Guide Through the Legal Jungle

$2.7 Million Is Price Tag for Mixing a Contest and a Sweepstakes. Just Ask Ironman.

The Illegal Lottery Problem

Prohibiting illegal lotteries is an underlying principle of the laws regulating contests and sweepstakes. An illegal lottery is what you may very well produce if your prize promotion mixes

• the element of chance also known as luck – which is permissible for a sweepstakes
• the element of consideration also known as money and other stuff that holds value – which is permissible for some contests

In my list of 10 Common Legal Mistakes for Contests and Sweepstakes Promotions, mistake number one is “Inadvertently Offering an Illegal Lottery or Gambling Game”.

Ironman’s Sweepstakes/Contest Mix-Up Leads to $2.7 Million FTC Penalty

WTC runs the annual Hawaii-based Ironman World Championship. People who did not otherwise qualify for the Ironman could purchase a $50 ticket for a chance to win entry into the triathlon via a random selection process.

Do you see the problem with that structure?

In the eyes of the U.S. government, that structure combined consideration (the $50 ticket price), chance (the random selection), and a prize (entry into the triathlon). Those are the three ingredients for an illegal lottery – an activity that carries both civil and criminal penalties.

The WTC promotion snafu prompted the U.S. Attorney’s Office to file a complaint against the organization. As part of settling the complaint, WTC forfeited to the U.S. government all the proceeds earned from the Ironman lottery since 2012 ($2,761,910). WTC did not admit any criminal, civil or other wrongdoing as part of the settlement.

Transforming an Illegal Lottery into a Legal Contest or Legal Sweepstakes

While combining prize, chance, and consideration typically leads to an illegal lottery, offering a promotion with only two of the three typically gets you out of illegal lottery territory. The Ironman promotion might have been a legal prize promotion had WTC eliminated consideration by not charging a fee for the ticket or eliminated chance by awarding the prize based on a skill.

10 Common Legal Mistakes for Contests and Sweepstakes Promotions – Part Two, Nos. 6 - 10

This is Part Two of a two-part blog posting outlining ten legal pitfalls to avoid when sponsoring a contest or sweepstakes. See Part One for legal pitfalls, numbers one – five. Here are numbers six – ten.

6. Taking Online Entries from Children in Violation of Privacy Laws.

Accepting entries from children in an online contest or sweepstakes requires compliance with the Children’s Online Privacy Protection Act (COPPA), applicable to children under thirteen, as well as compliance with state privacy laws, some of which apply to all minors under eighteen.

COPPA compliance requires parental notice and consent before collecting personal information from children under the age of thirteen. Personal information one may not collect online from a child without parental notice and consent includes name, email address, physical address, image of child, and other information. Federal regulators take kids’ privacy rights very seriously and have issued fines of up to $3,000,000 for COPPA non-compliance.

There are FTC-sanctioned workarounds – known as the one-time contact exception and the multiple-time contact exception – that let sponsors of online promotions collect certain personal information from a child before obtaining parental consent.

7. Using Entrants Names, Images, and Materials without Permission

Sponsors should obtain permission prior to using the names and pictures of winners and entrants in any advertising and marketing materials. Sponsors can often obtain such permission through their official rules or through winner affidavits.

In the worst case scenario, failure to obtain such permission can result in a right of publicity lawsuit against the sponsor. Review this cautionary tale of a sponsor who did not obtain the necessary permissions.

8. Ignoring Email Solicitation Laws

Sponsors planning to use email as part of their promotions must comply with the federal anti-spam law, CAN-SPAM, and with other state anti-spam legislation. These concerns are relevant for promotions that include Refer a Friend or Forward to a Friend features.

9. Failing to Protect Itself from Potential Mishaps

Ideally, sponsors should structure and administer their contests and sweepstakes in a manner that minimizes the risks of problems from printing and other inadvertent mistakes, winner disputes, ties, copyright issues, public relation mishaps, and fraud. For complicated promotions, these are areas in which a competent contests and sweepstakes attorney can be valuable.

10. Ignoring Tax Issues

Contests and sweepstakes winners must pay taxes on the prizes they win. The sponsor of a promotion offering an expensive prize such as a car should consider the tax implications on the winner and might consider other prize alternatives that do not trigger a significant tax obligations for the winner. Also, for any prizes valued at over $600, the sponsor must make an informational filing with the IRS (and potentially state tax regulators).

For More Information on Contests and Sweepstakes Law

Contests and Sweepstakes Law: A Guide Through the Legal Jungle Practice Manual provides marketing, business, and legal professionals with understandable answers and guidelines to their questions about contests and sweepstakes law. This 498-page book provides best practice suggestions for maximizing the operational success of contests, sweepstakes, and promotions while minimizing the risk of legal problems. It includes an overview of federal law as well as a separate, detailed legal synopsis for each state. Get a complimentary 40-page excerpt of the book here.

10 Common Legal Mistakes for Contests and Sweepstakes Promotions – Part One, Nos. 1 - 5

Contests and sweepstakes must comply with an assortment of federal and state laws, regulations, and rules. In this two-part blog posting, I outline ten areas of contests and sweepstakes law featured in my book on Contests and Sweepstakes Law (Get a free 40-page excerpt of the book here).

HERE ARE LEGAL PITFALLS TO AVOID WHEN SPONSORING A CONTEST OR SWEEPSTAKES:

1. Offering an Illegal Lottery or Gambling Game

Many laws relevant to contests and sweepstakes focus on preventing the promotion from being an illegal lottery or illegal gambling game. A lottery combines the three elements of chance, prize, and consideration.

To avoid being a lottery, a legal contest or sweepstakes may have only two of these three elements. Sweepstakes have the elements of chance and prize. Contests have the elements of prize and potentially consideration. (Read why non-profit raffles are the exception to this rule and why raffles are promotions that may combine all three elements of chance, prize, and consideration.)

What qualifies as chance, consideration, and a prize is not always straight-forward. As a result, sponsors sometimes inadvertently structure their promotions in a manner that turns their otherwise legal contest or sweepstakes into an illegal lottery or gambling game.

2. Failing to Provide Entrants with Complete Rules

I often see the statement that all contests and sweepstakes must have official rules. This statement is not completely accurate.

There are certainly circumstances in which sponsors are legally required to have official rules and to make those rules publicly available. For example, promotions requiring rules include a promotion in which the sponsor uses direct mail, a promotion offered by a broadcast station, and a promotion offered on a social media platform requiring rules.

There are many types of contests and sweepstakes and there is not one general law that requires written rules for all of them. Hence, in some circumstances, having published promotion rules might not be legally required. Nevertheless, it is always a good idea for a contest or sweepstakes to have written official rules.

Promotion rules serve as the contract between the sponsor and each participant. Well-written rules are one of the sponsor’s best defenses to complaints from disgruntled entrants, inquiries from government regulators, and promotion mistakes.

3. Making the Official Rules Hard to Find

Consumers interested in the promotion should be able to obtain or access a copy of the rules with ease. Sponsors of online promotions should not require a social media connection or other like-gating techniques as a prerequisite to seeing the complete official rules.

4. Diverging from the Official Rules

To obtain the maximum value from written official rules, the sponsor must adhere to them. A sponsor’s failure to follow its own rules can lead to accusations of fraud, lawsuits from entrants, and negative interest from state attorney generals.

5. Offering an Invalid Free Alternative Method of Entry (AMOE).

The “no purchase required necessary” language means that entrants in chance-based sweepstakes must be able to participate without making any payment. If, for example, consumers are automatically entered into a sweepstakes when making a purchase, the sweepstakes sponsor must also offer an entry method that requires no purchase – often referred to as a free alternative method of entry, or AMOE for short.

Sometimes sponsors do not realize their contest or sweepstakes requires payment (referred to as consideration in the promotions law context). While money qualifies as consideration, consideration is not limited to money. Other factors that might qualify as payment or consideration include the following:

• Requiring significant effort or personal information from entrants
• Requiring participants to submit entries of original photos, videos, and other original content (depending on the structure of the promotion)
• Accepting entries via text message
• Restricting entry to paying customers

PART TWO OF THIS BLOG POSTING INCLUDES MISTAKES SIX - TEN.

Free 40-Page Excerpt of Contests and Sweepstakes Law Book

Download a complimentary 40-page excerpt of

Contests and Sweepstakes Law
A Guide Through the Legal Jungle Practice Manual

Book Highlights

• Detailed discussion of contests and sweepstakes laws, rules and regulations by state
• Extensive table of contents, an annotated checklist, and cross-references facilitate skimming and locating specific information quickly
• Best practice suggestions for
  • official contests and sweepstakes rules
  • social media and online sweepstakes and contests
  • use of public voting
  • avoidance of copyright and rights clearance problems
  • compliance with state raffle and bingo laws, regulations, and rules
  • prize awards of real estate, travel, and luxury items
  • use of direct mail and telemarketing
  • children as participants
  • fantasy league sports competitions
  • collaborations with non-profit organizations and charitable causes

Attorneys and Legal Professionals, use the book to jumpstart your legal analysis and save hours of research time with the synopsis and citations provided for United States federal law and the laws of each state.

Marketing and Business Professionals, use the book to get comprehensive contests and sweepstakes legal information. Maximize the efficiency of your interactions with your contests and sweepstakes lawyer by identifying the components of your promotion that require legal review.

MORE DETAILS:

Contests and Sweepstakes Law: A Guide Through the Legal Jungle Practice Manual. Authored by Joy R. Butler, Published by Sashay Communications, ISBN: 978-9672940-6-3, 498 pages, hardcover, trim size 6 x 9, retail price $225.

The Complete Book is available for purchase at the book website and at online and retail bookstores including amazon.com and barnes & noble. Free 40-page excerpt is available here.

New Book on Contests and Sweepstakes Laws

Contests and Sweepstakes Law
A Guide Through the Legal Jungle Practice Manual

Contest and sweepstakes sponsors must comply with an assortment of federal and state laws. This 498-page book provides an overview of the United States federal and state laws that govern contests, sweepstakes, and other prize promotions. It also includes best practice suggestions for maximizing the operational success of promotions while minimizing the risk of legal problems. The book consists of three parts:

Part One, Introduction, includes a detailed checklist that helps readers spot legal issues and then refers them to subsequent sections of the book for greater explanation.

Part Two, Overview, addresses the legal issues one should consider when launching a promotion in the United States and provides guidance for multiple types of promotions including skill-based contests, in-package sweepstakes, fantasy sports competitions, raffles, and cause marketing.

Part Three, Summaries of State Laws, includes a separate summary for each state and for the District of Columbia discussing the laws most relevant to contests and sweepstakes in that state.

Get a complimentary 40-page excerpt of the book here.

MORE DETAILS

PRWeek Offers Ebook on Social Media Contests and Sweepstakes

PRWeek just released a 9-page ebook, “Eye on the Prize: How Brands are Winning with Social Media Contests and Sweepstakes” by Tanya Lewis. The ebook includes a legal tips sidebar with quotes from my work on my forthcoming book on contests and sweepstakes law.

You can download a free copy of the PRWeek ebook here.

The ebook covers several topics of interest to companies considering promotional contests such as the importance of selecting the right prize, popularity of available social media outlets, and methods for deepening engagement and measuring success. Some of the ebook discussion points that really captured my attention include the following:

Fantasy Prizes. I often recommend that sponsors consider non-monetary fantasy prizes. Fantasy prizes can achieve three valuable objectives:

• provide a prize that contest winners value highly,

• avoid the negative tax consequences (for the winner) that can come from winning an expensive prize such as a car, and

• lower - or even eliminate - the cost to the sponsor for acquiring the prize to be offered.

The PRWeek ebook interviewees had some excellent fantasy prize examples. My favorite was the opportunity to deliver on-stage an Oscar statue during the 2013 Oscars award program. That was the fantasy prize for a video-submission contest targeting aspiring filmmakers and sponsored by The Academy of Motion Picture Arts and Sciences.

Publicity Releases. While talking about a photo submission promotion, a marketing director commented that the sponsor does not make any external use of entrant’s photos without the entrant’s permission. Getting appropriate releases and permissions is crucial! Otherwise, a winner might have a privacy or right of publicity claim against the sponsor. I talked about such a scenario in a recent blog post, “A Cautionary Tale: Contest Sponsor Loses Avoidable Lawsuit”.

A Cautionary Tale: Contest Sponsor Loses Avoidable Lawsuit

What Led to the Lawsuit Against the Contest Sponsor?

In spring 2009, Prairie Ridge Media, publisher of the McHenry County Living magazine, sponsored the Gardens in the County gardening competition open to residents of McHenry County, Illinois. Karen Trannell was a finalist in the gardening competition and Prairie Ridge sent a photographer to her home for a photo shoot. Prairie Ridge used photos depicting Ms. Trannel in her home garden in two places:

• the autumn 2009 issue of McHenry County Living magazine which featured photos of the gardening competition winners and their gardens

• On the cover of a marketing brochure used by McHenry County Living magazine to solicit advertisers

Prairie Ridge did not obtain a release from Ms. Trannel for either use of her image. Ms. Trannel sued Prairie Ridge alleging unauthorized appropriation of her likeness and violation of the Illinois Right of Publicity Act.

What Happened in the Right of Publicity Lawsuit Against the Contest Sponsor?

An Illinois court concluded that Prairie Ridge’s use of Ms. Trannel’s photo in the McHenry County Living magazine segment featuring the gardening competition qualified as news and was, therefore, not a violation of Illinois right of publicity laws. While the court opinion does not discuss implied consents, in my view, Ms. Trannel gave an implied consent for the use in the magazine since she allowed the photographer to take her picture and knew those photos would be used in connection with the gardening competition.

The second use is different. The Illinois court concluded that the use of Ms. Trannel’s photo in the marketing brochure was a commercial use and did violate the Illinois Right of Publicity Act since Prairie Ridge used the photo without Ms. Trannel’s written consent.

How Much Did those Right of Publicity Mistakes Cost the Contest Sponsor?

$2,000 in Damages. Since Ms. Trannel could not prove actual damages or profits from the unauthorized use of her image, her damages were limited to statutory damages - $1,000 for herself and $1,000 for her daughter who also appeared in the photo.

No Punitive Damages. The court denied punitive damages to Ms. Trannel finding that Prairie Media had not willfully violated Ms. Trannel’s publicity rights. One of the things Prairie Media did right was to stop using Ms. Trannel’s photo in the marketing brochure after Ms. Trannel complained about the use. That remedial action had significant impact on saving Prairie Media from punitive damages.

Legal Fees Largest Expense. $2,000 is not a huge loss for Prairie Ridge – that is, until you factor in legal fees. The legal proceeding was fully litigated before the Circuit Court of McHenry County and then appealed to the Appellate Court of Illinois. That had to be costly. My guess is tens of thousands of dollars. To top that off, there is the outstanding possibility that Prairie Media may also have to pay Ms. Trannel’s attorney fees. The appellate court sent the matter back down to the lower circuit court to determine whether Prairie Media should be made to pay Ms. Trannel’s attorney fees.

How Contest Sponsor Could Have Easily Avoided this Right of Publicity Lawsuit?

From Prairie Media’s perspective, this lawsuit should have never happened! It was so easily avoidable. Contest rules form a binding contract between the contest sponsor and the contest entrant. A sentence such as the following in the Gardens in the County contest rules could have prevented this lawsuit:

Except where prohibited, participation in the contest constitutes entrant’s consent to contest sponsor’s use of entrant’s name, image, and/or biographical information for promotional purposes in any media, worldwide, without further payment or consideration.

Balough Law Offices, LLC, which represents Ms. Trannel in this matter, kindly provided me with a copy of the written rules used by Prairie Media for the Gardens in the County contest. While shorter than most contest rules, Prairie Media’s contest rules did contain some important terms useful for protecting contest sponsors such as the qualifications of the judges and the criteria on which the winners would be selected. Unfortunately for Prairie Media, the rules did not include a publicity release.

Since there was no publicity release in the contest rules, why, oh why, did Prairie Media not obtain a written release when the photographer went to Ms. Trannel’s home? Written releases need not be complicated or long. A very simple written release can be effective. In Prairie Media’s situation, one sentence such as the following likely would have saved Prairie Media from a lot of legal headaches and expense:

I give Prairie Media my permission to use my image and name in the McHenry County Living magazine and in connection with marketing the magazine in all media and territories.

The case is Trannel v. Prairie Ridge Media. You can read the appellate court’s full decision here.

Why Your Non-Profit May Not Be Able to Sell Raffle Tickets Online

Many non-profits cannot legally sell raffle tickets online . . .

What Is a Traditional Raffle

In a traditional raffle, the raffle sponsor sells tickets and selects a winning ticket via a random drawing. This is gambling and gambling (as a general rule with some limited exceptions) is illegal. As one of those exceptions, most states allow non-profits and other charitable organizations to offer raffles for fund-raising purposes.

Raffle Laws Vary by State

Since non-profit raffles are an exception to the state’s anti-gambling laws, the non-profit needs to make sure its raffle is in compliance with its state’s raffle laws and regulations. Raffle laws vary from state-to-state. This is where the online sale of raffle tickets might be problematic. Typically, the non-profit’s raffle is legal only in the state in which the non-profit is located. Hence, there may be issues if the non-profit sells raffle tickets across state lines. A non-profit that has locations in multiple states may be able to offer a separate raffle in each of those states but may have more difficulty coordinating compliance with differing state laws to offer one raffle across multiple states. Some states explicitly prohibit the sale of raffle tickets online.

Raffles Have Different Rules than Contests and Sweepstakes

Are you thinking that you see online sweepstakes and contests promoted and operated online all the time? That’s legal – and different.

Properly structured contests and sweepstakes are not gambling because they do not combine all three elements of (i) pay-to-play, (ii) prize, and (iii) random drawing. A promotion with all three of these elements is a lottery (i.e., form of gambling). A promotion with only one or two of these elements is not a lottery. In promotion/gambling legalese, these elements are sometimes referred to as consideration, prize, and chance.

Sweepstakes have a prize and random drawing (chance). Contests have pay-to-play (consideration) and prize. Traditional raffles have pay-to-play (consideration), prize, and random drawing (chance).

For More Information on Non-Profit Raffles

Contests and Sweepstakes Law: A Guide Through the Legal Jungle Practice Manual includes a general discussion of typical requirements found in state raffle laws. As part of the detailed legal summary for each state, there is a discussion of each state’s raffle and bingo laws. The book’s appendix also provides a table summarizing raffle laws for easy state-by-state comparison. Get a complimentary 40-page excerpt of the book here.