Don’t Run Afoul of Gaming Laws in Offering Sweepstakes and Contests ~ By Sean McGuinness and Karl Rutledge

Ethics

The Internet and social media have become the most efficient ways for companies to disseminate information and sell their products/services, connect with their customers and strengthen their brand. With this availability and convenience come numerous opportunities to run afoul of the law. This article touches on a few of the more common gambling issues to be aware of with promotional offerings.

Traditionally, the federal government has not played a major role in the regulation of gaming. Instead, regulation has been viewed as most appropriate for state and local jurisdictions. Accordingly, most states typically define gambling as any activity in which the following elements are present: (1) the award of a prize; (2) determined on the basis of chance, including a future contingent event outside of their control; and (3) where consideration is required to be paid. If any one of these elements is removed, then the activity is generally lawful.

Removal of Consideration

Most states have adopted a pecuniary/economic value approach to analyzing consideration. A promotion requiring a purchase or payment to participate presents a clear example of consideration. A less clear situation exists where participants are required to expend some degree of effort that ultimately benefits the promoter (e.g., completing a questionnaire). While no definitive standard exists, the rule of thumb is the more effort required, the greater the likelihood that it will be deemed consideration.

Removing consideration creates an activity known as a sweepstakes. To remove the element of consideration and avoid the general prohibition against lotteries, promoters offer an alternative method of entering the promotion for free (AMOE). This is generally effective in terms of legally eliminating the consideration element, although most entries into the promotion will be through the purchase of the promoted product/service.

A key to utilizing an AMOE is that the company must disclose the existence of the non‑purchase method of entry in a clear and conspicuous manner. Often the words “no purchase necessary” are displayed prominently on all sweepstakes materials. Another key is that non-paying participants must have “equal dignity” with purchasers and equal opportunity to enter to win the same prizes. For example, allowing free mail-in entries to have a grace period after the entry deadline promotes equal dignity.

Additionally, a person who enters by purchase cannot get a disproportionate number of entries compared to non-paying entrants. Non-paying participants should have equal chances to win all prizes offered. Separate prize pools may invalidate the AMOE because the non-paying participants do not have the opportunity to win the same prize. Likewise, non-paying participants should not face greater odds or obstacles to winning the prizes. Any material disparity (actual or perceived) can invalidate this model.

Official Rules

Quality official rules are critical for a sweepstakes. At a minimum, official rules should include: (i) start and end date; (ii) eligibility restrictions; (iii) entry methods; (iv) winner selection details (including judging criteria if a skill-based contest); (v) description and retail value of the prize(s); (vi) odds of winning; (vii) where to obtain a winners’ list; (viii) limitations of liability; (ix) name and address of the sponsor; and (x) dispute resolution provisions. Consider having entrants check a box affirming they have read the official rules and agree to be bound by such rules.

A company must also be careful to avoid any potential misinterpretation of its intent and must anticipate foreseeable issues, such as ties, prize unavailability, prize damage during shipment and cheating by participants when drafting official rules. It is essential to clearly state all aspects of the promotion, as courts will not be kind to operators that mislead participants. Claims for breach of contract, fraudulent misrepresentation and violation of false advertising statutes may arise if prize interpretation is in dispute.

With this in mind, companies should understand that official rules are like any other binding contract, except that instead of contracting with another sophisticated company, the company is potentially contracting with thousands of users. Detail, clarity and accuracy are therefore crucial in the drafting of rules. This is evidenced by attorney general enforcement actions and substantial fines levied by the Federal Trade Commission against companies found to be promoting fraudulent schemes and engaging in other forms of false or deceptive advertising on the Internet.

When utilizing social media, a company also must be aware of the applicable social media platform’s restrictions and draft the promotion’s rules in compliance therewith. This is important because a promotion could be terminated prematurely for noncompliance with the platform’s restrictions, which may lead to a violation of the law because the promotion did not follow the course as set forth in its official rules.

Finally, several states require registration and bonding of the promotion if the prizes awarded exceed a set amount. To register with a state, among other items, the promotion’s official rules and registration fees are required. Sufficient time for registration and bonding should therefore be given when contemplating offering a promotion. Failure to do so may result in the promotion being postponed to allow for the necessary registrations or result in the blocking of such states in order to proceed in the timeframe initially proposed.

Conclusion

Companies intending to use the Internet as a method to promote a product/service must recognize they are entering an intricate and specialized industry and be conscious of the complex legal boundaries in which they must operate. Utilizing counsel intimately familiar with these issues to develop and vet proposed promotions is a valuable strategy to avoid, at a minimum, embarrassing delays in promotional offerings or in more severe circumstances, criminal penalties resulting from improperly implemented promotions.

Should you have any questions regarding offering promotional sweepstakes, please do not hesitate to contact the authors, Sean McGuinness (smcguinness@lrrc.com) and Karl Rutledge (krutledge@lrrc.com).

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