The short answer is a resounding, Yes! Many of our blogs that cover sweepstakes rules often focus on the material provisions that should be contained in contest rules, including, eligibility, means of entry, prizes, duration of the sweepstakes, etc. A recent Ninth Circuit Court of Appeals decision highlights yet another important provision that must be included as part of any set of contest rules: a mandatory arbitration clause. A properly drafted arbitration clause requires that all disputes arising out of or relating to a given sweepstakes promotion must be resolved by and through arbitration. This should be consistent with the company’s website Terms and Conditions, which should also identify arbitration as the manner through which to resolve disputes. Incorporating an arbitration clause into your sweepstakes rules puts all entrants on notice of the manner in which potential disputes will be resolved. An arbitration clause, coupled with a class action waiver, should effectively eliminate the potential for a class action involving any claims arising out of a sweepstakes promotion.
Underlying Facts of the Ninth Circuit Sweepstakes Rules Case
In the Ninth Circuit case referenced above, plaintiffs, Dogecoin Cryptocurrency traders (collectively, “Traders”), brought a class action lawsuit against Coinbase and Marden-Kane, Inc. (“MKI”) (collectively the “Defendants”), for allegedly engaging in false, deceptive and misleading sweepstakes advertising. Coinbase, one of the largest online cryptocurrency exchanges, hired MKI to design, market and execute a $1.2 million “Dogecoin Sweepstakes,” beginning on June 3, 2021. Significantly, when Traders created their Coinbase accounts, they agreed to the “Coinbase User Agreement” which contained an arbitration clause designated as the means by which to resolve disputes arising out of the Agreement.
As we reported in an earlier post, the Traders’ complaint alleged that in order to enter the Dogecoin Sweepstakes, they had to buy or sell $100 in Dogecoin by June 10, 2021, for a chance to win a cash prize. Although Defendants did provide an alternative, free means of entry, or AMOE, it is also alleged that Defendants specifically designed their email and website advertising to prevent users from easily finding the AMOE information. The class is claiming that if the AMOE option had been disclosed properly to them, they would not have given Coinbase $100, or paid Coinbase any commission to acquire Dogecoins.
The Defendant’s motion to compel arbitration alleged that the Traders, by accepting the platform’s User Agreement, agreed to bring any and all sweepstakes-related disputes through individual arbitration and, as such, waived their right to participate in a class action lawsuit in a court of law. The Dogecoin sweepstakes rules, however, did not have an arbitration clause, but, instead, included a “forum selection clause,” providing that California courts have exclusive jurisdiction over any controversies concerning the sweepstakes promotion.
Ninth Circuit Upholds Sweepstakes Rules’ Dispute Resolution Clause
The Ninth Circuit affirmed the District Court’s decision denying the motion to compel arbitration. The Court reasoned that, although the Coinbase User Agreement contained an arbitration clause, the subsequent sweepstakes rules that were agreed to by entrants as part of the sweepstakes entry process, did not. As such, the Ninth Circuit held that the dispute resolution clause contained in the contest rules trumped the Coinbase User Agreement with respect to sweepstakes-related disputes and, accordingly, upheld the District Court’s denial of the motion to compel arbitration.
Important Lessons for Drafting Sweepstakes Rules
Marketing companies create sweepstakes contests to generate new customers and retain existing ones. No entity wants or expects to be faced with a class action lawsuit as a result of running such promotions. The Ninth Circuit Court of Appeals decision could not be clearer in this proceeding: had the sweepstakes rules included a properly drafted mandatory arbitration clause, then the Defendant’s motion to compel arbitration would have been granted. Drafting sweepstakes rules is an intricate process, requiring careful attention to every pertinent detail. To best limit liability, both the sweepstakes rules and the promotion sponsor’s Terms and Conditions should incorporate the same dispute resolution mechanism (mandatory arbitration), as well as a class action waiver. Businesses would do well to consult with experienced sweepstakes counsel before running any contest promotion to avoid potential regulatory and legal challenges.
If you require assistance with contest-related advertising, sweepstakes AMOEs, and/or the drafting of contest rules, please email us at info@kleinmoynihan.com, or call us at (212) 246-0900.
The material contained herein is provided for informational purposes only and is not legal advice, nor is it a substitute for obtaining legal advice from an attorney. Each situation is unique, and you should not act or rely on any information contained herein without seeking the advice of an experienced attorney.
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