Caribbean cruises, red sports cars, diamond rings, $1,000,000 checks – for years companies have used sweepstakes and similar promotions to advertise and draw customers to their products. Sweepstakes that are well planned enhance good will and can generate brand awareness and sales. However, over the years such promotions have grown increasingly more sophisticated and the method of conducting them more regulated. Companies need to be aware of federal and state regulations when conducting sweepstakes and similar promotions. For example sweepstakes are governed by a collection of sometimes inconsistent laws.

Private lotteries or raffles (unless charitable) are illegal in most states. Federal and state jurisdictions define a lottery as a promotion that contains three elements: (i) a prize, (ii) chance, and (iii) consideration. A prize is defined as anything of value awarded to the winner. Chance is self defining and typically involves selecting a winner by a random method over which the entrant has no control. Consideration takes two forms: monetary, in which the entrant must expend something of tangible value to participate, or non-monetary, where the entrant must spend a substantial amount of time or effort which will benefit the sponsor. In order to conduct a legitimate sweepstakes or similar promotion, companies must eliminate one of the three elements.

Companies conducting promotions typically eliminate either the element of chance or consideration as a prize always is involved. For example, a scratch-off card that states a person will win a prize under the scratch-off label would not be a lottery as no element of chance is involved, i.e. the prize will be awarded. Many promotions involve chance and therefore the element of consideration must be eliminated.

Not only must sweepstakes be structured in accordance with applicable federal and states laws, these laws also dictate how the promotions must be conducted. Generally speaking, federal and state law requires specific statements to be contained in the official rules which must be provided to every entrant. Federally, the Federal Deception Mail Prevention Enforcement Act imposes various other restrictions on sweepstakes which involve the mail. New York and Florida require companies to obtain a surety bond and register if the total amount of prizes awarded exceeds $5,000. These filings must be completed in New York and Florida at least thirty days and seven days, respectively, prior to the start of the promotion.

Companies should have detailed official rules for the sweepstakes. There are certain provisions that should appear in all rules including, but not limited to, (i) method of entry, (ii) method of determining winners, (iii) odds of winning, (iv) eligibility (age, resident, exclusion of employees and family members of sponsor), (v) duration (commencement date and termination date), (vi) award date, (vii) language that no purchase is necessary (viii) the random nature of the drawing, (ix) limitation of sponsor’s liability, (x) entrant’s liability for taxes, (xi) detailed information concerning the prizes, (xii) requirement of affidavit of eligibility and liability and publicity release, and (xiii) availability of a winners list.

The contents of sweepstakes rules often times depend on the type of prize being awarded. If a company is awarding a travel prize, it should disclose exactly what is included in the prize, including the number of travelers (including the winner), airfare (coach or first class, one way or round trip), accommodations (hotel name, occupancy or rating), ground transportation, (car rental, shuttle bus), meals (specific meals, locations or limitations), and additional tickets (events, concerts or others). If a company awards an automobile, it should describe (i) whether it is new or used, (ii) the make, model, and year, (iii) whether it is standard or automatic, (iv) the entrant’s responsibility for tax, title, license and insurance, and (v) any limitation on the legal age of the winner.

Depending on the type of prize awarded, a company should consider obtaining releases and waivers of liability from winners. For example, if the prize is a cruise trip, a company should get a written waiver of any liability occurring as a result of any injury to the winner when participating in cruise activities. In addition, a company may want to obtain an affidavit from winners to further protect itself from liability. If a car is awarded, the winner would certify in the affidavit that, among other items, that he or she has a valid driver’s license and that the car is covered by insurance.

Legal issues do not stop once a prize is awarded. If a company wants to use information concerning the winner in company promotions or otherwise, it should obtain a publicity release from the winner. Tax Form 1099 may be required to be filed with the Internal Revenue Service in connection with the award of a prize. The winner should be informed that he or she is responsible for all taxes, including sales and income taxes. Companies also should be mindful of the growing number of prize and gift notification statutes.

Online promotions present an additional level of complexity. The Internet has raised new issues with respect to the implementation of a sweepstakes. The issue as to whether Internet access constitutes consideration under the law has not been fully resolved. The best solution is to provide an alternative method of entry, such as by mail or facsimile. Alternative methods of entry must be treated with equal dignity as compared to entries submitted by other methods. Because the vast array of regulations regarding sweepstakes takes place on the state level, online sweepstakes which reach across the entire Internet must take into account the laws of all fifty states. At times, it may be difficult to tell who the entrant really is. In a dispute as to who submitted the entry, a company should provide that the entrant will be determined by who established the email account. A company should also consider requiring that an entrant scroll down through the rules and click “I accept” before entering.

To summarize, among the steps a company can take to minimize or avoid legal issues in conducting a promotion are: (i) establish and follow official rules, (ii) be aware of complying with various state laws regulating the specific type of promotion offered and (iii) when applicable, obtain liability releases, affidavits of eligibility and publicity releases. Promotions can be a successful marketing tool if properly conducted.