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Something For Nothing: Digital and Mobile Promotions, Sweepstakes and Contests

26 August 2009 No Comment

officeExecutives at NBC Universal decided to market reality TV show The Apprentice by launching a national watch-and-win sweepstakes. Viewers were given the opportunity to win a prize of $10,000 by voting for certain Apprentice contestants to be exiled from the group and forced to live in a tent. Those who voted online could participate for free. However, those who voted by text message were charged an entry fee of 99 cents.

In 2007, a Georgia woman sued Donald Trump and NBC Universal for operating an illegal lottery in violation of state racketeering statutes. Similar class action lawsuits have also been filed against popular shows such as America’s Got Talent, Deal or No Deal and 1 vs. 100. The class action suits have called into question whether these SMS promotions constitute gambling, even though viewers were provided with a method of entering the contest for free online. Participants paid only the opportunity to participate, rather than anything of economic value.

Free Giveaways, Many Rules

With the advent of email blasts, web promotions and real-time Twitter giveaways, companies can now instantaneously engage large audiences with the promise of something for nothing. Mail order sweepstakes and promotions have traditionally been used to build brand awareness and win customer goodwill, most notably national sweepstakes like Publisher’s Clearing House and Reader’s Digest. Such marketing vehicles have become more accessible in recent years since even small companies can set up and administer large-scale promotions online with relative ease.

However, as the producers of Donald Trump reality show discovered, promotions and sweepstakes can pose complex legal issues because of the uneven landscape of state law. Federal agencies have some authority to regulate certain aspects of prize promotions under federal law, but at the state level, a raft of varied local laws may apply. Despite the fact that it was most likely vetted by in-house counsel, the Donald Trump sweepstakes still resulted in litigation because it ran afoul of a Georgia anti-racketeering law that prohibits “illegal gambling contract.”

Games of Skill vs. Games of Chance

Marketing promotions generally fall into one of several categories. The law applicable to a particular promotion or sweepstakes will depend on the rules of the game and how the game is structured.

  • Sweepstakes. A sweepstakes is a random drawing governed by official rules. The success of a participant in a sweepstakes depends on chance, rather than skill. If a sweepstakes requires entrants to give up something of value to participate, it will most likely be considered a lottery and subject to state anti-lottery statutes, such as the Georgia statute that provided the basis for The Apprentice show lawsuit. These state statutes are discussed at greater length below.
  • Contests. In contrast, a contest is a promotion where the result depends on the individual participant’s unique skills, rather than pure chance. In most but not all states, contests are not subject to anti-lottery statutes and pay to play may be acceptable. For example, the increasingly popular marketing trend of user-generated content promotions could fall into this category.
  • Raffles. A raffle is a contest of chance where entrants who give up something of value for the opportunity to win a prize. The prize doesn’t necessarily have to be cash, and entrants don’t necessarily have to pay cash to participate. For example, several jurisdictions have held that the purchase of a product satisfies the requirement. Raffles are the equivalent of lotteries and are subject to state anti-lottery laws.

Federal Regulations: The Deceptive Mail Prevention and Enforcement Act

When launching a promotion, especially an online promotion, it is worth considering whether participants may hail from the United States or from abroad. A promotion or sweepstakes that launches internationally may also need to comply with foreign law. In the United States, agencies at the federal level can regulate how and when certain promotional games and contests are operated. Such agencies include the Federal Trade Commission (FTC), U.S. Postal Service, Federal Communications Commission, and the Bureau of Alcohol, Tobacco and Firearms.

One key federal statute in this area is the Deceptive Mail Prevention and Enforcement Act (DMPE), which is enforced by the FTC. Enacted in 1999, the law regulates some aspects of sweepstakes and creates strong consumer protections to prevent deceptive mailings. Under the law, the sponsor of a promotion must clearly and conspicuously disclose the terms and conditions of sweepstakes, as well as language stating that no purchase is necessary to enter. If the promotion is a contest, the sponsor must also disclose terms and conditions, as well as the cost of participation and the standards by which the contest will be judged. Sponsors must provide consumers with a method of opting out from notifications of future promotions and maintain an opt-out list.

In 2007, the FTC brought an action against direct-to-consumer adjustable bed marketer Craftmatic under the DMPE. The company operated a sweepstakes that gave consumers who filled out a form that chance to win a Craftmatic bed. The form did not inform consumers that they would be targeted with sales calls. However, the company nevertheless allegedly called numerous consumers who entered the sweepstakes, even when consumers requested to be placed on a do-not-call list. The company was subject to a $4.4 million civil penalty.

An Uneven Landscape: State Laws and Regulations

The real challenge for marketers is ensuring that promotions and sweepstakes comply with the state law regulations. The DMPE does not preempt state laws, so if a promotion is open to participants in all states, it will be necessary to ensure that the promotion does not violate the relevant laws of any of the 50 states. A state like Nevada will have different public policy goals from a state like Nebraska, so a promotion that is legitimate under the laws of one state may be illegal under the laws of another.

Given stringent anti-lottery regulations in certain states, it is not unusual for sponsors to exclude a promotion from certain states. The following are some examples of promotions and sweepstakes rules that apply in some states.

  • Anti-Lottery Statutes. The difference between lotteries, sweepstakes and contests is important because it determines whether state anti-lottery rules apply. If the promotion is based on chance and entrants are required to give up something of value – even “a rose, a hawk, or a peppercorn,” as noted by the court in the Lucky Calendar case – the promotion may be an illegal lottery. Currently, states with anti-lottery statutes include California, Connecticut, Georgia, Maryland, Massachusetts and Michigan.
  • Bonding and Registration Rules. Some states require sponsors to notify state agencies of their promotions and to register with state agencies if the total retail value of the prize exceeds $5000. These rules usually require sponsors to clearly disclose the rules of the promotion to the agency and to the public, and sometimes also require sponsors to post a bond. States with bonding and registration requirements include Florida, New York and Rhode Island.
  • Alcohol Sponsors. Some states including California, Tennessee and Utah have particular rules restricting or barring alcohol companies from sponsoring promotions and sweepstakes. For example, the Tennessee Alcoholic Beverage Commission would prohibit a state resident from entering an online sweepstakes sponsored by an alcohol brand.

Vetting The Campaign

The degree of work involved in giving away something for nothing often surprises companies seeking to build goodwill through promotions. The Internet has reduced the barriers to entry for brand marketers, but it is important to ensure that sweepstakes drawings, interactive media contests, user-generated content competitions, rewards programs, and mobile marketing programs do not run afoul of the relevant state, federal and where applicable, international rules. Given the complexity of regulation in this area, it is advisable to have an attorney vet a campaign in advance of launch.

- By Dava Casoni, Annie Lin

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