Contests and sweepstakes can be effective marketing strategies to help brands promote their products and services, engage potential customers and increase brand awareness. However, if your company is thinking about sponsoring a contest or sweepstakes, it's crucial that you're aware of the many applicable rules and regulations in order to avoid colliding with the law.
Multiple federal laws govern the administration of contests and sweepstakes, including most notably the FTC Act, which prohibits unfair and deceptive advertising practices. Contests and sweepstakes must be truthful, clearly disclose all material terms, include appropriate disclosures and follow all other truth-in-advertising laws. Additional federal laws may be applicable depending on the medium being used to advertise and administer the promotion, including laws enforced by the U.S. Postal Service and the Federal Communications Commission. Moreover, each state has its own laws that govern these types of promotions.
Both federal and state laws prohibit lotteries, except for state-run lotteries, which are promotions that include the following elements: (1) chance, (2) consideration, and (3) a prize. In order to run a legal contest or sweepstakes (and avoid qualifying as an illegal lottery), you must eliminate one of these elements.
Below, we provide a brief overview of the legal landscape surrounding contests and sweepstakes.
CONTESTS
- Chance: Contests remove the element of chance, which means they should be skill-based, and entrants should be judged by qualified judges based on objective criteria. This also means it is often permissible to require consideration in order to enter a contest (e.g., submitting a photo, design, artwork or essay to enter). However, certain forms of consideration, such as an entry fee or purchase requirement, are prohibited in multiple states, while other states may require registration or prohibit advertising a contest if a fee or purchase for entry is required.
- Structuring the contest to avoid chance: If consideration is
required for contest entry, it's crucial that you eliminate the
element of chance.
- Official rules should clearly disclose objective judging criteria by which entrants will be judged, and the criteria should be applied by qualified judges. Examples of objective judging criteria include creativity and originality (as opposed to subjective criteria such as "best," or "favorite"). The rules should also specifically disclose how much weight will be given to each criterion.
- Sponsors should provide clear guidance to entrants regarding submission parameters.
- Be cautious with certain types of games or entry methods that could include an element of chance such as trivia (i.e., an element of chance may be present if the questions are too easy or too difficult).
SWEEPSTAKES
- Consideration: A sweepstakes removes the element of consideration, which means it must be free to enter and the winner is randomly selected (i.e., by chance). "Consideration" can mean both a monetary or non-monetary expenditure. For example, requiring entrants to pay money or purchase a product to enter the promotion or requiring that they spend significant time or effort to enter can both qualify as "consideration." If you condition entry on payment, a purchase or some other form of consideration, you must also provide a free, alternative method of entry ("AMOE"), such as a mail-in or email entry.
- Equal Dignity: In order to avoid a real (or perceived) disadvantage to those who choose to enter a sweepstakes for free when more than one entry method is available, the AMOE must be treated with equal dignity. That is, the AMOE should be clearly and conspicuously disclosed in all marketing for the promotion, and all methods of entry should be subject to the same deadlines, prize pools and should have an equal chance of winning (e.g., you cannot give someone who pays to enter more entries than someone who enters via the free AMOE).
- Registration/Bonding: The following states require that a
sweepstakes be registered and/or bonded.
- Florida: Required if the total retail value of all prizes is over $5,000
- New York: Required if the total retail value of all prizes is over $5,000
- Rhode Island: Required for sweepstakes offered at a retail location if the total retail value of all prizes is over $500
OTHER CONSIDERATIONS
- Official Rules: Be sure all materials terms of your promotion are clearly disclosed in the official rules. This typically includes certain disclosures such as "No purchase necessary. A purchase will not increase your chances of winning," and "Void where prohibited," sponsor's name/address, start/end dates, eligibility requirements (e.g., age minimum, residency requirements, void jurisdictions, exclusions, etc.), any limits on the number of entries permitted per person, prize description (including the number of winners/prizes, approximate retail value of prizing and any applicable restrictions), judging criteria (if applicable), odds of winning, information on the winner selection and notification process, how a winners' list can be obtained, a general release of liability, and any other applicable conditions, terms or disclaimers.
- Abbreviated Rules: An abbreviated form of the rules, including a link or URL to the full rules, should be included with any call to action to enter the promotion (i.e., in all marketing of the promotion).
- Social Media Platforms: Allowing entry to a contest or sweepstakes via social media requires that entrants use a hashtag (#contest or #sweepstakes) to disclose the contest or sweepstakes. For example, "To enter, post a comment on this post and include the hashtag #BrandNameSweepstakes." Furthermore, in addition to all the laws that apply to contests and sweepstakes, each platform typically has their own set of rules or guidelines, which you should review prior to administering your promotion.
- Tax Liability: In the US, the recipient of any prize valued at $600 or greater is required to report the value of the prize as income. In this case, the sponsor should issue a 1099 form to the winner, and brands should always consult with their internal tax team while drafting the official rules for advice on how to address tax obligations in the rules.
- Other documents: Consider what other documents you may need in place besides the official rules, such as a winner's affidavit, liability/publicity release, prize provider agreement, etc.
- Using Third Party Trademarks: All of the rules that govern use of another person's or company's intellectual property apply to contests and sweepstakes. If you are co-sponsoring a promotion with another brand, or if your prize includes a third party's product or service, be sure you have the appropriate permissions in place prior to any use of the third party's name or logo. Also, be particularly cautious when giving away as a prize anything that is subject to its own set of terms and conditions, such as tickets to a concert or athletic event. For example, promotional use of tickets is often prohibited, and the sponsor may need to obtain specific permission from the rights holder in order to use the tickets as prizes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.