Perils of Using Social Media to Run Promotions

Social media has become a preferred medium for operators to disseminate information and sell their products/services, connect with their customers and strengthen their brand. With this availability and convenience, also comes numerous unforeseen 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 as you promote your sports and recreational products and services.

Gambling 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.

One of the most common promotional offerings is a sweepstakes. A promotional sweepstakes entails the awarding of a prize based upon chance, but removes the element of consideration. 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). Often the words “no purchase necessary” are displayed prominently on all sweepstakes materials. 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.

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, paying and nonpaying participants should be eligible for the same prizes at the same odds, i.e., paying participants should not be allowed to enter more than once if AMOE entrants are only permitted to enter once. Moreover, separate prize pools may invalidate the AMOE, because the non-paying participants do not have the opportunity to win the same prize. In essence, any material disparity (actual or perceived) can invalidate this model.

When utilizing social media, a company also must be aware of the applicable social media platform’s restrictions and draft the promotion’s rules in compliance therewith. This is important because a promotion could be removed from the platform for noncompliance with the platform’s restrictions. Such a removal may lead to a violation of the law because the promotion did not follow the course as set forth in its official rules.

Finally, several states require registration and bonding of the promotion if the prizes awarded exceed a set amount. To register with a state, among other items, the promotion’s official rules and registration fees are required. In addition to registration requirements, separate bonds/trusts based on the total approximate retail value (“ARV”) of all prizes are required for Florida and New York. Sufficient time for registration and bonding should therefore be given when contemplating offering a promotion. Failure to do so may result in the promotion being postponed to allow for the necessary registrations or result in the blocking of such states in order to proceed in the timeframe initially proposed.

In short, regardless of the size of the company or the promotion, those wishing to social media to offer a promotion to highlight their 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. Utilizing counsel intimately familiar with these issues to develop and vet proposed promotions is a valuable strategy to avoid, at a minimum, embarrassing delays in promotional offerings or in more severe circumstances, criminal penalties resulting from  improperly implemented promotions.

Should you have any questions regarding offering promotional sweepstakes or contests, please do not hesitate to contact the authors, Glenn Light at glight@lrrc.com or Karl Rutledge at krutledge@lrrc.com.