Western Telcon, Inc. v. California State Lottery

Page 812

53 Cal.Rptr.2d 812

13 Cal.4th 475, 917 P.2d 651, 96 Cal. Daily Op. Serv. 4645,

96 Daily Journal D.A.R. 7425

WESTERN TELCON, INC. et al., Plaintiffs and Appellants, v. CALIFORNIA STATE LOTTERY, Defendant and Respondent California-Nevada Indian Gaming Association, Intervener and Respondent.

No. S048618.

Supreme Court of California.

June 24, 1996.

Gibson, Dunn & Crutcher, Shauna Weeks, Robert Forgnone, Seyfarth, Shaw, Fairweather & Geraldson, Jerry M. Hill, Alexander H. Pope and David D. Jacobson, for Plaintiffs and Appellants.

Gil Garcetti, District Attorney (Los Angeles), George M. Palmer and Brentford J. Ferreira, Deputy District Attorneys, James P. Fox, District Attorney (San Mateo), Michael R. Capizzi, District Attorney (Orange), George W. Kennedy, District Attorney (Santa Clara), Michael D. Bradbury, District Attorney (Ventura), Susan Massini, District Attorney (Mendocino), Nielsen, Merksamer, Parrinello, Mueller & Naylor, Paul H. Dobson, John E. Mueller, Steven A. Merksamer and Richard D. Martland as Amici Curiae on behalf of Plaintiffs and Appellants.

Daniel E. Lungren, Attorney General, Roderick E. Walston, Chief Assistant Attorney General, Floyd D. Shimomura, Assistant Attorney General, Linda A. Cabatic, Cathy Christian and Manuel M. Medeiros, Deputy

Attorneys General, for Defendant and Respondent.

John Winkelman, Art Bunce, Levine & Associates, Jerome L. Levine, Frank R. Lawrence, Dickstein & Merin, Howard L. Dickstein, Alexander & Karshmer, George Forman, O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, Glenn M. Feldman, Rapport & Marston, David J. Rapport and Lester J. Marston, for Intervener and Respondent.

Fred J. Hiestand as Amicus Curiae on behalf of Intervener and Respondent.

WERDEGAR, Justice.

May the California State Lottery, consistent with its constitutional and statutory authority, operate the game it calls Keno? After examining California law on lotteries and other forms of gambling, we conclude it may not, for a simple reason: California State Lottery Keno is not a lottery. As operated by the California State Lottery, Keno does not meet the statutory definition of a "lottery game" (Gov.Code, § 8880.12) or that of a "lottery" (Pen.Code, § 319), but is instead a house-banked game, in which the participants bet individually against the game's operator, the California State Lottery.

Plaintiffs Western Telcon, Inc., doing business as Pachinko Palace, and the California Horsemen's Benevolent & Protective Association, Inc. brought this action against the California State Lottery (CSL), seeking a declaration CSL Keno is illegal and an injunction against its further operation. The trial court granted CSL's summary judgment motion, denied plaintiffs' cross-motion, permitted the California-Nevada Indian Gaming Association (CNIGA) to intervene as a defendant, and entered judgment for CSL and CNIGA.

The Court of Appeal affirmed, holding that CSL Keno "fully complies" with the provisions of the initiative measure authorizing the state lottery. We granted plaintiffs' and CSL's petitions for review. Because we conclude CSL Keno is, as a matter of law, not an authorized lottery game, we reverse the Court of Appeal and remand with directions that the superior court be ordered to enter judgment for plaintiffs.

FACTS

The pertinent facts as to the operation of CSL Keno are described in CSL regulations and are undisputed.

In CSL Keno, participants try to match between 1 and 10 numbers to a set of 20 numbers randomly selected, out of the integers 1 through 80, by a CSL computer. The game is played approximately every five minutes at locations throughout California, known in the regulations as "retailers," which are equipped with CSL computer terminals and video display screens.

The retailer provides the player with a "playslip" with the numbers 1 through 80 on it. The player first chooses and marks on the playslip how many numbers, from 1 to 10, he or she wishes to play. This number, according to the regulations, is the "spot." To play the "7 spot," for example, is to select 7 numbers from the field of 1 to 80. The player then selects the numbers to be played, and either places the playslip in the computer terminal or has an employee of the retailer do so. After the gambler pays what is referred to in the regulations as a "wager" of between $1 and $20, the terminal issues a ticket. The ticket is the player's only valid receipt for claiming his or her winnings, if any.

In the alternative, the player can allow the computer terminal to select one to ten numbers. This is called "Quick Pick." The gambler marks on the playslip the spot to be played and that he or she wishes to use the Quick Pick process. The playslip is then inserted in the terminal, and the Quick Pick numbers are selected randomly by the computer, which issues the ticket.

Approximately every 5 minutes, a central CSL computer randomly "draws" 20 numbers from the integers 1 through 80. It is these 20 numbers that the bettor hopes match the selections on the ticket. The 20 winning numbers are displayed on a video screen at the retailer location.

Payoffs in CSL Keno are "preset" according to a schedule in the regulations. The payoff for a given wager depends only on the spot played and the number of numbers matched. On a $1 wager, the payoff may be as low as $1 (for the 4-spot/2-match category, among others) or as high as $250,000 (for the 10-spot/10-match category).

In CSL Keno, a winner's payoff does not depend on the number of players participating in a particular draw, on the aggregate amount wagered on the draw by all players, or on how many other players made the same winning selection or other winning selections. The "prizes" established for each winning category are not shared among all winners; instead, CSL pays a fixed payoff to each winner no matter how many winners are in a given draw. The regulations provide only one exception to the pre-set payoff schedule: the total payoff on the 10 spot/10 match category for a single draw is limited to $10 million; if the payoff, at a fixed rate of $250,000 for each winning $1 bet, would exceed that amount, "each valid winner's share value for this category shall be calculated as a pari-mutuel prize for a prize pool of exactly $10,000,000."

Payoffs up to $599 may be collected from the retailer, while greater payoffs must be redeemed from a CSL office. The computer terminal itself does not pay out any money.

DISCUSSION

Constitutional and Statutory Authority

We begin by reviewing the pertinent statutes and constitutional provisions. Until 1984, the California Constitution had prohibited lotteries since the state's admission. (See Cal. Const. of 1849, art. IV, § 27.) Article IV, section 19, subdivision (a), of the Constitution currently provides: "The Legislature has no power to authorize lotteries and shall prohibit the sale of lottery tickets in the State." In 1984, however, the voters approved an initiative measure (Proposition 37, approved November 6, 1984) creating a state lottery. That measure, among other things, added subdivision (d) to section 19 of article IV, providing: "Notwithstanding subdivision (a), there is authorized the establishment of a California State Lottery." In the same measure, the voters also added subdivision (e), providing: "The Legislature has no power to authorize, and shall prohibit casinos of the type currently operating in Nevada and New Jersey."

From 1851 until 1984, lotteries were also prohibited by statute. (See Stats. 1851, ch. 28, p. 211.) Beginning with the original 1872 Penal Code, the definition of a lottery and the prohibitions on operation of lotteries have been contained in part 1, title 9, chapter 9 of the Penal Code (chapter 9), now consisting of sections 319 through 329. Penal Code section 319, unchanged since its enactment in 1872, defines "lottery" as follows: "A lottery is any scheme for the disposal or distribution of property by chance, among persons who have 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 it is to be distributed or disposed of by lot or chance, whether called a lottery, raffle, or gift-enterprise, or by whatever name the same may be known." Penal Code sections 320 through 326 broadly prohibit the operation of lotteries.

Like chapter 9 (title: Lotteries), chapter 10 of part 1, title 9 of the Penal Code (chapter 10) also was part of the original 1872 Penal Code. Chapter 10 (title: Gaming) begins with Penal Code section 330 (section 330), which both defines and specifies the punishment for illegal gaming. ¹ Anyone who conducts, plays or bets at any of the listed games for money or other representation of value commits the misdemeanor of illegal gaming. Section 330 specifies a number of games by name ("faro, monte, roulette, lansquenet, rouge et noire, rondo, tan, fan-tan, seven-and-a-half, twenty-one, hokey-pokey"), ² but it also forbids "any banking or percentage game played with cards, dice, or any device...."

In Proposition 37, the 1984 initiative measure creating a state lottery, the voters, in addition to amending the Constitution as described above, also added chapter 12.5 to title 2, division 1 of the Government Code. Known as the California State Lottery Act (see Gov.Code, § 8880), this law (the Lottery Act) creates the California State Lottery Commission (Gov.Code, § 8880.15), which is directed, among other things, to "promulgate regulations specifying the types of lottery games to be conducted by the lottery...." (Gov.Code, § 8880.28, subd. (a).)

" 'Lottery Game' " is defined as "any procedure authorized by the commission whereby prizes are distributed among persons who have paid, or unconditionally agreed to pay, for tickets or shares which provide the opportunity to win such prizes." (...