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Sweepstakes and Contests:
Avoid Losing… Big

By Howard G. Zaharoff

September 2009

What’s with sweepstakes? Why “Void where prohibited” and “Free method of entry”? Why such detailed rules? Given that they’re run by companies large and small and appear everywhere from the Internet to cereal boxes, what’s the big deal?

The deal is that, if designed or run improperly, at best a sponsor may be subject to investigation and fines by the FTC, FCC, U.S. Postal Service and state governments. At worst, the sponsor may be running an illegal lottery and be subject to criminal prosecution.

Ask the Nevada companies fined $1.4 million for luring consumers to pay to win. Or the Orlando resort that was fined almost $1 million for calling sweepstakes entrants in violation of Do Not Call lists.

Now that we have your attention, how do you avoid problems?

First, you need to understand what is, and isn’t, permitted. Charging someone a “price” to enter a game, where a “prize” is awarded on the basis of “chance,” is generally unlawful (exceptions include lotteries run by federal or state governments, nonprofits sponsoring a lawful raffle or bazaar, and organizations licensed to run bingo games). Thus, to avoid the worst problems, you need to eliminate one of these three features.

You can’t eliminate the “prize,” or no one wants to play.

If you eliminate the “price” (“free method of entry”), you now have a “sweepstakes,” which is legal if you obey the law. Federally, this means providing and obeying clear and accurate game rules — including eligibility criteria, prizes and prize values, odds of winning, and how winners are chosen — while also obeying laws that deal with special circumstances, such as mail and telephone solicitations. Locally… it depends. Florida, trying hard to protect its elderly population from swindlers, has registration and bonding requirements for sweepstakes that promise $5,000 or more in prizes. So does New York. Rhode Island, on the other hand, does not require bonding, but does require registration if the game is played at retail stores and prize value exceeds $500.

If you eliminate the “chance,” so winners aren’t determined randomly but through skill or objective criteria (such as running fastest or solving a math problem), you have a “contest,” which is also legal in the U.S., provided that you follow the rules. Federally, again, it’s mostly about truthful disclosures (and complying with special laws on mail fraud, Do Not Call lists, and the like). Locally, it varies: Though most states let sponsors charge a fee (if you have price and prize, but not chance, it’s not an illegal lottery), Vermont and several others do not, while Arizona requires that certain contests be registered.

In short, it’s critical to keep your games in compliance with the law, which varies from state to state and contest to sweepstakes. So unless you or your marketing agency knows these rules cold, consult an expert. Whether your company wins… or loses big… may depend on it.

For additional information on this avoiding liability and compliance problems with sweepstakes and contests, please contact Howard Zaharoff

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