New England Biz Law Update
A sweepstakes promotion can offer a unique marketing opportunity for many businesses. You can generate excitement, buzz, and possibly significant consumer interest in your products by offering prizes that are meaningful to the entrants, yet comparatively inexpensive to your business.
A company should be cautious, however, before organizing a sweepstakes promotion, because a number of laws are potentially in play.
There is one federal law aimed specifically at sweepstakes – the Federal Deceptive Mail Prevention and Enforcement Act – which applies to offers mailed directly to consumers. A company must also comply with the laws of various states, which vary from quite strict to fairly loose. If a company wishes to offer a promotion in Canada, Canadian law must be considered.
Different laws may apply depending on whether the sweepstakes is offered through a direct mailing or as an insert in a magazine. If the promotion crosses state lines, other states’ laws may apply.
Failure to comply with all applicable laws could stall your sweepstakes, and result in an admonishment or fine from an attorney general’s office, or even a consumer fraud complaint.
Avoiding liability
Make sure it’s a sweepstakes. The term “sweepstakes” is defined variably from state to state, but the key aspect is that it allows the consumer to engage in a game of chance for which no “consideration” (payment) is required to enter. This means a contestant cannot be charged anything of value for participating or be required to make any purchase.
Moreover, purchasing a product related to the sweepstakes cannot affect the contestant’s odds of winning. If a contestant is charged anything for entering the sweepstakes, he would be gambling what he was charged in the hope of receiving a valuable prize, and many states have monopolies on gambling (in the form of state lotteries).
Even if a particular state does not prohibit or monopolize gambling, it will have laws regulating gambling that are generally too onerous to comply with in the context of a mass mailing or magazine advertising.
States are strict about making sure that sweepstakes organizers follow the “no consideration” rule.
A sweepstakes promoter should make sure that it is not offering a “game of skill” or “skill contest.” These are promotions consisting of a puzzle, game, competition or other contest where a prize is awarded and the outcome depends predominantly on the skill of the contestant, and for which a purchase, payment, or donation is either required or suggested for entry.
Make rules and follow them. A sweepstakes cannot be offered without rules to organize it, such as the locations where it applies, the prizes offered, the process by which winners will be selected, and estimated chances of winning each prize.
Various states require that certain portions of the rules accompany the promotion. While no law requires that all the rules accompany the sweepstakes offer, they should be available to contestants, either on a website or by mail on request. Making them available will help prevent consumer disgruntlement and will protect the sweepstakes organizer from certain possible claims.
Void in … Some states have sweepstakes laws an organizer may not want to comply with, whether it be an overlong description of the rules that must accompany the sweepstakes offer in some states or a registration requirement in others. While the organizer could simply not advertise the sweepstakes in those states, this might not be economical if the sweepstakes is offered in a nationally-distributed magazine. Furthermore, a resident of the state might receive a copy of the sweepstakes offer in another state.
A common way to avoid such laws is to write “Void in [state]” with the sweepstakes promotion. Doing so allows the organizer to define the geographical scope of the sweepstakes, and pick the state sweepstakes laws with which it needs to comply.
Watch for costly errors. There have been cases where, through imprecise drafting of sweepstakes rules or clerical errors, sweepstakes organizers have picked too many winners by mistake. This could make the organizer of the contest responsible for awarding many more prizes than originally intended.
You can best protect yourself from such contingencies by clarifying your method of picking a winner, by explicitly stating the number and value of prizes to be awarded, and by including a disclaimer – such as “the sponsor is not responsible for any printing or typographical error in any material associated with the sweepstakes.”
Furthermore, an organizer or sponsor may wish to purchase liability insurance to cover the award of too many prizes, although this is a business decision that will vary from situation to situation.
If too many winners are selected, the extent to which regulatory agencies will force the organizer to award prizes to each winner may vary from state to state. The organizer may also face a class action or individual law suits from disgruntled winners who did not receive prizes, which is a further reason to clarify the method of picking a winner or to consider purchasing liability insurance.
Federal law
The Federal Deceptive Mail Prevention and Enforcement Act (39 U.S.C. § 3001(k)) is the only federal law that directly regulates sweepstakes promotions. It applies to any sweepstakes offer delivered through the mail. It does not apply to offers appearing in magazines, newspapers, or other periodicals not directed at particular individuals.
Sweepstakes mailings that fall under this law must make a series of disclosures in the mailing: (1) that no purchase is necessary to enter; (2) that a purchase will not improve the contestant’s chances of winning; (3) all terms and conditions of the promotion, including the rules and entry procedures; (4) the sponsor of the sweepstakes and the sponsor’s mailing address; (5) estimated odds of winning each prize; (6) the quantity, estimated retail value, and nature of each prize; and (7) the schedule of any payments made over time.
While all of these disclosures must be “clearly and conspicuously displayed,” the statements that no purchase is necessary and that a purchase will not affect the chances of winning must be displayed more conspicuously than the other disclosures.
There are also a number of prohibited statements: (i) that someone who does not buy products or services will be disqualified from future offers; (ii) that an entry must be accompanied by an order or payment; and (iii) that a contestant is a winner of a prize unless he has actually won that prize, or anything inconsistent with the required disclosures.
Any organizer who mails a sweepstakes covered by the Act must also set up procedures to respond to requests from individuals that future sweepstakes are not mailed to them, follow those requests, and keep records of such requests for five years.
Although it is not directed specifically to sweepstakes, the Federal Trade Commission has the power to prevent unfair methods of competition under the Federal Trade Commission Act (15 U.S.C. § 45(a)), and can use this power to file complaints against organizers of deceptive sweepstakes promotions.
State laws
Most states do not have a specific law dealing with sweepstakes. However, any sweepstakes should comply with at least the general advice given above, in order to minimize the risk of violating gambling, unfair competition or consumer protection laws.
Of the states that do have sweepstakes-specific laws, they vary as to how much disclosure is required to accompany the sweepstakes offer, as well as whether the law applies only to direct mailings or also to sweepstakes offers in magazines. They also vary as to whether the law applies only to sweepstakes with prizes above a certain amount, and whether the particular sweepstakes must be registered with the state.
Colorado has probably the most restrictive sweepstakes law (Colo. Rev. Stat. §§6-1-802, 6-1-803) in the United States, although, like the federal Act, it applies only to direct mailings. Some of its requirements are very similar to the federal law on direct mail sweepstakes. Its restrictiveness comes from (1) apparently requiring that a copy of the entire rules accompany the direct mailing (though this statute has not yet been interpreted); (2) specific requirements as to type size, font, and location of the required disclosures; and (3) specific additional requirements of what the offer cannot contain.
The Texas sweepstakes law (Tex. Bus.& Com. §45) is also relatively restrictive. Like Colorado, it only applies to sweepstakes offers delivered directly through the mail. Unlike Colorado, the law does not apply to direct mail sweepstakes offers unless the grand prize is worth more than $50,000.
Texas is unusual in not giving a list of disclosures that must accompany the offer (the only required one is that a purchase will not affect chances of winning), although it does bar statements that would contradict the typical disclosures.
Instead, Texas has an unusually long list of prohibited practices. Some of them are similar to those prohibited under the federal Act, but others are new, including: prohibitions on automatically entering individuals in sweepstakes; soliciting business using an order form related to a sweepstakes; using non-identical entry mechanisms; restrictions on allowing an individual to choose his own prize; offering sweepstakes within 30 days of last offering a sweepstakes; asking individuals for personal information; using scratch-off or other devices that might suggest an element of luck; inconsistent descriptions of the prizes; restrictions on awarding multiple prizes; and using multiple addresses to accept entries.
The statute in Illinois (815 Ill. Comp. Stat. 525) applies both to direct mail and magazine sweepstakes. It is limited, however, to offers aimed at a person in the state, or that invite persons to come into the state or contact state residents.
If the sweepstakes rules contain any requirement that contestant pay actual shipping, any restrictions on eligibility, or any groups that have an enhanced chance of receiving a prize, the sweepstakes offer must disclose them.
Illinois is probably the most restrictive statute that applies to sweepstakes conducted through magazines.
Oregon’s law (Or. Rev. St. §646.651(3)-(4)), like Illinois, applies both to direct mail and magazine sweepstakes. It requires a clear and conspicuous disclosure of the odds of winning, the name and address of the organizer, and the procedure for entry without purchase.
The law bars untrue statements that a person has won a particular prize, and statements that a person has an enhanced chance of winning if more than 25 percent of persons receiving the offer have the same chance of winning.
Like Vermont (discussed below), Oregon has also imposed restrictions via an attorney general interpretation of its unfair competition law (Oregon Attorney General Rule AOR 137-20-430, -440, adopted pursuant to Or. Rev. Stat. §§180.520(1)(c), 646.608(1)(u)). This rule mostly restates the sweepstakes law, but also requires the disclosure of the retail value of the prizes, and of the cost of shipping. There is also a special law protecting the elderly (Or. Rev. St. §§124.005-124.040).
Florida’s law (Fla. Stat. §849.094) applies to both direct mail and magazine sweepstakes. If the total prizes awarded are valued less than $5,000, the Florida law is relatively simple, only barring arbitrary removal of entries, failing to award prizes offered, false, deceptive, or misleading advertising or literature, and the requirement of an entry fee.
However, if the value of the prize exceeds $5,000, the organizer must register a copy of the rules with the state, enclose material terms with the sweepstakes offers, place the value of the prizes in a trust account, and pay a $100 fee.
Like Florida, New York requires registration with the state if the total value of the prizes exceeds $5,000 (N.Y. Gen. Bus. Law §369-e). It also requires registration of the rules, a trust account, a filing fee, and posting of the rules at physical locations.
There is a separate section that applies to “all prize award schemes,” not just those over $5,000. However, the section defines such schemes as those which “require the consumer to do something,” such as “traveling to a location to accept the prize, and listening to a sales presentation.” For promotions that are covered by this section, a disclosure similar to the Illinois law above is required.
Rhode Island (R.I. Gen. Laws §11-50-1 through -3) requires registration of sweepstakes (both direct mail and magazine), similar to New York and Vermont. However, the prize-value threshold is only $500.
For such sweepstakes only, the number and value of the prizes, the rules of the promotion, and names and addresses of prize winners must be posted at retail establishments offering the sweepstakes. The organizer must keep a record of the winners for sixth months. Rhode Island does not appear to regulate sweepstakes where the prizes offered are worth less than $500.
The Connecticut law (Conn. Gen. Stat. §§42-295-97) applies both to direct mail and magazines. It requires the sweepstakes offer to include disclosure of the retail value of the prizes, a statement of the odds of winning, any restrictions on the prize or receiving the prize, and the name and address of the promoter. Connecticut also bans phone based entry methods unless the contestant calls an 800 number.
California requires sweepstakes solicitation material (both direct mail and magazine) to contain a no-purchase-necessary message (Cal. Bus. & Prof. Code §17539.15). The message must be set out in the official rules in a separate paragraph. California bars statements in the sweepstakes offer similar to those barred under the federal Act.
Vermont does not have a sweepstakes-specific law. However, an attorney general opinion has interpreted Vermont’s unfair competition law as banning sweepstakes solicitations that are deceptive as to the odds of winning, the number of winners, or the value or availability of the prizes, banning false, deceptive or misleading advertising, and banning sweepstakes that require any kind of entry fee. (Vermont Attorney General Regulation CF 109.01, adopted pursuant to 9 Vt. Stat. Ann. §2453(c).)
The no-entry-fee provision has been interpreted as barring sweepstakes where the contestant pays for any shipping or mailing. Thus even the entry forms should have their postage paid by the organizer in Vermont.
Canada and its provinces do not appear to have sweepstakes-specific laws, but the Charter of the French Language in Quebec may require that offers and rules be translated into French if they are not marked “void in Quebec.”
Michael A. Albert is chair of the litigation practice group at Boston-based Wolf, Greenfield & Sacks, P.C. (www.wolfgreenfield.com). Hunter D. Keeton is an associate in that group. Wolf, Greenfield & Sacks is an intellectual property law firm, focusing on patent, copyright, trademark and other intellectual property protection and litigation. (617) 646-8000. The authors can be reached at (617) 646-8000, or [email protected] and [email protected], respectively.
