By Colleen Pleasant Kline, Principal & Enterprise Expert
Women business owners and women decision makers beware – if your company relies on sales for its revenue, you likely have considered how to creatively incentivize end-users to purchase more product or services or how to creatively build brand recognition. A common technique is to offer sweepstakes, raffles or other contests so that customers participate in a game for the opportunity to win a prize or other item of value. What you may not have realized is that these techniques are often regulated by federal, state and local government rules intended to prevent unlawful gambling or illegal lotteries. In many jurisdictions the failure to adhere to the law can result in criminal penalties, fines, and sometimes, imprisonment.
Generally, there are three key items that embody unlawful gambling or an illegal lottery under most state laws:
- Prize
- Chance
- Consideration
Since most contests grant a prize, in order to have a lawful contest either the element of chance or “consideration” (exchange of value) must be removed. Have you ever wondered why you always see “No Purchase Necessary to Enter and Win” on your McDonald’s Monopoly game commercials? Well, it is precisely to avoid the consideration issue. For example, you can have participants participate in a raffle to draw the winning key that starts a brand new car, but you cannot have them pay for their raffle ticket. (There are certain exceptions for qualified non-profits which vary by local law.) Consideration is a nuanced term that can be more than merely purchasing the ticket, or requiring someone to buy goods or services for a chance to win; it can sometimes require a party to be present at the drawing of the name to win, to provide detailed customer market information, to visit participating stores, to purchase goods or services, to join loyalty groups, or to complete a survey. The actual definition of “consideration,” especially non-monetary consideration, varies greatly from state to state, and it is easy for the uninformed to fall outside the law.
In addition, contests and sweepstakes cannot discriminate between purchasers and non-purchasers. This means that a purchaser of goods and services cannot have a better chance to win by creating more entries, entering separate contests or any other opportunity or advantage that is not similarly available to a non-purchaser.
Even seemingly innocuous contests can occasionally run afoul of the law; one example is a contest where the first 100 customers (or some other number) will also obtain a free gift. This creates an element of chance in so much as someone risks being number 101 and therefore ineligible to obtain the free gift.
Many contests try to eliminate consideration by offering skills contest, such as essay contests about use of the products or contests where entrants build things using the products, both of which can be legitimately done. These contests must have clear guidelines on how winners will be selected and include certain clear objective criteria at the outset to avoid any appearance of impropriety.
If a contest exceeds a certain dollar threshold, some states also require the registration of the contest anywhere from 7 to 30 days before the contest is advertised, and may require posting a bond or other form of surety to make certain the contest is valid.
Almost all states require a form of disclosure language or rules relating to contest. Such rules must be available to entrants both at the point of entry and upon request. Certain states also require that a list of winners be maintained and provided upon request and that documentation surrounding the contest be maintained for a specific period of time after a contest is over. The failure to do any of the foregoing can result in both civil and/or criminal penalties depending in the jurisdiction, not to mention a potential public relations nightmare.
In short, when properly done, contests and sweepstakes can be a great way to raise brand awareness and increase sales, but they should be carefully considered to determine whether they ultimately meet the goals of your organization while still complying with the law.
DISCLAIMER: Opinions and conclusions in this post are solely those of the author unless otherwise indicated. This article is for general information purposes and is not intended to be and should not be taken as legal advice on any particular matter. It is not intended to and does not create any attorney-client relationship. Since legal advice must vary with individual circumstances, do not act or refrain from acting on the basis of this article without consulting professional legal counsel. If you would like additional information on the subject matter of this article, please feel free to contact the author. IRS CIRCULAR 230 NOTICE: Any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (I) avoiding federal tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Colleen Pleasant Kline is a firm Principal and co-chair of the firm’s Corporate and Securities Practice Group, Miles & Stockbridge is one of the region’s premier law firms. Ms Kline’s preferred role is one of outside general corporate counsel and trusted advisor to clients ranging from business owners and entrepreneurs as well as their officers, directors and shareholders for entities of all sizes covering a broad range of legal and business issues. Colleen’s holistic approach is focused on providing practical legal solutions to the issues that companies face day to day, in a manner that allows them to be solidly poised and supported for growth.