Online Sweepstakes - Don’t Wager a Guess, Take Note Before You Promote

Online sweepstakes are popular promotional tools for a variety of reasons. First, they work because people generally are intrigued by the idea of getting something for nothing. Second, they are relatively low cost and easy to manage as a means of increasing Web site traffic. A primary benefit of Internet sweepstakes is that they allow the sweepstakes promoters to compile demographic and personal information regarding the entrants that they otherwise might not get. Online sweepstakes promoters have multiple opportunities to make contact with the participants – to solicit their entries, confirm their entries, announce the winners, congratulate the winners, remind the winners, and, of course, sympathize with the unwashed masses of non-winners. Sweepstakes may be sponsored by multiple companies that share the costs and benefits. Of course, online sweepstakes, like other forms of advertising, facilitate the ever-important brand recognition. Sweepstakes can be out-sourced easily and, in fact, numerous fulfillment companies offer these services.

The primary downsides to online sweepstakes are similar to offline promotions . . . the often onerous state and federal regulations, which vary by state and whose application may depend on a variety of factors, such as the use of the mail, monetary thresholds and the business of the sweepstakes promoter. As you can imagine, the regulatory complications increase exponentially for sweepstakes with no geographic limitations. Because the promoter or operator of a sweepstakes is potentially subject to the regulation of any country in which the sweepstakes is available, U.S. sweepstakes promoters typically limit entries to the continental United States. Some go further and exclude a few of the more troublesome states. One such state is Florida, which requires advance registration and bonding of certain promotions, as well as post-sweepstakes record retention. Failure to comply with these requirements may jeopardize the sweepstakes promoter’s future ability to conduct legal promotions in Florida. New York also has registration and bonding requirements, while Rhode Island requires registration only. This article is limited to games of chance and does not address contests of skill.

Beyond the regulatory issues that must be addressed before promoting an online sweepstakes, the sweepstakes promoter should undertake an analysis to confirm that the promotion is legal. For example, most states prohibit private "lotteries" as a form of illegal gambling. An illegal lottery or gambling occurs with the convergence of three elements in a single promotion: (1) prize; (2) chance; and (3) consideration. Typically, the key element is "consideration," as most online promotions will involve an element of chance and a prize.

"Consideration" is present when there is anything of value given by the participant. That is why carefully written sweepstakes rules will include the phrase "no purchase necessary." However, consideration may be present even where no purchase or entry fee is necessary. For example, for years, the Florida Department of State (which previously regulated game promotions) refused to register online-only sweepstakes, taking the position that requiring users to have a computer, modem and access software constituted "consideration." In addition, regulators have deemed consideration to be present when the promotion requires that the participant exert more than a minimal amount of effort – requiring a participant to respond to a 30-page survey could be deemed consideration so as to convert an otherwise lawful sweepstakes into illegal gambling.

Sweepstakes laws change often and vary from state to state. As a result, as the geographic scope of the promotion expands, more care should be taken to ensure that it complies with the laws of each state in which the promotion is to be offered. For example, as noted earlier, Florida used to prohibit Internet-only entries. Other states have special disclosure requirements with respect to the content of the rules and their distribution. Tennessee prohibits promoters from conditioning the winner’s receipt of a prize on the execution of a publicity release. Illinois requires that winners be notified within 15 days in order for the sweepstakes promoter to declare them "prize winners" and requires prizes be awarded within 30 days of the winner’s declaration. Recent Texas legislation prohibits sweepstakes entry forms that have any connection with buying or ordering a product. In addition to the various state statutes, the Federal Deceptive Mail Prevention and Enforcement Act applies to sweepstakes in which entry materials are being distributed by mail, and requires that such materials contain various detailed disclosures. This statute may apply to online promotions that are also run offline.

The sweepstakes promoter must consider its target audience in evaluating the legality of the proposed sweepstakes and drafting pertinent rules. For example, if the sweepstakes promoter intends to include minors as eligible participants in an online sweepstakes, a broader range of rules and regulations applies. For example, the federal Children’s Online Privacy Protection Act imposes fairly rigorous burdens on Web sites that obtain personally identifiable information about children under the age of 13. Also, promotions that target one economic or racial group may exclude another group, whether explicitly or by implication. Even if such exclusion is unintentional, it nevertheless may constitute a violation of equal-protection laws. Senior citizens have been the subject of enforcement actions following recent offline promotions. The business of the sweepstakes promoter and any co-promoters also must be considered. For example, some states impose additional obligations on retailers who offer promotions. Promotions by companies in regulated industries (such as alcohol, tobacco, insurance, etc.) are subject to special restrictions, and the restrictions are not uniformly written across all states that enforce such rules.

Beyond the regulatory implications, a promotion should be structured carefully to reduce the likelihood of legal entanglements. Once a sweepstakes promoter decides where the promotion will be offered, it should begin preparing official rules that comply with the each of the states’ requirements. The rules should be finalized before the advertisement copy is created. Even if the sweepstakes is not required to be registered, the "official rules" are crucial, as they serve as the "contract" between the sweepstakes promoter and the general public. Thus, it is imperative that the rules precisely delineate who may participate and how, and state clearly any prize restrictions. At the same time, however, the rules should be written in plain language and be easily accessible. The sweepstakes promoter must be prepared to enforce those rules as drafted and not grant prizes to someone who violates the rules. To do otherwise may subject the sweepstakes promoter to a claim by a disgruntled non-winner for unfair and deceptive trade practices or false advertising. The sweepstakes promoter likewise must comply in full with any obligations placed on it by the rules. Thus, in drafting the rules, it is helpful to include provisions allowing some flexibility under unusual circumstances. For example, a sweepstakes promoter should reserve the right, in its discretion, to substitute a prize of equal or greater value. In post-911 travel-related sweepstakes, winners often were reluctant to accept a prize that required international travel – this provision allowed sweepstakes promoters more latitude in fashioning an alternate prize.

At a minimum, the official rules for any sweepstakes promotion should address the following issues:

• geographic scope of the promotion

• start, end and drawing dates

• statement of the odds of winning

• description of the prize, including any limitations or restrictions on the prize and the approximate retail value

• explanation of the method of entry

• any limits on the number of entries

• explanation of method of winner selection

• identification of any steps winner must take to claim prize

• eligibility

• sweepstakes promoter’s right to interpret the rules, disqualify cheaters, etc.

• limitation on sweepstakes promoter’s liability

• reservation of publicity rights as to winner

• method for learning winners’ identities

With an online promotion, the official rules should address additional concerns. For example, the start and end dates should be stated in terms of date and time (including pertinent time zone). The sweepstakes promoter also may seek to limit the number of entries by any e-mail address. The sweepstakes promoter should prohibit the use of an automated entry device and should require the participants to provide a valid e-mail address. In the event of a dispute as to who entered the sweepstakes using a particular e-mail address, the official rules should state that the entrant is deemed to be the registered owner of the e-mail address. The sweepstakes promoter should disclaim liability for any entries that are not received as the result of faulty network connections, failed telephone or computer hardware or software, or other failed or delayed transmissions. A sweepstakes promoter may wish to reserve the right to cancel or suspend the promotion if its integrity is impaired by a virus or computer malfunction. The sweepstakes promoter also may wish to disclaim liability for any for damage to a participant’s computer resulting from participating in the Sweepstakes. Sweepstakes promoters should consider notifying the winner by regular or certified mail as well as e-mail, because of the potential difficulty in proving that the winner actually received the notification. If the sweepstakes promoter intends to publicize the results of the promotion via the Internet, it should ensure that the winner’s publicity release is broad enough to include this contemplated use.

Once the "official rules" are finalized, the sweepstakes promoter’s advertising should be consistent with those official rules and should not be misleading or deceptive in any way. Some states have specific requirements for posting the rules, depending on the nature of the promotion. For example, Florida requires the sweepstakes promoter to "conspicuously post the rules and regulations...in each and every retail outlet or place where such game promotion may be played or participated in by the public" and publish the "rules and regulations in all advertising copy used in connection therewith." Fla. Stat. § 849.094(3) (1999). The entry forms likewise should be consistent with the rules. In addition, some states require that a full set of rules be printed on or accompany the entry form.

Sports Tickets as Prizes. In addition to the primary issues discussed above, sweepstakes promoters should consider a number of collateral issues that often are overlooked. Sweepstakes promoters often use sports tickets as prizes without considering whether they can do so legally. A ticket to a sporting event typically is merely a license and some sports franchises restrict the holder’s legal right to use the tickets as prizes. Sweepstakes promoters who wish to affiliate themselves with a sports or movie event must obtain permission to use the other entity’s trademarks, slogans and copyrights. Obviously, written permission is preferred; however, at a minimum, verbal permission should be obtained and documented.

Co-promotions. If a sweepstakes promoter is running a large promotion with a co-promoter, particularly if that co-promoter derives unique benefit from the promotion or where the co-promoter drafts the rules, the sweepstakes promoter should consider obtaining an indemnity agreement from the co-promoter.

Privacy Policies. Sweepstakes promotions are used frequently to gather consumer information for future marketing purposes, whether personally identifiable information or aggregated information for demographic use. Existing privacy policies should be reviewed and any sweepstakes rules must be consistent with such privacy policies.

Eligibility and Release Issues. As noted above, the sweepstakes promoter must honor its own official rules. Consequently, it is important for the sweepstakes promoter to monitor entries, particularly where there is a "one entry per person" requirement or an "official entry form" requirement. The sweepstakes promoter also must take steps to ensure that its eligibility restrictions are fulfilled. To this end, the sweepstakes promoter should require the winner to execute affidavits of eligibility and release, which generally require that the winner verify his or her eligibility. These handy documents also include waiver provisions and allow the use of the winner’s name and likeness in future promotions. They should be executed before the prizes are released.

Long-Term Obligations. The sweepstakes promoter’s obligations may not end after the winner’s name is drawn from the hat. If the sweepstakes was registered in Florida, New York, or Rhode Island, each state has its own peculiar reporting and record retention requirements. For example, Florida requires that the sweepstakes promoter file a winner’s list with the Florida Department of Agriculture and Consumer Services within 60 days of the promotion’s close; supply a copy of the list of winners, without charge, to any person who requests it; and hold winning entries for at least 90 days after the promotion is closed. New York has similar disclosure requirements and more onerous retention requirements. Rhode Island requires that information on winners be retained for a certain period in case the state asks for it. In addition, for tax reporting purposes, the sweepstakes promoter must issue a Form 1099-MISC for all prize awards valued at $600 or more.

The foregoing is simply a summary of the regulatory and practical issues that should be addressed prior to commencing an online sweepstakes. Online promotions can be wildly successful, but they can be equally hazardous to the ill-prepared.