David Klein

The “daily deal” business model, which is most closely associated with industry leaders Groupon and LivingSocial, offers a unique means for businesses to attract customers, while generating revenue for the deal site proprietors themselves. The appeal of such a model is as basic as it is compelling: consumers are more easily attracted to retail establishments by the enticement of discounts, special offers and other promotions, than with more mundane, perk-free advertising.

However, certain state and federal laws may apply to the discount offers, and any business utilizing such marketing tools could incur substantial legal liability if it violates applicable law. In order to better avoid the potential legal pitfalls associated with this marketing approach, it is essential to first understand how it works and which laws may apply.

Generally speaking, this marketing method involves a “daily deal” website providing its subscribers with exclusive discounts and other promotions as made available by retailers in those subscribers’ local communities, or on a nationwide basis. Interested subscribers can purchase the applicable discount offer for a fee paid to the “daily deal” website. For example, an offer of $50-off a meal at a local restaurant may be made available to subscribers for a $10 fee. As per the terms of their marketing relationship, the “daily deal” website operator shares the $10 purchase price paid by the subscriber with the subject local restaurant.

Problems arise, however, due to the fact that many, if not all, of these special discount offers expire after a certain amount of time. Because consumers must pay a fee for these “daily deals,” these offers may be considered gift certificates, and therefore fall under the purview of certain state and federal laws regulating such products – in particular, the Credit Card Accountability, Responsibility and Disclosure Act (“CARD Act”).

The CARD Act, and its state law counterparts, requires that all gift certificates clearly and conspicuously disclose any expiration period. More importantly, these laws require that the expiration date for gift certificates must be at least five years from the date of purchase.

While Groupon, LivingSocial and their competitors maintain that the discount offers in question are coupons, not gift certificates, and thus are not regulated by laws applicable to gift certificates, attorneys general in multiple states (e.g. Connecticut and Illinois) have begun to scrutinize this business model to determine the nature of the offers. In addition, multiple class action lawsuits have been filed alleging violation of the CARD Act and corresponding state law.

Consequently, some “daily deal” website operators have sought to avoid liability by recently offering subscribers a full refund of the purchase price paid for the applicable discount offer should that offer expire. While this is a recommended step, and should be taken at a minimum, it does not guarantee immunity from regulatory action and/or litigation. In order to best limit liability, “daily deal” website operators should choose one of two approaches (in addition to adding standard disclaimers where offers are limited, such as “while supplies last” and “at participating stores only).

First, discount offers could be made available to subscribers without a fee, with the applicable retail establishment providing the “daily deal” website operator with payment based on some other formula. Alternatively, each discount offer that is made available to subscribers for a fee could have an expiration date of no less than five years.

Please note that this is only a brief overview of some of the legal issues surrounding “daily deal” promotions. Remember to obtain guidance from a licensed and experienced legal professional prior to employing such marketing tools.

The use of promotional contests, games and sweepstakes can be a dynamic and cost-effective way to increase conversions, build a database of engaged and responsive consumers and otherwise increase brand awareness and buzz – all valuable commodities in the social media and performance marketing space. The logic is simple, if undeniable: consumers are more easily attracted to your marketing message or brand by the opportunity to win prizes than with more mundane advertising that offers little in the way of incentive. When you are competing with the multitude of players vying for attention in the increasingly cluttered social media marketing arena, it pays to have an edge.

Despite the allure of the sweepstakes model, there are very specific state and federal laws that apply to promotional games and sweepstakes, as well as rules for operating and marketing on social media websites such as Facebook®, Google+® and Twitter®. You could incur substantial legal or pecuniary liability if these laws and web platform rules are not followed closely. Also of importance, to the extent that you intend to use a sweepstakes to build a database of customers, you must include the proper disclosures in your privacy policy and associated marketing material. In order to navigate the legal maze associated with promotions, it is essential to first identify the nature and purpose of the game itself.

There are, generally speaking, two overarching categories of promotional games: games of “skill” and games of “chance.” Games of skill are typically easier to operate because they have fewer legal obstacles, but it is harder to set up a pure game of skill (regulators take a narrow view of what constitutes “skill,” and even slight elements of chance can change the way a game is viewed). Further, some games of skill can run afoul of anti-gambling laws depending on the structure of the prizes awarded and the level and degree of participation of the entity that is running the game. In addition, some states require that the proprietors of games of skill register beforehand with applicable state agencies.

Games of chance, on the other hand, can face an insurmountable legal obstacle: they are generally considered illegal lotteries in each state, unless one of the following three elements that comprise a lottery is removed: (1) there is a prize awarded to the winner; (2) there is an element of “chance” involved in determining the winner; and (3) there is consideration required from contestants for entry in the game. Because removal of the prize feature undermines the promotional aspect of the game (and thus diminishes the effectiveness of the game as a marketing tool), and because chance is hard to eliminate entirely (as mentioned above, many states find that even a small trace of chance in determining the winner satisfies the “chance” element), consideration is the element most frequently removed.

Consideration can be eliminated by offering a free, alternative means of entry that does not require a purchase or other costly action (the frequent use of this method leads to the ubiquitous “no purchase necessary” language appearing in most sweepstakes marketing material). However, in order to qualify as an elimination of consideration, the free, alternative entries must be afforded the same opportunity of winning as entries from consumers that made purchases, paid to enter the contest or otherwise took an action that is so involved that it is considered a form of consideration. So, if you can gain ten entries in a sweepstakes from making ten purchases, you must offer the public the opportunity to enter free up to ten times by, for example, mailing in a postcard with certain contact information or calling a toll free number.

After you have decided on the basic structure of your promotional game, it is crucial that you determine all key aspects of the contest (duration, prize amounts, number of prizes, etc.) ahead of time when drafting the all-important contest rules, because once a promotion commences, and the rules are published, it is next to impossible to legally alter material terms. The key with respect to rules drafting is: do not overextend in terms of time or the number or value of prizes.

Shorter contest durations with fewer prize commitments are easier to manage. If a shorter contest proves successful, nothing prevents you from conducting another one immediately after the first one ends – but if you are committed to a year-long contest with prizes handed out each month, you can not simply stop after the first month or two if the contest is not meeting your marketing expectations. By conducting several shorter-lived contests, rather than one long-lived variation, you will not be obligated to waste time and money continuing to operate a game (and, possibly, hand out prizes) for the full duration set forth in the rules if the particular game is not serving a useful function. In this instance, a bit of extra time spent in the planning stages can pay dividends and prevent costly obligations that outlive their utility from a marketing perspective.

When drafting the rules, there are also several specific legal requirements that, while seemingly minor, are important to address. For example, the proprietor of the contest must maintain a list of winners – with some states requiring that such list be filed with the applicable state agency. Also, it is advisable to obtain an affidavit from prospective winners verifying their identities prior to issuing a prize. In addition, if you intend to publish the names or likenesses of winners in order to promote your sweepstakes, you must obtain proper authorization from the winners well in advance of any such publication.

It is also vital that you ensure that your marketing approach complies with applicable laws and guidelines. For example, you must at all times comply with trademark and intellectual property laws, as well as the marketing guidelines of social media websites and search engines, when promoting your sweepstakes. This is especially true when you are offering the opportunity to win a prize that carries a registered trademark, such as an iPhone®, or marketing your contest within a social media environment, such as Facebook®, and wish to use the Facebook® name in your marketing material.

The nature and amount of the prize(s) to be awarded, and the process of awarding those prizes, can also present challenges. It is advisable to have an unaffiliated, independent and respected third party conduct the applicable drawing or winner selection in order to ensure the appearance of fair play should any contestant or regulator question your practices. Further, where offering non-cash prizes (such as merchandise), many states require that a cash equivalent be offered as an alternative.

For prizes above certain cash (or cash equivalent) thresholds, three states – Florida, New York and Rhode Island – have specific sweepstakes registration and bonding requirements. If the aggregate value of the prizes in a given contest exceeds a certain limit, Florida and New York require that the game be registered and bonded. In Rhode Island, the prize threshold for registration is lower than in Florida and New York (and only applies for certain contests), but there is no bonding requirement. To avoid having to adhere to these requirements, you can bar residents from any or all of these states from entering the applicable contest. In addition, you should always prohibit employees of your business, and relatives of those employees, from participation.

Despite the occasional hurdle, with the proper planning and knowledgeable legal guidance, promotions and sweepstakes can be valuable marketing tools in the social media world. This is true for new businesses looking to create initial brand awareness in certain demographics, as well as for established brands looking to maintain interest and engagement with the public. Just make sure you take the time and effort to ensure that your promotional contest is a winner!

Please note that this is only a brief overview of some of the legal issues surrounding game promotions. Remember to obtain guidance from a licensed and experienced legal professional prior to conducting your promotional games.

Is a patent infringement lawsuit in your future? While litigation has become all too common in the industry, very few companies consider patent infringement to be a prospective topic of litigation. For affiliate networks, times certainly have changed.

A previously relatively unknown company by the name of Essociate Inc. (“Essociate”) recently became known through a slew of patent infringement actions filed predominantly in federal court in California against a number of affiliate networks. How did this come to pass? On October 12, 2004, the U.S. Patent and Trademark Office (“PTO”) issued US Patent No. 6,804,660 to inventors and Essociate co-founders, Evan Horowitz and Michael Landau, for their “invention,” which they then assigned to Essociate. This invention, according to the Patent Abstract, provides a method, system and computer program for affording “virtual affiliates” access to an existing affiliate system.

According to Essociate, it allows advertising partners to cross existing affiliate network borders, combine resources and monitor all of their affiliate relationships via one account with Essociate. Is this really a novel and non-obvious invention (as is the required standard to obtain a patent)? The PTO was convinced, but some companies strongly disagree and are fighting back. Many others have chosen to settle rather than face what is often very costly litigation.

In June 2010, ShareASale.com, Inc. (“ShareASale”) sued Essociate in Illinois Federal Court for declaratory judgment (a formal declaration by the court) on two grounds: (i) ShareASale did not infringe Essociate’s patent; and (ii) Essociate’s patent is invalid because, among other reasons, it is obvious to one of ordinary skill in the art. The case was transferred to California Federal court and eventually consolidated with Essociate’s pending case against Blue Whaler Investments, LLC (“Blue Whaler”), ShareASale, and a number of others. Blue Whaler has counterclaims pending against Essociate (on grounds that the patent is invalid and unenforceable and that Blue Whaler did not otherwise infringe the patent). Defendants in other actions have made similar arguments, only to settle with Essociate and be dismissed from the action prior to obtaining any decision by the court.

On June 28, 2011, ShareASale filed a motion for sanctions and to strike (or dismiss) Essociate’s complaint against it. ShareASale argued that Essociate’s complaint is frivolous and that Essociate failed to conduct a pre-filing investigation into the infringement allegations against ShareASale. According to ShareASale, had Essociate performed the investigation it was required to do before commencing the action, it would have discovered that ShareASale could not be liable under any theory of infringement. The crux of the argument is that the subject ShareASale website does not contain a “TWID,” a unique identifier for an affiliated webmaster, which is associated with the patent. Rather than being a TWID, ShareASale alleges that its code is static, not unique, and included in every click-through to the website from all ShareASale affiliate members. Thus, unlike Essociate’s unique identifiers, ShareASale’s code remains the same so that the referring affiliate member cannot be uniquely identified. According to ShareASale, it brought this and other facts to Essociate’s attention on numerous occasions and requested that Essociate dismiss it from the action. Essociate declined to do so and ShareASale’s motion is now pending before the court.

While ShareASale’s motion, if decided in its favor, would not invalidate Essociate’s patent, it would send a message to other defendant companies in similar Essociate-instituted “shake down” lawsuits: Fight it out, rather than settle and pad the pockets of Essociate.

Blue Whaler’s claims, on the other hand, could greatly impact the industry as a whole. If it proceeds full speed ahead towards a decision on its claims, the very validity of the patent would be at issue and determined by the California Federal court. If invalidated, affiliate networks will be able to rest easy – at least for the time being. However, no such decision is likely to come down anytime soon due to the length and complexity of the litigation process. That leaves the ground quite fertile for similar patent infringement lawsuits in the near future. Are you at risk? Take a close look at your affiliate business and then discuss this issue with legal counsel experienced in Internet marketing.