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Structuring Sweepstakes and Contests

By Austin Padgett

Whether operated by a franchisor or a franchisee, contests involving skill (“contests”) or games of chance (“sweepstakes”) aimed at consumers are often an integral part of a promotional and brand-building effort. These promotions can range in size and complexity ' from a restaurant's “business card fishbowl” drawing to a complex Internet and mobile promotion. Regardless of the details of your promotion, various federal and state laws and regulations may apply. This article sets forth some key legal and practical issues you should consider when operating a promotion.

Illegal Lotteries. Generally, federal and state laws prohibit any entity other than a state (or state licensees) from conducting a “lottery.” A contest or sweepstakes that contains each of the following three elements is considered an illegal lottery:

  1. An element of chance ' that is, randomness or luck plays a part in the determination of winners. State laws vary on the amount of chance required to constitute an illegal lottery;
  2. A prize ' anything of value awarded to one or more winners chosen; and
  3. Consideration ' this includes monetary and non-monetary consideration, and state laws vary on the amount of consideration required to constitute an illegal lottery.

Accordingly, one of these three elements should be removed before any promotion may proceed.

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