Is Your Contest Illegal? 33 Important Legal Considerations for Contests and Sweepstakes

In today's competitive marketplace, companies are relying heavily on innovative and edgy promotions that often include submission of user-generated content, tweets, Facebook applications, blogging, viral marketing and other social networking elements. However, the tech-savvy marketing professionals who are entrusted to do so are often unaware of the complex legal overlay of the digital world and the potential significant financial repercussions for their company's failure to comply. In working closely with our clients to structure sweepstakes and contests in compliance with applicable legal requirements, we have identified the following top compliance issues to consider before administering a promotion. Are You Running a 'Sweepstakes' or 'Skill Contest'? A "sweepstakes" is a promotion where the winner is determined by a chance event and the participants exercise no control over the outcome. Typical sweepstakes are random drawings or instant win games, such as scratch and win cards. If the promotion involves skill, rather than random chance, it might be a contest since a "contest" or "skill contest" refers to a promotion where skill or the ability to perform a required task determines the winner. If there is a mix of chance and skill to determine the winner(s), you may have an illegal lottery. Issues Applicable to Both Sweepstakes and Skill Contests The following legal documentation should be in place prior to launch of a promotion: Official Rules: Each promotion must include a set of official rules that identify the material terms and conditions that govern the promotion, and various laws provide that they meet certain requirements. Advertisements: Each promotion is advertised in some manner (print, Internet, radio, television, etc.). All ad copy and other creative elements (e.g., web pages, registration/entry forms, banner ads, direct mail pieces and game cards) must include certain abbreviated rules disclosures. These vary from state to state. The exact language and size of the abbreviated rules must be specifically tailored for the nature of the advertisement and the medium. Winner Releases: Sponsors of promotions typically require signed affidavits of eligibility and liability/publicity releases from all major prize winners (trips, vehicles, prizes with the approximate retail value over $600, inherently dangerous prizes, event prizes, etc.). Guest Release: If a prize awarded in the promotion involves the winner being permitted to bring a guest (e.g., travel companion for a trip/event prize), sponsors typically require signed guest releases from the winner's invited guest. Contracts: Signed contracts should be in place with all vendors, co-promotional partners, prize suppliers, fulfillment houses, bonding companies, licensees (e.g., a third party that will use your company's trademarks to promote a promotion) or other third party that provides services or prizes in connection with the promotion. Each agreement should spell out the third party's obligations for the promotion and indemnify your company for a breach of those obligations. To comply with various laws regulating promotions, the following is typically required for every promotion: Same Start and End Dates for All Entry Methods: If there are multiple ways to enter the promotion (e.g., online and regular mail), the start and end dates for each entry method must be the same. If one method of entry is via regular mail, entrants who mail-in their entries must be able to mail-in on the last day that people can enter via the other methods. No Payment or Purchase to Receive or Claim a Prize: Do not require payment by the winner to receive or claim a prize. Also, a coupon (as opposed to a gift card) is generally not a recommended prize for promotions since usually a coupon requires the winner to still make some sort of payment to use the coupon. Prize Descriptions: The official rules and ad copy for the promotion must fully and accurately disclose prize details, including the approximate retail value of each of the prizes offered. Eligibility: The official rules and ad copy for the promotion must fully disclose who is eligible to participate in the promotion (e.g., age, residency and location restrictions). Winner Selection, Clearance and Taxes: Make sure to perform each aspect of the promotion, including winner selection, verification, prize redemption, and every other aspect exactly as described in the official rules. Approvals and Risk Management: Make sure that the official rules and all advertising, game pieces, entry materials, packaging and other materials are consistent (number of prizes, details about prizes, deadlines, etc.). Store and process entries in a secure location. Record Keeping and Winners Lists: Keep all promotion entries and winner lists for a minimum of four years from the date the last prize is redeemed. Keep all winner documentation for a minimum of four years from the date of prize redemption (or completion if the prize is an event or trip). Provide winners' lists upon written request for at least six months after the promotion entry period ends. Specifics for Sweepstakes For sweepstakes, make sure of the following: Make Sure There Is "No Purchase Necessary" to Enter or Win: If a purchase, payment or substantial time or effort is required to enter, make sure that: (i) there is at least one "free" way to enter that doesn't require mandatory consent to receive marketing materials; or (ii) no prize is given (you can alternatively award items with no value, such as non-tangible items like bragging rights or a special mention); or (iii) winners are determined by skill instead of chance. The "free" entry method should be clearly disclosed in all advertising. Make sure any payment is for a legitimate product or service, not just for entry into the sweepstakes (regardless of whether a free entry method is offered) to avoid prohibitions on "pay to play." All Participants Treated Equally: Make sure that all participants are on equal footing, regardless of how they enter. For example, make sure all eligible people have the same number of opportunities to enter and chances to win. Where there is a purchase involved in the entry process, the sponsor must award the same number of entries for each non-purchase act as each purchase act. Open in Rhode Island: If the total approximate retail value of all prizes awarded is over $500 and the sweepstakes is offered through a retail establishment (online or otherwise) and open to residents of Rhode Island, the sweepstakes will need to be registered in Rhode Island or residents of Rhode Island disqualified. Open in New York or Florida: If the total approximate retail value of all prizes is over $5,000 and open to residents of either Florida or New York, the sweepstakes will need to be registered and bonded in New York and Florida or residents of those states disqualified. Also, plan your budget accordingly—registration and bonding in New York and Florida carry additional costs, which are mostly dependent on the total value of all prizes in the sweepstakes at issue. Specifics for Skill Contests For skill contests, make sure of the following: Skill Must Determine the Winner: Make sure that actual "bona fide skill" determines the winner rather than chance (otherwise the promotion may be a sweepstakes). States take a range of approaches on what constitutes skill versus chance, and typically apply one of the following tests when determining whether a promotion is a contest or sweepstakes: "pure chance," "predominant element," "material element" and "any chance". Judging Criteria: Disclose the objective judging criteria that will be used to determine the winner(s) and the weight that will be given to each in the official rules. If no percentages are given, make sure each is weighted equally. Judges: The judges must be qualified and have the expertise to judge the entries using the stated criteria. Determining Winners: The judges should fill out score cards when judging. Breaking a Tie: Plan for how you will break a tie among entrants. The tie-breaking mechanism will need to be disclosed in the official rules. Make sure that the tie is not broken by a random drawing or other chance mechanism or you will turn a contest into a sweepstakes. Payment or Purchase Required to Enter a Skill Contest: If payment or purchase of a product is required for entry in a contest, beware because a handful of states still prohibit requiring a purchase or payment to enter a skill contest and many that permit this have specific disclosure and registration requirements. Special Issues Where Additional Legal Compliance Steps Are Needed The following issues raise special legal concerns and additional compliance steps must be taken to ensure the promotion is conducted legally: Open Outside the U.S.: Where the promotion is open to those outside of the U.S., local legal counsel should be engaged to ensure compliance with applicable laws. Direct Mail Promotions: Where advertising for the promotion or entry materials are sent by regular postal mail. Special Entry Requirements: Where a survey, questionnaire or repeat visits to a website or location are required to enter the promotion. User-Generated Content Promotions: Where participants are invited to create and submit videos songs, or other works, and the sponsor or another entity associated with the promotion will use entries in any way other than besides to determine the winner. Promotions Soliciting Posts to a Third Party Website: Where participants are asked to post content on a third party's website (e.g., Facebook, Twitter, YouTube, etc.). Public Voting: Where the general public is involved in any way by ranking, voting, or is otherwise involved in determining the winner. Mobile Promotions: Where any part of the promotion occurs via text message. Children/Minors: Where the promotion is aimed at young audiences or where those under the age of majority in their state of residence can participate in any way. Send-to-a-Friend: Where consumers can or are encouraged in any manner to forward promotion materials to others. Charitable Aspects: Where any charity is involved, if the promotion solicits a purchase or other consideration and the prize or any part of the prize can be or is donated or used for a charitable purpose. Promotions in Specific Industries: Where the promotion concerns highly regulated industries, such as dairy, alcohol, tobacco, gas, financial or insurance industries. Contests and sweepstakes are popular and effective ways for brands to engage with consumers. However, doing so presents numerous regulatory, intellectual property, privacy and other potential liability issues. Alan Friel and Jesse Brody are partners at the Los Angeles-based business law firm Edwards Wildman Palmer. Reach them at afriel@edwardswildman.com and jbrody@edwardswildman.com.

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