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How to run a legal sweepstakes, contest or promotional giveaway

Enticing customers with prizes and other rewards is probably one of the oldest marketing tactics there is. Whether it’s a random drawing or a photo contest, getting people’s attention with the promise of free cash or merchandise makes perfect sense. Unfortunately, because such promotions provide so many opportunities to mislead consumers and because of their seeming proximity to gambling, businesses who wish to make use of these undeniably effective tools must navigate a minefield of regulations.

Prize-based promotions are particularly problematic when operated on a national scale. Because many relevant regulations are at the state and local level, even businesses with experienced legal counsel may be unable to say with confidence that their promotion is legal in all fifty states and countless municipalities. If a business wants to accept international entries, assuring compliance becomes almost impossible.

That said, providing entrants with a carefully drafted set of rules and terms can help mitigate risk and avoid some common pitfalls:

Avoiding lottery laws

Many state laws prohibit lotteries. While statutes vary, a “lottery” is typically defined as an activity involving a prize, chance and consideration.

Businesses that want to run a promotion featuring prizes awarded by chance (i.e. a sweepstakes) therefore often attempt to eliminate the third element, consideration. “Consideration” means giving up something of value. This would include any sort of entrance fee, but many states interpret it to also encompass any requirement that entrants purchase something or even a requirement that entrants exert substantial effort to enter, such as visiting a store or signing up for a mailing list.

This is why many sweepstakes feature a “no purchase necessary” entry method, whereby entrants can participate for free and without jumping through any hoops. However, sweepstakes sponsors must still be careful that no-purchase entrants are treated the same as other entrants and that the method doesn’t involve excessive effort or some hidden form of consideration. Otherwise, regulators may still consider the sweepstakes an illegal lottery.

Skill-based contests

Contests, as opposed to sweepstakes, typically award prizes based on some criterion other than chance. Therefore, promotions structured as photo or essay competitions, puzzle challenges or games of skill might seem to fall outside the scope of lottery laws and thus allow for entrance fees, purchase requirements or other forms of consideration.

Contest sponsors must nevertheless be cautious about charging entry fees. For one thing, many states regulators demand that chance be eliminated from a contest altogether. For example, if winners are selected randomly from a pool of qualified contestants (such as those who solve a puzzle), it is likely still an illegal lottery. Likewise, if winners are determined based on an activity requiring a mixture of skill and luck (like games involving cards or dice), this may not sufficiently eliminate chance. If a photo or essay competition lacks any discernable judging criteria, it’s possible that it too may be judged to be a de facto game of chance.

More importantly, many states, such as Arizona and Vermont, have laws that prohibit certain types of entry requirements, regardless of whether winners are chosen by random drawing or a contest of skill, and promoters must be cautious to exclude entrants from those states.

Disclosure requirements, registration and other requirements

Even if a sweepstakes or contest is properly structured to avoid being cited as a lottery, it may still violate state regulations. Many statutes place very specific requirements on the sponsors and administrators of such promotions. These requirements might include disclosing certain specific information in the contest or sweepstakes rules, such as the prize value or the odds of winning.

Other laws place restrictions on the manner of advertising contests and sweepstakes. Still others, like the federal Child Online Protection Act, restrict the way that information is gathered from participants. Some states, such as New York and Florida, even require the sponsors of certain sweepstakes and contests to register and pay a fee or post a bond under certain circumstances.

If you have a question about whether your promotion is viable, contact Knowmad Law to schedule a business consultation. Or contact us to request an engagement letter to begin preparing your contest rules right away.

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