I do love the folks in Marketing. They are always very engaging and fun, and they have cool giveaways they will share with you. But, I love them a lot less when they show up at my office door wanting to launch a contest. Tomorrow. Ugh. If you’ve been in-house long enough and your company has a marketing department, you will at some point probably need to figure out how to deal with contests and sweepstakes. These games can be great promotional devices, generating excitement and interest in your company’s products and services. For many companies, these are their most effective forms of advertising. As consumers, I know that many of us have entered such games – filling out a form, dropping a business card in a fishbowl, submitting a photo, clicking on a link on Facebook, getting a “Monopoly” game piece at the supermarket, or just buying a “Lotto” ticket at the gas station. As consumers, however, most of us pay little attention to what goes on behind the scenes of a contest or sweepstakes. As lawyers, we know that creating a successful one takes a lot of work by the business and the legal department, all of which will go to waste if the contest rules are not clear or if the sweepstakes runs afoul of state or federal laws. Unfortunately, sometimes your marketing team doesn’t understand all the work and complexity of pulling off a successful contest or sweepstakes. It most certainly is not as easy as showing up at your door and announcing that the company wants to launch a one tomorrow or even next week. As we say in Texas, that dog won’t hunt. Yet, with some forethought and planning you can work with your marketing team to set up a reasonable process to create and approve contests that meet everyone’s needs. This edition of “Ten Things” discusses the basics of creating legal contests and sweepstakes in the United States:
1. There are several types of “contests.” The first thing you (and the client) need to realize is that there are three basic types of contests: Lotteries, games of chance (sweepstakes), and games of skill (contests). Which one you choose — or avoid — depends on the details of the game, i.e., what is it that the business wants to do, and how strong is your desire to stay out of jail.
2. No lotteries! Unless you are a governmental entity, conducting a lottery is illegal. Big time illegal. A lottery has three elements: (1) entry requires some type of payment or consideration (not necessarily money); (2) a prize is awarded (cash, a trip, a car); and (3) “chance” determines the winner, e.g., pulling name out of fish bowl or numbers drawn via ping pong balls on the Lotto TV show. You can avoid getting a nasty letter from a State Attorney General by simply avoiding one of these three elements. The most common element avoided is payment/consideration (i.e., sweepstakes), with a close second being “chance” (i.e., contests). Note that many states give waivers to not-for-profits (churches, schools, etc.) to conduct small lotteries. But, as to regular commercial businesses, the state fiercely guards its monopoly on lotteries.
3. What counts as consideration/payment? “Payment” to enter a sweepstakes can mean that a contestant pays money to enter the game (e.g., buys a ticket) or that the contestant is required to perform some substantial act to enter the sweepstakes. For example, authorities will likely find that requiring entrants to become paying members of an organization or complete a lengthy form providing a lot of personal information is a “payment.” Since all three of the key elements must be present for an illegal lottery to exist, you can avoid the problem by having a simple “free” method of entry.
4. Free entry. You may require payment/consideration to enter a game of chance (e.g., purchase a case of Modello Especial) if you also have a free method of entry, i.e., the now famous “no purchase necessary” method. For example, if you are running a sweepstakes whereby someone is automatically entered into a prize drawing each time they buy a vacation package on a travel website, providing participants with a free method of entry (e.g., allowing participants to enter by mailing in 3” x 5” note cards or through a brief registration online at your website), keeps your sweepstakes from being an illegal lottery. Note that “free” entries must be treated the same as entries that occurred because of a “payment,” including having the same odds and method of being selected as the winner. If you are using 3×5 cards as the free method, you must make sure it is possible to receive mail-in entries prior to the drawing, i.e., there must be sufficient lag time such that no winner is selected before the time it would take to receive any mail-in entries. The drawing cannot occur until all free entries are received. Accordingly, a cut-off date should be set by which time all mail-in entries must be received (not postmarked), and the drawing to select a winner cannot be conducted prior to that date. For example, setting the end of the sweepstakes for June 5 (the cut-off), and holding the drawing for the winner on June 15 – – allowing 10 days for all mail-in entries to be received.
5. Games of skill (contests). Games of skill can engage participants in a way sweepstakes (selecting winners by chance) may not. A game of skill has three elements: (1) entry may be free or may require payment; (2) skill determines the winner; and (3) a prize is awarded to the winner. Prizes that are awarded on the basis of skill are not illegal lotteries even if some form of “payment” is required because the winner is determined by skill and not by chance. So, to run a successful game of skill/contest, chance must be eliminated. This is not as easy as it sounds. Here are some things you need to think long and hard about.
Is it really “skill” that is involved?
A court found a contest to predict the outcome of 20 football games was based upon chance rather than skill. Although an avid fan would have a better chance of winning the contest than a person knew nothing about football, any attempt to predict the outcome of a sporting event is dependent upon chance. Thus, the contest was declared an illegal lottery (think about your “March Madness” pools with money on the line). Similarly, counting the number of jellybeans in a jar is a contest of chance because this task requires participants to perform a virtually impossible task.
What happens if there is more than one correct answer?
Contests that allow for more than one correct answer (such as puzzle solving) can lead to trouble because the entrants must guess at which answer is the right one, thus making the outcome depend upon chance rather than skill.
What about judging standards and qualified judges?
To reduce the probability that chance rather than skill determines the winner the rules of the contest need to clearly explain how to win the contest. For example, if the contest is the “best” photograph or the most “creative” essay you will also need to set forth specific judging criterion in the contest rules. In the case of the essay contest, the rules should explain how the “best” essay is determined, e.g., 40% originality, 30% writing skill, and 30% creativity (and the judges should have work-sheets setting out the “math”).
What happens if there is a tie?
Eliminating chance means that in the event of a tie, a plan must be in place — and must be stated in the contest rules — to break the tie and determine the winner by skill and not by chance (like by flipping a coin). For example, one way to break a tie in a contest is to have the people who are tied solve a simple word-search puzzle and the first one done is the winner. Again, any tie-breakers need to be set out in the official rules.
6. The rules. While not legally required by law in some cases, the better plan is to always ensure that you have a detail official set of rules for every contest or sweepstakes your company promotes. Click here to see a set of official contest rules for a $250M “Monopoly” grocery store game sweepstakes. Here are some of the key things to include in your official rules:
- Who is eligible to play (including any age and residency requirements).
- How the winner is selected (including judging criteria if a contest).
- Free method of entry (if a sweepstakes).
- Tiebreaker (if a contest).
- If content is generated by the entrant, who owns it?
- Permission to use likeness and image of the winner and other necessary releases such as liability.
- Dates of the contest/sweepstakes.
- Odds of winning.
- Whether substitutes for prizes will be permitted (e.g., the winner wants cash instead of the trip to Hawaii).
- What happens if the winner dies before claiming the prize.
- Description of the prize(s) and approximate retail value.
- Identity of the sponsor(s),
- Exclusion of any geographies, if necessary (e.g., “Residents of New York are not eligible to play”).
- A catch all statement that the contest or sweepstakes is “Void where prohibited by law.”
One thing I did when putting together a contest/sweepstakes program at a former company was study the official rules of several sweepstakes and contests and then creating a template for us based on the “best of” and that could be modified as needed. You learn a lot about how to draft the right rules by reading those created by large, well-known companies because it is almost certain that they spent a lot of time and money (including legal fees) putting their rules together. Well written rules are one of your best defenses from problems. The fallout from a poorly run contest or sweepstakes can really hit your company’s reputation (in addition to legal trouble). And once you have rules in place, do not diverge from them. Doing so can lead to major problems with the authorities and lawsuits from contestants.
7. Fulfillment of the prizes. Almost as challenging as creating the contest or sweepstakes rules is the task of fulfilling the prizes, i.e., selecting the winners and getting them the prizes. This can be a massive job and requires a lot of time and effort on the part of the business (and is something the business rarely considers when first getting into contests and sweepstakes). Typically, the legal department will not participate in this part of the process. The business must select the winner(s) based on the rules criteria, hand out the prizes, obtain the necessary waivers and other paperwork, prepare 1099’s for the winners for any prizes awarded with a value over $600 (yes, the winnings from a contest or sweepstakes are taxable), and retain certain documents regarding the contest/sweepstakes. In particular, for two years after the contest/sweepstakes, the business must keep:
- The identity and address of those responsible for developing, creating, and implementing the contest/sweepstakes.
- Records showing that the winning entry for each major prize was selected at random from all entries or by skill criteria if applicable.
- A copy of official contest rules, promotional materials, etc.
- All tax-related documents.
- Records showing:
- total number of entries.
- number of prizes awarded.
- date prizes were awarded.
- the prizes awarded (including brand and model).
- method of computing retail value of the prizes.
- method of selecting the winner.
- names and addresses of winners (you are also required to provide the names and addresses of winners to anyone who asks).
Many companies outsource fulfillment of their contests and sweepstakes to one of several companies. This might be a smart idea for your company, especially if the prizes are large or internal resources insufficient to do the job properly
8. Exclusion of selected states and foreign countries. Florida, New York, and Rhode Island have stringent registration requirements applicable to contests and sweepstakes if the total amount of prizes to be awarded exceeds a certain amount. In Florida and New York, the threshold is $5000. In Rhode Island, the threshold is $500. In addition, these states require that you file a bond in the amount of the prizes. Consequently, you may want to exclude these states/residents from your contest in the official rules (or plan on a significant amount of time for you to complete the paperwork and obtain approvals in these states before your launch your contest or sweepstakes).
The rules discussed in this article only apply to contests and sweepstakes conducted within the United States. In many foreign countries contests/sweepstakes are illegal with no exceptions. In the countries that do allow contests/sweepstakes, complying with the local laws may be expensive. For example, running a contest in Quebec, Canada requires that the contest is registered, all materials are in both French and English, a bond posted, and several other obligations. So, help the business be thoughtful about operating a contest or sweepstakes outside the US.
9. Other stuff. There are plenty of traps for the unwary when it comes to pulling off a successful contest or sweepstakes. Here are a few things to watch out for:
- Ignoring email spam laws when promoting your contest or sweepstakes.
- Taking online entries from children under the age of 13 in violation of COPPA.
- Not following the contest or sweepstakes policies of social media sites you use to promote yours.
- Not obtaining insurance if your contest has a very large prize for a very difficult task, e.g., awarding a $1M to anyone you can sink a shot from one end of a basketball court to the other – it could happen!
10. Setting up the process. If your company is a big user of contests and sweepstakes (or it’s something it would like to do), you will be well-served by sitting down with the marketing team and working out a process that everyone will follow anytime the company wishes to use a sweepstakes or contest. Here are some ideas:
- Find a good outside law firm that specializes in contests/sweepstakes. These will be your “go to” folks in the event of problems or questions.
- Have them help you prepare an initial set of templates to use, including draft official rules. Also, ask them to come out to your offices and present to the legal team and the marketing team about the basics of contests and sweepstakes.
- Create an intake sheet for the marketing team to use that will extract all of the critical information you will need to understand exactly what they want to and how the contest/sweepstakes will work so legal can prepare the right materials.
- Determine with marketing whether legal spending time on contests/sweepstakes is a good use of the resource or if contests/sweepstakes should be outsourced to a law firm with marketing footing the bill as an advertising cost.
- Anoint one person in legal to be the point person for contest and sweepstakes and ensure they are properly trained on what’s required. Likewise, marketing should anoint one of their own for the same role.
- Set the right expectations with respect to turn around time for contests and sweepstakes, e.g., the information required to start and the time needed to complete the legal part of the contest/sweepstakes including any registration and bonding requirement, e.g. marketing needs to get the proper materials to legal 45 days before the launch of any contest or sweepstakes.
- Agreement from marketing that they will handle and are responsible for fulfillment of the contest/sweepstakes and will keep the required records, etc.
- Identifying some free resources to help the legal team with contests and sweepstakes, such as Sweepstakes Law blog and Guide Through the Legal Jungle.
To state the obvious, there is way more to discuss about contests and sweepstakes than I can set out in the column. While these games can be fun and very effective marketing tools, they require a lot of work on the part of the business – and legal — to pull off. Your job is to set up an effective process to vet and create legal contests and sweepstakes for your company and to engage with the business early in the process — and on a standing basis — so they know where to go and who to talk to before they go through the work of creating something that simply isn’t legal. Being proactive and helpful is how in-house lawyers provide value to the company. So, here’s a great way to step up.
June 18, 2018
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 While this column focuses on the laws of the United States, many of the principles and issues apply in other countries. Of course, always check and understand the laws of your particular jurisdiction.
It’s best to participate in a contest for top-of-the-line blogs on the web. I’ll advocate this web site!
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Thanks for the comment and the link Ashish!
Excellent article. Can it be said generally if a small business can set a minimum limit of entrants into a sweepstakes or contest? this could be said as if 100 people do x thing to enter, then the business will give away Y prize, but also essentially saying if less than 100 people enter, then no prize will be given away?
Hi Louis – short answer is “I don’t know.” I have never come across a situation where anyone wanted a minimum number of participants or else the contest/sweepstakes is canceled. That would be a good question for counsel that specializes in contest and sweepstakes or a company that assists companies with setting them up. You can find either with a simple Google search. Regards – Sterling