June 16, 2010

Sweepstakes can be an effective and economical way to generate interest in your business and its products and services. In particular, a well-marketed sweepstakes promotion may help build customer loyalty to a company's website and provide an easy tool for collecting information about existing and potential customers. In light of the higher costs associated with conducting a sweepstakes through the U.S. Mail or via broadcast and print media, more and more businesses are turning to the Internet. As a result, we have seen a dramatic increase in the number of sweepstakes that are promoted, take place and allow entry through commercial websites.

Sweepstakes, Lottery or Contest?

When creating a successful sweepstakes promotion, businesses must carefully draft rules and disclosures to avoid having the sweepstakes characterized as a private lottery, which is illegal in every state. Defined simply, a sweepstakes is a marketing promotion that awards a prize—either monetary or non-monetary—to a participant on the basis of chance. A lottery, on the other hand, requires chance and a prize, along with what is known as "consideration" (as defined below). Ultimately, the only difference between a lottery and a sweepstakes rests on the finding of consideration. A third category of marketing promotion, known as a contest, does not qualify as either a lottery or a sweepstakes because the winner is selected through some demonstration of skill, ability, knowledge, creativity, judgment or expertise. Examples of contests include photography, writing, athletics, cooking and playing video games. Entrants in a contest must be evaluated under objective, predetermined criteria by one or more judges who are qualified to apply such criteria.

As most marketing promotions award prizes randomly (i.e., by chance) to attract a larger audience, businesses must be careful to avoid the "consideration" element. While the definition can vary from state to state, consideration generally requires entrants to pay a fee or purchase a product to participate in the promotion. In addition, state courts have found consideration in certain non-monetary expenditures (e.g., requiring a consumer to visit a store, fill out a cumbersome marketing questionnaire, etc.).

There has been some concern that requiring a computer and/or Internet access to enter a sweepstakes could be deemed consideration. However, as long as consumers are not specifically induced to purchase Internet access and/or a computer for the purpose of participating in a promotion, Internet sweepstakes are not likely to be deemed an illegal lottery on that basis alone.

Rules of the Road

While all sweepstakes are subject to Federal Trade Commission regulations, it is important to consider state laws as well. In fact, because Internet sweepstakes are essentially borderless, they must comply with the relevant laws in all 50 states and, unless the promotion is limited to U.S. residents, international laws. Furthermore, Internet sweepstakes that permit children under the age of 13 to enter must comply with the Children's Online Privacy Protection Act (COPPA). Depending on the structure of the sweepstakes, the types of media used to promote and implement the program, and the types of products or prizes involved, additional FDA, IRS, ATF and other regulations may apply.

The bottom line is that businesses considering a sweepstakes promotion should work with legal counsel to review state legislation and case law, and to carefully draft the official rules defining the sweepstakes to avoid an argument that the promotion requires illegal consideration. These official rules, as well as disclosures for promoting an Internet sweepstakes, must be made available to potential entrants. Generally, the rules must disclose the method of entry, eligibility, method of determining a winner, odds of winning, the beginning and ending dates of the sweepstakes, and where a list of winners may be obtained. The sponsor's name and address must also be included in the rules.

If you are considering an Internet sweepstakes as a way to promote your business and drive traffic to your website, our Intellectual Property & Technology group can help you navigate through the applicable federal and state regulations to design and run a cost-effective marketing promotion that achieves your objectives. Our IP attorneys have experience drafting sweepstakes rules and disclosures that are designed to maintain the integrity of your promotion while minimizing the risk that your sweepstakes will be deemed an illegal private lottery.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.