03/31/14 | Uncategorized

Good Luck: Avoiding Illegal Lotteries When Structuring Sweepstakes and Contests

Have a prize to give away? Don’t try your luck: make sure your promotion plays by the rules.

By Olga V. Mack (Startup Lawyer)

Startups and businesses of all sizes have been increasingly using promotions, sweepstakes, and contests to attract the attention of its customers, promote a new product or service, standout in a sea of competition, or generally just get attention. A complex web of federal and state laws and regulations govern the use of promotions. This article provides a helpful framework for categorizing your promotions and then understanding the legal issues associated with your type of promotion. You should consult a competent legal practitioner before structuring all promotions.

Categorizing your promotions correctly is a first, important step. Lotteries, sweepstakes and contests must be distinguished because they are regulated differently. Specifically, lotteries are, for the most part, illegal while sweepstakes and contests, if properly structured, are legal.

Lottery = Prize + Chance + Consideration

A lottery consists of a prize that is awarded to a winner selected by chance after she pays to participate. A prize is anything of value offered to encourage participation, such as cash, merchandise, coupons, vouchers, or discounts. Additional state laws may apply if a promotion involves regulated products, such as alcohol, tobacco, or dairy. Chance is any part of the selection process that is beyond the judgment or control of the participant, such as a random drawing. Finally, in general, payment (often called “consideration”) is something of value that a participant must provide to participate in the promotion, such as an entry fee, the purchase of a product or service, and even the postage for entry (in some states). Significant effort may also constitute payment, such as traveling to a location, multiple store visits, completion of a lengthy survey, disclosure of personal information, waiver of legal rights (e.g., waiving do-not-call rights), or attending a sales presentation.

In general, lotteries are illegal unless you are a state, a state agency, or a religious institution. Even when lotteries are allowed, lotteries are highly regulated and require permits and registration with the appropriate regulatory authority.

Sweepstakes = Prize + Chance

Structuring your promotion as a sweepstakes is one way to avoid running an illegal lottery. A sweepstakes is a form of promotion that involves only a prize and chance. Notably, there is either no payment required to participate in a sweepstakes or payment may be required as long as a free alternate method of entry (AMOE) is provided.

In practice, promoters sometimes fail to properly structure a sweepstakes because they do not ensure that the free AMOE is as equally plausible and viable for winning the sweepstakes as all other paid methods of entry. The classic line of: “No purchase necessary. Void where prohibited.”, is perhaps the most well-known part of an AMOE strategy to clearly and consciously provide a free AMOE. The AMOE should be clearly presented in all advertisements and sweepstakes rules.

To be classified as a sweepstakes, the “free” and the “paid” entries must be treated the same way. For example, they should have the same chance to win, entry limits, deadline dates, and prize pools. Your competent legal provider will walk you through various AMOE options, such as mailing a postcard, emailing a submission, calling toll free number, or entering through a website.

Contest = Prize + Skill

A contest is another way to structure a promotion to avoid an illegal lottery. A contest involves a prize and may (though does not have to) involve a payment or non-monetary consideration to enter.  Notably, it relies on skill or ability (and not chance like a lottery), to determine a winner. In other words, a contest is a promotion that is based on finding “bona fide” talent, not random selection (or chance).

What “skill” and “ability” mean and how they should determine the outcome of your contests are pivotal concepts when structuring content, and your competent legal provider will walk you through what that means specifically in the context of your startup or business. For example, a “genuine skill” may include creative skills or athletic ability. This, of course, means that judges must be qualified to judge the contest.

The rules of the contest must describe how tiebreakers are addressed (i.e., not by chance). The rules should also define predominately objective judging criteria such as humor, originality, or relationship to product.

Summary and Other Considerations

Structuring a promotion as a sweepstake (i.e., by eliminating the payment element) or a contest (i.e., by eliminating the chance element) are two ways to avoid running an illegal lottery. Of course, eliminating the prize is another way to do it, but this usually defeats the purpose of the promotion.

This article provides a framework to start with when you are considering running a promotion that involves a prize. You should also discuss the details applicable to your startup or business with a competent legal provider. A successful promotion will require planning, careful structuring and rule drafting, reviewing all promotional activities, and compliance with all applicable state and federal laws.

In addition, if you are planning to use online social media sites to promote your sweepstake or contest, you need to make sure that your promotion complies with relevant social media policies. Other factors, such as collecting personal information as part of the sweepstake or contest, may also require compliance with additional applicable laws, such as privacy laws.

* This article is for informational purposes only and no attorney/client relationship is formed by/through this article. It is not legal advice.

What kind of legal challenges have you encountered in launching your startup?

Olga Mack 1About the writer: Olga V. Mack (@OlgaVMack) is a startup lawyer and a mother of two active girls. She enjoys advising her clients to success and growth.
About the illustrator: Molly Doering is a concept artist, illustrator, and cartoonist. For more of her gallery visit: http://balloons504.deviantart.com/.

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