The use of promotional contests, games and sweepstakes marketing can be a dynamic and cost-effective way to increase sales, build a database of interested consumers and otherwise increase brand awareness and buzz. Consumers are more easily attracted to your marketing message by the opportunity to win prizes than with more mundane advertising. However, there are specific state and federal laws that apply to such games, and you could incur substantial legal liability if these laws are not followed closely.
In order to navigate the legal maze associated with promotions, it is essential to first identify the nature of the game itself. There are, generally speaking, two overarching categories of promotional games: games of "skill" and games of "chance."
Games of Skill vs. Games of Chance
Games of skill are typically easier to operate because they have fewer legal obstacles. However, 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. Some states require that the proprietors of games of skill register beforehand with applicable state agencies.
Games of chance, on the other hand, are considered illegal lotteries in each state, unless one of the following three elements that comprise 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 removal of the prize feature undermines the promotional aspect of the game, and because chance is hard to eliminate entirely (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.
How to Remove Consideration From a Promotion
Consideration can be eliminated by offering a free, alternative means of entry that does not require a purchase or other costly action. However, in order to qualify as elimination of consideration, the free, alternative entries must be afforded the same opportunity of winning as entries from consumers that made purchases or otherwise paid to enter the contest.
Keep Track of Promotional Prizes
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 third party conduct the applicable drawing or winner selection in order to ensure the appearance of fair play. Further, where offering non-cash prizes, many states require that a cash equivalent be offered as an alternative. Finally, 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.
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 $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. 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.
Review Your Promotion With a Marketing Lawyer
It is crucial that you 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 rules are published, it is next to impossible to legally alter material terms. Nevertheless, with the proper planning and knowledgeable legal guidance, promotions and sweepstakes can be valuable marketing tools – almost always with more than one winner!
Originally published November 18, 2012
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.