You may decide to offer some type of prize promotion, such as a sweepstakes or contest to promote your website or business. While sweepstakes and contests are generally permitted in most states, lotteries are not. The following summary of website and social media lottery, sweepstakes and contest laws should help your business stay within the boundaries of the law.
Lotteries are generally prohibited in each of the fifty states unless legislatively exempted (i.e., state run lotteries). The element of “chance” is one of the elements generally required to be present in order for some promotion or activity to violate a state anti-gambling statute. Most states have concluded that where the elements of skill, whatever they may be, predominate over the elements of chance in determining outcome then the game involved does not violate that state's anti-gambling law.
A lottery consists of a prize, chance, and consideration. Therefore, sweepstakes, contests and similar promotions must omit one of the three elements of a lottery to avoid being deemed as an illegal lottery. They both only combine two of the three “lottery elements.” A contest combines the elements of prize and consideration, but the prize is awarded to on the basis of skill rather than chance. A sweepstakes combines the elements of prize and chance, but lacks the element of consideration.
Thus, a prize promotion that conditions the chance to win on subscribing for a service, purchasing a product or, in some states, visiting a physical store, may be deemed an illegal lottery.
Federal statutes prohibit, among other things, the mailing or transportation in interstate or foreign commerce of promotions for lotteries or the sending of lottery tickets themselves. (Pic-A-State Pa., Inc. v. Reno, 76 F.3d 1294 (C.A.3 (Pa.), 1996). State laws vary, but “chance” is one of the elements generally required to be present in order for a game to violate a state anti-gambling statute.
States restrict illegal lotteries through criminal anti-gambling laws. For example, the Illinois anti-gambling statute defines an illegal lottery as “any scheme or procedure whereby one or more prizes are distributed by chance among persons who have paid or promised consideration for a chance to win such prizes, whether such scheme or procedure is called a lottery, raffle, gift, sale or some other name.”
Most states have concluded that where the elements of skill, whatever they may be, predominate over the elements of chance, whatever they may be, in determining outcome, then the “chance” element is lacking and the game involved does not violate that state's anti-gambling law. Most states apply this “dominant factor,” or predominance, test.
Are there express state Internet prohibitions?
The fact that a state has not passed a specific law does not make participation in or offering of gambling over the Internet legal under the laws of that state. The question is a complex one and is addressed in several of the articles included on this site.
Online Sweepstakes & Contests
Sweepstakes and contest or prize promotions are regulated by numerous federal and state laws. Federal agencies with jurisdiction to regulate sweepstakes promotions include the Federal Trade Commission (“FTC”), the Federal Communications Commission (“FCC”), the United States Postal Service, and the United States Department of Justice (“DOJ”). Sweepstakes promotions may also be regulated by state attorney generals and, in some states, district attorneys. In some states, this could require registration and obtaining a bond depending on the amount of the prize, among other requirements.
If you engage in this type of practice, talk to your Internet attorney to fill you in on the FTC and state requirements. You'll also want to include sold terms and conditions of the contest or prize promotion to protect your business.
The key for conducting a sweepstakes is avoiding consideration. That definition varies and will depend on various factors, such as: (1) how easy or difficult it is to participate in the sweepstakes; and (2) whether an alternative method of entry (e.g., entry by mail or fax) is available. Examples of consideration include conditioning entry on the participants purchase a product, a monetary payment, visiting a store, or even providing detailed consumer information in some cases.
Social Media Contest Liability
The FTC's 2009 revised guidelines confirmed that the rules continue to apply to endorsements and testimonials made directly through “new media” platforms including social media.The FTC has stated that a consumer endorsement made in an effort to win a prize is not different from a consumer endorsement in exchange for the payment of cash or free goods! If the chance to win a prize requires participants to post content featuring your business's products or services, the participants must disclose that their posts are pursuant to a contest. (This includes “pinning” photos of your business's products on Pinterest). Your business is expected to tell the participants to make clear that their posts are being made as part of a contest.
Don't Forget To Disclose “Material Connections”!
In a nutshell, your business and any individual endorsers must disclose any material connection. According to the FTC, “When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed.”
For direct endorsements made on social media, the FTC guidelines state that receiving a payment, a free product or some other benefit from your business in exchange for posting a product review or other endorsement is a “material connection” which must be disclosed. The individual endorser is the party expected to clearly and conspicuously disclose that connection. However, your business is expected to advise the endorser up front that this connection should be disclosed and have procedures in place to try to monitor postings by such individuals to confirm the connections are being disclosed.
In March, the FTC sent a letter to the shoemaker Cole Haan indicating that the pins required to enter its contest on Pinterest for a chance to win the $1000 prize were endorsements subject to the disclosure requirements! In that letter, the FTC has essentially clarified that asking consumers to post, pin or otherwise publish content on a social media platform regarding the company's products or services in order to enter a sweepstakes, contest or other prize promotion requires that the post be clearly labeled as being part of the contest!
How Should Social Media Contest Entry Disclosures Be Made?
It is not entirely clear how a chance to win a prize must be disclosed as a material connection with the contest posts or pins. What is clear is that a disclosure which makes no reference to a contest or to the company's brand fails the FTC's standards for disclosing the material connection. The FTC did not explain in its letter to Cole Haan exactly how such disclosures should read. But, according to the FTC's.Com Disclosures guide, “disclosures must be communicated effectively so that consumers are likely to notice and understand them in connection with the representations that the disclosures modify.” This is required even though space-constrained limitations of mobile devices and social media platforms causes obvious problems.
So, potentially, using a hashtag that names the sweepstakes or contest with each post will be sufficient. But, to play it safe, businesses should use a longer disclosure indicating that the post is being made as part of entering a particular contest, when the platform allows for longer disclosures to be made.
This article was written by Philip A. Nicolosi, J.D. Mr. Nicolosi provides legal services through his law firm, Phil Nicolosi Law, P.C., focusing on startup and small business law, Internet & technology law and commercial transactions.
Mr. Nicolosi serves as a trusted advisor to numerous startups and small to medium sized businesses. This includes representation for a wide range of business law matters including business organization, corporate/LLC governance, regulatory law, contracts and transactions and most other matters outside of litigation. Mr. Nicolosi provides guidance with e-commerce, Internet marketing and technology-related legal matters. He also assists startup technology companies with seed financing, venture capital and exit transactions.
Mr. Nicolosi is also the founder of InternetLegalArmor (www.internetlegalarmor.com), an automated custom website legal document solution.
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