Online Promotions: Sweepstakes, Contests, and Avoiding Illegal Gambling

Prize based online promotions go by a lot of names: sweepstakes, contests, giveaways, and more.  They can be an incredibly effective tool for marketing a new product, getting the name of your business out there, or just building buzz.  However, these promotions can be a legal minefield to the unprepared. In order to properly build a legal and successful promotion, you need to consider everything from federal and state specific regulations, to privacy laws and rights of publicity.

Over this series of articles, we hope to give an overview of promotional law.  These articles are not legal advice, but merely an overview of the legal terrain that can help inform your discussions with your attorney, or provide a starting point for an attorney’s research.  We strongly suggest you retain legal counsel before attempting any sort of prize based promotion.  The fines for violating state and federal law can be immense, and can break a young startup.

The Big Issue: Sweepstakes, Contests, and Lotteries

The first and most important threshold any promotion must pass is to avoid being an illegal lottery.  A lottery is, generally, where entrants pay a fee for a chance to win a prize. Although many states run their own lotteries, the practice is highly regulated when private citizens or corporate entities wish to run one.  You should never try to run a lottery without consulting an attorney.  These are the general trends various rules follow, but state laws are often very different.

A promotion becomes a lottery if it (1) has a prize, (2) winning that prize is based on chance, and (3) entrants have to provide something in order to enter the promotion (commonly called ‘consideration’ by lawyers).  If a promotion only has any two of those elements, it is usually legal in most states.  However, if all three are present, the promotion is often an illegal lottery.

Prizes

The simplest element to discuss is the prize element.  A prize is any reward of value offered by the promotion, from money, to some sort of item (a car, a computer, a music cd, etc).  Some jurisdictions can even count intangible rewards like naming a new product or an interview with a celebrity. Most online promotions use prizes to motivate entrants, so this element is rarely excluded from a promotion.  More often, chance or consideration must be absent.

Chance

The second element to discuss is random chance, or promotions based on luck.  These promotions are called sweepstakes (often called giveaways as well).  However, the degree of chance that must be present in order to render a promotion a sweepstake changes from state to state.  There are 4 main categories that state regulations and case law governing random chance fall under.  Those 4 categories are called (1) Dominant Factor, (2) Material Element, (3) Any Chance, and (4) Pure Chance.  If a promotion is not determined by luck, but instead by some skill of the participants, then the promotion is called a contest.

Dominant Factor states care about whether chance is the dominant factor in determining the winner of the promotion.  If chance predominates over skill in winning the promotion, then it is a sweepstakes.  However, if the promotion is at least 50% skill based, than most states consider such a promotion to be based on skill, not chance, and deem it a contest.

A fewer number of states are concerned about whether chance plays a significant role in determining the winner.  These “Material Element” states require that chance not be so significant that it is a “material” part of determining the winner.  This makes determining the role of chance in promotions tricky, because “material” is a legal term that can vary slightly from jurisdiction to jurisdiction.  A good rule of thumb, however, is if most people would think that chance or luck matters in the promotion, then it is a material element.

Very few jurisdictions take a more black and white view of chance in sweepstakes, but they do exist.  These jurisdictions either mandate that any promotion with any element of chance is a sweepstakes, or else require that no skill is present, only chance.

Consideration

The third element used in distinguishing promotions from lotteries is consideration. Consideration is a legal concept revolving around the exchange of things.  Almost anything can qualify as consideration, from money and tangible objects, to information, to an agreement to act a certain way in the future (for instance, an agreement to come to an in person promotion).  In the case of promotions, the element of consideration is met if the entrants are required to give up or provide anything to enter the promotion. Most problematic for online promotions is the fact that many jurisdictions can regard requiring entrants to “like” or share a page, “retweet” a post, or even visit a webpage to be consideration.  This is unfortunate, because generating social media buzz is often the point of online promotions.

A Few Rules of Thumb

There are a few common ways to avoid being an illegal lottery.  First, is to minimize the role of chance in a promotion, by requiring the submission of pictures, video segments, short essays, etc.  If the submissions are then judged or voted on, with no randomized selection, it is unlikely that any particular jurisdiction will find the chance element to be present.  This renders the promotion a contest, and will leave you free to offer a prize and require consideration (like submitting a picture, or sharing the contest on social media).

The second common way to avoid being an illegal lottery is to ensure entrants can enter the promotion for free, simply by submitting their contact information, with no requirement to submit anything else, or visit any page, or like any post.  Once the threshold for initial entry is free of consideration, it is often possible to offer additional entries into the promotion for liking a page, or sharing a video.  This allows you to run a sweepstakes, by offering a prize based on random chance.  

However, it is vital to keep in mind that these are general trends that many states, but not all, follow.  The states are divided on how to regulated promotions and gambling, and there is no “one size fits all” rule for running promotions.  These are general guidelines you should consider when thinking about running a promotion, but you should always consult an attorney on the specifics.

Wrapping It Up

To sum it up, the first and most important thing you need to do is make sure you don’t run afoul of the relevant state(s)’ gambling laws by running an illegal lottery.  To start with, you must make sure your promotion only includes 2 of prize, chance, and consideration.  This can be tricky, because online promotions can be considered to run in multiple states-with all their different laws applying.

However, this is only the first step you must take in designing your promotion!  Next, you have to ensure that you comply with the myriad of other state and federal laws on things like soliciting entry to your contest, regulations on the prizes, specially regulated sweepstakes situations (things like promotions involving user-generated content, promotions which are charitable in nature, or in industries such as dairy, gas, tobacco, insurance, finance, or alcohol), state and federal privacy laws, and more.   Then, you need to consider internet specific issues like data security, internet law, and the terms of service of any third party sites you might use (like Facebook or Twitter).  Finally, you need to have an airtight and iron clad terms and conditions of your own to prevent nasty surprises down the road.

To make sure all your ducks are in a row, you really do need an attorney to make sure your promotion is up to snuff.  Here at The Law Offices of Lurie and Ferri, we are more than happy to help!  To contact us, just send a message through the contact link below.  Also, keep an eye out for more articles on promotions in the near future!  We’ll be posting on state laws, solicitation rules, and basically all the nitty-gritty details that may impact your promotion.