October 27th, 2015
As part of your business, do you ever run a lottery, sweepstakes or contest online? And do you know the difference between these promotions?
If you don’t, you could easily and unknowingly convert a sweepstakes into an illegal lottery. This is an area of law that is heavily regulated by both state and federal law. The promotion of lotteries, sweepstakes and contests and the disclosure rules that apply to each one are subject to numerous requirements that may vary from state to state. Some states require the registration of the promotion and may even require that a bond be posted (sufficient to guarantee the prize, for example). If you don’t properly limit the geographic scope of the lottery, sweepstakes or contest, or define the eligibility requirements, you may open yourself up to trouble.
Let’s first look at each one in turn.
A lottery includes an offering for anything of value, is a game based solely on chance (winner selected at random), and to participate, a consumer has to provide consideration (something of value).
A sweepstakes is a game of chance in which the participants do not have to give anything of value to play.
A contest is a game of skill, which may have an entry fee and different levels of allowable chance.
If you are running a contest, the standard is not extreme to overcome when picking a winner (based on skill). You just need to lay out the rules in advance, and define what you are looking for in the participants’ entries.
Some question is raised about the validity of contests which involve voting, based on whether the voters are qualified to decide the adequacy of a participant’s entry or skill. Some companies overcome this issue by internally picking the finalists according to the set standards, and the open up the contest for voting by the public to select the winners.
It is important to remember that a sweepstakes can all too easily be converted into an illegal lottery once “consideration” is required. This is why, with almost all sweepstakes (particularly those connected to the purchase of a product, for example), there are alternative methods of entry defined in the small print which do NOT require consideration. On this point, it is generally accepted that providing a self-addressed, stamped envelope is sufficient for entry and does not constitute consideration. Similarly in a strictly online format, an email address may be required, and although there is some academic debate about whether an email address constitutes consideration (i.e. something of value), it is generally thought that requesting an email address is acceptable, and does not convert a sweepstakes into a lottery. However, if you were to request an email address, first and last name, mailing address, etc., this is where one may be violating the narrow requirements of a true sweepstakes and inadvertently converting it to an illegal lottery.
And let’s not forget the fine print!
What should be included in the fine print for a contest, for example?
1. A deadline – clearly state the last day to enter or a contest deadline.
2. Describe the odds of winning – it is required in some, but not all states, and may be broadly described (i.e. “depends on the number of entries received …”
3. Identify the value of the prize (and to the extent you reserve the right to switch out a prize, must be of equal or lesser value, etc);
4. The Judging criteria (you don’t want a contest to become a sweepstakes without any criteria for winning);
5. Age or residency restrictions (limit it to within your state if possible, to reduce complexity and opportunities to violate state or federal law);
6. Alternative method of entry (make sure that you don’t convert sweepstakes into a lottery by requiring something of value);
7. Limitations of Liability; (include that submission of the entry confirms agreement to the terms);
8. To the extent possible, make it a click-wrap agreement (click the box to agree with the terms);
9. Reserve the right to change the contest rules at any time;
10. Reserve the right to cancel, terminate or modify the contest if in your sole discretion is becomes impossible or impractical for any reason to continue the contest or select a winner.
The goal is not to be overly paranoid when running one of these online promotions, but simply to understand that restrictions may apply. And these could include heavy regulation and involvement by the state (registering the promotion, filing a bond, publishing a list of participants or winners with the state, etc).
Some companies, especially large companies that run regular promotions, hire out promotion services to businesses that oversee the whole promotion process. There are businesses that provide everything from insurance to marketing, to compliance activities (registrations, posting bonds, overseeing and preparing the rules, etc), and ultimately deliver the goods to the winning participants. For smaller businesses that do not have sufficient funds for these types of services, the best way to limit your liability is become familiar with the playing field, be practical and reasonable in the planning and handling of your promotions, and place appropriate limitations on geography and other necessary restrictions (age/participant-based restrictions).
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DISCLAIMER: THE INFORMATION PROVIDED IN THIS POST MAY CONTAIN LEGAL INFORMATION, BUT DOES NOT CONSTITUTE LEGAL ADVICE. NO RELATIONSHIP, INCLUDING ATTORNEY-CLIENT RELATIONSHIP, HAS BEEN FORMED AS A RESULT OF THIS POST. YOU ARE ADVISED TO SEEK THE ADVICE OF AN ATTORNEY LICENSED IN YOUR STATE IF YOU HAVE ANY QUESTIONS.