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Presentation on Sweepstakes and Contests

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  • 1. DAVID RICE SWEEPSTAKES & CONTEST LAW
  • 2. OVERVIEW
    • Definitions
    • Background
      • Why are sweepstakes highly regulated?
    • Regulatory review
      • State and Federal
    • Best practices
  • 3. SWEEPSTAKES ARE POPULAR MARKETING TOOLS
    • Companies view sweepstakes as significant sources of publicity and business
    • By mail -- Publishers Clearing House, Reader’s Digest, American Family Publishers
    • By internet
    • In-store promotions
  • 4. DEFINITIONS
  • 5. SWEEPSTAKES
    • Sweepstakes
      • (1) Chance
        • Random drawing
        • Not a skill contest
      • (2) Prize
        • Anything of value
      • (3) No consideration
        • “No purchase necessary”
        • A “sweepstakes” that includes consideration is actually an illegal lottery.
  • 6. SWEEPSTAKES
    • Sweepstakes
      • “‘ Consideration’ means anything of pecuniary value required to be paid to the promoter or sponsor in order to participate in a promotional contest.”
        • RCW 9.46.0356(5)(a).
      • “ Substantial effort or time.” FCC v. ABC , 347 US 284 (1954).
  • 7. LOTTERY
    • Lottery - Chance, prize, consideration
      • States operate lotteries
      • Private lotteries are illegal
  • 8. CONTEST
    • Contest.
      • Skill, prize, possible consideration
      • The winner is determined by skill not chance
        • Write a winning song, solve puzzles, or answer questions.
        • Skill or knowledge wins the contest, not chance.
        • Caution: Do not insert an element of chance back into the skill contest by using a random tie-breaker mechanism.
      • An entry fee or purchase may be required.
  • 9. RAFFLES
    • Raffles - Contain all three elements of an illegal lottery
      • May be permitted if conducted by nonprofit entities that use the proceeds for educational or charitable purposes.
      • Sponsor typically must register in advance and obtain a license from the state.
  • 10. GAMBLING
    • Gambling – Wagering something of value on the outcome of a “contest of chance” or a future contingent event not under the player’s control, on the chance of winning a prize. RCW 9.46.0237.
    • A poorly designed sweepstakes or contest can be illegal gambling -- Criminal penalties
  • 11.
    • The Federal Trade Commission (“FTC”)
      • Receives more than 10,000 complaints a year from consumers about gifts, sweepstakes and prize promotions.
    • Congress
    • U.S. Postal Service
    • State attorneys general
    • State gambling/gaming commissions (lottery)
    • Others
    REGULATORS
  • 12. BACKGROUND
  • 13. INVESTIGATIONS
    • Why are sweepstakes and contests highly regulated?
    • Long history of regulation of lotteries and gambling
    • Serious problems arose in 1990’s with sweepstakes
      • Sweepstakes participants were swindled.
      • Between 1997 and 1999, more than 3000 consumers reported losses to the Postal Inspection Service totaling $5.2 million from schemes related to fraudulent or misleading sweepstakes mailings. *
      • Congressional hearings
        • * http://levin.senate.gov/newsroom/release.cfm?id=218293
  • 14. PUBLISHERS CLEARING HOUSE
    • Winners announced on television.
    • Ed McMahon promoted, announced prize winners
    • Players put stickers on outside of entry envelope indicating whether they made a purchase.
    • Problem: PCH sweepstakes offers made some people believed their odds of winning would increase with purchases
  • 15. PUBLISHERS CLEARING HOUSE
    • State AGs investigated in 2000
    • June, 2001 - Comprehensive settlement involving 26 states.
      • PCH agreed to pay $34 million in fines, penalties and restitution , including $19 million to be paid as restitution to consumers deceived by PCH.
    • Do not assume that a national sweepstakes is being run legally.
  • 16. M C DONALDS
    • McDonald’s Monopoly, very popular, long running
    • 2001, promotion put on hold.
    • Simon Marketing, game administrator, had a procedure flaw.
  • 17. M C DONALDS
    • Chief of Security removed the rarest game pieces, gave them to others who redeemed them and shared proceeds.
    • Almost all grand prize and top prize winners for several years participated in the scheme.
    • $24 million taken by scammers.
  • 18. M C DONALDS
    • McDonald’s did not know and later made efforts to cure.
    • Five $1,000,000 awards to legitimate winners.
    • Concern about McDonald's oversight.
    • 51 indicted.
    • Lawsuit between McDonald’s and Simon Marketing.
    • Game resumed in 2003 with additional precautions.
      • In 2007, a UV light cent symbol was added.
  • 19. SCAMS
    • Use of fake names of government agencies and phone numbers that mask where they’re calling from.
      • “ The national consumer protection agency”
      • “ National Sweepstakes Bureau”
      • Even the “Federal Trade Commission (FTC)” itself
      • Technology used to make it appear as if they are calling from Washington, DC
      • Gives false legitimacy.
  • 20. STATE REGULATIONS
  • 21. WASHINGTON
    • Promotional Contest of Chance (“PCOC”)
    • “The elements of prize and chance are present but . . . the element of consideration is not present.” RCW 9.46.0356.
  • 22. WASHINGTON
      • PCOC exception
        • Consideration does not include requirements such as visiting a business location, placing or answering a telephone call, completing an entry form or customer survey, or furnishing a stamped, self-addressed envelope.
        • RCW 9.46.0356(5)(a).
  • 23. WASHINGTON
    • To comply with the WSGC guidelines, an Offer should have the following disclosures:
      • (1) No purchase is necessary to win
      • (2) The name and address of the sponsor
      • (3) All eligibility requirements
      • (4) The termination date for eligibility, and whether that date is a postmarked or receipt date
      • (5) The number of prizes offered
  • 24. WASHINGTON
    • (DISCLOSURES CONTINUED):
      • (6) The approximate odds of winning, and whether the odds depend on the number of entrants
      • (7) The geographic areas covered and areas where the offer is void, if any
      • (8) The date winners will be chosen and notified
      • (9) The method by which winners will be selected, which should involve selection by random chance
      • (10) Whether or not the winner must be present at the drawing
  • 25. WASHINGTON
    • (DISCLOSURES CONTINUED):
      • (11) Disclose publicity rights regarding use of the winners’ names
      • (12) A mailing address to allow consumers to request a list of winners of prizes greater than $25.00 in value
      • (13) Whether the winner is responsible for paying taxes.
      • (14) All entry procedures
      • (15) Alternative method of entry
  • 26. CASE STUDY #1
    • Illegal lottery or legal sweepstakes?
      • Under Washington law, a lottery involves prize, chance and consideration. RCW 9.46.0257.
      • Newspaper runs a promotion in which participants predict the outcome of football games.
      • Participants pay an entry fee; winner gets a prize
      • Newspaper accused of running an illegal lottery
      • Newspaper defends its actions saying that it is not running a lottery because it takes skill to predict the outcome of football games, even though the outcome does involve chance.
      • Illegal lottery or sweepstakes?
  • 27. CASE STUDY #1
    • The Seattle Times “Guest Guesser” case
      • A lottery
        • Chance rather than skill was the “dominant factor” in determining the outcome, “however harmless [ the contest ] may be in the opinion of the participants and the promoters.”
        • See Seattle Times v. Slade Gorton , 80 Wn.2d 502, 510 (1972).
  • 28. CASE STUDY #2
    • Fantasy sport league
    • Entry fee submitted by players
    • Entry fee pays for prizes and expenses of league.
    • Cash prize awarded based on performance of teams
  • 29. CASE STUDY #2
    • WSGC – “A fantasy sports league which collects an entry fee and awards prizes based on the performance of the respective teams is gambling.”
    • But the contest is legal because:
      • The entry fees for the Fantasy Sports League paid for the prize and the expenses involved in running the game only.
      • No one other than the players themselves received any profit other than personal gambling winnings.
      • This is known the “player exception” to gambling. See RCW 9.46.0269.
  • 30. CASE STUDY #2
    • What happens if it is a fundraiser, such as for a non-profit organization?
    • Could be illegal, if player exception does not apply
  • 31. CASE STUDY #3
    • Player and third party money staked on outcome of billiards/pool game
    • Illegal gambling or skill contest?
  • 32. CASE STUDY #3
    • Gambling.
    • Billiards is a game of chance (and therefore illegal gambling) rather than skill.
    • Dodd v. Gregory , 663 P.2d 161 (Wash App. 1983)
  • 33. WASHINGTON
    • “Promotional Advertising of Prizes”
    • Disclosure requirements apply to any “promotion offer” made
      • (1) to a person in Washington,
      • (2) to induce someone to come to Washington to collect a prize, or
      • (3) to induce someone to contact a promoter in Washington.
      • RCW 19.170.010(3).
  • 34. WASHINGTON
    • Washington prohibits “unfair or deceptive acts or practices in the conduct of any trade or commerce.” RCW 19.86.020.
    • Intent to deceive is not required.
    • Courts have found that an illegal sweepstakes may be an unfair or deceptive act or practice.
      • Put material terms and conditions in the sweepstakes offer.
  • 35. OREGON
    • Oregon prohibits private lotteries. Or. Const. art. XV.
    • Sweepstakes offer - ORS 646.651(1)(b).
      • Clear and conspicuous disclosure of
        • The odds
        • The name and address of the sponsor
        • The procedure for entry without purchase
  • 36. OREGON
    • OAR 137-020-0430
      • It is unfair or deceptive in trade or commerce for a sponsor to advertise or solicit any sweepstakes unless there is a clear and conspicuous disclosure of specific issues.
  • 37. OREGON
    • Contests - OAR 137-020-0420. Clear and conspicuous disclosures, including:
      • (1) Rounds
      • (2) If the contest involves multiple rounds of increasing difficulty, an example illustrative of the last determinative round or a statement that subsequent rounds will be more difficult;
      • (3) The maximum total cost the final winner will have paid to the sponsor to participate in the contest,
  • 38. OREGON
    • (CONTESTS CONTINUED):
      • (4) If the contest is judged by other than the sponsor, the identity of or description of the qualifications of the judges;
      • (5) The method used in judging
  • 39. OTHER STATES
    • Each state regulates sweepstakes and contests differently.
    • Survey of other state laws outside the NW
  • 40. STATE LAW VARIES
    • New York
      • Register and obtain a bond when giving away prizes valued at over $5,000.
    • Florida
      • Register and obtain a bond when giving away prizes valued at over $5,000.
    • Rhode Island
      • Register if retail contest over $500
  • 41. STATE LAW VARIES
    • Tennessee - State law prohibits sweepstakes agencies and sponsors from requiring sweepstakes prize winners to submit to “in perpetuity” publicity releases.
    • Vermont - It is “unfair and deceptive” to require people who request a list of sweepstakes winners to pay for postage for the response, according to the Vermont Attorney General.
  • 42. STATE LAW VARIES
    • Texas – Special rules apply to sweepstakes with prizes above $50,000
      • Such as: you may not automatically enter an individual in a sweepstakes because the individual has made a purchase.
  • 43. STATE LAW VARIES
    • Virginia – 1930’s case says that requiring a player to visit a location to enter is a form of consideration, that would convert an otherwise legal sweepstakes into a lottery.
  • 44. CALIFORNIA – CASE STUDY #4
    • What happens if you are a payphone owner and you want to run a sweepstakes for callers using your phones?
    • Participants win cash prizes
    • Winner based on chance drawing
    • No purchase necessary, alternate method of entry used.
  • 45. CALIFORNIA – CASE STUDY #4
    • Illegal slot machine, with criminal penalties.
      • See California Penal Code Sections 330a, 330b, and 331.
    • A device can be a slot machine regardless of whether money is physically inserted into it.
  • 46. CALIFORNIA - CASE STUDY #5
    • Sweepstakes vending machine –
      • Telephone card vending machine
      • Users inserted a bill into the machine and a video screen showed animated spinning wheels depicting money.
      • Winners received money and a telephone card, and losers received a telephone card only.
      • The device informed users that it was part of a sweepstakes that players could enter by sending in a postcard, and thus no purchase was necessary to win.
  • 47. CALIFORNIA - CASE STUDY #5
    • The vending machine is a slot machine
      • It gave “ more than the merchandise – which means the sum deposited is not the ‘exact consideration’ for the telephone card.”
    • Lockyer v. Pacific Gaming Technologies , 82 Cal. App. 4th 699 (2000).
  • 48. OTHER STATES
    • State laws re unfair and deceptive advertising may also apply
    • Each state is different.
      • Know the law of each state where the sweepstakes/contest is offered
  • 49. FEDERAL REGULATIONS
  • 50. FEDERAL LAW - DMPE
    • The Deceptive Mail Prevention and Enforcement Act (“DMPE”) contains explicit regulations regarding the conduct of sweepstakes.
      • However, the DMPE applies to mailings deposited in the U.S. mail rather than email, so it does not expressly regulate the Sweepstakes.
      • Applies to mailings containing entry materials
    • Does not preempt state law
  • 51. DMPE
    • Sweepstakes disclosures
    • Prohibits promotions that cause a reasonable person to believe that the promotion came from or was approved by the government.
      • No federal government seals
      • No implication that benefits will be reduced or altered unless a product is purchased
  • 52. DMPE
    • Disclosures must be “clearly and conspicuously displayed.”
    • “ Readily noticeable, readable and understandable” by an “average” consumer
    • No “facsimile checks” unless clear disclosure that it is not negotiable and has no cash value
    • Postal service will discard “deceptive” mailings.
  • 53. DMPE
      • No purchase necessary, purchase will not improve the chances of winning
        • This must appear in the mailing, the rules and the entry form and must be each to find and understand.
      • Sponsor's name and business address
      • Estimated odds.
      • Quantity and estimated retail value and nature of every prize.
      • Payment schedule of every prize – installment payments.
  • 54. DMPE
    • Mailings can’t say that, if you don't buy a product or service, you won't receive future mailings.
    • Cannot require that an entry be accompanied by an order or payment
  • 55. DMPE
    • Cannot say that someone has won a prize unless they have actually won.
      • Different from a “premium,” which all entrants receive for free. See “free” as defined by 16 C.F.R. § 251.1.
    • Separate disclosures for skill contests
  • 56. DMPE
    • Sponsor must give consumers a reasonable means of requesting removal from sweepstakes mailing lists.
      • Even if entry materials not enclosed
  • 57. DMPE
    • Sponsor must maintain a list of all people requesting removal for 5 years.
    • Civil penalties up to $2,000,000.
  • 58. AFTER DMPE
    • In 1999 there were 7,500 consumer complaints about sweepstakes mailings made to the USPS.
    • By 2003, just 1,800 sweepstakes-related complaints.
    • Sweepstakes complaints now make up only 3.7 percent of total USPS complaints, down from nearly 13 percent.
    • Success? It may be due to the fact that sweepstakes are moving online . . .
  • 59. UNFAIR AND DECEPTIVE ADVERTISING STATUTES
    • The FTC regulates sweepstakes under its general authority to prohibit unfair or deceptive acts or practices.
      • 15 U.S.C. 45(a).
    • Applies broadly, not just to mailings.
  • 60. TELEMARKETING SALES RULE
    • FTC Telemarketing Sales Rule (16 CFR Part 310)
      • Telemarketers offering a prize promotion
      • Inform consumers clearly and conspicuously:
        • no purchase is necessary to enter,
        • how consumers who do not wish to make a purchase may enter the prize promotion, and
        • the odds of receiving the prize where there are several prizes.
      • Prohibits others from providing substantial assistance to telemarketers whom they know or consciously avoid knowing are violating the rule.
  • 61. LOTTERY BROADCASTS
    • 18 U.S.C. Sec. 1304
    • Prohibition against advertising of lotteries
      • Prohibits broadcast of “any advertisement of or information concerning any lottery, gift enterprise, or similar scheme, offering prizes dependent in whole or in part upon lot or chance , or any list of the prizes drawn or awarded by means of any such lottery, gift enterprise, or scheme, whether said list contains any part or all of such prizes”
  • 62. LOTTERY BROADCASTS
    • Fine or one year imprisonment
    • “Each day's broadcasting shall constitute a separate offense.”
    • Exceptions apply where state law does not prohibit the game
  • 63. LOTTERY TICKETS
    • Prohibition against interstate trafficking of lottery tickets.
      • 18 USC 1301.
      • Some poorly designed “sweepstakes” may be caught in this
      • Exceptions
  • 64. THE INTERNET
    • Entering sweepstakes by mail is declining in popularity, replaced by online sweepstakes
    • Online sweepstakes:
      • Quick and easy to enter.
      • Player does can enter hundreds of sweepstakes a day at no cost.
      • Provide immediate confirmation when an entry is received,
      • No postage or paper costs.
      • Check boxes certifying that entrants have read rules, etc.
  • 65. THE INTERNET
    • Many of the laws are the same. Focus on:
      • Federal laws against online gambling
      • Key issues for sweepstakes
        • Player data security
        • Children's Online Privacy Protection Act
    • Mobile phones
  • 66. ONLINE GAMBLING
    • Unlawful Internet Gambling Enforcement Act (UIGEA), enacted in 2006. 31 USC §§5361-5367
      • Prohibits interstate gambling funding transfers.
      • Only applies where game violates state gambling laws.
      • A poorly designed sweepstakes can violate UIGEA
  • 67. ONLINE DATA SECURITY
    • Privacy Policy
      • Data collection is fundamental part of operating a sweepstakes or contest
      • Conflict between collection and handling of data from participants and company privacy policy
      • Unfair and deceptive?
  • 68. ONLINE DATA SECURITY
    • Jan 2008 Consent Decree between www.lifeisgood.com and the FTC
      • Not a sweepstakes case, but illustrates what must be in a privacy policy
      • Collected consumers’ name, address, e-mail address, phone number, credit card number, credit card expiration date, and credit card security code through their website and telephone orders
      • Stored it on a network computer accessible through the website.
  • 69. ONLINE DATA SECURITY
    • Company had a privacy policy on their Web site stating:
      • “ We are committed to maintaining our customers’ privacy.”
      • “ All information is kept in a secure file and is used to tailor our communications with you.”
  • 70. ONLINE DATA SECURITY
    • Hacker accessed the sensitive information in 2006
      • Credit card numbers, expiration dates, and security codes.
  • 71. ONLINE DATA SECURITY
    • FTC – Company failed to protect data:
      • Stored the consumer information in clear, readable text;
      • Created unnecessary risks to consumer information by storing it indefinitely on their network, without a business need, and by storing credit card security codes;
      • Did not adequately assess the vulnerability of their web application and network
  • 72. ONLINE DATA SECURITY
    • FTC
      • Company did not implement reasonable and appropriate measures to protect consumer information against unauthorized access.
      • Privacy policy was false or misleading, and company’s actions were deceptive acts or practices in violation of FTC Act.
    • Relevant to online sweepstakes
  • 73. CHILDREN’S ONLINE PRIVACY PROTECTION ACT
    • The Children’s Online Privacy Protection Act (2000)
      • Key issue for sweepstakes involving children
      • Applies to the online collection of personal information from children under 13.
      • What a Web site operator must include in a privacy policy, when and how to seek verifiable consent from a parent and what responsibilities an operator has to protect children's privacy and safety online.
      • Violation is an unfair and deceptive practice
    • Relevant to online sweepstakes
  • 74. MOBILE PHONES
    • How to reach younger audiences?
      • Don’t read the newspaper
      • Don’t respond to mail-in sweepstakes
      • Some use their mobile phone as their only phone
    • Answer? Mobile contests and sweepstakes
  • 75. MOBILE PHONES
    • Text messaging promotions advertised during The Apprentice , Deal or No Deal , and American Idol .
      • Enter a text message to enter the sweepstakes
    • Players were charged a 99 cent premium fee by their cellular providers
  • 76. MOBILE PHONES
    • February 2007 -- a class charged The Apprentice with running an illegal gambling scheme for its “Get Rich With Trump” sweepstakes.
    • The suit alleged that the sweepstakes was an illegal lottery even though viewers could participate for free online.
      • Dismissed without prejudice
  • 77. MOBILE PHONES
    • Similar suits filed against Deal or No Deal and 1 vs. 100 and against FOX for the sweepstakes broadcast during American Idol
    • Same method of entry
  • 78. BEST PRACTICES
  • 79. BEST PRACTICES
    • Best practices will not guarantee immunity from liability
      • Some of the requirements that apply to sweepstakes are ambiguous and involve fact-specific analysis and state-by-state analysis.
    • What is legal in one state may not be legal in other states
  • 80. BEST PRACTICES
    • Official Rules
      • No purchase necessary
        • Be careful regarding non-monetary consideration
      • Alternate form of entry
      • Identify promoter
      • Entry procedures
      • Eligibility requirements
      • Clearly describe the prize
      • Odds
      • Geographic area covered and areas in which the offer is void, if any
  • 81. BEST PRACTICES
    • ( Official Rules CONTINUED)
      • The date winners will be chosen and notified
      • Method of selecting a winner
      • Whether or not the winner must be present for the drawing
      • Publicity rights regarding use of the winner’s name
      • Taxes
      • Protect sponsor
      • Limit liability
    • Consider having a third party administrator handle the contest/sweepstakes
      • Know the law and monitor them
  • 82. Case Study
    • Illegal?
      • (1) Pay an entry fee, winner determined by chance, win a prize.
      • (2) Pay nothing, provide name and email address, winner determined by chance, win a prize.
      • (3) Enter information into website regarding your finances, purchasing patterns, where you vacation, winner determined by chance, win a prize.
      • (4) $5 entry fee, must answer 4 out of 6 sports trivia questions to win a prize.
  • 83. DISCLAIMER
    • This presentation of MILLER NASH LLP is provided for informational purposes only and does not constitute legal advice or legal opinion about specific situations.
    • Attendees are urged to consult with legal counsel concerning their own specific facts and circumstances and any specific legal questions. For further information about the contents of this presentation, please contact David Rice , (206) 622-8484 or [email_address]
    • Copyright 2008.