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ONLINE SWEEPSTAKES PROMOTION OR ILLEGAL LOTTERY?
(February 1, 2001)


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Introduction

This article will focus on sweepstakes promotions offered online. Sweepstakes and contests have been used by marketers to attract customers for decades. Now, they are popping up everywhere on the Net as companies vie for new "eyeballs". Sweepstakes promotions promise visitors a chance to win a myriad of prizes in exchange for visiting a website, registering for a service, or downloading a product. Companies offer these prizes to increase brand awareness and drive traffic to their web sites - and these on-line promotions appear to be working. Nevertheless, while online sweepstakes promotions appear to be a very effective marketing tool, sweepstakes and contests are heavily regulated activities in the United States (at both the federal and state level) and abroad. Failure to comply with all the applicable rules and regulations may lead to both civil and criminal penalties. Therefore, such promotions should be structured properly to ensure compliance with both federal and state laws prohibiting lotteries.

State and Federal Regulations

Sweepstakes promotions in the United States are regulated by numerous federal and state laws and agencies. Federal agencies with jurisdiction to regulate sweepstakes promotions include the Federal Trade Commission ("FTC"), the Federal Communications Commission ("FCC"), the United States Postal Service, and the United States Department of Justice ("DOJ"). Sweepstakes promotions may also be regulated by state attorney generals and, in some states, district attorneys. And, sweepstakes promotions may be the subject of a private lawsuit brought directly by a consumer.

If a sweepstakes promotion allows nationwide participation, the promotion must comply not only with federal regulations, but also the regulations of each state. For example, in California, the Penal Code sets forth the definition of a "lottery," and the Business and Professions Code governs the promotion of the sweepstakes. In New York, the law requires that consumer sweepstakes be registered and bonded 30 days before the commencement of the sweepstakes, if the value of the prize offered is more than $5,000.00.

Legal Sweepstakes or Illegal Lottery

While sweepstakes promotions are generally permitted in most states, lotteries are not. Unlike lotteries, "sweepstakes" promotions do not require the participants to pay anything for the chance to win. Thus, a promotion that conditions the chance to win on subscribing for a service, purchasing a product or, in some states, visiting a physical store, may be deemed an illegal lottery.

A lottery consists of a prize, chance, and consideration (defined below). Lotteries are generally prohibited in each of the fifty states unless legislatively exempted (i.e., state run lotteries). Therefore, sweepstakes promotions must omit one of the three elements of a lottery (prize, chance, or consideration) to avoid being deemed an illegal lottery. Generally, a sweepstakes promotion will include a prize and chance but no consideration.

So what is consideration? The definition of consideration varies from state to state and whether a sweepstakes promotion will be found to include an element of consideration will depend on various factors, such as:

(1) how easy or difficult it is to participate in the sweepstakes and

(2) whether an alternative method of entry (e.g., entry by mail or fax) is present. Examples of consideration include conditioning entry on the participants: (1) purchase a product; (2) monetary payment;

(3) visiting a store, or

(4) provision of detailed consumer information. It is unclear whether requiring on-line access to participate in a sweepstakes constitutes valid consideration. We therefore suggest that any online promotion provide an alternative method of entry (e.g. via fax or mail). Please note, however, that regulators have found the certain promotions containing an AME to be an illegal lottery.

Things To Consider When Designing An Online Sweepstakes Promotion

Online promotions create certain issues not present in traditional media. Accordingly, special rules should be followed when structuring an on-line sweepstakes promotion. Those responsible for the design of an online sweepstakes promotion should consider the impact of the following eight (8) issues:

1. International Considerations

An online sweepstakes promotion is potentially available throughout the world in every country. In many countries, the conduct of sweepstakes is prohibited or involves complex registration and approval requirements. For example, federal law in Canada requires the inclusion of a skill element in all sweepstakes conducted in Canada. In addition, for sweepstakes promotions open to Quebec residents, there are additional procedural and registration requirements. In other countries, sweepstakes promotions considered legal in the U.S., may be banned outright. We therefore suggest that participation in a sweepstakes promotion be restricted to U.S. residents

If a company chooses to allow entries from residents of other countries, care should be taken to specify the countries from which participation is allowed and the rules for the sweepstakes should be cleared with counsel located in the relevant foreign country. If a company chooses to restrict eligibility to U.S. residents as suggested, the web site should clearly and conspicuously say: "OPEN TO U.S. RESIDENTS ONLY".

2. Technical Considerations

Companies sponsoring an on-line sweepstakes promotion should reserve the right to suspend or cancel the promotion if a computer virus, bug, or other technical problem corrupts the administration or security of the sweepstakes. Additional technical considerations include:

! Incomplete, garbled, misdirected, or delayed electronic entries.

! Limitations on liability in the event information downloaded from a company's web site causes damage.

! Ensuring that off-line entrants are treated with "equal dignity" as those who enter on-line. For example, allowing five on-line entries per day may result in an unfair disadvantage to those entering by mail. To increase fairness between on-line and off-line entrants, companies should consider allowing mail-in entrants to include five entries per envelope mailed.

3. Risk Factors: Criminal and Civil Fines & Public Relations Nightmare

Due to the sheer number of online sweepstakes and other promotions, companies may be tempted to cut corners on sweepstakes clearance. Companies, however, should not be lulled into a false sense of "safety in numbers." While it may be true that many "suspect" sweepstakes promotions escape detection, be mindful that companies may face criminal and monetary sanctions as a result of running a sweepstakes promotion found to be an illegal lottery. In addition, some states are extremely aggressive in policing promotions and the fines can be significant. In California, for example, the damages assessed may depend upon the number of violations, which can be significant in an online sweepstakes promotion. Companies should also consider the potential public relations nightmare that may result from a regulator finding that a sweepstakes promotion runs afoul of state regulations prohibiting lotteries.

4. Trademark.

There are several trademark issues that should also be considered. First, the name of the promotion should be cleared by qualified trademark counsel to ensure that use of a mark does not infringe on the trademark rights of third parties; Second, if a sweepstakes promotion includes a reference to a third party's trade name or trademark, such use should be factual and accurate. Third, care should be taken to avoid creating a false sense of association or sponsorship between the sponsor of the sweepstakes and a third party. Thus, for example, if a sweepstakes offer includes as a prize a Ford Thunderbird automobile, it may be permissible to recite this fact. However, it may not be permissible to prominently feature the Ford logo.

5. Copyright

If a sweepstakes promotion includes an image of a particular prize, such use may raise copyright issues that must be resolved prior to posting such image on the Internet.

6. Advertisements

On-line sweepstakes promotions advertised in traditional media may also be subject to state regulations governing promotional advertisements. Some states require disclosure of certain information in connection with promotional advertisements.

7. Special Registration Requirement For Certain Prizes.

Depending on the value of the prizes offered, some states require: (1) the sweepstakes rules be registered with a state office, where the rules will be made publicly available, and/or (2) the posting of a bond in the amount of the prize value.

8. Special Regulations For Certain Industries

In addition to the above concerns, sweepstakes promotions in some industries (alcohol, tobacco, health) are subject to special rules. Companies offering sweepstakes in these industries may be required to comply with additional federal and/or state regulations.

Checklist for your Sweepstakes Promotion Rules

It is helpful to think of a sweepstakes promotion as a contract with the each and every participant. A complete set of rules should be drafted for each sweepstakes promotion and made available to participants. Set forth below is a checklist for drafting sweepstakes rules. This checklist should only be used as a starting point, because each sweepstakes promotion is unique, and the rules governing each promotion should be reviewed independently by competent counsel aware of your particular needs and risk tolerance levels.

Any online sweepstakes promotion rules should, at a minimum, clearly provide the following:

1. No Purchase Necessary
Stating that it is not necessary to purchase a product should be set forth clearly and conspicuously at the beginning of the sweepstakes rules.

2. Identification of Sponsor(s)

The sweepstakes rules should provide the name of the sponsor as well as the sponsor's address.

3. Eligibility Requirements

Participation in sweepstakes may be restricted by factors such as age, residence, and occupation. Employees of the sponsor, sponsor's agents, and members of the sponsor's household should be excluded from participation to remove any appearance of bias. A restriction to those 18 years or older may also be helpful since promotions targeted to children under the age of 13 may be subject to greater scrutiny.

4. How To Play

Instructions for participation in an on-line sweepstakes should be set forth in a clear and concise manner.

5. Duration

The sweepstakes should have a definite start and ending date, and as it is important to treat those who enter on-line and off-line in a fair manner, ending dates for mail-in or facsimile entries may need to be adjusted to allow equal participation by off-line participants.

6. Prizes

The number and nature of the prize(s) should be described in detail in the sweepstakes rules.

7. Odds of Winning

The odds of winning should be stated. If the number of entries is restricted, the rules should state the exact odds of winning. If the number of entries is unrestricted, the rules should say the odds of winning will depend on the number of eligible entries received.

8. Selection and Notification of Winner

The sweepstakes rules should set forth: (a) the date on which winners will be selected and announced, (b) the manner in which winners will be selected and notified, and (c) provide a mailing address where entrants may request a list of winners.

9. Affidavit of Eligibility and Release of Liability

The sweepstakes rules should include a provision requiring prize winners to execute an affidavit that the winner meets all of the eligibility requirements set forth in the rules and that includes a release of liability.

10. Limitation of Liability

The sweepstakes rules should include a limitation of liability in connection with misdirected or incomplete entries, electronic or computer malfunctions, and for any injuries or losses caused by a prize awarded in the sweepstakes or by participation in the sweepstakes.

11. Void Where Prohibited

While every effort should be made to ensure your sweepstakes promotion complies with federal and state regulations, the rules should say that the promotion is "void where prohibited."

Conclusion

Due to the effectiveness of sweepstakes promotions, the number of on-line promotions are bound to increase. However, this increase will likely trigger additional regulations and enforcement of these promotions. Accordingly, the rules governing online sweepstakes promotions should be carefully reviewed to ensure compliance with all past and newly enacted federal and state regulations.

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DISCLAIMER: This article has been prepared by Melissa C. Marsh for the benefit of clients and friends. Although prepared by a professional, this article should not be used as a substitute for legal advice because your specific factual circumstances may differ, the laws of your jurisdiction may differ, your specific situation may require different advice, or the laws may have changed. Readers should not act upon the information contained in this article without first seeking the advice of a local licensed and practicing attorney.

If you have questions relating to this article, please call (323) 655-1002 or email: mmarsh@yourlegalcorner.com.

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