February 11, 2016

Sweepstakes & Contests — A Jackpot for Your Business or One of Potential Risk?

Walking the SHOT Show this year, one couldn’t help but notice the number of creative and edgy promotions exhibitors were using to entice attendees to visit their booths. Whatever direction you headed, you were bound to run into a company engaged in some kind of giveaway like a buy-one-get-one deal or get-a-gift with every purchase kind of offer. And because this was Vegas, baby, no attendee could pass up the thrilling opportunity to enter one of the many exhibitor-sponsored sweepstakes or contests for the chance to win a big prize.

Sweepstakes and contests have been used for decades, if not centuries, as relatively passive, inexpensive and easy-to-deploy promotional tools that help create buzz about a company’s products and services. With brand wars growing fiercer and competition to attract and retain customers at fever pitch, companies of all sizes are pursuing more comprehensive and aggressive marketing campaigns centered around elaborate and sophisticated nationwide sweepstakes and contests. Judging by the sheer number of sweepstakes and contests running daily on the Internet and being shared across social media sites, savvy marketers realize the positive impact these promotions can have on stimulating excitement for their company’s products or services, boosting sales and creating long-term customer relationships.

But running a sweepstake or contest is not without its risks. Among these risks is that your promotion, which you may have spent months planning, is found to violate federal and/or state lottery laws.

Lottery Ins and Outs

Unless you are the government, running a lottery is generally illegal in every state and could subject your business to substantial civil and criminal penalties and fines, not to mention an outpouring of negative publicity. At the federal level, the U.S. Department of Justice, U.S. Federal Communications Commission, U.S. Federal Trade Commission and U.S. Postal Service all have jurisdiction over illegal sweepstakes and contests. States do, too, and because state laws regulating sweepstakes and contests vary and are often the most onerous to comply with, promoters should give them their undivided attention, especially when running a national promotion.

Generally, a lottery is defined as any game in which: (1) someone is required to pay money or give something of value to enter; (2) a winner is chosen by random chance; and (3) a prize is awarded. To be precise, a lottery combines all three elements — consideration, chance and prize. Thus, to avoid having a promotion shut down as an illegal lottery, any one of these three elements must be eliminated.

Sweepstakes or random drawings for prizes are not classified as lotteries because they typically exclude the element of “consideration” (criteria No. 1, in the preceding paragraph). Consideration could be an entrance fee someone must pay to enter a sweepstake or the providing of something else of value, say, requiring an individual to expend substantial time or effort to complete a task (e.g., visiting a store or sending a text to enter). Sweepstakes are frequently structured to allow participants to enter without requiring any consideration and will use the magic phrase “No Payment or Purchase Necessary to Enter or Win” in their rules to emphasize this point. Promoters hosting sweepstakes in which individuals are automatically entered if they make a product purchase, or that require individuals to expend substantial time or effort, should offer individuals an easy, free alternative method of entry (AMOE) into the sweepstakes that is as equally likely to win as is someone who made a purchase or provided other consideration. Simply just providing an AMOE, however, may not necessarily make a sweepstake lawful in all cases. Therefore, it is prudent for companies thinking of running pay-to-play sweepstakes to seek legal counsel in structuring them appropriately.

Contests — Chance vs. Skill

Dices Contests are not lotteries because they lack the element of chance (or chance is greatly reduced). In contests, prizes are awarded based to a substantial degree on the skill of an entrant. For example, essay-, photography- and trivia-driven contests are not lotteries because the key to winning is not based on chance, but rather on the skill or the effort of the contestant. In the case of an essay contest, entries must be judged and scored based on objective criteria, with the highest-scoring essays being announced the winners. Conversely, guessing games or any game that requires entrants to perform virtually impossible activities (e.g., guess the number of rice grains in a bottle) are not contests, because they are predominantly based on chance, not skill.

Contest organizers must be particularly careful not to introduce chance into a contest devised around skill. If chance dominates in a contest, it is not a game of skill, even if some skill is required to participate in the contest.

A couple other things to consider regarding contests. States generally allow promoters to impose a fee or product purchase requirement on individual contest entrants. Some states like Arizona, however, oblige contest organizers requiring a product purchase to register their contests, while other states like Vermont and Maryland do not allow such pay-to-play contests at all.

Contest Pay to Play? As Varied as the 50 States Themselves

Assuming a promotion passes the basic lottery sniff test, promoters, especially those running nationwide sweepstakes or contests, will need to comply with the laws of all 50 states, as well as federal law. New York, Florida and Rhode Island, for example, require promotions to be registered and bonded with those states depending on the nature of the promoter and if aggregate prize values exceed a certain amount. Promotions in specific industries, such as alcohol, tobacco and financial services, may also be subject to specific state restrictions. Then there are states that require promotions to make available to consumers clear and conspicuous disclosures such as the name of the organizer, the rules under which the promotion will be conducted (e.g., who can enter, entry methods, how winners are determined, etc.), the odds of winning a prize and the dates of the promotion. Organizers should also be aware of disclosure obligations under federal law, such as the Deceptive Mail Prevention and Enforcement Act, which covers direct mail promotions, as well as Federal Trade Commission regulations prohibiting false and misleading advertising.

Even if not mandated, it is recommended that organizers create rules informing consumers of all material terms and conditions governing a promotion and post them wherever participants may enter the game, including on the Internet and in retail outlets. Following is a list of general terms that should be included in such official promotion rules (again, however, states and even federal regulators may require that additional terms be disclosed).

A statement that no purchase or payment necessary to enter or win (if true)
Identification of promoter and contact information
Who is eligible to enter (e.g., legal U.S. residents age 21 years or older)
Any geographic limitations (e.g., void outside the United States or list the specific states where promotion is excluded)
How to enter (don’t forget about an AMOE if needed)
Beginning and ending dates of promotion
Winner selection and notification procedures
Prize information, including the approximate retail values of prizes
Odds of winning a prize or a statement that odds depend on the number of qualifying entries received
A statement that the winner’s list will be made available, along with information how to obtain the list

iStock_000019174743XSmall The patchwork of state and federal promotions laws and regulations can certainly be a trap for the unwary. However, if navigated correctly, sweepstakes and contests can give companies the extra edge needed to stand out from the rest of the competition. As such, businesses are strongly encouraged to consult with an attorney or other qualified advisor experienced with the specific state and federal legal and regulatory requirements associated with sweepstakes and marketing promotions. By doing otherwise, you could wind up winning a knock on the door by a government agent, rather than winning more customers and sales.