In February of this year, the Federal Trade Commission (“FTC”) and Missouri State officials brought charges against a network of Kansas City area businesses (“Defendants”) which allegedly had used deceptive sweepstakes and other prize mailers to bilk consumers out of more than $100 million. The complaint alleges that Defendants sent prize notices to consumers, claiming that they had won a prize and, in order to receive that prize, consumers would have to pay an acquisition fee of anywhere from $11.89 to $139.99. Additionally, Defendants sent mailers to consumers, offering cash prizes if they could answer a simple arithmetic question and pay a registration fee of anywhere from $9 to $45. In reality, answering the arithmetic question entered consumers into a contest that had multiple rounds of mathematical puzzles, which required additional fees, and eventually ended with a puzzle that very few people, if any, could solve.
In July of this year, a federal judge had frozen the assets of the Defendants because he believed that the state and federal governments were likely to prevail on the merits of the case. Defendants were back in court last week to ask a federal judge in Kansas City to increase their living expenses from $18,000 a month to roughly $45,000 a month. The judge was not persuaded by their arguments and has ordered the Defendants’ assets to remain frozen.
How can I run a legitimate sweepstakes or contest promotion?
In general, a lottery is defined as requiring: 1) consideration; 2) for an opportunity to win a prize; 3) in a game of chance. Most states reserve the right to conduct lotteries and deem it illegal for businesses to conduct promotions containing all three of the foregoing elements. Notwithstanding the foregoing, the consideration element may be removed to create a sweepstakes, or the element of skill can replace chance to create a contest. Sweepstakes and contests can be beneficial promotional tools when conducted correctly. However, when done incorrectly, businesses can suffer negative publicity and risk civil and criminal punishment.
A sweepstakes is a game of chance, where prize winners are selected at random. To be a legal sweepstakes promotion, the sponsor of the event must offer an alternative method of entry where consideration is otherwise required in order to participate. Promotion sponsors should be aware of the fact that consideration is not limited to entry fees alone. Additional categories of consideration include filling out long, detailed surveys, signing up for offers, or being required to post multiple pictures on social media. Please note that the alternative means of entry requirement can be satisfied by offering entry via mail, over the phone, or on a website.
As we have discussed in previous blogs, some states require sweepstakes sponsors to register and bond their promotions. Both Florida and New York require registration and bonding if the value of the prizes in a given promotional contest (in the aggregate) exceeds $5,000, and Rhode Island requires registration if the prize amount exceeds $500 (in the aggregate) for brick and mortar retail establishment only promotions.
Contests/Games of Skill
When the element of chance is substituted by skill, a lottery becomes a contest. The degree of skill required to be deemed a contest is unique in each jurisdiction. Previously, we have blogged about the tests that states employ to determine whether a given promotion is a game of skill or chance. A majority of states use the “dominant factor” test. According to this test, if chance is the dominant factor in determining the outcome in a given promotion, then the game will not be considered a game of skill and likely will be found to be an illegal lottery. Other states use the “material element” test. Under the material element test, a game is considered illegal gambling where chance is considered a “material element” in a game, even where the game would otherwise be one of skill. Finally, some states deem games to be illegal lotteries where any element of chance is present. Please note that, even after removing the element of chance, some states have restrictions on the amount of consideration that is allowed for participation. For example, Maryland prohibits a purchase or payment requirement for skill contests in which the prize values are greater than $200. When businesses employ promotional games as a means to advertise goods or services, it is crucial to comply with applicable federal and state laws. Experienced counsel can help protect businesses from running afoul of these regulations.