BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
                              Senator Isadore Hall, III
                                        Chair
                                2015 - 2016  Regular 

          Bill No:           AB 1437          Hearing Date:     6/28/2016
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          |Author:    |Gray                                                 |
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          |Version:   |6/21/2016    Amended                                 |
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          |Urgency:   |Yes                    |Fiscal:      |Yes             |
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          |Consultant:|Felipe Lopez                                         |
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          SUBJECT: Gambling:  Internet Fantasy Sports Game Protection Act


            DIGEST:    This bill enacts the Internet Fantasy Sports Game  
          Consumer Protection Act, which requires a person or entity to  
          apply for and receive a license from the Department of Justice  
          (DOJ) prior to offering an Internet fantasy sports game for play  
          in California. 

          ANALYSIS:
          
          Existing law:
          
          1)Provides, under the Gambling Control Act, for the licensure  
            and regulation of various legalized gambling activities and  
            establishments by the California Gambling Control Commission  
            (CGCC) and the investigation and enforcement of those  
            activities by DOJ.

          2)Requires DOJ to investigate the qualifications of applicants  
            before any license or other approval is issued and, if  
            necessary, recommends the denial or the limitation,  
            conditioning, or restriction of any license or approval.  

          3)Requires DOJ to monitor the conduct of all licensees and other  
            persons having a material involvement, directly or indirectly,  
            with a gambling operation or its holding company, for the  
            purpose of ensuring that licenses are not issued or held by,  
            and that there is no direct or indirect material involvement  







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            with, a gambling operation or holding company by ineligible,  
            unqualified, disqualified, or unsuitable persons, or persons  
            whose operations are conducted in a manner that is adverse to  
            the public health, safety, or welfare. 

          4)Specifies that the Legislature has no power to authorize, and  
            shall prohibit, casino games of the type currently operating  
            in Nevada and New Jersey.

          5)Prohibits a person, whether or not for gain, hire, or reward,  
            from making a betting pool or placing a bet or wager on the  
            result of any contest or event, including a sporting event, as  
            specified.

          6)Prohibits any bet, bets, wagers, or betting pool or pools made  
            between the person and any other person or group of persons  
            who are not acting for gain, hire, or reward, upon the result  
            of any lawful trial, or purported trial, or contest, or  
            purported contest, of skill, speed, or power of endurance of  
            person or animal, or between person, animals, or mechanical  
            apparatus. 

          7)Specifies that no person in this state has a right to operate  
            a gambling enterprise except as may be expressly permitted by  
            the laws of this state and by local ordinances.

          8)Prohibits banking or percentage games played with cards, dice,  
            or any device, for money, check, credit or other  
            representative of value. 

          9)Prohibits bookmaking and pool selling. 

            10) Prohibits false advertising, unfair competition and  
              unlawful business practices, specifically prohibiting  
              certain acts or practices undertaken by a person in the  
              operation of a contest, including misrepresenting the odds  
              of winning a prize or failing to award and distribute all  
              prizes, providing for civil penalties and other remedies. 

            11) Prohibits lotteries, with exceptions for the California  
              State Lottery, bingo for charitable purposes, and charitable  
              raffles conducted by non-profit, tax-exempt organizations. 

            12) Defines a lottery as any scheme for the disposal or  
              distribution of property by chance, among persons who have  








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              paid or promised to pay any valuable consideration for the  
              chance of obtaining such property or a portion of it, or for  
              any share or any interest in such property, upon any  
              agreement, understanding, or expectation that is to be  
              distributed or disposed of by lot or chance, whether called  
              a lottery, raffle, or gift enterprise, or by whatever name  
              the game may be known. 

            13) Prohibits any raffle to be conducted by means of, or  
              otherwise utilize any gaming machine, apparatus, or device,  
              whether or not that machine, apparatus, or device meets the  
              definition of a slot machine as currently defined in  
              California Law. 

            14) Federal law essentially prohibits online gambling but does  
              include specific provisions that allow individual states to  
              offer intrastate internet gaming, provided that state laws  
              permitting and regulating that activity could impose  
              reasonable protections against participation by underage  
              persons or by persons located outside the boundaries of the  
              state.

          This bill:

          1)Requires a person or entity to apply for and receive a license  
            from DOJ prior to offering an Internet fantasy sports game for  
            play in California.

          2)Defines an "Internet fantasy sports game" as a game of any  
            duration conducted on the Internet in which a registered  
            player does all of the following:

             a)   Competes against other registered players or a target  
               score as the owner or manager of an imaginary or simulated  
               team of professional athletes in an imaginary or simulated  
               game.
             b)   Uses the statistics accumulated by professional athletes  
               in real-world sporting events to determine the scores of  
               the imaginary or simulated game.
             c)   Plays for a predetermined prize.
             d)   Pays a fee to the licensed operator providing the game  
               in order to participate. 

          3)Requires DOJ to issue a license to a person or entity to  
            operate an authorized Internet Web site if the applicant  








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            satisfies all of the following:

             a)   The applicant is of good character, honesty, and  
               integrity.
             b)   The applicant's prior activities, criminal record, if  
               any, reputation, habits, and associations do not pose a  
               threat to the public interest of the state, or to the  
               effective regulation and control of Internet fantasy sports  
               games, or create or enhance the dangers of unsuitable,  
               unfair, or illegal practices, methods, and activities in  
               the conduct of Internet fantasy sports games or in the  
               carrying on of the business and financial agreements  
               incidental to those games. 
             c)   The applicant is in all other respects qualified to be  
               licensed as provided by the provisions of this bill,  
               including, but not limited to, providing documentation  
               establishing that the applicant is capable of paying the  
               one-time license fee through its own net position or  
               through credit directly available to the applicant. 

          4)Authorizes DOJ to promulgate regulations to implement the  
            provisions of this bill. 

          5)Specifies that in order to ensure the protection of registered  
            players, an authorized Internet Web site shall identify the  
            person or entity that is the licensed operator. 

          6)Requires a licensed operator to ensure that an Internet  
            fantasy sports game on its authorized Internet Web site  
            complies with all of the following:

             a)   An imaginary or simulated sports team in the game shall  
               not be based on the current membership of an actual team  
               that is a member of a professional sports organization. 
             b)   A prize or award offered to the winning registered  
               player or players shall be established and made known to  
               the participating registered players in advance of the  
               contest. 
             c)   The value of a prize or award offered to the winning  
               registered player or players shall not be determined by the  
               number of participating registered players or the amount of  
               any fees paid by those participating registered players to  
               the licensed operator. 
             d)   The winning outcome of the game shall not be either of  
               the following:








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               i)     Based on the score, point spread, or performance of  
                 any single real-world team or any combination of  
                 real-world teams.
               ii)    Based solely on the single performance of an  
                 individual athlete in a single real-world sporting event.

          7)Prohibits a licensed operator from offering an Internet  
            fantasy sports game based on a collegiate sports or athletic  
            event, or any other sports or athletic event in which amateur  
            athletes participate.

          8)Requires a licensed operator to hold the funds of a registered  
            player in a registered player's account in trust for that  
            registered player.

          9)Requires a licensed operator to implement, and prominently  
            display on its authorized Internet Web site, procedures that  
            accomplish all of the following:

             a)   Prevent unauthorized withdrawals from registered player  
               accounts, including, but not limited to, withdrawals by the  
               licensed operator and other individuals.
             b)   Prevent commingling of funds in a registered player  
               account with other funds, including, but not limited to,  
               the licensed operator's funds.
             c)   Establish procedures for a registered player to report  
               complaints to the licensed operator regarding whether his  
               or her account has been misallocated, compromised, or  
               otherwise mishandled, and a procedure for the licensed  
               operator to respond to those complaints. 

            10) Prohibits a licensed operator from issuing credit to a  
              registered player. 

            11) Prohibits a licensed operator from allowing a registered  
              player to establish more than one account or user name on  
              its authorized Internet Web site. 

            12) Prohibits a licensed operator from advertising in  
              publications or other media aimed exclusively or primarily  
              at persons under 21 years of age and from depicting person's  
              under 21 years of age, including students, or school or  
              college settings. 

            13) Prohibits a licensed operator from advertising an Internet  








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              fantasy sports game to an individual by phone, email, or any  
              other form of individually targeted advertisement or  
              marketing material, if the individual has self-excluded  
              himself or herself or if the individual is otherwise barred  
              from participating in that Internet fantasy sports game. 

            14) Requires a person to register with a licensed operator  
              prior to participating in an Internet fantasy sports game on  
              an authorized Internet Web site. 

            15) Requires a licensed operator to ensure that a registered  
              player is eligible to play on an authorized Internet Web  
              site, and implement appropriate data security standards to  
              prevent access by a person whose age and location has not  
              been verified.

            16) Requires a licensed operator to ensure that a registered  
              player is physically located within the State of California  
              at the time of participating in an Internet fantasy sports  
              game on an authorized Internet Web site.

            17) Requires a licensed operator, prior to registering and  
              permitting a person to participate in an Internet fantasy  
              sports game, to verify that the person is 21 years of age or  
              older by doing both of the following:

              a)    Attempt to match the name, address, and date of birth  
                provided by the person to information contained in records  
                in a database of individuals who have been verified to be  
                21 years of age or older by referencing an appropriate  
                database of government records.
              b)    Verify that the name and physical billing address on  
                the check or credit card offered for payment by the person  
                seeking to be a registered player matches the name and  
                address listed in the database. 

            18) Specifies that if the licensed operator is unable to  
              verify that the person is 21 years of age or older, the  
              licensed operator shall require the person to submit  
              age-verification documents consisting of an attestation  
              signed by the person that he or she is 21 years of age or  
              older and a copy of a valid form of government  
              identification, either electronically or by mail.  A valid  
              form of government identification includes a driver's  
              license, state identification card, passport, official  








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              naturalization or immigration document, including an alien  
              registration receipt card or an immigrant visa, or United  
              States military identification.  The licensed operator shall  
              verify that the physical billing address on the check or  
              credit card provided by the person matches the address  
              listed on his or her government identification.

            19) Specifies that a licensed operator is not in violation of  
              the age prohibition if the operator complies with the age  
              verification process set forth in this bill, and a person  
              under 21 years of age participates in an Internet fantasy  
              sports game on the operator's authorized Internet Web site. 

            20) Specifies that DOJ may assess a civil penalty against a  
              licensed operator that violates the provisions of this bill  
              according to the following schedule:

              a)    Not less than $1,000 and not more than $2,000 for the  
                first violation.
              b)    Not less than $2,500 and not more than $3,500 for the  
                second violation.
              c)    Not less than $4,000 and not more than $5,000 for the  
                third violation.
              d)    Not less than $5,500 and not more than $6,500 for the  
                fourth violation.
              e)    $10,000 for a fifth or subsequent violation.

            21) Requires DOJ to develop an online self-exclusion form on  
              or before July 1, 2017 and deliver the form to each licensed  
              operator. 

            22) Requires a licensed operator to prominently display a link  
              to DOJ's Responsible Gambling Internet Web page and the  
              online self-exclusion form when either of the following  
              occurs:

              a)    A person registers as a registered player.
              b)    Each time a registered player accesses the authorized  
                Internet Web site prior to playing.

            23) Requires a licensed operator to retain each online  
              self-exclusion form submitted to it by a registered player  
              to identify persons who want to be excluded from play.  A  
              licensed operator shall exclude those persons from play.  A  
              licensed operator that has made commercially reasonable  








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              efforts to comply with this subdivision is not in violation  
              of this section if a person who has filled out an online  
              self-exclusion form thereafter participates in an Internet  
              fantasy sports game on the operator's authorized Internet  
              Web site. 
            
            24) Prohibits an officer, director, principal, employee, or  
              contractor of a licensed operator from doing any of the  
              following:

              a)    Playing on an Internet fantasy sports game by a  
                licensed operator.
              b)    Playing an Internet fantasy sports game offered by a  
                licensed operator through another person or proxy. 
              c)    Disclosing proprietary or nonpublic information that  
                may affect the play of an Internet fantasy sports game to  
                any individual authorized to play that Internet fantasy  
                sports game. 

            25) Requires a licensed operator to make the prohibitions  
              known to all affected individuals and corporate entities.

            26) Requires a licensed operator to identify a highly  
              experienced registered player using a symbol attached to  
              that registered player's account or username or by other  
              means easily identifiable by other registered players. 

            27) Requires a licensed operator to develop and offer at least  
              one Internet fantasy sports game in which a highly  
              experienced player cannot participate either directly or  
              through another person as a proxy.

            28) Requires a licensed operator to facilitate the collection  
              by the Franchise Tax Board of personal income taxes from  
              registered players and be responsible for providing current  
              and accurate documentation on a timely basis to all state  
              agencies.  State entities shall treat the proprietary  
              information provided by a licensed operator as confidential  
              in order to protect the licensed operator and to protect the  
              security of an authorized Internet Web site. 

            29) Exempts proprietary information supplied by a licensed  
              operator to a state agency from public disclosure. 

            30) Creates the Fantasy Sports Fund (Fund) in the State  








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              Treasury, to be administered by DOJ.  All the moneys in the  
              fund are continuously appropriated to DOJ, without regard to  
              fiscal years, in the amounts necessary for DOJ to perform  
              its duties under the provisions of this bill.

            31) Requires each licensed operator to pay an annual  
              regulatory fee, to be deposited in the Fund, in an amount to  
              be determined by DOJ, for the reasonable costs of license  
              oversight, consumer protection, state regulation, problem  
              gambling programs, and other regulatory purposes related to  
              this bill, including, but not limited to, enforcement  
              efforts related to illegal Internet gambling activities. 

            32) Specifies that prior to operating its authorized Internet  
              Web site, a licensed operator shall remit to the State  
              Treasurer a one-time license fee in an unspecified amount to  
              be deposited into the General Fund and credited against the  
              annual regulatory fee.  Upon depletion of the license fee  
              balance, DOJ shall notify the licensed operator to commence  
              quarterly payments to the state. 

            33) Specifies that in consideration of the substantial value  
              of each license, a licensed operator shall remit to the  
              State Treasurer on a quarterly basis for deposit in the  
              General Fund an amount equal to an unspecified percentage of  
              its gross income that is attributable to the operation of an  
              authorized Internet Web site in California.

            34) Specifies that each quarterly payment shall be due on the  
              10th day of the month following the end of each quarter.

            35) Requires a licensed operator to make all electronic and  
              written financial records available to the State Treasurer  
              and DOJ on an electronic basis. 

            36) Prohibits a city, county, or city and county to regulate,  
              tax, or enter into a contract with respect to any matter  
              governed by the provisions of this chapter.  This section  
              does not prohibit or limit the investigation and prosecution  
              of any violation. 

            37) Makes various legislative findings.

            38) Includes an urgency statute to take effect immediately.









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          Background

          Author's statement.  According to the author, AB 1437 will  
          establish a framework to license and regulate Daily Fantasy  
          Sports (DFS) in California to ensure consumers are playing on  
          websites that provide comprehensive consumer protections.   
          Currently, Californians participate in DFS games on a daily  
          basis on unregulated Internet websites.  Despite a lack of  
          regulation, participation in DFS remains very popular.  AB 1437  
          will bring more transparency, accountability and protections to  
          this rapidly growing industry.


          The author states that, neither federal nor California laws  
          provide any protections for DFS consumers causing California  
          players to assume all the risk.  Any negative social or  
          financial impacts are borne by the citizens of California, while  
          the revenues generated from these games are being realized by  
          unlicensed operators.  The games do not provide any benefits to  
          the citizens of California.  In California, every legal gaming  
          industry (card clubs, horse racing, and Indian casinos) is  
          subject to licensing requirements, regulatory oversight, and  
          enforcement under DOJ, CGCC, or the California Horse Racing  
          Board.  Even church fundraisers are subject to regulation when  
          conducting a charitable raffle or bingo night.


          The author states, it is not his intent to stifle or ban this  
          growing industry as other states have done, but to protect  
          California consumers, which the Legislature has a responsibility  
          to do.  AB 1437 would replace an unregulated online industry  
          with a safe and responsible entertainment option for adults,  
          which includes safeguards against compulsive and underage play,  
          money laundering, fraud, and identity theft.


          Daily fantasy sports (DFS).  DFS are a subset of traditional  
          season long fantasy sports games, which have been around to some  
          extent for more than 40 years.  However, unlike traditional  
          fantasy sports, DFS began around 2009 and are conducted over a  
          short-term period, such as a single day-MLB, NBA, NHL-or on a  
          weekly basis-NFL or NCAA Football.


          DFS players compete against others by building a team of  








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          real-world athletes from a particular league or competition, and  
          earn points based on the actual statistical performance of the  
          players in real-world competition.  For example, in football,  
          DFS players are generally required to choose a team that  
          includes a real life quarterback, two running backs, two to  
                                                                                three wide receivers, a tight end, a kicker and a team defense. 


          Each real world athlete is assigned a specified price by DFS  
          operators, with the best players, who are more likely to produce  
          superior statistics, having the highest price.  DFS players must  
          decide whether a highly valued athlete is worth the higher price  
          or if a less expensive athlete is a better bargain.  The salary  
          cap ensures that a DFS player's team is not composed entirely of  
          the highest priced real-world athletes. 


          A DFS player earns points based on how real-world athletes  
          perform in their respective games.  For instance, running backs  
          earn points based on how many touchdowns they score-generally  
          six points per touchdown-and how many rushing/receiving yards  
          they produce-generally one point per every 10 yards.  To  
          illustrate, if professional football player Adrian Peterson ends  
          a game with one touchdown, 90 rushing yards, and 20 receiving  
          yards, a DFS player would receive a total of 17 points for  
          having Adrian Peterson in his or her team.  This includes six  
          points for the touchdown, nine points for the 90 rushing yards,  
          and two points for the 20 receiving yards.  The DFS player's  
          team who accumulates the most total points is declared the  
          winner. 


          Depending on their overall performance, DFS players win a share  
          of a pre-determined payout.  Generally in larger contests,  more  
          than one DFS player will earn a portion of the payout-depending  
          on what position the DFS player finishes in that contest.   For  
          example, an operator might hold a 1,000 entry contest where the  
          top 100 players receive a payout.  The player, who finishes in  
          100th place, while still receiving a payout, will receive less  
          of a payout than the 20th place player, who in turn will receive  
          less of a payout than the 1st place player-who receives the  
          largest payout.


          DFS players pay an entry fee in order to participate.   








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          Generally, 90 percent of the player's entry fee will go toward a  
          pot, and the remaining 10 percent is paid to the DFS operator.   
          Entry fees can range from as low as a single dollar to as high  
          as thousands of dollars.  There are various types of games, from  
          head-to-head contests, where two players face off against each  
          other, to larger contests with thousands of entries and payouts  
          of up to millions of dollars. 


          Nationwide, DFS games are expected to generate roughly $3.72  
          billion in entry fees and $370 million in revenue this year,  
          according to industry consultant Eilers Research.  By 2020, DFS  
          operators could reach $17.7 billion and $1.77 billion,  
          respectively.  Industry experts have estimated that California  
          accounts for approximately 10 to 15 percent of the overall  
          national DFS market.   It is estimated that there are  
          approximately 57 million DFS players in the United States and  
          Canada.  


          DraftKings/FanDuel.  Although DFS operators have been operating  
          since 2009, the two largest operators, DraftKings and FanDuel,  
          became household names through a large media blitz that began  
          prior to the start of the 2015 NFL season.  It has been reported  
          that both DraftKings and FanDuel spent a combined $150 million  
          on television and Internet advertising during that period.  Not  
          only were the advertisements prominent on television and the  
          Internet, they were front and center at professional and  
          collegiate sporting events. 


          Though there are various DFS operators, DraftKings and FanDuel  
          constitute approximately 90 to 95 percent of the DFS market.   
          According to financial consultants, it is estimated that each  
          company has a valuation of more than $1 billion.  Various news  
          agencies, including ESPN, have recently reported that DraftKings  
          and FanDuel have been in discussions about a possible merger.


          The Unlawful Internet Gaming Enforcement Act of 2006 (UIEGA).   
          The UIEGA prohibits gambling businesses from knowingly accepting  
          payments in connection with the participation of another person  
          in a bet or wager that involves the use of the Internet and that  
          is unlawful under any federal or state law.  The act  
          specifically excludes fantasy sports that meet certain  








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          requirements, skill-games and legal intrastate and intertribal  
          gaming.  


          However, UIGEA also contains language that states "no provision  
          of this subchapter shall be construed as altering, limiting, or  
          extending any Federal or State Law or Tribal-State compact  
          prohibiting, permitting, or regulating gambling within the  
          United States."  Thus, UIGEA defers to any other federal or  
          state law that prohibits or regulates gambling, including DFS.   
          Despite the fact that UIEGA did not expressly legalize DFS and  
          deferred to applicable federal law and state law concerning  
          gambling matters, supporters of DFS have pointed to the carve  
          out in UIGEA in discussing the legality of DFS. 


          The Professional and Amateur Sports Protection Act of 1992  
          (PASPA).  PASPA makes it unlawful, except in four states, for a  
          person or governmental entity to sponsor, operate, advertise,  
          promote, license, or authorize wagering or gambling based,  
          directly or indirectly, on one or more competitive games in  
          which amateur or professional athletes participate, or on one or  
          more performances of such athletes in such games.  PASPA  
          originally provided a one-year window opportunity, from its  
          effective date for states to pass laws permitting sports  
          wagering.  California passed no such law. 


          The Wire Act of 1961.  The Wire Act prohibits individuals and  
          entities from engaging in the business of betting or wagering  
          through the use of a "wire communication for the transmission in  
          interstate and foreign commerce."  The Wire Act was recommended  
          by U.S. Attorney General Robert Kennedy "to crack down on  
          organized crime members using the telegraph to get results on  
          horse races."  The U.S. Department of Justice has on occasion  
          used the Wire Act to prosecute professional gamblers.

          Under the Wire Act, the legal definition of a "wire  
          communication" includes any communication made through an  
          "instrumentality used or useful in the transmission of writings,  
          signs, pictures, and sounds ? by aid of wire, cable, or other  
          like connection between the points of origin and reception." 

          Legality of DFS in California.  It is unclear whether DFS is  
          currently legal in the State of California as there are no  








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          statutes or legal decisions that directly address the topic.  As  
          of today, there has been no determination by California's  
          Attorney General as to whether DFS violates any California law.   
          Several legislators have requested a formal opinion from the  
          Attorney General as to the legality of DFS in California.   
          However, the Attorney General has yet to respond to such  
          request. Supporters of DFS argue that "because there is no  
          statute or legal decision that explicitly makes DFS illegal,  
          until it is deemed otherwise, DFS is legal under California  
          law."  

          Article IV, Section 19 of the California Constitution states  
          that the Legislature has no power to authorize, and shall  
          prohibit casinos of the type currently operating in Nevada and  
          New Jersey.  In addition, the Governor is authorized to  
          negotiate tribal compacts, for the operation of slot machines  
          and for the conduct of lottery games and banking and percentage  
          games by federally recognized Indian tribes.  
          Opponents of this bill argue that "pursuant to the California  
          Constitution, banked games fall within the exclusive purview of  
          California's gaming tribes, and if DFS violates the  
          Constitution's prohibition against gaming of the sort found in  
          Nevada casinos, it can be authorized only through a  
          constitutional amendment approved by the state's voters."

          In addition, opponents to this bill argue that, "the California  
          State Legislature long ago determined that sports pools and  
          percentage games are illegal gambling activities in California.   
          In addition, because online DFS operators charge bettors a rake  
          that is a percentage of the wager, DFS is an illegal percentage  
          game."

          Gambling regulation/enforcement in California.  The Gambling  
          Control Act creates a comprehensive scheme for statewide  
          regulation of legal gambling under a bifurcated system involving  
          DOJ and the five-member CGCC.  The CGCC is authorized to  
          establish minimum regulatory standards for the gambling industry  
          and to ensure that state gambling licenses are not issued to or  
          held by unsuitable or unqualified individuals. 

          DOJ monitors the conduct of gaming operations to ensure  
          compliance with state gambling laws and conducts extensive  
          background investigations of applicants seeking a state gambling  
          license.  DOJ also conducts background checks for all key  
          employees and state gambling licensees and vendor applications.   








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          In addition, DOJ inspects premises where gambling is conducted,  
          examines gambling equipment, audits papers, books, and records  
          of the gambling establishment, investigates suspected violations  
          of gambling laws, and is ultimately responsible for enforcing  
          compliance with all state laws pertaining to gambling. 

          "Lottery" and "Skill vs. Chance".  The Legislature is prohibited  
          from authorizing lotteries.  Thus, if an activity is deemed to  
          be a lottery, then it is considered illegal gambling.  When  
          deciding whether an activity is a lottery, one factor the state  
          must determine is whether it is a game of "skill" or "chance."   
          Should an activity meet all the criteria of a "lottery," which  
          includes the determination that it is a game of "chance" not  
          "skill," the activity is illegal under California law. In  
          determining whether a particular game or scheme is a lottery,  
          the test in California is whether the game is dominated by  
          chance, the test is not whether the game contains an element of  
          chance or an element of skill but rather, as between them, which  
          is the dominating factor in determining the result of the game. 

          The status of DFS in other States.  Many states have begun to  
          take regulatory actions or propose legislation regarding DFS.   
          Several states, specifically Nevada and Illinois, have  
          determined DFS to be illegal gambling.  In Texas, the state's  
          attorney general declared that DFS would likely be considered  
          gambling if the issue came up in the courts. 

          In Massachusetts, the Attorney General laid out regulations in  
          late march that would govern the DFS industry from a consumer  
          protection standpoint.  While lawmakers have expressed interest  
          in licensing and taxing DFS operators, Massachusetts has yet to  
          officially license DFS.  Recently, the New York Legislature  
          passed a bill to legalize and regulate DFS-Governor Cuomo has  
          not yet acted on that bill.

          Staff comments and policy considerations.


          Current operators - The bill does not specify whether current  
          operators would be allowed to continue to operate prior to being  
          officially licensed in California.  Should current operators be  
          allowed to operate during this time frame?


          License fees - The bill currently does not specify the annual  








          AB 1437 (Gray)                                      Page 16 of ?
          
          
          licensing fee or the percentage of gross revenue that should be  
          remitted to the state.  Without knowing the fee or the  
          percentage that the state will receive, it is hard to determine  
          what the benefit is to the state.  In addition, without specific  
          numbers it is difficult to determine the impact that such a fee  
          would have on competition.  What should be the license fee and  
          the percentage of the gross income that is remitted to the  
          state?


          Role of California Gambling Control Commission (CGCC) - The CGCC  
          is responsible for determining suitability for the issuance of  
          licenses, work permits, registrations and Tribal key employees,  
          vendors, and financial sources to ensure that no ineligible,  
          unqualified, disqualified, or unsuitable persons are associated  
          with control gaming activities in the state of California.  The  
          bill currently does not specify a role for CGCC in regulating  
          DFS in California.  Should the CGCC play a role in licensing DFS  
          in California?


          Highly experienced players - The bill currently specifies that  
          licensed operators must identify a highly experienced registered  
          player using a symbol attached to that registered player's  
          account or username or by other means easily identifiable by  
          other registered players.  However the bill does not define a  
          "highly experienced player."  Should a highly experienced player  
          be defined? 


          Computer scripts - Computer scripts are a list of commands that  
          a computer can execute without the user's interaction.  For  
          example, a player could use a script to convert data from a  
          spreadsheet into hundreds of unique lineups almost instantly,  
          rather than entering them manually on the site.  Computer  
          scripts could also be used to adjust lineups quickly on late  
          breaking news.  In the past, some DFS players have complained  
          that computer scripts are unfair for players that do not use  
          them and are against the DFS' core idea of players playing  
          against other human players.  Should computer scripts be  
          prohibited? 


          Athlete prohibitions - Should real world athletes, staff,  
          coaches, or game officials be prohibited from participating in  








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          DFS games?


          Complaint process - Should a licensed operator be required to  
          establish a player complaint process, in consultation with DOJ?


          Geolocation - The bill currently requires a licensed operator to  
          ensure that a registered player is physically located within the  
          State of California at the time of participating in an Internet  
          Fantasy sports game.  This language suggests that California  
          players would be prohibited from playing with DFS players in  
          other states.  If California players are allowed to play with  
          DFS players in other states, it is unclear how the requirements  
          in this bill-if found to be contradictory with requirements in  
          other states-would be fulfilled.  Furthermore, because some DFS  
          contests occur over a period of days, it is unclear if this  
          prohibition means that a player's entry would be invalid if that  
          player travels out of state during the duration of the contest.   
          Current language also suggests that a DFS player would be  
          prohibited from changing their entry if they travel  
          out-of-state.  Should California provide for pool liquidity?


          DOJ/CGCC regulations - The bill only specifies that DOJ may  
          promulgate regulations.  Should DOJ be required to promulgate  
          regulations? Should the CGCC play a role in developing those  
          regulations?


          Background investigations - Should DOJ be required to perform  
          background checks on officers, owners, investors or corporate  
          affiliates of a licensed operator? 


          License renewal - Should a licensed operator be subject to a  
          biennial license renewal process?


          Parental controls - Should a licensed operator be required to  
          establish parental control procedures?


          Advertising prohibitions - Should a licensed operator be  
          prohibited from advertising misleading claims including odds of  








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          winning DFS contests?


          Tournament format - Some states that have introduced and/or  
          passed DFS legislation include provisions to require licensed  
          operators to disclose the maximum number of entries allowed by a  
          single DFS player for each contest and/or to require licensed  
          operators to provide single entry tournaments.  Should a  
          licensed operator be required to disclose the maximum number of  
          entries allowed by a registered player in each contest and  
          should they be required to provide single entry tournaments? 


          Self-exclusion - The bill specifies that DOJ shall develop a  
          self-exclusion form by July 1, 2017.  Should the self-exclusion  
          form be available as soon an operator is licensed? Should a  
          licensed operator be required to provide DFS players the option  
          to self-exclude from individual DFS contests, for any period of  
          time including a lifetime ban across all platforms and across  
          different licensed operators? 


          Audit authorization - Should DOJ have the authority to conduct  
          an audit of any licensed operator, at any time, or at least  
          annually to ensure compliance with this bill?


          Server location - The bill is currently silent on the location  
          of a licensed operator's server and back-up server.  Since both  
          DraftKings' and FanDuel's servers are located out-of-state,  
          should California mandate that a licensed operator's server be  
          located in this state in order to enable quick inspection by DOJ  
          agents?


          Player records - Some states that have introduced and/or passed  
          DFS legislation include provisions to require licensed operators  
          to maintain player records for a period of five years.  Should a  
          licensed operator be required to maintain such records?


          Approval of games - Should DOJ be required to approve specific  
          games before a licensed operator is allowed to offer such games?










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          Prior/Related Legislation
          
          AB 2863 (Gray, 2016) establishes the Internet Poker Consumer  
          Protection Act of 2016 and authorizes the CGCC and the DOJ to  
          license and regulate internet poker, as specified.  (Pending on  
          the Assembly Floor) 

          FISCAL EFFECT:                 Appropriation:  Yes    Fiscal  
          Com.:             Yes          Local:          No


            SUPPORT:  

          Anschutz Entertainment Group
          California Police Chiefs Association
          Daily Fantasy Sports Players Alliance
          Los Angeles Clippers
          San Diego Chargers

          OPPOSITION:

          California Coalition Against Gambling Expansion
          California Nations Indian Gaming Association
          California Tribal Business Alliance
          County of Riverside, District Attorney, Michael A. Hestrin
          County of San Bernardino, District Attorney, Michael A. Ramos
          Morongo Band of Mission Indians
          New Sports Economy Institute
          Pala Band of Mission Indians
          San Manuel Band of Mission Indians
          Stand Up for California!
          United Auburn Indian Community

          ARGUMENTS IN SUPPORT:    The California Police Chiefs  
          Association states that, "DFS websites are visited by millions  
          of Californians and should continue in a regulated environment  
          where consumers are protected.  AB 1437 will ensure that DFS  
          websites provide safe and responsible entertainment option for  
          adults, which include safeguards against compulsive and underage  
          gambling, money laundering, fraud, and identity theft."

          The NBA Los Angeles Clippers state that, "fantasy sports have  
          been an important tool used by many sports teams, including the  
          LA Clippers to deepen connections and engagement with our fans.   
          Our organization looks for ways to increase fan enjoyment of our  








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          games.  We have found fantasy sports to be an important tool in  
          this mission.  We are supportive of efforts to ensure that our  
          fans are enjoying fantasy sports in a protected, regulated  
          environment."

          ARGUMENTS IN OPPOSITION:    The Morongo Band of Mission Indians  
          state that, "many attorney generals across the country have  
          concluded that DFS is in fact gambling.  While California  
          Attorney General Harris has yet to opine on the issue, the  
          question still remains as to whether or not DFS is illegal in  
          California.  Specifically does DFS violate Article IV, Section  
          19 of the California Constitution or Penal Code Section 337 (a),  
          and thus, is the Legislature both prohibited from authorizing it  
          and mandated to prohibit it? AB 1437 acknowledges that DFS  
          explicitly violates 337 (a), yet, DFS operators are seemingly  
          rewarded with the adoption of a new regulatory structure, with  
          no repercussions for violating state law."

          Additionally, the San Manuel Band of Mission Indians argue that,  
          "any measure that expands gaming in California must also address  
          how regulatory costs are to be equitably apportioned among  
          licensed entities and how problem gaming programs are to be  
          funded.  Both the State's regulatory agencies and its efforts to  
          address problem gambling currently are funded disproportionately  
          by Indian tribes that conduct gaming activities in California.   
          In order to operate in California, DFS operators must be  
          required to pay a proportionate share of the costs associated  
          with regulation, enforcement and problem gaming."

          The California Coalition Against Gambling Expansion argues that,  
          "like a growing number of states have concluded, we contend that  
          DFS is an illegal gambling activity that should be banned, not a  
          legal activity needing to be regulated.  Although the actions of  
          other states may not be definitive, they should at least be  
          informative.  In addition, DraftKings has applied for and  
          received a gambling license from the United Kingdom.  This seems  
          an acknowledgement from the industry that this is gambling, and  
          if so, any legislation seeking to authorize a new form of  
          gambling must first amend our State Constitution."

          DUAL REFERRAL:  Senate Rules Committee












          AB 1437 (Gray)                                      Page 21 of ?