Many businesses run contests or sweepstakes as a way to promote the business and engage customers. If done properly, these promotions can be a great way to generate sales. However, if a contest or sweepstakes is not run correctly, it could be considered a lottery. Lotteries, unless state-run, are illegal in every state and could subject your business to civil and criminal penalties and fines. In addition, you may get unwelcomed attention from the Federal Trade Commission (FTC). The FTC received 98,479 complaints about prizes, sweepstakes, and lotteries in 2012, making this issue the fifth most common complaint during that year.
What is an Illegal Lottery?
A lottery includes three things: (1) chance, (2) prize, (3) and consideration. To successfully run a contest or sweepstakes and not an illegal lottery, you must eliminate one of these factors. A contest, for example, eliminates chance and a sweepstakes eliminates consideration (typically an entry fee). You must be careful, however, that you are actually eliminating one of the three factors.
For example, predicting the outcome of a college football game is not a skill. Therefore, if your business ran a “contest” in which individuals paid an entry fee to predict the outcome of a college football game and the winner received a prize, you would be running an illegal lottery. The skill involved in a contest must be an actual skill that can be judged and must not involve any degree of chance. Singing, races, and other similar competitions involve an actual skill that can be judged.
To run a successful sweepstakes, it is important that you eliminate any form of consideration. Typically, consideration consists of an entry fee. However, anything that requires a substantial amount of effort or giving something in exchange for entering the sweepstakes may be deemed consideration. Because many businesses like to run a sweepstakes that involves purchasing a product to win a prize, it is vitally important that you set up an alternate method of entry that is just as easy as purchasing the product but involves no fee. When you hear “no purchase necessary”, this is why. If your customers pay a fee for a chance to win a prize and the free method of entry is too difficult to redeem, you are running an illegal lottery.
Other Promotional Issues
There are a number of other considerations to take into account when running a contest or sweepstakes. Are you properly disclosing the odds of winning? Do you have clearly drafted rules regarding entries and prizes? Do you have permission to use the winner’s name and photograph? What happens if the winners get hurt on that trip you sent them on? Does your promotion need to be registered or bonded in the state you are running it in? These are only some of the legal issues that present themselves when running a promotion.
Running a promotion can be great for your business, but only if it is done right. Talking with an attorney beforehand can help you avoid costly mistakes. If you are thinking about running a promotion for your business, contact one of our attorneys to help you navigate the legal issues involved.
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