An Introduction To Sweepstakes And Contests Law

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The Practical Lawyer | 39

Steven C. Bennett

Whatever else your client wants from its

marketing, a jackpot of problems isn’t one

of them.

SweepStakeS and prize conteStS in vari-

ous forms have been used as a means to promote com-

merce for hundreds, if not thousands, of years. These

promotions have not lost their appeal, even in an econ-

omy saturated with media and advertising. Indeed, the

development of a culture of gambling, with gaming re-

sorts increasingly popular as vacation destinations, and

many states and Native American tribes offering casinos,

horse-racing, lotteries, and other forms of gambling, has

encouraged increased development of sweepstakes and

contests. The availability of online systems for advertis-

ing and conducting promotions, moreover, has further

heightened interest in these promotional schemes.

The drive to take advantage of promotion fever, how-

ever, is not without risk. When a business runs either a

sweepstakes or contest, the business must structure the

promotion to avoid characterization as a lottery under

federal and state law. In general, lotteries, other than

those sponsored by governments, are illegal. Moreover,

sweepstakes and contests are governed by a variety of

federal and state laws, requiring registration, prohibiting

specific practices, and defining the limits of permissible

promotions. These laws have changed frequently over the

past few years. These laws, moreover, are often so broadly

Steven C. Bennett

is a partner in the New York offices of Jones

Day, and teaches a course in Privacy Law

at Hunter College. The views expressed are

solely those of the author, and should not be

attributed to the author’s firm, or its clients. He

can be reached at scbennett@jonesday.com.

An Introduction To Sweepstakes

And Contests Law

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40 | The Practical Lawyer

August 2007

drafted that they could be applied to almost every

type of promotion (customer appreciation give-

aways, trade show drawings, employee sales incen-

tive contests, and raffles, among others). Official

interpretations of these broad statutes and rules,

such as the opinions of state attorneys general,

vary widely, even with respect to the most common

forms of regulations.

As a result of this patchwork of law, entry into

a poorly considered sweepstakes or contest (jointly

called here “promotions”) can be a trap for the un-

wary promoter. (Outsourcing responsibility for the

promotion to a marketing firm or other service pro-

vider, moreover, may not solve the problem. The

sponsor of the promotion may be subject to regula-

tion and enforcement actions even if the promo-

tion is administered by another entity.) Failure to

follow pertinent statutes

and regulations regarding

promotions can lead to

government inquiries, civil

enforcement actions, and

even criminal penalties.

The adverse publicity as-

sociated with a mishandled promotion, moreover,

may defeat the entire purpose of the effort.

This article seeks to provide a basic introduc-

tion to sweepstakes and contests law, which should

permit a prospective promoter to ask the right

questions before beginning such a promotion. Al-

though it is hoped that this article will provide a

good grounding in the most essential elements of

promotions regulation, it is important to recognize

that there is no “one-size-fits-all” form of promo-

tion. The purposes and circumstances of promot-

ers vary; rules appropriate for one promotion may

not work well for another. Thus, review of any pro-

posed promotional scheme by a competent, experi-

enced professional is essential.

tHe BaSic Law: wHat iS an iLLeGaL

LotterY? • A promotion may be characterized

as a lottery if it has all three of the following ele-

ments:

Chance;

A prize; and

Consideration.

Generally, “sweepstakes” (random drawings for

a prize) are not classified as lotteries, because they

lack consideration (i.e., something of value that the

entrant must provide to participate in the sweep-

stakes). True “contests” (tests of skill), moreover, do

not qualify as lotteries, because chance is replaced

by ability and effort.

Even though a sweepstakes or contest may

avoid characterization as an illegal lottery, promo-

tions are nevertheless heavily regulated by state

and federal laws. Depending on how a promotion

is structured (and what unique issues that structure

may raise), determination of

the lawfulness of a promotion

could require review of the

law in each state where a busi-

ness seeks to undertake the

promotion.

SweepStakeS iSSUeS • Sweepstakes are reg-

ulated by both state and federal law. Sweepstakes

(typically random drawings for prizes) possess two

of the three characteristics of a lottery: chance

and a prize. Therefore, to avoid classification as a

lottery, a sweepstakes promotion must not involve

consideration. Arguably, characterization as an ille-

gal lottery might also be avoided by eliminating the

element of a prize. “Amusement” gambling, such

as the playing of pinball, is not generally consid-

ered gambling, in that the only “prize” awarded is

more playing time. Yet, even this premise may be

challenged. See United States v. Sixteen Electronic Gam-

bling Devices, 603 F. Supp. 32 (D. Haw. 1984) (meters

to record credits, plus knockoff switches to reset

count for next player, indicated use of machine in

gambling). In practical terms, this no-prize avenue

may not be worth pursuing, since few participants

•

Sweepstakes (typically random drawings

for prizes) possess two of the three

characteristics of a lottery: chance and a

prize.

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Contests and Sweepstakes | 41

would pursue entry into a promotion with no real

prize.

the consideration Question

State legislatures and courts apply varying rules

to determine what is consideration. Valuable con-

sideration generally requires parting with cash or

something of marketable value. This is the major-

ity view and the modern view among states. A mi-

nority of states, however, apply the view that any

benefit to the promoter is consideration.

Effort To Participate

The existence of consideration thus may turn

on the amount of effort required to participate in

the sweepstakes (and the amount of the potential

benefit to the promoter). Consideration is generally

not present when the entrant’s efforts are minimal

and the promoter’s benefits are restrained. Thus,

completing a mail-in entry form, listening to the

radio, watching television, completing a simple sur-

vey, calling a toll-free number, or going into a store

to enter (with no purchase necessary)—these are

typically not considered steps that involve consid-

eration.

Does The Entrant Give Something

Of Value?

Consideration generally exists if the entrant

must give something of value to enter the sweep-

stakes. The most easily identified or typical form

of consideration is a requirement of a purchase

or payment to enter the sweepstakes. However,

consideration may also be found to exist when

an entrant must exert substantial effort or time to

participate in the promotion. For example, requir-

ing an entrant to fill out a lengthy marketing ques-

tionnaire might constitute substantial effort. Some

states may find consideration to exist if the sponsor

of the sweepstakes receives a benefit through the

entrant’s efforts, such as a valuable competitive ad-

vantage or other economic opportunity.

is there a “Free” alternative?

In many cases, there is a way to avoid having

a sweepstakes classified as an illegal lottery even

when consideration is arguably present: Make an

alternative “free” method of entry available. For

example, the promoter could permit entrants to

send their names on postcards without having to

purchase any product or service. Yet another alter-

native approach is the offering of the promotion

only to existing/prior customers. The promotion,

in that instance, would not require new consider-

ation for entry, and thus arguably would not con-

tain the consideration element that could make the

promotion a lottery.

Must Not Be Unduly Burdensome

The “free” entry form must not be unduly bur-

densome. In Seattle Times Co. v. Tielsch, 495 P.2d 1366

(Wash. 1972), the court noted that, even though

participants were not required to make a purchase,

they were required to spend hours in following a

football forecasting contest. The court held that

the requirement of consideration was met, because

participants were required to do something that

they would not otherwise do, and because there

was an arguable benefit to the promoter.

“Equal Dignity”

Moreover, an “equal dignity” requirement ap-

plies. There can be no discrimination in treatment

of sweepstakes entrants. Those who give some con-

sideration to enter, either by making a payment or

by exerting significant effort, may not be treated dif-

ferently, or more favorably, than those who do not

provide consideration. The odds of winning must

be substantially similar for both. If the two groups

are treated differently, the differential could create

pressure for entrants to give consideration, and thus

might transform the sweepstakes into an illegal lot-

tery. Trivial differences (such as the requirement of

mail-in postage for free entries, versus in-store en-

tries) in most instances will not violate the “equal

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42 | The Practical Lawyer

August 2007

dignity” rule. In Glick v. MTV Networks, 796 F. Supp.

743 (S.D.N.Y. 1992), the court found that consid-

eration was not present, even though participants

were required to pay a $2.00 charge to use a “900”

number. The court held that the use of the paid

telephone system was merely a convenience to the

participants, who could have pursued a cost-free

entry system made available by the promoter.

other concerns about Sweepstakes

In addition to the basic lottery question, gov-

ernment regulators have expressed a host of other

concerns about sweepstakes. Sweepstakes, in many

instances, are targeted at vulnerable consumers,

especially the elderly and poorly educated. Some

promotions can create a false impression that a

consumer has won something or that the consumer

is close to winning. Others may give the false im-

pression that a purchase improves the chances of

winning the sweepstakes.

To combat these kinds of concerns, some states

permit sweepstakes, but require registration of the

promotion with one or more government agencies.

Some states have laws or regulations that restrict

sweepstakes in highly regulated industries. For ex-

ample, California regulations prohibit alcoholic

beverage licensees from conducting promotional

contests in which cash prizes are given to consum-

ers. Promotions involving tobacco, weapons, mo-

tor fuel, time-shares and financial services (to name

only a few) may also be subject to special rules.

Additionally, New York and Florida, for example,

require registration if the retail value of the prize

given away exceeds $5,000 and the sweepstakes is

run in connection with sale or advertisement of

consumer products or services. In Rhode Island,

registration is required if the retail value of the

prize exceeds $500 and the sweepstakes is run by a

retail establishment to promote its business. Some

states may also require a bond from the promoter.

If the promoter wishes to avoid these kinds of re-

quirements, the rules of the promotion must specif-

ically prohibit residents of the registration-requir-

ing states from participating in the sweepstakes.

disclosure rules

Some states have passed specific laws or regu-

lations that identify information that must be dis-

closed to potential entrants. Generally, such dis-

closures must explain the rules (method of entry,

eligibility, and method of determining a winner),

the odds of winning, the beginning and ending

dates of the contest, and where a winners list may

be obtained. The identity of the sponsor often must

also be disclosed.

drafting Sweepstakes rules

Drafting clear rules for sweepstakes promotions

can guard against potential problems. The rules

(when accepted by the entrant by registration for

the promotion) are essentially a contract between

the promoter and the participants. The rules lay

out the terms and conditions under which the

promotion will be conducted. The rules may help

shield the promoter from liability. In addition, the

rules should be designed to demonstrate compli-

ance with all applicable regulatory requirements.

Basic Elements

To a large extent, state regulation of gambling

and promotions is highly individual. Thus, in pre-

paring rules, attention to the rules in all jurisdictions

where the promotion will be available is essential.

Given prevailing legislation and rules in a majority

of states, however, sweepstakes rules should gener-

ally contain at least the following elements:

A statement that no purchase is necessary to

enter or win;

Details of entry procedures;

Any limits on the number of times a person

can enter (for example, one entry per person

or household);

The closing date of the sweepstakes and any

other relevant deadlines;

•