United States: Rules Of The Game: Marketing Through Sweepstakes

Last Updated: January 31 2015
Article by David O. Klein

Sweepstakes and promotional contests are excellent ways for businesses to market their respective products and services, particularly when used in combination with Internet and mobile media. Numerous state and federal laws apply to such games—and businesses must understand these laws, as well as any social media rules, that may apply to their sweepstakes and promotional contests.

A Game of Chance

Games of chance are deemed illegal lotteries across the country unless one of the following elements that constitute a lottery is removed: (1) a prize awarded to the winner; (2) chance in determining the winner; and (3) consideration for entry in the game. Because the sweepstakes model is premised on the awarding of a prize through chance, consideration (typically monetary) is the element most frequently removed by providing a free, alternative method of entry (often referred to as an "AMOE").

Companies may, however, advertise entry into their sweepstakes promotions through monetary payment or the purchase of a product or service, provided that they also offer an AMOE. In the absence of such free AMOE, contest sponsors run the risk that their contests will be determined to be illegal lotteries under applicable law. Please note that individuals entering contests through an AMOE must be given the same exact opportunity—with the same exact odds—to win the sweepstakes prize(s) as paid entrants. This means that AMOE entrants cannot receive a limited number of entries as compared with paid entrants, and paid entrants cannot be afforded any advantage in terms of increased odds of winning.

Of course, while companies must be knowledgeable of the laws governing games of chance throughout the Unites States, if a promotional contest or sweepstakes is offered through social media, such as Facebook or Twitter, the respective forum's promotional contest policies must be reviewed, understood and followed as well.

A Binding Contract

The contest rules for a sweepstakes promotion are the sponsor's contract with its contest entrants. This means that the rules of the game cannot be different on the first day versus the last day of the contest period. Therefore, regardless of the perceived success of the sweepstakes promotion as a marketing tool, the duration of a given sweepstakes that is set forth in the contest rules must be allowed to run its course, and the amount to be awarded and the number of prize drawings cannot be changed at any time during the contest period. As such, it is imperative for the contest sponsor to carefully consider and craft its sweepstakes contest rules before launching the subject promotion.

Establishing legally compliant rules for the eligibility of contest entrants is a top priority, and sweepstakes sponsors must indicate the associated eligibility requirements in the applicable contest rules. Usually an entrant must be 18 years of age or older, must reside in a specific geographic location and cannot work for the sweepstakes sponsor or be a member of the same household as a sponsor employee.

Once a winner is selected, the sweepstakes sponsor must contact the winning entrant. Contest rules often contain language that disqualifies potential prizewinners if they do not respond to the attempted prize notification within a certain time period. The winner is often then required to complete a publicity release (where permitted under state law), an affidavit of eligibility and any state and/or federal tax forms. Please note that sweepstakes sponsors must not require prizewinners to pay any shipping or handling charges or other fees in order to receive their prizes. Further, contest sponsors must file winners' lists with applicable state agencies within a statutorily defined period of time following the awarding of any prizes.

It is recommended that newcomers to the sweepstakes model create contests with a short term and a manageable number of prize drawings. This will help contest sponsors limit their exposure and commitment for promotions that do not deliver the intended marketing benefit and/or yield the desired results.

Registration and Bonding

The total amount of the prize(s) to be awarded at the conclusion of the sweepstakes contest period also must be considered. Prizes above certain cash (or cash equivalent) thresholds may trigger specific sweepstakes registration and bonding requirements in a handful of states, specifically Florida, New York and Rhode Island.

In Florida and New York, if the aggregate value of the prizes in a given contest exceeds $5,000, the contest must 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 contests that are conducted by brick-and-mortar businesses in connection with a retail outlet.

Of course, there are costs associated with completing the registration and bonding process, which must be considered by companies planning to run sweepstakes promotions. As such, companies may choose to bar residents of these states from entering their sweepstakes to forego the registration and bonding process entirely.

Trademark Considerations

Sweepstakes and promotional contests also may trigger certain intellectual property issues, particularly when the contest sponsor is offering the opportunity to win a prize that carries a registered trademark, such as an Apple iPad. The issue also arises when the contest sponsor is marketing the contest within a social media environment, such as Facebook, and it wishes to use the Facebook name and/or logo in its marketing materials. In such situations, the contest rules and marketing materials must include language that disclaims any endorsement, sponsorship or affiliation between the third-party trademark owner and/or social media platform and the contest sponsor

Further, contest sponsors may consider seeking user-generated content (in the form of text, images or video) to increase the visibility of their contests on the Internet. In the event that a contest sponsor solicits, uses or publishes user-generated content, a variety of intellectual property and privacy issues should be addressed in the official rules as well as waiver documents and affidavits.

In sum, while sweepstakes promotions are a time-tested marketing favorite, companies should not lose sight of the various laws and applicable social media guidelines when preparing to run their contests.

David O. Klein is the managing partner of Klein Moynihan Turco in New York, where he practices Internet marketing law, promotions law, sweepstakes law and gaming law. He can be reached at dklein@kleinmoynihan.com.

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.

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