With the economy still in the doldrums, many advertisers simply do not have millions of dollars to spend on advertising campaigns. But they do have $50,000 - $75,000 to spend on an Internet sweepstakes, and advertisers, even major ones, have increasingly turned to social networks like Facebook, YouTube and Twitter to run sweepstakes, which can be promoted through various advertising networks.

Lurking Problems?

Online promotions and sweepstakes are subject to all laws and regulations that apply to those conducted through traditional media. As defined under both federal and state laws, an illegal lottery is one in which all three elements are present: Prize, Chance and Consideration. Prizes can be anything of value awarded to winners; chance entails that winners be selected by a random process; and consideration takes two basic forms: monetary involving a payment or, in a few states, non-monetary where the consumer expends substantial time or effort benefiting the sponsor in some direct way. Consideration has been a problem where the consumer was required to purchase something to enter the sweepstakes. This has been resolved by providing a viable, free, alternate method of entry. However, questions have been raised when the sweepstakes allowed consumers to enter by sending a text message that was subject to a charge, even a small one. Providing for an online free method of entry should resolve the problem, but litigation is pending challenging those sweepstakes which provide for entry by a text message, even with an alternate free method of entry.

Online Sweepstakes Are Automatically National in Scope

Since online sweepstakes are automatically national in scope, an online sweepstakes sponsor must comply with the laws of all 50 states (unless states are specifically excluded, which most sponsors are loathe to do). While state laws vary, complying with the most onerous state laws should assure compliance with the laws of all 50 states. This is not as difficult as it sounds, and the inclusion of a few key provisions should satisfy all states. These include: “no purchase necessary to enter;” “purchasing does not improve your chances of winning;” and “odds of winning depend on the number of eligible entries received.” Depending on the state, other disclosures and provisions are needed but none are difficult to fulfill.

Only three states require registration: New York and Florida require registration where the total amount of the prizes is more than $5,000, and both states mandate surety bonds equal to the total. Rhode Island requires registration for sweepstakes conducted at “retail” where the prizes total more than $500 (no bond is necessary), but the Attorney General of Rhode Island recently specified that “retail” sweepstakes include online sweepstakes.

Issues Arise Where Consumer Data Is Sought

Advertisers are discovering that “search-related ads”—text ads that appear when a person conducts a web search via Google, Yahoo, et al.—work. When a consumer clicks on the ad, he or she is then exposed to the sweepstakes promotion. In turn, sweepstakes with desirable prizes are attracting thousands of participants. Advertisers are now moving to the next step – requiring sweepstakes participants to provide contact information. Having a sweepstakes entrant provide his or her mailing address not only is proper but necessary in order to enable the sponsor to contact the sweepstakes winner.

The same appears to be true for telephone numbers; but many advertisers also have made it a condition of participation in the sweepstakes for the consumer to agree that he or she will be amenable to receiving telemarketing calls concerning the sponsor’s goods or services. The idea here is that this creates an “established business relationship” between a seller and a consumer, under the applicable regulations, which would provide an exemption for making telemarketing calls even though the consumer previously has signed on to the national Do-Not-Call list. (It should be noted that any such exemption would not apply to state or company-specific do-not-call lists).

Neither the Federal Trade Commission (FTC) nor the Federal Communications Commission (FCC), who oversees the national Do-Not Call list, has been heard from on this. While the exemption appears to be in literal compliance with the regulations, the FTC or the FCC or both may have a different interpretation.

In addition, an issue of consideration may be raised, particularly in those states where non-monetary consideration has been found to be an element of an illegal lottery. Does requiring a consumer to agree to receive telemarketing calls in order to participate in the sweepstakes cross the line? No state has so declared, but sweepstakes sponsors should keep a wary eye on the situation.