Editor’s Note: Prize promotions—such as sweepstakes, contests and giveaways—are popular and effective ways for healthcare organizations to attract, engage and retain customers; increase brand awareness; and, for nonprofits, raise funds. They also are governed, however, by a vast array of state and federal laws. Those unaware of the regulations may find themselves facing serious legal and public relations repercussions—including significant fines and even criminal prosecution in some states.

How can you safely navigate the potential minefield of laws and regulations governing prize promotions? How can you reap the business rewards without triggering the legal risks? And what added regulatory issues increase the complexity for healthcare organizations? Manatt shared the answers in a recent webinar. In part 1 of our article summarizing the webinar, below, we define key terms and share some basic principles critical for organizations planning prize promotions. Watch for part 2 of our summary in the August “Health Update” focusing on laws specific to healthcare companies, as well as social media and user-generated content promotion. Click here to view the full webinar—and here to download a free copy of the webinar presentation.

Key Terms

Before addressing legal requirements and compliance practices, it is important to understand the terminology used in discussing prize promotions. For each term, it is key to consider the combination of individual elements involved:

  • Prize—something of value awarded to the winners
  • Game of chance—a prize promotion where the winner selection is random, such as a prize drawing
  • Game of skill—a prize promotion where the winner is determined on the basis of a bona fide skill, such as speed, strategy, talent, athletic ability or knowledge 
  • Consideration—something of value (such as a payment or purchase) or that has a commercial benefit to the sponsor or is a burden to the entrant, that is required to participate
  • Sponsor—the entity that operates, promotes or conducts the promotion

Each type of prize promotion has a different mix of these elements. A lottery has three of the elements. It offers a prize, is based on chance and requires payment to enter. Lotteries are illegal under federal law and in all 50 states, except for limited exceptions.

Sweepstakes—also known as games of chance—have two elements. They award a prize, and winning is based on chance. Sweepstakes are legal but are subject to state-level prize promotion laws.

Contests—also known as games of skill—always include a prize and chance as elements. Contests can sometimes also include consideration, such as an entry fee. Like sweepstakes, contests are legal though subject to state-level prize promotion laws.

“Raffle” is a term that’s often used interchangeably with “sweepstakes”—but raffles are typically illegal under both state and federal law, with certain exceptions related to charities. Raffles are illegal because, like lotteries, they have three elements—offering a prize, depending on chance and requiring consideration (or payment) to enter. 

Finally, the term “giveaway” is loosely used to refer to any promotion that gives away something of value. Not all giveaways are subject to prize promotion laws.

What Is a Prize Promotion? And When Is It a Game of Chance vs. a Game of Skill?

To be considered a prize promotion, something of value must be given away. Basically, there must be an actual prize. “Bragging rights,” for example, are not deemed to be prizes.

If there is something of value being given away, the next point to consider is whether the item is a free gift or a prize promotion. If all participants are getting the same gift—and therefore there is no element of chance—then it is a free gift promotion. If all participants are getting some kind of prize but the value of the items differs, then the promotion would be considered a game of chance. (The fact that there are different prizes with different values introduces the element of chance.) 

If there are a limited number of free gifts, the promotion could be considered a game of chance. Limited supply promotions are not generally deemed to be prize promotions—but it is key to ensure that the supply meets the anticipated demand. If there are only a few gifts available and the expected demand is high, the element of chance is introduced.

If the promotion is a prize promotion, it’s critical to determine whether it involves a game of chance (a sweepstakes) or a game of skill (a contest). The distinction is important because different requirements apply to games of chance vs. games of skill. For the game to qualify as a game of skill, the winner must be selected based on a particular skill or talent, such as solving a puzzle, writing an essay or answering trivia questions. For games of skill, both the judges and the judging criteria must be disclosed. When disclosing the criteria—such as creativity, originality and strategy—it also is a requirement to include the percentage allocated to each criterion when judges make their decisions. 

What about popular voting contests? Those could be problematic because there are no objective judging criteria. They could be considered games of chance, because the winner selection is not based on any skill but simply on popularity.

Where there is an element of chance involved at some point during the winner selection process, states generally apply one of the three common tests:

  • Dominant factor test (Is chance or skill the dominant factor in determining the outcome?)
  • Material element test (Is chance a material element in determining the outcome?)
  • Any chance test (Is there any chance involved in determining the outcome?)

For nationwide sweepstakes, organizations need to go with a common denominator. If an organization is holding a limited sweepstakes in one particular state, however, it is advisable to understand the laws of that particular state and determine which test is applied.

What if there is a tie? It’s important that, in determining how to break the tie, no elements of chance are introduced. In a game of skill, tiebreakers need to be based on a skill rather than a random drawing, such as putting all entries with a winning score into a hat.

Why Is Consideration Critical?

Consideration is key, because it’s central to determining whether a prize promotion is legal or not. Methods of entry for prize promotions are allowed to include purchase, payment or substantial effort as long as the following requirements are met:

  • A free, alternative method of entry (AMOE) is provided, such as a mail-in, online or in-store entry option.
  • The free AMOE is clearly and conspicuously discussed, prior to purchase and in equal prominence with the payment/purchase methods. Footnotes in print ads or brief announcements at the end of radio commercials are not sufficient.
  • Free AMOE entries must have “equal dignity” with payment/purchase entries. Every entry—regardless of method—must be treated the same way.  

It is critical to remember that sweepstakes cannot require consideration or they will be deemed illegal under state gambling laws. Contests, however, are allowed to require consideration, with a few exceptions. 

What Are the Requirements Around Prizes?

All prize promotions must include a clear description of the prize, including the approximate retail value (ARV) of each prize and the ARV of all prizes. The ARV must be based on the fair market value of the prizes, not how much it cost the sponsor to obtain them. 

Sponsors must disclose any prize limitations and exclusions. For example, if the prize is a ticket to an event, sponsors must clearly disclose whether or not travel is included. In addition, be careful to avoid requiring the winner to do something more—such as make a payment or purchase—to use the prize. For instance, providing a coupon could be problematic, because certain states have post-consideration bans which prohibit requiring consideration to receive or utilize the prize. 

It is also important to disclose that payment of taxes is the winner’s responsibility and to provide the winner with a 1099 form if the prize’s value exceeds $600. In addition, sponsors should verify the winner to be sure he or she has, in fact, met all eligibility requirements. If the prize is a high-value item, the winner should sign an affidavit of eligibility and a liability release. These documents are particularly important if the prize includes travel. If the prize covers travel for a guest in addition to the winner, the guest also should be required to sign a release.    

In addition, there are registration and bonding requirements to keep in mind. Both Florida and New York, for example, require registration and bonding if the total value of prizes—the value of all the prizes combined, not each individual prize—exceeds $5,000. The registration and bonding requirement applies only to sweepstakes, not to contests or trade promotions. Registration and bonding are required at least seven days prior to the promotion’s start date in Florida and 30 days prior in New York. New York usually will accept late registrations, but Florida will not.

Rhode Island requires registration if the total value of the prizes exceeds $500. The requirement only applies, however, to consumer promotions conducted by retailers. There is no specific advance registration requirement.

What Needs to Be Included in the Official Rules?

The official rules are basically a contract between the participants and the sponsor. The official rules should be easily available to entrants and cannot be amended once the promotion starts. At a minimum, the official rules should include:

  • The fact that no purchase is necessary,
  • Start and end dates,
  • Odds of winning,
  • Any disclaimers/releases,
  • Eligibility requirements,
  • Limits on entry (if any),
  • Winner selection/verification process,
  • The sponsor’s name and address,
  • How to enter,
  • A description of the prize,
  • The prize fulfillment process, and
  • Information on how to obtain the list of winners.

What Needs to Be Disclosed in Advertising for Prize Promotions?

There are specific disclosures that need to be made in advertising and marketing collateral for prize promotions. The disclosures are required across all media—print, broadcast, website, social media and in-store. The disclosures include “no purchase necessary” (for sweepstakes); void where prohibited; eligibility requirements; how to enter; sponsor name and contact information; a description of the prize, including the ARV; the odds of winning; and how to obtain a copy of the official rules. Typically, attorneys or sweepstakes agencies will provide the sponsor with abbreviated disclosures that can be included on different platforms.  

For Internet ads, sponsors must be sure that the key material terms are disclosed in a prominent manner. There should not be the need to scroll or click through multiple pages to find the information.