Why Your “Mundane” Online Promotion May Have Not so Mundane Gambling Consequences

“Almost every company offers sweepstakes and contests, what is the concern?” This is the response I get on almost a daily basis when speaking with clients and their marketing departments about a proposed online promotion.

Unequivocally, the Internet and social media have become the most efficient mediums operators use in order to disseminate information and sell their products/services, connect with their customers and strengthen their brand. With this availability and convenience, also comes numerous opportunities to run afoul of the law (e.g., violations of gambling prohibitions, FCC/FTC guidelines, necessary official rules provisions and state registration/bonding requirements). This post touches upon a few of the more common gambling issues to be aware of with promotional offerings.

Traditionally, the federal government has not played a major role in the regulation of gaming. Instead, regulation has been viewed as most appropriate for state and local jurisdictions. Accordingly, most states have commonality in that they typically define gambling as any activity in which the following elements are present: (1) the award of a prize, (2) determined on the basis of chance, including a future contingent event outside of their control, and (3) where consideration is required to be paid. If any one of these elements is removed, then the activity is generally lawful.

In regards to consideration, most states have adopted a pecuniary/economic value approach to analyzing it – some measurable economic value flowing from participants to promoters (e.g., transfer of money). A promotion requiring a purchase or payment to participate presents a clear example of consideration. A less clear situation exists where participants are required to expend some degree of effort that ultimately benefits the promoter (e.g., completing a questionnaire). While no definitive standard exists, the rule of thumb is the more effort required, the greater the likelihood it will be deemed consideration.

Removing consideration creates an activity known as a sweepstakes. To remove the element of consideration and avoid the general prohibition against lotteries, promoters offer an alternative method of entering the promotion for free (AMOE). This is generally effective in terms of legally eliminating the consideration element although most entries into the promotion will be through the purchase of the promoted product/service.

A key to utilizing an AMOE is that the company must disclose the existence of the non-purchase method of entry in a clear and conspicuous manner. Often the words “no purchase necessary” are displayed prominently on all sweepstakes materials. Another key is that non-paying participants must have “equal dignity” with purchasers (i.e., equal opportunity to enter, to win and to win the same prizes). For example, allowing free mail-in entries to have a grace period after the entry deadline promotes equal dignity.

Additionally, a person that enters by purchase cannot get a disproportionate number of entries compared to non-paying entries. Non-paying participants also should have equal chances to win all prizes offered. That is, separate prize pools may invalidate the AMOE, because the non-paying participants do not have the opportunity to win the same prize. Likewise, non-paying participants should not face greater odds or obstacles to winning the prizes. Any material disparity (actual or perceived) can invalidate this model.

In short, those wishing to use the Internet as a method to promote a product/service must recognize they are entering an intricate and specialized industry and be conscious of the complex legal boundaries in which they must operate. Counsel therefore, plays a pivotal role in the design, review, and, ultimately, dissemination of any online sweepstakes presence.

Should you have any questions regarding offering promotional sweepstakes, please do not hesitate to contact me at krutledge@lrrc.com.

Image Courtesy of: Frontier Official Used under Creative Commons license