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Cash, Cruises and Cars
Sweepstakes
Promotions
By Jane Fergason
Caribbean cruises, red
sports cars, diamond rings, $1,000,000 checks – for
years companies have used sweepstakes and similar
promotions to advertise and draw customers to their
products. Sweepstakes that are well planned
enhance good will and can generate brand awareness and
sales. However, over the years such promotions
have grown increasingly more sophisticated and the
method of conducting them more regulated.
Companies need to be aware of federal and state
regulations when conducting sweepstakes and similar
promotions. For example sweepstakes are governed
by a collection of sometimes inconsistent
laws.
Private lotteries or
raffles (unless charitable) are illegal in most
states. Federal and state jurisdictions define a
lottery as a promotion that contains three
elements: (i) a prize, (ii) chance, and (iii)
consideration. A prize is defined as anything of
value awarded to the winner. Chance is self
defining and typically involves selecting a winner by a
random method over which the entrant has no
control. Consideration takes two forms: monetary,
in which the entrant must expend something of tangible
value to participate, or non-monetary, where the entrant
must spend a substantial amount of time or effort which
will benefit the sponsor. In order to conduct a
legitimate sweepstakes or similar promotion, companies
must eliminate one of the three elements.
Companies conducting
promotions typically eliminate either the element of
chance or consideration as a prize always is
involved. For example, a scratch-off card that
states a person will win a prize under the scratch-off
label would not be a lottery as no element of chance is
involved, i.e. the prize will be awarded.
Many promotions involve chance and therefore the element
of consideration must be eliminated.
Not only must sweepstakes
be structured in accordance with applicable federal and
states laws, these laws also dictate how the promotions
must be conducted. Generally speaking, federal and
state law requires specific statements to be contained
in the official rules which must be provided to every
entrant. Federally, the Federal Deception Mail
Prevention Enforcement Act imposes various other
restrictions on sweepstakes which involve the
mail.
New York and Florida require companies to
obtain a surety bond and register if the total amount of
prizes awarded exceeds $5,000. These filings must
be completed in New York and Florida at least thirty
days and seven days, respectively, prior to the start of
the promotion.
Companies should have
detailed official rules for the sweepstakes. There
are certain provisions that should appear in all rules
including, but not limited to, (i) method of entry,
(ii) method of determining winners, (iii) odds of
winning, (iv) eligibility (age, resident,
exclusion of employees and family members of sponsor),
(v) duration (commencement date and termination
date), (vi) award date, (vii) language that no purchase
is necessary (viii) the random nature of the drawing,
(ix) limitation of sponsor’s liability, (x) entrant’s
liability for taxes, (xi) detailed information
concerning the prizes, (xii) requirement of
affidavit of eligibility and liability and publicity
release, and (xiii) availability of a winners
list.
The contents of sweepstakes rules often times
depend on the type of prize being awarded. If a
company is awarding a travel prize, it should disclose
exactly what is included in the prize, including the
number of travelers (including the winner), airfare
(coach or first class, one way or round trip),
accommodations (hotel name, occupancy or rating), ground
transportation, (car rental, shuttle bus), meals
(specific meals, locations or limitations), and
additional tickets (events, concerts or others).
If a company awards an automobile, it should describe
(i) whether it is new or used, (ii) the make, model, and
year, (iii) whether it is standard or automatic, (iv)
the entrant’s responsibility for tax, title, license and
insurance, and (v) any limitation on the legal age of
the winner.
Depending on the type of
prize awarded, a company should consider obtaining
releases and waivers of liability from winners.
For example, if the prize is a cruise trip, a company
should get a written waiver of any liability occurring
as a result of any injury to the winner when
participating in cruise activities. In addition, a
company may want to obtain an affidavit from winners to
further protect itself from liability. If a car is
awarded, the winner would certify in the affidavit
that, among other items, that he or she has a valid
driver’s license and that the car is covered by
insurance.
Legal issues do not stop
once a prize is awarded. If a company wants to use
information concerning the winner in company promotions
or otherwise, it should obtain a publicity release from
the winner. Tax Form 1099 may be required to be
filed with the Internal Revenue Service in connection
with the award of a prize. The winner should be
informed that he or she is responsible for all taxes,
including sales and income taxes. Companies also
should be mindful of the growing number of prize and
gift notification statutes.
Online promotions present
an additional level of complexity. The Internet
has raised new issues with respect to the implementation
of a sweepstakes. The issue as to whether Internet
access constitutes consideration under the law has not
been fully resolved. The best solution is to
provide an alternative method of entry, such as by mail
or facsimile. Alternative methods of entry must be
treated with equal dignity as compared to entries
submitted by other methods. Because the vast array
of regulations regarding sweepstakes takes place on the
state level, online sweepstakes which reach across the
entire Internet must take into account the laws of all
fifty states. At times, it may be difficult to
tell who the entrant really is. In a dispute as to
who submitted the entry, a company should provide that
the entrant will be determined by who established the
email account. A company should also consider
requiring that an entrant scroll down through the rules
and click “I accept” before entering.
To summarize, among the
steps a company can take to minimize or avoid legal
issues in conducting a promotion are: (i)
establish and follow official rules, (ii) be aware of
complying with various state laws regulating the
specific type of promotion offered and (iii) when
applicable, obtain liability releases, affidavits of
eligibility and publicity releases. Promotions can
be a successful marketing tool if properly
conducted.
Jane Fergason is a partner at
Gardere and a member of the Retail Industry Team where
her practice focuses in the corporate area, with
particular expertise in representing franchise, direct
sales, and distribution clients. Please email
Jane if you have questions or would like more
information about this article.
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