The appeal of promotional contests, games and sweepstakes is as old as it is obvious: consumers are attracted, and motivated, by the allure of winning money and other prizes. As a result, companies large and small have utilized these marketing tools to grow sales, connect with consumers, and generate brand awareness for existing product lines or new releases. There are risks involved, however. Specific state and federal laws apply to sweepstakes, and companies that do not conduct their contests, and draft the associated rules, in compliance with those laws could incur significant legal liability.
The Key Question in the Legal Analysis of Sweepstakes
The baseline question one should ask when assessing the nature of a given promotion or contest is whether it is a game of skill or a game of chance. Games of skill are typically easier to operate because they entail fewer legal obstacles. However, most states adhere to a strict interpretation of what is considered a game of skill, and will view even slight elements of chance as sufficient to designate the applicable contest as a game of chance.
Furthermore, even where a contest is deemed a game of skill, certain anti-gambling laws may still apply, depending on the structure of the prizes awarded and the level and degree of participation of the entity that is running the game. It is important to note that some states require that the proprietors of games of skill register with applicable state agencies before the games are conducted.
Games of chance, on the other hand, are considered illegal lotteries in every state, unless one of the following three elements that comprise a lottery is removed: (1) a prize awarded to the winner; (2) chance as a factor in determining the winner; and (3) consideration that is required for entry in the game. Because removal of the prize feature undermines the appeal to consumers of a given game (Who wants to participate in a sweepstakes where the winner receives nothing?), and because the element of chance is hard to eliminate entirely (as mentioned above, many states find that even a limited degree of chance satisfies the “chance” element in the law’s eyes), consideration is the element that is most frequently removed.
How to Remove the Element of Consideration from the Game
Consideration can be eliminated by offering a free, alternative means of entry that does not require a purchase or other time-consuming or costly action. The removal of consideration is the reason for the ubiquitous “No purchase necessary” language that is frequently affixed to the marketing material and included in the rules that are applicable to most sweepstakes promotions. However, in order to successfully eliminate consideration from the equation, the free, alternative entries must be afforded the same opportunity to win as entries from consumers who made purchases or otherwise paid to enter the applicable contest.
Some Additional Sweepstakes Complexities
The nature and amount of the prize(s) to be awarded, and the process of awarding those prizes, can also create thorny legal issues. It is advisable to have an unaffiliated third party conduct the applicable drawing or other winner-selection process in order to ensure fair play. As a general, common sense rule, you should always prohibit employees of your business, and relatives of those employees, from participation in the game.
Where the game is offering non-cash prizes, many states require that a cash equivalent be offered as an alternative. In addition, the proprietor of the contest must maintain a list of winners that is made available to anyone who inquires—with some states requiring that the list be filed with the applicable state agency.
Many entities that conduct sweepstakes contests in order to promote a given brand or product intend to publish the name and likeness of the winner in order to enhance the promotional effect of the given sweepstakes. However, obtaining such consent beforehand is crucial and, even then, certain states do not permit a contest operator to require the consent of prospective winners to the publication of their names and/or likenesses.
For prizes that rise 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 $5,000, Florida and New York require that the game be registered and bonded. In Rhode Island, the prize threshold for registration is $500, but there is no bonding requirement and the registration requirement only applies to brick and mortar-based contests. Companies that want to avoid the bonding and registration process can bar residents from any or all of these states from entering the applicable contest.
It is crucial that the sweepstakes sponsor determine all key aspects of the contest or promotion (duration, prize amounts, number of prizes, etc.) ahead of time, because once a promotion commences, and the associated contest rules are published, it is exceedingly difficult to legally alter the material terms of those rules. And once the rules are published, you are bound to conduct the promotional game for as long as, and according to the rules for payouts, etc., that are set forth in the rules.
The Difference Between Sweepstakes and Internet Sweepstakes Cafes
The above discussion should not be misconstrued to pertain to the increasingly popular casino-style games that are featured in establishments known, colloquially, as “Internet sweepstakes cafes.” These sweepstakes cafes usually feature rows of computer terminals where users can play casino-style games, similar to video slot machines, to attempt to win prizes. Patrons usually obtain a certain number of chances to win prizes after they make a purchase of a given product or service, such as Internet access or prepaid phone cards. While proprietors of these venues maintain that their games are compliant with applicable sweepstakes law, the payment element (as well as other pertinent factors related to the nature of the games themselves) is what renders these sweepstakes cafes illegal in most states.
In conclusion, while the regulations applicable to the marketing and operation of promotional contests are complex and nuanced, with the proper planning and knowledgeable legal guidance, these games can be valuable marketing tools—where everyone wins!
Please note that this is only a brief overview of some of the legal issues surrounding sweepstakes and other promotions, and as such, please remember to obtain guidance from an experienced attorney prior to conducting a promotional game.