Julia C. Archer

Enns & Archer LLP

This paper provides a brief overview of federal and state regulation of prize promotions, that is, promotional programs which invite members of the public to submit an entry and which award prizes to fewer than all of the entrants. These promotions fall into two basic categories: sweepstakes and contests of skill.

The descriptions below cover only basic concepts and general rules. There are many other details and nuances surrounding this area of law, and it is always recommended that the official rules and any related advertising for any prize promotions be reviewed by counsel familiar with the field.

A sweepstakes is a promotional device in which prizes are offered to participants selected on a random basis.

The primary issue in structuring and executing a sweepstakes or other chance promotion is to avoid becoming an illegal lottery. A lottery consists of the elements of prize, chance, and consideration.

The prize is the primary reason for having the sweepstakes and elimination of this element would defeat the purpose of the promotion.

The element of chance comes into play whenever the winner is determined by random drawing, or some other method dependent on variables outside the control of the participants in the promotion. Elimination of the chance element transforms the promotion into a skill contest, discussed below.

Thus, the primary means of preventing a sweepstakes promotion from being considered an illegal lottery is the elimination of the element of consideration.

Consideration may be found in a requirement for a purchase of goods or services or other monetary payment, or can be found in burdensome performance requirements, such as multiple store visits, or a lengthy survey. Consideration is typically eliminated by allowing a mail entry or other free method of entry without proof of purchase. The promotion must be structured in such a way that the free method of entry has equal dignity with the purchase method of entry and all entrants have an equal chance of winning the same prizes.

All sweepstakes and chance promotions must have a set of official rules. The official rules constitute the contract between the sponsor and the consumers participating in the promotion. For a national sweepstakes, the official rules must contain at least the following disclosures:

• No purchase necessary.
• The alternative method of free participation.
• Complete name and address of the sponsor and promoter of the contest.
• Number of prizes, the accurate description of each prize, the retail value of each prize, and the odds of winning each type of prize. (In many cases the odds will depend on the number of eligible entries received, however, if a particular number of entry forms, direct mail pieces, or similar items will be distributed, the odds should be stated according to that number.)
• Geographic area of the sweepstakes and/or who is eligible to participate in the sweepstakes.
• Opening date and scheduled termination date of the sweepstakes.
• Whether all prizes offered will be awarded, and how the prizes will be awarded.
• Manner of selection of winners, and when a determination of winners will be made.
• Where and when a list of winners can be obtained.

There are many other aspects of the sweepstakes that should be described in the official rules as well, including any special eligibility requirements, restrictions on use or scope of a prize such as for a trip, methods of claiming a prize (usually by signing and returning a declaration of eligibility and liability release by a certain date), and other issues. Obviously, the official rules cannot be misleading and cannot attempt to hide the free method of entry. You will also want to include disclaimer language for lost mail, lost connections in internet contests, liability and publicity releases.

Once the official rules are published and posted, they must be followed exactly and cannot be changed during the course of the promotion, except under extreme and unusual circumstances. In addition to the official rules, any advertisement or promotional mention of the sweepstakes should be reviewed for consistency with the rules and to avoid consumer misimpressions about any aspect of the promotion.

If the total amount of all prizes being awarded in the sweepstakes exceeds $5,000, the promotion must be registered (with either a surety bond or certificate of deposit in the total amount of all prizes) in both Florida and New York. If the promotion will be advertised through retail outlets in Rhode Island, Rhode Island also has a registration requirement if the total value of all prizes exceeds $500. The New York registration and bond forms must be filed at least thirty (30) days prior to the start date of the promotion. Florida requires seven (7) days advance registration. Florida has taken the position that any promotion in the United States that does not explicitly exclude Florida residents could allow a Florida resident to win and subjects the promotion to Florida’s jurisdiction, including the filing requirements. Therefore, if you have a promotion running in another part of the country where the total value of the prizes exceeds $5,000, you will want to consider including in the official rules the provision that Florida residents are not eligible. Florida also requires that any mention of the promotion in a print advertising must contain the complete official rules. This requirement does not apply to television and radio advertising, but would apply to any magazine with national circulation, any direct mail sent into Florida, or similar print advertisement circulated within that state.

For television and radio advertising, a shorter version of the official rules can either be printed on the screen in the case of television, or read aloud. The short form disclosure must include at least the following disclosures:

• No purchase necessary.
• Void where prohibited.
• Any special eligibility restrictions.
• The scheduled termination date of the promotion.
• If the advertising will occur before the start date of promotion, the short form advertising must also include the opening date.
• Instructions for how consumers can obtain a copy of the official rules.

If the television or radio advertising explains or makes reference to a purchase method of entry, the rules should also disclose the free method of entry.

Several other states have specific requirements or provisions to keep in mind. For example, Tennessee requires a separate agreement regarding granting of publicity rights by the winner; Michigan may consider multiple store visits to be consideration. If the promotion will have an online aspect, there are also additional considerations and disclosures that should be made.

Congress has also passed a federal sweepstakes law that requires certain affirmative disclosures in rules and related sweepstakes materials and requires sponsors to establish a name removal notification system that allows individuals to request removal of their names from mailing lists used for sweepstakes and contests. The affirmative disclosures apply to any solicitation containing sweepstakes entry materials, with the exception of advertisements in newspapers, magazines and similar periodicals. Sponsors of contests involving direct mail solicitations must establish the name removal notification system regardless of whether or not entry materials are included.

Skill contests are a promotional marketing tool requiring participants to use specific skills to solve or complete a specified objective in order to qualify for an award. As with sweepstakes or games of chance, many states have their own sets of statutes and regulations governing skill contests. In addition, there is relatively little guidance from the courts to help interpret the provisions. Therefore, when setting up a skill contest it is important to consult with legal counsel familiar with the area to avoid violating state gambling laws.

As noted above, a sweepstakes or other chance promotion can avoid being considered an illegal lottery by eliminating the element of consideration. In a bona fide skill contest, it is the element of chance that is eliminated. Therefore, it is often possible to require consideration, such as an entry fee for participation. However, note that the states of Colorado, Maryland, Nebraska, North Dakota and Vermont do not allow consideration in a skill contest. Additional states, such as New Jersey and Tennessee, have Attorney General opinions in which the AG has opined that consideration in a skill contest is unlawful. So if your contest is on the internet or is otherwise a national contest, no entry fee or other consideration may be charged, or else these states should be specifically excluded from participation. Because state laws in this area are always subject to change, this list may not be complete.

If there will be consideration or payment involved, it is important to be sure that the contest is a bona fide skill contest and that chance is not injected into the process, affecting either the selection of the winner or the amount of the prize the winner will receive. The following are some basic guidelines to eliminate the element of chance:

• Questions cannot be too hard or too easy;
• Ties must be broken on the basis of skill (not a drawing);
• Judging criteria must be objective and clearly disclosed (for example, an essay might be judged based on "originality," "grammar," "humor," or "relationship to product attribute," but "best" would be inadequate);
• Judges must be qualified to apply the judging criteria;
• All entrants must be competing on the same playing field / all entries must be judged (can’t have employees weed out entries and only send certain ones to the judges).

Some examples of contests that are typically held to be skill contests include the following:

• Essay contests
• Photography contests
• Athletic contests
• Cooking or recipe contests
• Math contests
• Art contests
• Trivia contests (depending on how structured)
• Spelling bees

Some examples of contests where skill has been held absent, injecting chance into the contest include the following:

• First 100 to respond
• Guessing number of beans in a jar
• Predicting the results of an athletic event
• Spotting a mystery shopper
• Accumulating the most proofs of purchase

As with sweepstakes and chance promotions, there are a number of states that require certain disclosures for a skill contest. Therefore, all skill contests must have a set of official rules. Indeed, failure to disclose the rules may be considered the equivalent of injecting chance into the contest resulting in an illegal lottery. In addition to the general rules, for a national contest, the official rules must contain at least the following disclosures:

• Complete name and address of the sponsor and promoter of the contest.
• If applicable, that subsequent rounds are more difficult.
• The number of rounds or levels.
• The maximum cost to the participant, if any.
• The identity or description of judges and their qualifications.
• How winners will be determined and when.
• Number of prizes, the accurate description of each prize, the retail value of each prize.
• Geographic area of the contest.
• Opening date and scheduled termination date of the contest.
• Where and when a list of winners can be obtained.

Other items that should be included in the rules include any special eligibility requirements, an exclusion of employees of the sponsor from participation, a general release of liability, agreement with the rules and acknowledgement that the decisions of the judges are final, etc. Once the official rules are published and posted, they must be followed exactly and cannot be changed during the course of the contest, except under extreme and unusual circumstances.