Contests, giveaways, etc. are popular tools for businesses to attract customers to their websites, stores, or shopping centers, to sell products or services, or to obtain personal information to be used for marketing purposes. It is very important that marketers, particularly online marketers, be aware of the legal pitfalls that may be encountered when using these tools.
Sweepstakes . . . Contests . . . Raffles . . . Lotteries . . . Gambling? What’s the Difference?
Prize giveaways where the winners are chosen by luck are typically called “sweepstakes”. Prizes can range from t-shirts to cars, houses, and millions of dollars in cash. An example that most everyone is familiar with is the Publishers Clearing House Sweepstakes.
On the other hand, in what is commonly known as “contests”, the winner is chosen based upon some merit or element of skill. The person with the most delicious recipe, funniest joke, most moving essay, best beach body - or whatever the criteria - will be chosen as the winner. (For example, in National Geographic Traveler magazine has held a contest in which contestants submitted digital photographs of in one or more specific categories (Travel Portraits, Outdoor Scenes, Sense of Place, and Spontaneous Moments). The photographs were judged on published criteria and the winner was awarded, among other things, a 10-day Galápagos Expedition aboard a ship called aboard the National Geographic Endeavour).
Now, to the one that all marketers must be especially aware of: “lotteries” and “raffles” are prize drawings where people must pay money or give some other “consideration” to “buy” a chance to win. (Examples of "lotteries" that most Americans know are Powerball and Mega Millions. Europeans will be familiar with EuroMillions).
What we commonly refer to as “raffles” are often run by non-profit organizations, such as a local Boy Scouts troupe raising money for a camping trip.
Why is it important for marketers to be aware of lotteries and raffles?
Lotteries are highly regulated, are considered "gambling", and are usually only legal if they are run by the government (or in accordance with a tribal-state gaming compact or otherwise in accordance with the requirements of the Indian Gaming Regulatory Act).
Virtually every jurisdiction has criminal penalties for running “Illegal lotteries” or "gambling" . These penalties can include hefty fines, forfeiture of any property offered for distribution through the illegal lottery, and even imprisonment. In Arizona, promotion of gambling is a class 5 felony.
So, what defines a “lottery” or "gambling"? California Penal Code § 319 provides a good example of a definition of a "lottery":
A lottery is any scheme for the disposal or distribution of property by chance, among persons who have paid or promised to pay any valuable consideration for the chance of obtaining such property or a portion of it, or for any share or any interest in such property, upon any agreement, understanding, or expectation that it is to be distributed or disposed of by lot or chance, whether called a lottery, raffle, or gift enterprise, or by whatever name the same may be known.
In Arizona, an illegal lottery is called a "gamble". Pursuant to A.R.S. § 13-3301(4), "Gambling " or "gamble" means one act of risking or giving something of value for the opportunity to obtain a benefit from a game or contest of chance or skill or a future contingent event ..."
Put simply, a “lottery” or (in Arizona) "gambling" consists of three elements: (1) a prize or benefit, (2) providing consideration or something of value, and (3) distribution of the prize by chance.
Let’s say that an affiliate marketer makes the following offer:
“If you buy Product X through my affiliate link, you will be entered to win an iPhone through a random drawing!”
This is clearly an illegal lottery and constitutes gambling, as the three elements of prize (an iPhone), consideration ("buy Product X through my affiliate link”) and, of course, chance (the random drawing), are present.
Now, if you remove any one of the three elements from the scenario, you no longer have an illegal lottery. Sounds easy, right?
Let’s start with the "prize". A prize is anything of value awarded to a winner of the contest. As consumers likely would be uninterested in a contest that did not offer a prize, this element is difficult to eliminate.
"Consideration" is giving something of value to the contest sponsor that the consumer provides as a prerequisite to participating in the contest. Consideration may be monetary (an entry fee or a purchase requirement) or non-monetary (a significant amount of time or effort that the participant expends to the benefit of the sponsor).
It is relatively easy to remove consideration from a promotion. The most common way to eliminate consideration is to provide an alternate method of entry, commonly known as an “AMOE” - Alternate Method of Entry (or Alternate Means of Entry). This is usually manifested with the “no purchase necessary” language that you often see. (Publishers Clearing House is very careful to advise that purchasing a product will not improve your odds of winning its sweepstakes).
Going back to our affiliate marketer example, the element of consideration could be eliminated if consumers were permitted to enter the iPhone drawing by way of an AMOE - perhaps by sending in a postcard, calling a toll-free number, or filing out a simple free online entry form.
The random drawing in our example is a common game of chance. Chance may be eliminated by awarding a prize to every entrant. In the example, chance could be eliminated by awarding an iPhone to every person who buys Product X through the affiliate marketer’s link. Alternatively, the marketer could eliminate chance by conducting a game of skill in which winners are selected on the basis of some sort of ability, knowledge, creativity, judgment, or expertise.
If winners are selected based upon some skill or merit, it eliminates the element of chance, allowing a sponsor to impose an entry fee or other consideration without creating an illegal lottery. Skill contests can involve photography, essay writing, athletics, cooking, or mathematics. Skill contests must have objective criteria upon which entries are judged, and the judges must have sufficient qualifications to apply such criteria.
If you were to look at the rules for the National Geographic Travelers Photo Contest referenced above, you would find the following:
"This is a skill-based contest and chance plays no part in the determination of winners” ... “Judging consists of two (2) rounds of evaluation. In Round One, each judge in a panel of photographic experts (at least one of whom will be independent of Sponsor) ("Judges") will select ten (10) entries from among all eligible entries based on the following criteria ("Judging Criteria"): (1) Creativity 50%; (2) Photographic quality 50%. The entries selected in Round One will proceed to Round Two. In Round Two, the Judges will collectively select a Winner for each prize level based on the Judging Criteria.”
That All Sounds Pretty Simple, Doesn’t It?
Don’t be fooled! If everything were simple, there’d be no need for lawyers . . . and wouldn’t that be a wonderful world! (Just kidding).
The reason why the whole illegal lottery/gambling thing is not simple is primarily because terms such as "consideration", "chance", "skill", "merit", etc. are somewhat ambiguous and open to interpretation.
To illustrate how complicated and confusing this can get, let’s look at another hypothetical. Suppose, ABC Company runs a “Refer-a-Friend” contest in which, for every friend they get to sign up for the company’s newsletter, contestants receive an entry in a drawing for an iPhone. Is this an illegal lottery?
You might be quick to say, “No. There is no consideration. Participants don’t have to pay an entry fee, buy a ticket, or purchase a product”.
However, it’s not a clear cut as that. It is true that there is no monetary consideration; however, consideration can be non-monetary, as well. Common examples of non-monetary consideration include filling out a lengthy registration form as a prerequisite to entering the contest, or providing the sponsor with personal information.
Generally, courts have decided that requiring a nominal degree of effort is not deemed to constitute consideration (e.g., telephoning a toll-free number, completing a short survey, or visiting a store).
In our example, getting friends to opt-in on ABC Company’s website may or may not constitute consideration, depending on such things as the length of the registration form and the type of information the friends must provide.
To be safe, ABC Company could allow consumers to enter the drawing without referring their friends to the company’s Website. This could be accomplished by adding an AMOE (mailing in a postcard, calling a toll-free number, etc.)
More about AMOEs
In general, AMOE entrants must have the same chances of winning as purchasing (or consideration-giving) entrants. They must also have equal deadlines and equal prizes.
Additionally, it goes without saying that the AMOE cannot itself rise to the level of consideration, and it must be clearly and conspicuously disclosed in all advertising materials for the contest. In short, the AMOE must not be seen as disadvantageous or burdensome with respect to the purchase entry method. For online contests, sponsors must be particularly careful to ensure that the AMOE provides the same opportunities to entrants as online entries. (For example, if ABC Company’s "Refer-a-Friend" contest awarded a prize to the first 100 people to respond, it would be problematic, as the AMOE responders clearly would be at a disadvantage if they only way they could enter was by mailing a postcard, whereas the other entrants could immediately enter via the Website.)
Strange as it may sound, the question has arisen as to whether needing Internet access in order to enter an online contest constitutes consideration. Some state regulatory authorities previously answered this question in the affirmative, and contest sponsors had to provide mail-in methods of entry. However, this position has now been generally reversed. State regulatory authorities no longer consider the mere requirement of having Internet access as constituting consideration. (The sponsor does not directly benefit from the consumer’s payment of fees for Internet access. Moreover, it is unlikely that the consumer was induced to purchase Internet access for the purpose of participating in the sponsor’s promotion.) Therefore, online contests that do not require any other consideration to enter generally do not require an AMOE.
When it comes to bloggers, vloggers, Instagramers, pod-casters, and their ilk, there are few things more valuable than "followers". As such, requiring someone to "like" you or "follow" you could be construed as consideration.
Even more important, asking an entrant to go to a third-party site, navigate to find a product or service and then report back to your site is even more likely to be deemed consideration, thus placing your giveaway into the classification of illegal lottery.
Time is exceedingly valuable!
What about a requirement that special software be downloaded to the consumer’s computer in order to participate in a contest? I would submit that this could rise to the level of consideration and, therefore, an AMOE would be recommended.
Class Dismissed? ... Not Even Close!
Once you’re confident that your promotion does not constitute an illegal lottery or gambling, you must still comply with the laws and restrictions of each jurisdiction in which the promotion is conducted.
(Bear in mind that, in the USA, Internet contests are accessible in all 50 states and therefore must comply with the laws of all 50 states as well as federal laws and regulations.)
Federal agencies with jurisdiction to regulate sweepstakes promotions include the Federal Trade Commission (‘FTC’), the Federal Communications Commission (‘FCC’), the United States Postal Service (“USPS”), and the United States Department of Justice (“DOJ”).
As you might expect, the laws of each jurisdiction can vary significantly from those of others, and they often impose very different procedural requirements.
Complying With US Laws
Providing exhaustive information concerning every federal and state law applicable to online contests is way beyond the scope of this article . . . and would be a never-ending task.
TIP: Avoid Certain Prizes.
Some things are more tightly regulated than others and prizes that include tobacco, firearms, alcohol, or items valued at over $600, will get more scrutiny. You can avoid that by simply offering other prizes.
If you are promoting a contest in the USA, there are a number of rules that have general applicability across the 50 states and should be included in the official rules of all contests. These include:
A few states also require publication of the winners’ list and awarding of all prizes, so these elements should be included in nationwide promotions as well.
To complicate matters, several states have special procedural requirements for certain types of contests. In Arizona, skill contests that require a purchase to enter must be registered with the state attorney general’s office.
In Florida and New York, games of chance with prizes totaling over $5,000 must be registered and a bond must be posted, and Rhode Island requires registration of games of chance conducted through retail outlets with prizes in excess of $500. For many sponsors, it is simpler to exclude residents of these states from participating in their contest rather than comply with these extra, somewhat burdensome procedural requirements; hence the commonly seen limitation in many contest rules, "Void where prohibited”, or more specifically, "Void in Florida, New York, and Rhode Island."
What about the Rest of the World?
Internet contests - which are technically accessible worldwide - must comply with the laws of not only the 50 U.S. states but also each country in which someone could access the promotion. The laws and regulations of contests and sweepstakes vary widely from country to country. For instance, certain countries (Belgium, Malaysia, Norway) prohibit sweepstakes altogether, while other countries (including France and Spain) require registration and payment of fees.
Even Canada has laws that differ greatly from those of the United States, particularly in Quebec, where foreign language requirements apply.
International compliance would entail hiring local counsel in every country to provide an analysis of the proposed contest rules and confirmation that they do not violate particular local laws. This is not only prohibitively expensive but also too time-consuming to be a plausible option for most contest sponsors. This is why US sponsors of online contests are better off limiting participation to US residents only (and perhaps a handful of select foreign countries in which they have checked the rules with local counsel).
The key here is to clearly and prominently disclose any geographic limitations to entry in the official rules and in all advertising materials.
Intellectual Property Issues
All sponsors of contests and promotions must, of course, exercise caution not to infringe upon the trademark, copyright, or patent rights of others when running their promotions; however, this is an issue of particular concern for online marketers. Promotions over the Internet generally are more high profile and involve greater exposure for the sponsor than more traditional media contests.
Marketers must be careful about advertising prizes by using the brand name of the prize without consent from the trademark owner. To revisit our example above, ABC Company could not name its contest ‘The ABC Company iPhone Giveaway” This would infringe upon Apple's trademark and suggest a false association. Apple would most likely have to be a co-sponsor of the promotion before it would agree to such use of its trademark in a contest name.
ABC Company could, however, identify the iPhone by name as a prize in the official rules. Contest sponsors may even be able to use brand names in promotional materials for their contests, so long as the trademarked brand is used in a factual manner (i.e., to identify the prize in the contest) rather than in furtherance of promoting the contest.
TIP: A good general rule of thumb is to identify the trademarked term in a sentence in which all the words are of the same font and prominence and avoid use of the trademark in the name of the promotion or in any other prominent way.
Copyright laws protect original works of authorship fixed in a tangible medium of expression. Thus, copyright protection may be extended to creative materials embodied in contests and promotions such as music, audiovisual works, animation, graphic designs, illustrations, works of art, or written text. Although nobody can copyright the underlying idea or concept of a contest or promotion, someone’s original expression of that contest may be copyrightable. For example, in a 1995 case, the plaintiff ran a promotional radio contest, and the defendant subsequently ran a similar contest. The court found that the defendant had infringed the copyright in the printed brochure promoting the plaintiffs contest, even though the underlying radio contest itself was not protected by copyright.
Finally, although way beyond the scope of this article, online contest sponsors should be aware of the growing number of business method patents being granted in connection with online games, particularly in the context of “instant-win” technology. It is recommended that sponsors of online “instant-win” games should seek the advice of patent counsel to ensure that their game does not infringe upon a third party’s patent
In an effort to build e-mail lists, a common tool used by online contest sponsors is to require entrants to agree to accept future promotional email as a condition to entering the contest. Internet privacy concerns are clearly on the rise, and so is regulatory scrutiny of this practice. If an online contest is accessible by residents of the EU, the General Data Protection Regulation ("GDPR"), which was implemented in May of 2018, is a major concern because of the potential draconian penalties for non-compliance. A discussion of the GDPR is beyond the scope of this article.
Also, the concept of “viral marketing”, in which contest entrants must provide the names and e-mail addresses of others in order to become eligible to enter (e.g., “Refer your friends by submitting their e-mail addresses, and be automatically entered into a drawing to win an iPhone.”) also may raise concerns under privacy and spam laws.
Another area of concern for game sponsors relating to privacy is COPPA, the Children’s Online Privacy Protection Act. This US federal statute went into effect in April 2000 and addresses the collection of online personal information from children under the age of 13. The act requires a website operator to obtain verifiable parental consent before collecting personal information from children. Therefore, a contest or sweepstakes requiring disclosure of entrants’ names, addresses, email addresses, phone numbers, and any other information that would allow someone to contact or identify a child, must either exclude children under 13 from participating or else comply with the procedures set forth in COPPA. These procedures include requiring:
Operators must use reasonable procedures to ensure they are dealing with the child’s parent. The particular mechanisms required are based on a sliding scale, depending on the manner in which the child’s information is to be used. If the Website operator will be sharing the child’s information with third parties, it must use more stringent verification of parental consent, such as:
If the child’s information will only be used internally by the Web operator, then verifiable parental consent may be obtained using less stringent methods, such as e-mail from the parent plus sending either a confirmatory e-mail or confirmatory postal mail to the parent, or making a confirmatory telephone call to the parent.
Because compliance with COPPA is fairly burdensome and requires several extra steps, many contest sponsors wisely prefer to simply exclude children under 13 from participating in the contest, particularly in light of the significant penalties that may be imposed for noncompliance.
An occurrence a few years ago has caused Web operators, including online contest sponsors, to exercise extra caution with respect to children. On September 7, 2006, the Federal Trade Commission (FTC) came down hard on a social networking Website, Xanga.com, with a fine of $1 million in connection with alleged violations of COPPA. In light of this, many online contest sponsors and other Web operators understandably prefer not to undertake the risk of inadvertently violating COPPA and being hit with a stiff fine. Unless the contest is geared specifically toward children, most online promotions limit eligibility to those 13 or over.
Marketers in the USA need to be aware that any giveaway with a value of $600 or more must be reported to the Internal Revenue Service. Knowing that, the marketer should not only make entrants aware of the value of the prize but also that they will need to complete a prize validation as well as be responsible for any taxes that may result from winning.
Miscellaneous Issues and Suggestions
Any material on the Internet is subject to malfunctions, errors, and viruses, not to mention hackers who may attempt to take advantage of contest offers by, for instance, inundating the contest website with entries and thereby preventing others from accessing the site. Accordingly, online promotions should always include a clause that disclaims liability for fraud, viruses, or other events that compromise the integrity of the contest and reserves the right to terminate or modify the contest in such a situation.
TIP: Notify winners by email, not social media. Facebook and Twitter are a good way to promote a contest or sweepstakes that you’re running, but many social media companies want to avoid liability too. Even if it’s not expressly banned by the terms of service, it’s best to keep social media out of it when contacting winners.
Additionally, contest rules should limit entries to a particular number, such as one-per-day, per entrant. The duration of the contest, and especially the deadline for entries, should be stated in terms of dates and precise times in a specific time zone. Contest sponsors should ensure that the how-to-play instructions are clear and that any special technical requirements are set forth in the official rules. For instance, if an entrant’s browser must be set to accept cookies in order to effectively participate in the promotion, this should be set forth in the rules. In cases in which the game is relatively complex, entrants should have to indicate their acceptance of the official rules by clicking an “I Accept” button before being permitted to enter.
Often a group of marketers will band together and offer several prizes. This phenomenon presents unique concerns. Although it is relatively uncharted territory, the legal ramifications can be far-reaching. Consideration needs to be given to the total value of the prizes given away because, as referenced above, it could require either filing for and obtaining bonds in jurisdictions that require them, or declaring their promotion void in those jurisdictions. As the giveaway is often billed as a cross-site promotion and involving many prizes, it would be advisable for the marketers involved to ensure they are all compliant to avoid potential civil and/or criminal violations.
If your prize is over $5,000.00 there will be other state laws and bonding requirements that will need to be met.
Steering clear of illegal lotteries, complying with myriad state, federal (and possibly international) requirements, and respecting intellectual property and privacy laws are only a small sampling of the issues facing marketers who sponsor contests.
My closing advice: Obtain proper legal counsel to ensure that your online marketing promotions do not run afoul of the law. Contests, giveaways, etc. are increasingly popular tools for companies to attract customers to their websites, sell products or services, or obtain personal information to be used for marketing. It is very important that marketers are aware of the legal pitfalls that may be encountered when using these tools.