Hayward Sweepstakes Cafes Sue City in Response to Moratorium

Hayward City Council unanimously extended its moratorium, or prohibition, last Tuesday, to the creation of internet sweepstakes businesses within the city to Feb. 19, 2014.

The two remaining sweepstakes cafes in Hayward, I-Biz and Net Connection, which are in violation of the moratorium, have opposed the ordinance on the grounds that it should not apply to existing businesses.

“There is substantial case law that suggests that moratorium may not be applied to pre-existing businesses. It’s highly unusual, and we urge that the city not do that,” said John Weston,  the attorney representing I-Biz.

Both locations shut down on Mar. 11 in response to repeated cease and desist letters from the city. A restraining order granted by the court allowed both locations to reopen and operate until Apr. 9. It will have to be renewed by Judge Samuel Conti.

David Rizk, director of the city’s Developmental Services Department, asked the city council to adopt an extension of the moratorium so that his staff would have more time to conduct research.

City Attorney Michael Lawson cited the actions of the county as support for the city’s moratorium against the sweepstakes businesses.

Last week, the Alameda County Board of Supervisors shut down four sweepstakes businesses in unincorporated areas. San Leandro’s Net Connection is one of those four businesses, and is also the sister branch of the Hayward location.

Gambling, as defined by the moratorium, “…would cover gambling as defined by the state of California, or gambling-like or casino-like activities, which may not be criminal but is not permitted by the city of Hayward’s zoning regulations,” Lawson stated.

The staff report on the issue included a statement from the state Attorney General’s office last December.

“The ‘sweepstakes aspect’ of the internet cafes permits customers to play gambling-themed games on computers to win cash prizes,” stated the report.  “The Bureau of Gambling Control considers internet cafes that offer these types of sweepstakes to be illegal gambling operations.”

It stresses, however, that it is not intended to be taken as legal counsel.

Weston disagreed with Attorney General Kamala Harris’ report, stating it was “shameful” and “legally sloppy.” He strongly stated the results of the sweepstakes machines is already predetermined when you purchase computer time and that it was free-to-play, which makes the software legally not gambling.

“In order to be an illegal lottery, the activity requires the payment of money in order to participate in it,” Weston said. “And there’s a free option that is available as part of I-Biz’s offering which is no different from Publisher’s Clearinghouse, Burger King, McDonald’s, or Subway.”

He asked the council to consider adopting the suspension with an exemption for existing businesses. Oakland and Antioch adopted similar moratoria that excluded existing cafes. Alameda County also adopted a moratorium that did not apply to current businesses.

“The steps taken by Alameda County last week as related by Mr. Lawson a few minutes ago were not part of the moratorium approach that Alameda had initially adopted which as I say specifically expressly exempted existing uses,” Weston added.

The attorney for Figure Eight Technologies, Kevin Morse, explained the operation of the software to the city council. Figure Eight Technologies is responsible for the software used by I-Biz.

Morse demonstrated the program has the ability to connect to the internet, access a word processor, provide a tutorial on how to create an email account and translate different languages.

Patrons can reveal their prizes by clicking an “instant reveal” button, asking an attendant to check for them, or playing a game to reveal their prize.

“They all work the same, none of the games actually mean anything at the end of the day,” Morse said.

Patrons can receive 100 points every day by entering the business and asking for a free ticket. They can also receive 500 points by mailing Figure Eight Technologies’ headquarters in North Carolina and asking for a ticket. These tickets can then be checked by an attendant for cash prizes.

However, the patron would not be able to use the computer, Morse explained, because they have not purchased computer time.

The moratorium was passed unanimously, with the only council member to make comments being council member Francisco Zermeno, saying that he was initially excited about the internet cafes but the situation had not turned out as he expected.

Lawson added that there was law that supported the adoption of a retroactive moratorium, if the existing businesses did not initially disclose their proposed activities. Lawson stated that I-Biz’s lease did not include anything about sweepstakes gambling.

Net Connection’s lease does not contain that information, either, though it is referred to in the General Overview of Proposed Business letter, submitted by Ron Doyle.

The word “sweepstakes” is never used. Instead it is stated that, “…to promote our business and continual customer returns to our stores, we provide special promotions where our customers have the opportunity to earn cash prizes through their usage of purchased internet time.”

Doyle, owner of Net Connection, expressed frustration in his interactions with Lawson. His complaints are officially documented in the restraining order submitted to and approved by Judge Conti.

“The city attorney has refused multiple requests for meetings, and has failed to return the phone calls or respond to the letters made or sent by my attorneys. The city attorney’s refusal to communicate is surprising, since in both letters he signed and sent to me, he invited my telephone call,” Doyle reported.

“We didn’t hide anything about the nature of this business,” stated Steven Meyer, the attorney representing Net Connection.  The city went to look at Doyle’s other location in San Leandro, and the planning director said it was “fine” and issued the permit.

Meyer seemed confident the judge will rule in their favor, calling the retroactive closing down of businesses “unconstitutional” because they already had a valid existing use, and to close their business was unfair treatment under the law.

“The fact that we got a temporary restraining order in court is a very strong indication that we’re on the right path here,” said Meyer.

Weston stated that I-Biz has joined Net Connection’s lawsuit against the city as of last Thursday.

“It didn’t have to be this way, and we regret it enormously,” Weston added. “But this is a world we never made and so we’ll play the hand that we were dealt and we’ll now go forward.”