Sponsoring Sweepstakes Without Getting Swept into a Lawsuit
Sweepstakes can be a great way to drum up new business, build out marketing lists, and promote products. But sponsoring a sweepstakes involves wading into a complex web of state and federal rules. Navigating through this regulatory thicket requires a clear understanding of what you can and cannot do.
What Is the Difference Between Lotteries, Contests, and Sweepstakes?
Only states can run lotteries. Lotteries have three elements: chance, prize, and consideration. Chance means the outcome depends on factors outside of participants’ control. A prize is anything of value offered to participants. Consideration means participants must provide something of value, or expend considerable time and effort, to enter the promotion. Any promotion that has all three elements is an illegal lottery, unless of course it is being operated by a state.
There are two general approaches to ensure your promotion will not be deemed a lottery. First, if you keep chance and prize, but take away consideration, you have a sweepstakes. Second, if you replace chance with skill—meaning the participants’ own efforts determine the outcome—you have a contest. See the below illustration:
That sounds easy enough, right? Read on to see how companies, despite their best efforts, have hit the proverbial lottery—and not in a good way.
Laws Governing Sweepstakes
Sweepstakes are primarily governed by state laws. However, like all sales promotions, sweepstakes must also comply with Federal Trade Commission advertising guidelines. A number of specific federal rules may also apply. For example, sweepstakes marketed by phone or text messages must comply with the Telemarketing Sales Rule and the Telephone Consumer Protection Act.
Particular rules vary from state to state. But advertisers should be aware of three major concerns:
a. No Consideration. First, sweepstakes cannot require consideration. The easiest and safest way to ensure a sweepstakes does not require consideration is to provide a free “alternative method of entry,” or AMOE. An alternative method of entry allows consumers to participate without purchasing a product or providing consideration. However, the advertiser must clearly and conspicuously communicate the AMOE option to potential participants. The advertiser must also allow for entry on the same terms as any other participant. One way this is done is via postcard entry.
b. Official Rules. Second, sweepstakes should be accompanied by official rules, which help to mitigate the advertiser’s risk by establishing a contract between the advertiser and the participants. The goal of the official rules is to avoid any ambiguities while also anticipating potential issues that could arise. The rules should typically outline, at a minimum: eligibility, timing, entry instructions, prize description, and odds. They should also contain terms designed to limit the advertiser’s liability.
c. Registration and Bonding. Third, certain states require registration and/or bonding prior to starting a sweepstakes. A sponsor/advertiser must comply with these requirements no matter where they are located if it makes the promotion available to residents of the pertinent states. New York requires sponsors to register and post a bond with the state thirty days before commencing a sweepstakes when the total value of prizes offered exceeds $5,000. Similarly, for sweepstakes exceeding $5,000 in total prize value, Florida requires sponsors to register and post a bond seven days before the sweepstakes begins. Rhode Island requires registration for sweepstakes with as little as $500 in total prize value if the sweepstakes is operated in conjunction with a retail establishment.
Enforcement and Litigation
Careless or improper design and operation of a sweepstakes can expose sweepstakes sponsors to a government enforcement action and/or private litigation. For example, Coinbase, a cryptocurrency exchange, is facing costly litigation for allegedly requiring participants to buy or sell Dogecoin, a polarizing crypto coin that started as a joke, to enter its promotion. Coinbase offered an alternative method of entry. However, the class of plaintiffs argued that Coinbase designed its email and website advertising to prevent users from easily finding the alternative method of entry information. In other words, it was not clear and conspicuous.
Avoiding unnecessary risk for sweepstakes requires thoughtful design, diligent crafting of official rules, close attention to individual states’ laws and regulations, and careful review of related marketing materials. With private litigation and government enforcement an ever-present concern, now is the perfect time to seek advice. Contact Elliot Kelly, Kevan Lee Deckelmann, and Matt