Certain provisions of the Gambling Act 2005 (the “Act”) came into force on 1 September 2007 (the “New Law”), introducing material changes to the legislative regime governing marketing through sales promotions, prize draws and competitions. The Act replaces the Lotteries & Amusements Act 1976 (the “Old Law”). The New Law helpfully clarifies the distinction between lotteries, which are subject to regulation under the Act, and product promotions that are not subject to regulation under the Act. This should make it much easier for companies to use prize draws and competitions as marketing tools without straying into the regulated territory of lotteries. For example, under the New Law it will be possible to run on pack promotions where participants are required to purchase the product before they can enter without the need for offering an alternative free entry route. The New Law will on the whole be a welcome change for promoters, but there are certain pitfalls that companies still need to be wary of when structuring sales promotions.

Position under the Old Law

Under the Old Law, a promotion was classified as an illegal lottery if three elements were present: (1) a distribution of prizes; (2) distribution by chance; and (3) payment by the entrant to participate in that chance. This last element was given a broad interpretation and was deemed to be satisfied where entry was conditional upon the purchase of the promotional product. The requirement to purchase, even at the normal cost of the product, was seen as payment to enter making the promotion an illegal lottery. To get round this, promoters in the main relied on two types of promotions (with certain variations on theme). Promotions were structured with a “purchase not necessary” rule, offering an alternative free to enter route to participate (thereby eliminating the payment to enter requirement of a lottery). Where it was not possible to offer a free entry route, the promotion was structured as a skills based competition usually with a tie break question (thereby eliminating the distribution by chance requirement of a lottery). Changes in the New Law have resulted in the free to enter method becoming easier but the skills based competition route potentially becoming more difficult due to the introduction of a new skills test.

Purchase not necessary rule and Northern Ireland

Under the New Law, the Act introduces a statutory definition of a lottery including clarification and a narrowing of what constitutes payment to enter. As long as the price of a product or service to which the promotion relates is not increased as a result of the promotion, the requirement to purchase a product will no longer constitute payment to enter. This will make the “purchase not necessary” rule redundant in the majority of cases for standard product promotions doing away with the administrative burden of having to offer an alternative free entry route. At the moment, the Act does not have effect in Northern Ireland where sales promotions are still governed by The Betting, Gaming, Lotteries and Amusements (Northern Ireland) Order 1985, which is based on the Old Law. Accordingly, before promoters disregard the “purchase not necessary” rule altogether, they need to think very carefully about how to handle promotions that extend to Northern Ireland.

Skills based competitions

Previously, as long as the chances of winning a prize were based substantially on skill, the level of skill involved did not matter. This led to questions such as ‘Which breakfast cereal is jumbled up in these letters: “cnorfalkes”’, with the intention being to get a big a response as possible. The Act introduces a measurement of difficulty for skills based competitions. Any promotion which requires persons to exercise skill (including judgement or display of knowledge), will be treated as relying wholly on chance (making it an unlawful lottery) if the skills requirement cannot reasonably be expected to:

(a) prevent a significant proportion of persons who wish to participate from participating; or

(b) prevent a significant proportion of persons who participate from having a chance of winning the prize.

The Act does not contain any definition of what constitutes “reasonable expectation” or “significant proportion”. The Gambling Commission, a new body set up to regulate the Act, has issued some guidance on the practical effects of this change. The guidance states that in some cases it will be obvious that the difficulty threshold has been satisfied – e.g. a crossword puzzle where entrants have to solve a large number of clues is clearly likely to satisfy the requirement. However, promotions that ask just a simple question, the answer to which is widely and commonly known or is blatantly obvious, is likely not to meet the test. The Commission goes on to state that the onus will be on the promoters to produce evidence that they have taken steps to form their “reasonable expectation” that the promotion would satisfy the test.

This change will undoubtedly make it more uncertain when running pure skills based promotions. However, in most cases, the new skills test may not be much of a problem for promotional product marketing where there is no “payment to enter” under the new narrower definition of that term as that alone will make it sufficient for the competition to bypass the lottery definition. It will only pose a problem where there is a clear payment to enter requirement (e.g. an entrance fee or a premium phone line) without there being a valid alternative free entry route.

In summary, the narrowing of the definition of “payment to enter” is a welcome change which will make it easier to market products through prize draws and competitions. However, due to the discrepancy with Northern Ireland, promoters may choose to either exclude Northern Ireland from certain promotions or, rather then running a separate promotion for Northern Ireland, simply continue running promotions under the Old Law. It will also be interesting to see how the introduction of a skills test impacts upon promotional competitions. Although the Commission guidance on this is of some help, we will have to wait until the court gets an opportunity to interpret these provisions before we can judge the real impact the skills test will have.