Promotional contests and sweepstakes can be a cost-effective and dynamic marketing tool, especially when used in combination with Internet and mobile marketplaces. Despite the appeal, there are myriad state and federal laws that apply to such games, and any would-be sweepstakes operator could incur substantial legal liability if these laws are not followed closely.

Games of Skill vs. Games of Chance

It is essential to first identify the nature of the promotional game itself. There are, generally speaking, two categories of promotional games: games of “skill” and games of “chance.” Games of skill are typically easier to operate because they have fewer legal obstacles. However, some games of skill can run afoul of anti-gambling laws depending on the structure of the prizes awarded and the level and degree of participation of the entity that is running the game.

Games of chance, on the other hand, are considered illegal lotteries in each state, unless one of the following three elements that comprise a lottery is removed: (1) a prize awarded to the winner; (2) chance in determining the winner; and (3) consideration for entry in the game. Because removal of the prize undermines the promotional aspect of the game, and because chance is hard to eliminate entirely (many states find that even a small trace of chance in determining the winner satisfies the “chance” element), consideration is the element most frequently removed.

Consideration can be eliminated by offering a free, alternative means of entry that does not require a purchase or other costly action. However, in order to qualify as an elimination of consideration, the free, alternative entries must be afforded the same opportunity of winning as entries from consumers that made purchases or otherwise paid to enter the contest.

Rules, Rules, Rules

The nature and amount of the prize(s) to be awarded, and the process of awarding those prizes, can also present challenges. Depending on the jurisdiction, a sweepstakes operator may have to register and bond the contest, retain an unaffiliated third party to conduct the applicable drawing and/or offer cash equivalents as alternatives to merchandise prizes.

In addition, it is crucial that you determine all key aspects of the contest or promotion (duration, prize amounts, number of prizes, etc.) ahead of time, because once a promotion commences, and the rules are published, it is next to impossible to legally alter material terms. It is highly recommended that you retain qualified legal counsel to ensure that you get the contest rules right in advance, as well as to avoid the numerous potential legal pitfalls that loom if the contest is not operated in compliance with applicable law.