Structuring Sweepstakes and Contests

Finally, sweepstakes and contests are often developed by marketers and reviewed by counsel, if at all, after the promotion has begun or during stages when changes are difficult or costly to make. Online marketing has enabled complex and exotic types of sweepstakes and contests that, if handled properly, may be structured to manage any risk of government or consumer action against the sponsor. There are many ways to structure promotions so that they are legally sound and still effective with consumers, but these decisions become more difficult in the later stages of development ' after time and money have been poured into a risky promotional campaign. Marketers and their counsel would be well-advised to consider the structure of the promotion in the beginning creative stages.

Austin Padgett is an attorney with Frost Brown Todd LLC in Cincinnati. He can be contacted at 513-651-6753 or [email protected]. This article incorporates elements of a presentation by Padgett at the February 2011 Hospitality Law Conference.

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.

For a sweepstakes to avoid being classified as an illegal lottery, advertisers often eliminate the element of consideration from the promotion. Some sweepstakes may automatically include an element of consideration (e.g., requiring the participant to purchase a product, sign up for a credit card, or to make a toll call). Even requiring the consumer to visit a store location in order to enter the promotion might be deemed “consideration” in some states. Where consideration is a part of the sweepstakes, the promotion should include a free alternative method of entry, such as a mail-in entry or a free Internet entry, so that consideration is not required for entry.

If you do not wish to eliminate the element of consideration, you can still administer a legal promotion by converting the sweepstakes to a contest by eliminating the element of “chance.” To do this, you must structure the promotion so that the winners are picked solely on the basis of “skill” (e.g., participants submit recipes or pictures and judges select submissions to win the contest). The contest's official rules should clearly define the criteria by which the participants or their submissions will be judged, and the judges must be qualified to apply the judging criteria to the entries.

Registration and Bonding. In some circumstances, you will need to register and provide a surety bond for a sweepstakes. New York and Florida generally require registration and surety bonds for games of chance with prizes in excess of $5,000. Rhode Island requires registration for games of chance conducted by or through retail outlets with prizes in excess of $500. Arizona requires registration for intellectual contests that require a purchase for entry.

User-Generated Content Promotions. Many promotions now require that participants submit a picture, a movie, a song, or another kind of “user-generated content” (“UGC”) for either entry into a sweepstakes or as the skill to be judged in a contest. There are two key considerations when administering a UGC-based promotion: who is judging the contest and who has rights to the UGC.

First, UGC promotions offering prizes and involving genuine skills should be properly set up as contests. In most instances, this will require, at a minimum, judging of submissions on reasonably identified criteria by qualified judges. The contest rules should include information on the judging criteria and standards.

Second, UGC promotions present a host of copyright issues. Promotion participants should warrant that the content submitted is free of material that is subject to rights of third parties, including intellectual property rights. Of course, depending on how the promotion is set up and how winners will be selected, these types of promotions can be considered either a sweepstakes or contest. In the context of online UGC promotions, some entities claim ownership over the UGC submitted by the entrant. The desires to use some or all of the UGC in future marketing and to prevent the entrant from allowing competitors to use the UGC play a role in this approach. Properly drafted, a license can provide sufficient marketing use rights and restrictions on the entrant's future use of the content and can provide protection from competitor use.

Promotions in the Facebook and Texting Environments

As discussed above, contests and sweepstakes are governed by state and federal laws and regulations. Additionally, online promotions require you to be aware of another body of rules ' the online forum's rules. If you are hosting promotions on your own website, there may be no additional rules.

Facebook, a popular forum for online promotions, however, has special rules that you should consider at the earliest stages of creating the promotion. Facebook's Promotions Guidelines mandate certain requirements regarding the entry process of promotions administered on Facebook, for example:

• The promotion must be closed to those under 18 years of age.
• Do not require promotion participants to buy anything or complete a lengthy task to enter the sweepstakes.
• Do not require promotion participants to take actions on Facebook; for example, update a Facebook status, post a comment on a Profile page, or upload photos directly to Facebook. Exception: You may condition entry on the participants becoming fans of your Facebook Page.
• You may require entrants to like your Page, check in to your Place, or connect to your Platform integration before they provide their full entry information, such as name and contact information.
• You may condition entry of the promotion upon a participant providing content through your application ( e.g., upload a photo for entry).
• You must include the following language adjacent to the promotion entry field: “This promotion is in no way sponsored, endorsed or administered by, or associated with, Facebook. You understand that you are providing your information to [list your company and any additional recipient(s) of information] and not to Facebook. The information you provide will only be used for [disclose any way that you plan to use the user's information].”

Regarding the practical administration of the promotion, Facebook requires certain actions that you should be aware of when planning your promotion. Most importantly, Facebook requires that you administer the promotion through a Facebook application. Though the application will run through the Facebook platform, Facebook views the application as your own forum, where you bear the responsibility and liability for the administration of the promotion, including any privacy-related concerns. Therefore, under the Facebook rules, you must avoid creating the perception that you are partnering with Facebook in any of your promotional materials. Generally, you may only reference Facebook when explaining the directions for entry. Further, when identifying winners, you may not do so through Facebook (e.g., messages, chat, posts on profile pages) ' though you may, however, collect mail or e-mail addresses through the application.

Text Message Promotions. Many promotions, particularly sweepstakes, include a text message entry option. Any fees incurred by participants in using a mobile device to enter a text message promotion will constitute consideration, whether the fee is charged by the sponsor as part of the promotion (i.e., premium) or by the mobile carrier based on the participant's applicable rate plan. These fees typically take the form of a flat rate for each text message sent and received, but in some instances participants can incur mobile carrier data rates or other fees for participating in a promotion. Regardless of the type of text'message-related fee imposed on a participant, all text message sweepstakes should include a free alternative method of entry to permit the participant to avoid such fees or costs.

In the event an entrant uses a mobile device to participate in a promotion, there are certain standard ' but unique ' advertising disclosures that should be made: “Standard mobile carrier text/data rates may apply,” or similar language. Depending on the relevant terms of the promotion, other disclosures may also be needed. In this context, it is important to think through the terms of the promotion and the associated terms that may need to be disclosed, due to certain inherent limitations in connection with mobile devices. For instance, placement of disclosures is an important consideration for text message promotions, given that most mobile devices provide very limited screen space. In addition, text messages afford a limited number of characters. In most instances, these limitations will require the use of additional methods to promote the text message promotion outside of the mobile device (e.g., television or print advertising, websites, etc.) in order to disclose all relevant terms and provide the complete rules.

Mobile-based promotion operators should consider reviewing and complying with the Mobile Marketing Association's (“MMA”) Mobile Marketing Sweepstakes and Promotions Guide. These guidelines mostly provide industry-standard technical requirements associated with each mobile carrier, as well as best practices to address the unique issues associated with promotions facilitated through mobile devices (e.g., opt-in/opt-out requirements for text messaging). In most instances, the company will use a third-party vendor to facilitate the mobile device promotion and interact with the applicable mobile carriers. These vendors may represent and warrant that they are facilitating the promotion in compliance with the MMA's guidelines.

Franchising: Who Has Control?

Because potential liability arises when operating sweepstakes and contests, one of the most important considerations when operating a promotion is to clearly determine what entity ultimately bears responsibility for the promotion: franchisor, franchisee, or, perhaps, a third-party service provider. The structure and marketing goals of the promotion will likely guide this determination. For example, if the promotion consists of multiple sweepstakes operating in separate geographic markets, it may be easier to administer each promotion on a local level with guidelines in place to assure uniformity. Promotion operators must also keep practical limitations in mind as well. If the sweepstakes operates on the Internet or Facebook platform, it may be preferable to centralize the promotion from a unified, branded website or Facebook application to avoid consumer confusion. Further consideration is warranted for international brands because some platforms, like Facebook, do not allow promotion operators to easily distinguish between foreign subsidiaries or citizens of particular countries, and this may warrant discussions regarding privacy, choice of law, and related issues.

Finally, sweepstakes and contests are often developed by marketers and reviewed by counsel, if at all, after the promotion has begun or during stages when changes are difficult or costly to make. Online marketing has enabled complex and exotic types of sweepstakes and contests that, if handled properly, may be structured to manage any risk of government or consumer action against the sponsor. There are many ways to structure promotions so that they are legally sound and still effective with consumers, but these decisions become more difficult in the later stages of development ' after time and money have been poured into a risky promotional campaign. Marketers and their counsel would be well-advised to consider the structure of the promotion in the beginning creative stages.

Austin Padgett is an attorney with Frost Brown Todd LLC in Cincinnati. He can be contacted at 513-651-6753 or [email protected]. This article incorporates elements of a presentation by Padgett at the February 2011 Hospitality Law Conference.