Sweepstakes and contests have increased in popularity as a way of engaging consumers. The legal requirements, however, for these games are complex. Domenic Romano and Kyle-Beth Hilfer of Hilfer Law recently discussed common questions about launching these prize drawings and relevant legal advice.
Kyle-Beth: In the United States, promotional giveaways are governed by lottery and gambling laws in each of the 50 states. There are also certain federal laws and regulations that can come into play pursuant to Section 5 of the Federal Trade Commission Act. Generally, for a promotion to be legal, it cannot have all three elements of prize, chance, and consideration. The lottery and gambling laws interpret those elements slightly differently, but, upon the elimination of one of the three elements, a brand normally would have a legal giveaway. A skill contest would eliminate chance, although in a handful of states monetary consideration to enter is still a problem. A sweepstakes would eliminate consideration. Consideration means either a monetary requirement or substantial consideration. These days, sweepstakes and contests have become sophisticated because of the drive towards consumer engagement. Many promotions are hybrids between sweepstakes and contests and require vetting to ensure their legality.
Kyle-Beth: With increased globalization of marketing and social media blurring boundaries, more social media sweepstakes and contests are multinational. At the same time, brands frequently ignore the crucial step of clearing the games in their target international venues. Just north of the United States, in Canada, the laws regulating sweepstakes and contests require sponsors to choose winners differently. Rules need to be drafted and publicized with different mechanisms. So, too, each country in Europe, Asia, or South America may have different laws governing these games. While a complete international vetting program is undeniably expensive, brands would be well advised to clear their promotions in their target markets and limit entry eligibility to those venues.
Kyle-Beth: Every sweepstakes or skill contest should have rules in one form or another. The rules are the contract between the sponsor and the entrants. Rules protect the sponsor in the event something goes wrong in the promotion (e.g., a virus infects the entry platform, resulting in multiple winners, or a contestant submits an off-color entry that the sponsor wants to declare ineligible). Unfortunately, too many marketers act casually in this area. They may copy other rules they see on social media without doing their own legal vetting. They may mistakenly trust their administrative agency to draft the rules. All too often, they may post inconsistent rules on different platforms. By failing to draft one set of comprehensive rules, brands invite ambiguity into their promotions and increase their legal risk. In addition, because of limited text space on social media, game sponsors often make incomplete disclosure of the rules.
Kyle-Beth: The FTC’s DotCom Disclosure guidelines require all material terms of an offer “unavoidable” and clearly and conspicuously disclosed. Working with its legal team, a brand should be able to create short form rules. Then, they can figure out how to make the disclosures meet the FTC guidelines. Simple hyperlinks may not always work if they are not labeled properly.
Kyle-Beth: Brand managers may have technical or marketing reasons for preferring Facebook, Twitter, their websites, or other platforms. Often, there are legal reasons as well. Each platform has rules about promotions that change frequently. Legal counsel can help the brand determine how to interpret these rules.
Kyle-Beth: The FTC has made it clear that offering sweepstakes entries in exchange for mentions in social media creates a material connection between the promotion sponsor and the consumer. The consumer, in effect, becomes an influencer for the brand. The onus falls on the brand to ensure that consumer’s mentions disclose that such a material connection exists. Otherwise, the brand may find the FTC investigating it for violating its Endorsement and Testimonial Guidelines. This risk is particularly prevalent with low engagement prize promotions. Usually, this problem can be solved with the right kind of hashtag attached to the entry. That hashtag must make clear that the mention is connected with a sweepstakes. The wrong hashtag can get the brand into trouble.
Kyle-Beth: In short, marketers can use sweepstakes’ and contests’ entries to build content libraries, but this requires planning and a risk mitigation strategy. If the brand wants to use all the entries as a marketing library, it should provide notice in the giveaway rules that copyright ownership transfers on entry or that the entrant provides the brand with a license. The marketing team should work with a lawyer to ensure that the copyrights are covered properly in the rules. In addition, the terms should have content guidelines to pre-screen entries for third party trademarks and objectionable materials. Before making use of a photograph, for example, the brand will want to clear all content in the image. Best practices call for obtaining releases not only from the photographer (who may not be the entrant, depending on how the prize promotion is structured), but also from every individual and third-party rights holder in the picture. Failing to do so may expose the brand to claims of violation of rights of publicity or privacy, copyright infringement, or other legal causes of action. Videos are more complicated because they may also include music with multiple rights holders.
Kyle-Beth: Prizes offered nationally must meet all requirements of the 50 states’ laws. Often, prize descriptions require disclaimers for exclusions, particularly event or travel-related prizes. In addition, some companies, like Apple, ban use of their products in prize promotions. Competent legal counsel can help minimize the risk of using these products as prizes. If people are required to travel to pick up their prizes, that could be problematic under various states’ laws that ban post-winning consideration. Finally, a variety of laws govern giveaways relating to certain industries, such as dairy, alcohol, and cannabis. In some instances, the laws relate to who is sponsoring the game. In other instances, the laws regulate using such items as prizes.
Kyle-Beth: Yes. For sweepstakes, Florida and New York both require registration and bonding for prizes that total over $5,000 in retail value. Rhode Island requires registration if there is retail involvement and prizes are over $500. For skill contests, Arizona has a registration requirement as well. Remember that consolation prizes should factor into the total value of prizes in the promotion when it comes to registration and bonding requirements. California has registration requirements for prizes and gifts offered as part of a telephone solicitation campaign. Too often, marketers forget that the total retail value of their prizes determine if they have to register and bond. Often, they commit to prizes too quickly and then they may have missed crucial deadlines for registering and bonding, subjecting the brand to penalties. It’s never too early to start planning ahead.
Kyle-Beth: Unfortunately, even the best laid plans can change. Generally, changing prizes, or the terms of a sweepstakes, can violate the sponsor’s contract with the entrants. Drafting rules properly is the key here to allowing changes. Marketers also need to be careful where they have registered and bonded for certain prizes. During the Covid-19 pandemic, Florida indicated that it would allow substitute prizes in certain instances because of the state of emergency. Presumably, once the state of emergency is over, however, states like Florida will revert to a strict interpretation of prize descriptions.
Kyle-Beth: Now that you’ve completed your promotion, you may have collected email addresses and mobile phone numbers from entrants. Before you rush to send them marketing material, consider that those actions may violate the Telephone Consumer Protection Act, the CAN-SPAM Act, and other laws. It is always best to review your post-promotion marketing plan with legal counsel before the campaign launches.
Kyle-Beth: As I mentioned, drafting the rules the right way is critical. Making sure that all marketing messages are consistent with the terms is also a fundamental tenet of running a prize promotion. In addition, companies should remember that the winners they choose may reflect on their brand’s reputations. Brands typically may not want to publicize an association with a criminal or a political extremist. Accordingly, they should draft rules that permit, at the sponsor’s sole option, background checks for potential winners of high-end prizes.
Kyle-Beth: Well, many things, but here are a few examples. Certainly, deceptive prize mailers are consistently in regulators’ crosshairs. In addition, marketers often solicit user-generated content from consumers and select the best entry as a winner. Public popularity may be a driving force in winner selection. Yet, public judging may also introduce chance into the game, converting it from a legal skill contest into an illegal lottery. In addition, in some games of chance, brands do not structure a clear alternate method of entry, rendering these sweepstakes illegal. In other cases, sponsors who have not clarified whether they are running a sweepstakes or skill contest may inadvertently ignore the registration and bonding requirements of certain states. While consumers delight in the instant rewards of social media games, they are complaining more to regulators about deceptive or illegal contests. Indeed, the category of “Prizes, Sweepstakes and Lotteries” consistently ranks high in the FTC’s annual list of top ten complaint categories. It was in the top five again in 2020. Remember, regulators are paying attention to these games.
Copyright Kyle-Beth Hilfer 2021