• Sweepstakes Compliance: It's a Crime to Make a Mistake
  • October 21, 2003 | Author: Stephen R. Bergerson
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • Although the words are often used interchangeably, sweepstakes and contests are very different things. Contests are games of skill, where winners are determined by their ability to perform a specified task. A sweepstakes is a game of chance, where winners are determined by an event -- such as a drawing -- over which they have no control. If not carefully constructed, sweepstakes can violate state and federal lottery (gambling) laws.

    Lottery Laws

    When a promotion combines the elements of (1) prize, (2) chance and (3) consideration, it's a crime (misdemeanor!). But if any one of the elements is eliminated, so is the need to worry about lottery laws. Since the prize can't be eliminated, and games of chance are more popular than games of skill, consideration must be eliminated to make a sweepstakes legal.

    Consideration is a somewhat elusive aspect of promotion law, but some generalities can be drawn. It takes either of two basic forms: monetary, in which the consumer must pay the sponsor to play (a purchase or an entry fee), or non-monetary, in which the consumer must expend substantial time or effort (completion of a detailed questionnaire or a mandatory visit to the sponsor's retail location, for example) to participate.

    Over time, most states have adopted a monetary approach, although Michigan recently challenged an instant win game in which Sears had required consumers to visit its Detroit store. The Attorney General deemed the store traffic generated by the promotion a material benefit to Sears. A sponsor can, however, generally require consumers to watch a TV program, complete a brief survey, read a brochure, or (in most states) participate in a sales presentation as a condition of participation.

    Consideration can legally flow to the promotion sponsor; it just can't be mandatory. Virtually all U.S. jurisdictions will permit a promotion where participants pay to play, as long as the sponsor provides a free alternative method of entry.

    For an in-pack promotion, for example, the sponsor may insert an instant win card in the package, which also includes a "no purchase necessary" statement and a disclosure that free game pieces are available.

    Consideration that precedes the game is legal. Credit card promotions, for example, limit sweepstakes participation to those who have cards as of the date the promotion is first advertised. Otherwise, the sponsor would be unlawfully inducing consumers to subscribe as a condition of participating in the game.

    Similarly, consideration is permitted where the game is "blind." When the Twins conduct an unannounced drawing for all game attendees, the consideration (admission) has been given without knowing that a chance to win was included . . . unless the drawings have become fairly common.

    Official Rules

    Rules are a critical element in disaster-proofing a sweepstakes. They constitute an enforceable contract between the sponsor and participants and can't be changed once they're published. There are no "perfect" rules; they vary by promotion and by state. When drafting rules, it's good to remember that with a sweepstakes, everything that can go wrong will if you give it a chance. Rules should include provisions regarding:

    1. Methods of entry (including free)

    2. Limits on number of entries per person, family or household

    3. Mechanically reproduced entries

    4. Method of determining winners

    5. Odds of winning

    6. Eligibility (age, residence, exclusion of employees and family members of sponsor and related parties from participation in the game, etc.)

    7. Duration (beginning and ending dates for entry, free game pieces and winners lists)

    8. Limitation on sponsor liability

    9. Lost, late, misdirected mail

    10. Void where prohibited clause

    11. Liability for taxes on prizes

    12. Affidavit of eligibility and liability/publicity releases

    13. Reservation of publicity and promotion rights

    14. Unclaimed prizes (or second-chance drawing)

    15. Entries become property of sponsor

    16. Finality of judges decisions

    17. Printing, typographical and other errors

    18. Participation by minors

    19. Fraud/malfunction/errors

    20. Description of prize (travel prizes are especially dicey)

    Considerable care needs to be taken to be thorough and yet avoid ambiguities; rules should be drafted or reviewed by experienced counsel.

    Bonding and Registration

    New York and Florida require sponsors to bond and register consumer sweepstakes and contests where the combined value of prizes exceeds $5,000. Rhode Island also has a registration requirement (no bond), but only for games sponsored by retailers.

    Contests

    As previously indicated, a contest is a game of skill. But what is skill? And why is it important to know?

    The best definition of skill may be the absence of chance, where winners are judged on their ability to successfully perform non-chance activities. For example, writing an essay, preparing a recipe, answering trivia questions or solving puzzles all are deemed to require skill.

    Perhaps the best thing about contests is that since winners have some control over their destinies, sponsors can usually (except in Vermont, Maryland and North Dakota) require consideration as a condition of participation. (Chance has been eliminated, so one of the three elements of a lottery has been, too.)

    When designing a contest, a sponsor must clearly specify the criteria for judging entries. For example, essay contests can be judged on originality, humor and creativity; photo contests on composition, color and creativity. In trivia and puzzle games, winners are judged by their ability to correctly answer the questions or solve the puzzles, sometimes with a time factor applied.

    It is important to be sure that the judging criteria are objective, judges are expertly qualified, entrants compete on a level playing field, and tie-breakers are based on skill. Otherwise, the game of skill (contest) converts into a game of chance (sweepstakes). And be careful: things that you think are skill may not be in the eyes of the regulatory authorities. Picking winners of sporting events, guessing the number of beans in a jar, and answering true/false questions are not considered skill.

    As a practical matter, remember that skill promotions require more administration than games of chance, because all entries must be considered and judged.

    On-line Promotions

    On-line promotions are guided by the same laws that govern those offered through other media, although the rules must cover many more contingencies. The question most often posed is whether consideration is present in a sweepstakes.

    Historically, the enforcement patterns suggest that consideration must be paid directly to the sponsor for it to be a problem. For example, if ESPN requires consumers to watch an ESPN show to be eligible to win, participants would have to subscribe to cable. Since the subscription fees would not benefit ESPN, regulators probably wouldn't challenge the promotion.

    Although an on-line sweepstakes requires participants to e-mail an entry, and most entrants will access the site through an on-line service provider (AOL, CompuServe, etc.), the sponsor receives no monetary benefit from the consumer, so the sweepstakes should be lawful.

    Nonetheless, some sponsors have elected a more conservative approach out of concern that payment of the access fee or for on-line time might be deemed consideration. There is no expressed regulatory basis for this concern, with one possible exception: the Florida Secretary of State's announced policy reflects that view, although the Florida Attorney General has not adopted it.

    Cause Marketing

    If you tie a promotion in with a charity or not-for-profit organization, it is important to know that several states (Connecticut, Florida, New York, Ohio, Massachusetts, New Hampshire and Maine) have what are known as commercial co-venturer laws. If, for example, a sponsor offers a promotion in which a charity receives 10 cents from each purchase of the sponsor's product, these states require (among other things) the sponsor to submit its contract with the charity, provide a post-promotion accounting to the state, and make certain disclosures to the public. New Hampshire and Massachusetts also demand a $10,000 performance bond to guarantee the commercial entity's performance of its promotional obligations.

    Conclusion

    Legally, contests and sweepstakes are a minefield, littered with opportunities for disaster. But, with the help of experienced counsel who knows where the mines are buried, a sponsor can run through the field with little to fear.