutes include such "illegality clauses" in their definitions of a "sweepstakes": Alabama and California. As in Colorado, compliance with more specific sweepstakes requirements cannot save a contest that is illegal under another law. Because of this, it is unsurprising that neither Alabama nor California courts analyzed sweepstakes cafes under their respective sweepstakes codes; instead, both states looked solely to anti-gambling laws in their respective decisions to ban the cafes. Barber v. Jefferson Cnty. Racing Ass'n, Inc., 960 So.2d 599 (Ala. 2006); Lucky Bob's Internet Cafe, LLC v. California Dep't of Justice, 11-CV-148 BEN JMA, 2013 WL 1849270 (S.D. Cal. May 1, 2013).

Moreover, in assessing the legality of sweepstakes cafes, we are aware of no state appellate court that has held that compliance with the technical requirements for a "sweepstakes" has rendered the activity legal. To the contrary, these states, most of which have elaborate sweepstakes requirements, uniformly decline to analyze compliance or non-compliance with such requirements. Instead, these states have looked to broader anti-gambling statutes to hold that the activity conducted at the sweepstakes cafes, whether or not it constituted a "sweepstakes," is nonetheless illegal activity.

II. Do the Internet or on-site server-based games offered for play at sweepstakes cafes in Colorado constitute illegal gambling?

Even if sweepstakes cafes comply with some of Colorado's technical requirements for sweepstakes contests, the activity is illegal under the state's anti-gambling laws. The General Assembly has declared a policy "to restrain all persons from seeking profit from gambling activities in this state." § 18-10-101(1), C.R.S. The provisions of the criminal gambling statute "shall be liberally construed to achieve these ends and administered and enforced with a view to carrying out [the enumerated policies]." § 18-10-101(2), C.R.S.

Gambling is defined as: "[R]isking any money, credit, deposit, or other thing of value for gain contingent in whole or in part upon lot, chance, the operation of a gambling device, or the happening or outcome of an event ... over which the person taking a risk has no control...." § 18-10-102(2), C.R.S.

To constitute gambling, the activity must involve three elements: (1) consideration exchanged ("risking any... thing of value"); (2) for a chance to win ("contingent... upon lot, chance, or the happening of an event"); and (3) prize ("gain"). Sniezek v. Colo. Dep't of Revenue, 113 P.3d 1280, 1282 (Colo. App. 2005). Thus, in weighing the legality of the activity taking place in Colorado sweepstakes cafes, each of the three elements must be considered in turn.

Notably, the definition of gambling found in § 18-10-102(2)(c), C.R.S., includes an exception for an act or transaction "expressly authorized by law." However, the sweepstakes cafes generally and the activity offered at the sweepstakes cafes specifically are not expressly authorized anywhere in the Colorado Constitution or the Colorado Revised Statutes. Other activities, i.e. limited stakes gaming, non-profit bingo and a state-supervised lottery, are expressly authorized. Because gambling is illegal by constitution unless it is expressly authorized, such exception must be narrowly construed to any illegal activity until it has been so expressly authorized through an amendment to the constitution.

A. Consideration

The first question is whether the sweepstakes cafes feature the exchange of "consideration" for the chance at winning, that is "risking any... thing of value for gain contingent... upon... chance." § 18-10-102(2), C.R.S. The key inquiry here is whether the money paid by sweepstakes cafe users has been paid "for" the chance to gamble.

As noted, the basic premise of the activity offered at a sweepstakes cafe is that payment is being made not for the chance to gamble, but rather for a different product, such as Internet time, phone cards, or coupon books. In other states, sweepstakes cafe owners have argued that the consideration element is lacking because customers are paying money in consideration for receiving the product. For example, they claim that the cafes are no different from the McDonald's or Pepsi sweepstakes, in which consideration is exchanged for soda or fast food, but customers are also given a "bonus" chance to win a prize.

Courts have rejected this argument, finding that the activity taking place at the cafes constitutes the exchange of consideration for gambling, not for the underlying product. In reaching this result, courts have adopted a number of approaches. One of the most common perspectives is to focus on the substance, and look to whether the consumers were actually exchanging consideration for the product, or actually exchanging consideration for the chance to win. This inquiry has often been resolved on the basis of investigations or other fact gathering. In U.S. v. Davis, the Fifth Circuit considered whether the evidence that sweepstakes cafe activity constituted gambling was sufficient to uphold a criminal conviction. The Court concluded that it was. In doing so, it noted with approval that the trial court "stated that 'consideration regarding lotteries should be measured by the same rule as in contracts,'... and determined on the facts presented that a reasonable jury could have found the presence of consideration beyond a reasonable doubt." Davis, 690 F.3d at 338.

The trial court explained that its decision turned on "whether the sweepstakes was intended to promote the sale of telephone cards or whether the telephone cards were there as an attempt to legitimize an illegal gambling device." Id. Driving the court's finding that the telephone cards were an attempt to legitimize an illegal gambling device, and that therefore the consideration requirement was satisfied, were the following facts: the telephone cards cost much more per minute than the market cost of telephone time; there was testimony that the telephone cards did not work; there was evidence that players did not value the telephone cards, and that some players did not know they even were telephone cards; there was testimony that the employees were aware that the customers did not value the telephone cards; there were no signs on the outside of the building advertising or indicating that telephone cards were sold at the store; and no employee tried to sell customers on the telephone cards. Id.

Other examples of this substance-over-form-based approach to consideration are manifest. In Barber, the Alabama Supreme Court held that "if, looking through the form of the operation to its substance, consumers are paying for the entries, in whole or in part, regardless of the cybertime acquired in conjunction with those entries... the element of consideration set forth in § 13A-12-20(10) and (11) is satisfied." Barber, 960 So.2d at 611.

Similarly in Midwestern Enterprises, Inc., the North Dakota Supreme Court held that "Despite Midwestern's characterization of the Lucky Strike game as a promotional sweepstakes with the purpose to increase the sales of phone cards, people continued to play even when phone cards were available free of charge. People were not paying their dollars for phone cards but rather, were paying their dollars for a chance to win up to $500 in cash. The element of consideration is not missing from the Lucky Strike game." 625 N.W.2d at 240.

In People ex rel. Lockyer v. Pac. Gaming Technologies, a California appellate court considered a machine that looked significantly like a slot machine and gave users an opportunity to win a "sweepstakes" each time they purchased a phone card. Quoting Trinkle v. Stroh, 60 Cal.App.4th 771 (3d Dist. 1997), the Lockyer Court observed that "once the elements of chance and prize are added to a vending machine, the consideration paid from the player-purchaser's perspective is no longer solely for the product." Lockyer, 82 Cal. App. 4th at 705.

Colorado courts have not directly considered this question. However, existing Colorado case law suggests that a "functionalist" view of gambling devices would be adopted, and thus that consideration would be found. In 1942, the Colorado Supreme Court considered the argument that because a set of pinball machines had a "non-gambling mode" that operators could elect, the machines were not "gambling devices." Approximately Fifty-Nine Gambling Devices v. People ex rel. Burke, 110 Colo. 82, 86-87 (1942). Rejecting this argument, the Court held that "The flaw in this argument is that at the time the machines were seized and demonstrated in court they were set to function for gambling purposes. The test was not whether there was a possibility of their being used for amusement purposes, but their reasonably intended use and their inherent tendency to stimulate the gambling instinct latent in many people." Id.

In Sniezek v. Colorado Dep't of Revenue, 113 P.3d 1280 (Colo. Ct. App. 2005), a shop owner sued for the return of various "ad-tab" dispenser machines that had been seized by the state as gambling devices. For one dollar, patrons purchased paper tickets that contained a coupon on one side and a cash prize game on the other. The Colorado Court of Appeals rejected the plaintiff's argument that because the Ad-Tab coupon had a cash value greater than one dollar, consideration had been exchanged for purchase of the coupon (as opposed to the chance to win a prize). The court was particularly struck by the fact that "the items to be purchased with the coupons are not displayed anywhere near or on the machine, nor does a customer know what the coupon is for before purchasing the Ad-Tab.... Hence, the customer takes a risk upon the purchase of the Ad-Tab. In addition, the machine advertises the chance to win money, and the emphasis in the advertisement is the 'win cash' slogan, as opposed to the purchase of merchandise."

Notably, the fact that sweepstakes cafes offer the possibility of free entries has not saved the sweepstakes in other jurisdictions. In Midwestern Enterprises, Inc., the North Dakota Supreme Court noted that "the limited availability of free play does not exempt the Lucky Strike game from being defined as gambling. Sweepstakes that are commonplace as marketing promotion tools are significantly different than the Lucky Strike game. The high pay-out rate of the Lucky Strike game is a distinguishing feature because it goes to the true purpose of the game.... North Dakota has not established, by either legislation or judicial ruling, an exception to the gambling and lottery definitions for promotional sweepstakes." 625 N.W.2d at 239-40.

Such games induce gambling behavior and because consideration is given by a patron, at least in part, to participate in a chance for a larger payout, the games offered at sweepstakes cafes meet the consideration element for gambling under Colorado statute.

B. Chance

The next element, chance, turns on whether the gain sought is "contingent in whole or in part upon lot, chance, the operation of a gambling device, or the happening or outcome of an event ... over which the person taking a risk has no control." § 18-10-102(2), C.R.S.

Colorado's statute states that the test for "chance" turns on the perspective of the user, not the cafe operators. Even if the sweepstakes tickets have been pre-determined, this pre-determination is an outcome of an event "over which the person taking the risk has no control." § 18-10-102(2), C.R.S. (emphasis added). Thus, the language of the statute provides that chance would still be present, despite whether the tickets have been pre-determined.

This conclusion was also adopted by those courts that have considered the "chance" argument in detail. In Telesweeps of Butler Valley, Inc. v. Kelly, a Pennsylvania appellate court noted that chance is defined from the perspective of the player, and that "'[f]rom the player's perspective,... every outcome is a random outcome,' so a player would perceive a slot machine and an internet sweepstakes as the same." Likewise, in People v. Nasser, a California appellate court expressly found that "even though all sweepstakes entries were previously arranged in batches (or pools) that had predetermined sequences, that fact does not change our opinion of this issue (i.e., the chance element) because the results would still be unpredictable and random from the perspective of the user." In Barber v. Jefferson County Racing Ass'n, Inc., the Alabama Supreme Court found that, even where computer terminals were merely "reading" predetermined results, "the element of chance is satisfied at the point of sale, before the readers are activated." 960 So.2d at 610.

Accordingly, the games offered for play at sweepstakes cafes in Colorado satisfy the "chance" prong of section 18-10-102(2), C.R.S.

C. Prize

The final element, prize or "gain," is also present in the sweepstakes cafe model. To date, every state court that has considered the question has found that the devices offer the potential for such gain, whether the prize is monetary or non-monetary, and indeed, no sweepstakes cafe owner has disputed that gain is present.

Because all three elements: consideration, chance, and prize are present, under Colorado law, the activity occurring at sweepstakes cafes in Colorado constitutes illegal gambling.

III. Would an amendment to the Colorado Constitution be required to authorize Internet-based or server-based games offered for play at sweepstakes cafes in Colorado?

An amendment to Colorado's Constitution would be required before Internet-based games or server-based games could be offered for play at sweepstakes cafes in Colorado. Article XVIII, Section 2 of the Colorado Constitution ("Section 2") generally prohibits lotteries and other games of chance, except for non-profit bingo or lotto and a state-supervised lottery. A subsequent amendment, Section 9, requires that with the exception of the limited gaming cities of Central, Black Hawk, and Cripple Creek, any subsequent expansion of gambling must be approved by a statewide vote amending the constitution. Any such expansion must also be approved by an affirmative vote of the majority of the electors of the city, town, or county in which limited gaming will occur. Thus, neither Internet-based games nor server-based games offered for play in sweepstakes cafes could be authorized in Colorado without a constitutional amendment.

CONCLUSION

Based on the foregoing analysis, I conclude that the activity occurring at sweepstakes cafes constitutes illegal gambling under Colorado law, whether Internet-based or server-based. Such activity is an unauthorized expansion of gambling, is illegal, and cannot be allowed without a state-constitutional amendment specifically authorizing such activity.

Issued this 9th day of October, 2014.

JOHN W. SUTHERS
Colorado Attorney General