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Business Law Today

The promotion that went south
A look at the hazards of product sweepstakes and contests
By Tsan Abrahamson
Companies in an increasingly competitive market have to get the word out. One common tool is a promotion, such as a contest. Just be sure to keep an eye on the law.

Consumer product companies are expanding the ways in which they get out their product message. More aggressive ad campaigns, coupled with new digital and wireless marketing techniques, put new pressures on lawyers to evaluate the legality of promotions. Understanding the basic tenets of promotions law can be useful in guiding clients toward successful — and legal — promotions.

While the term "promotion" typically refers to any form of advertising that has a product message, from a legal perspective, a promotion is the umbrella term for three categories: sweepstakes, contests and give-aways. These specific terms are often interchanged, particularly by clients, but they do represent very different legal concepts and common sense doesn't always prevail in understanding the distinctions.

A legal promotion will contain two of three essential components: (1) a prize, (2) the element of chance, or (3) consideration. In order for a promotion to withstand legal scrutiny in the United States, one of the referenced elements has to be eliminated. That is, a legal promotion cannot contain all three: chance, consideration and a prize. Virtually all promotions have some form of a prize, so the presence of either chance or consideration is what determines the type of promotion.

"Sweepstakes," also called games of chance, eliminate the element of consideration. The winner of a sweepstakes must be allowed to enter the promotion free of charge, and must be chosen at random from a pool of qualified entries. Because the promotion includes the element of chance, companies may not require consideration for an opportunity to win the prize. Any promotion that requires payment in order to be entered into a random drawing is considered an illegal lottery.

Most states have carved out an exception for state governments to generate public income, which is how state LOTTO sweepstakes can have a pay-to-play system. Any other sweepstakes promotion must ensure that no purchase is necessary.

"Contests" measure a contestant's skill, and as such, they must eliminate the element of chance. Contestants enter a contest by either paying an entrance fee, or performing some act that constitutes consideration (such as writing an essay or running in a race), or both. Contestants' entries must be judged and scored by objective measurable criteria. The highest score among all qualified entries must identify the winner. In a contest, the element of chance is eliminated, or at least greatly reduced.

Like contests, "give-aways" eliminate the element of chance, but differ in that no judging takes place and a prize is guaranteed. A classic give-away promotion is the "buy-one-get-one-free" premium. Other common give-away scenarios include a "gift-with-purchase" promotion or a survey promotion that yields a gift on completion of a questionnaire. The term "give-away" does not have legal effect and many sweepstakes promotions are called give-aways, even though they fit a sweepstakes model.

Lawyers should be clear on the distinctions regarding promotions, as well as where to find more detailed information on the laws governing them. From the prize offered, to the target audience, to the method of delivery, each element of a promotion requires consideration of the laws that govern this form of marketing.

Section 5 of the Federal Trade Commission Act governs advertising law, generally, and is used to regulate false or misleading advertising, but contests and sweepstakes are primarily state regulated (so, too, are coupons and rebates). Since most sweepstakes are national in scope and the states do not work to harmonize their statutes, promotion rules are typically drafted to the most stringent state standards. National chain and Internet promotions should be created to be as inclusive as possible.

In addition, some promotions involve specific industry regulations. The alcohol, tobacco, dairy, banking and insurance industries all require special disclosures if the sponsor or the prize involves a product under their purview. Lawyers should advise clients to steer clear of promotions in these areas unless they have a clear understanding of the law. The more unique and complicated the promotion, the more scrutiny will be required.

The landscape of promotions law presents numerous opportunities for problems, but some are significantly more common than others. Lawyers can assist clients even without a strong background in promotions law by understanding the areas where most companies get into trouble. Sweepstakes tend to be the darling of the attorneys general, but enough issues arise in contests and give-aways that it is worth noting where companies may run afoul of the law.

The problem of consideration. The magic words that must attach to every sweepstakes are no purchase necessary. Though simple in concept, more fines are levied as a result of violation of this proscription that any other contest or sweepstakes provision. No purchase necessary should mean what it says, and any company that offers a chance to win a prize concurrent with a purchase must also offer the same chance without a purchase.

In the case of a packaged good, for instance, where the entry token or winning message is under a bottle cap or inside a box, the rules must contain an alternative method of entry (AMOE) that allows consumers the option to enter the sweepstakes without paying. This AMOE must not only give consumers an equal chance to win, but the format must have "equal parity" with the pay-to-play option; that is, the AMOE process must not be overly difficult. Finally, the AMOE must be reasonably prominent and not buried in fine print.

Recently, the CVS drugstore chain was fined heavily for offering a sweepstakes without clearly disclosing that no purchase was necessary. Consumers were mistakenly told that they first had to make a purchase in the photo department, even though the rules provided for a free method. Similarly, Nestle was cited for its candy promotion where children were told to buy candy to see if it turned their tongues "Prankster Purple." While the "no purchase necessary" language was included in the ad, it was so small in comparison to the rest of the copy that it was ineffective. The maker of Tylenol was fined for telling entrants in large letters "Buy Tylenol" for a chance to win, and making the AMOE language too small to make a difference.

In addition to the concerns related to a free-entry method, lawyers must also consider the question of what actually constitutes consideration. While most states define consideration as a monetary payment, some states — Delaware, Florida and Kansas, for instance — interpret the concept of consideration more liberally.

Moreover, states are now examining the "commercial benefit theory" in deciding if consideration is present; namely, the more benefit the sponsor receives from the requirement, the more likely consideration will be found. Most states have been reluctant to write into law such a standard, but have at least used a "sniff test" to see if it appears that the sponsor is exploiting the consumer in some form.

In general, with some limited exceptions, asking a consumer to use the Internet, dial a toll-free number, watch television, or answer a short survey are not deemed consideration. Requiring a consumer to answer a longer survey, however, or asking an entrant to provide certain personal identification information (such as disclosure of a Social Security number, or the names of friends) may rise to the level of consideration.

Requiring a store visit can also be problematic, depending on the state, and the type of visit. In Ohio, if the primary purpose of the store visit is to enter a sweepstakes, such a visit is considered consideration and sponsors must provide a method of entry that does not require a store visit. In California, store visits are not consideration, but sponsors must make special advertising disclosures about the requirement.

From a rule-drafting perspective, special provisions may be put into the rules that carve out alternative means of entry to accommodate those states that have special consideration requirements. Alternatively, those stringent states may be excluded altogether, though clients frequently are reluctant to remove states from their marketing strategy.

Once the consideration question is resolved, lawyers should consider whether other elements of the promotion will affect its legality. These may include the sponsoring company, the nature of the promotion, and the prize involved. For instance, California prohibits liquor manufacturers from sponsoring sweepstakes that have valuable prizes. Thus, lawyers should advise wineries and brewing houses to exclude from eligibility residents of California. If the liquor promotion is online, then Tennessee must also be excluded (or consumers must be allowed a mail-in option), since Tennessee doesn't allow liquor companies to have in-store promotions.

Registration, bonding and beyond. Many lawyers are aware that Florida and New York require bonding and registration for sweepstakes that have an aggregate prize value of $5,000 or more, but other states require registration under certain circumstances, too. Accordingly, lawyers should query their client on exactly how the promotion will be conducted. In Rhode Island, for instance, if a sweepstakes is offered at a retail location, then the sponsoring company must post the rules at those participating locations.

There are other quirky state rules that may affect a promotion. West Virginia's attorney general has ruled, informally, that sponsors of bottle-cap promotions must provide free bottle-cap liners to retail outlets. Montana prohibits certain dairy promotions. Wisconsin requires that a retailer be allowed to request entry forms. Alabama notes the age of majority as 19. The list goes on.

Contests and give-away promotions. Contests and give-aways have their own unique set of problems. Most important, Sponsors must eliminate the element of chance in a contest, and sponsors must have on hand sufficient product for a give-away. A well-drafted set of rules will provide a sponsor with some protection in case of trouble, but there must be specific language that addresses these special problems.

The problem of chance. A common pitfall of many contests is that the rules will state that in the event of a tie, the winner will be chosen by random drawing. Such a provision adds back the element of chance to a skill promotion and, thus, creates an illegal lottery. Rules should contain a rescoring provision to eliminate this problem. Often, sponsors will create a contest that is really not a measure of skill. Guessing the number of beans in a jar, dog racing, predicting the outcome of an athletic event, or creating a contest with nonobjective judging criteria have all been held not to be measures of skill. The sponsor should clearly state — and then follow — rules that lay out an objective measure.

Give-away promotions should always state "while supplies last" in the ad copy, and clients should be advised that they must have on hand a reasonable number of the gift offered to account for the response rate. Having too few gifts can constitute a "bait-and-switch" unfair business practice in most states.

Other legal issues. Lawyers should also be mindful of the ancillary legal issues that can affect the smooth operation of a promotion, such as intellectual property and false advertising concerns. Clients should be advised that the promotion should not create a false sense of sponsorship by a third party. This often happens if the prize is related to a third-party brand, like an airline, hotel or pop star, and give rise to an infringement suit. Worse, sponsors might have to cut short the promotion, upsetting customers and creating a difficult public relations problem.

If the promotion collects personal information, then clients should be reminded to either use that information consistent with their privacy policy or to include the necessary exceptions in the rules. Clients should also consider whether they will be opening the promotion to children and, if so, whether they need to comply with the Children's Online Privacy Protection Act.

Notwithstanding the above guidelines, and without being a promotions expert, nonspecialists can guide clients through simple promotions and assist them in creating a sweepstakes that meets their marketing needs. A company wishing to offer a promotion online that does not involve otherwise-regulated industries needs to follow a few important rules to comply with most state and federal guidelines.

No matter what form a promotion takes, certain disclosures are universally necessary.

Consumers need to know who is sponsoring the promotion and where the sponsor is located. Many states require a physical address rather than a P.O. box. The rules should have a start and end date, and it is a good practice to include a start and end time, too, particularly with Internet promotions. If the promotion provides for mail-in entries, the rules should note a postmark date for those entries, as well as a "received-by" date (typically seven days after the close of the promotion). Mail-in entries are not required for Internet-only advertised promotions, but if offered, they must have equal parity with the online entry process.

Sponsors can reduce their liability in foreign jurisdictions and in locations where they would not like to promote by clearly stating where the promotion is valid. For instance, if the promotion is valid in the United States, the client should consider whether that includes U.S. military bases overseas. Also included in this paragraph should be eligibility requirements for the entrant. A minimum age is a standard practice, but requirements may also include other conditions, such as being a college graduate or owning a home. Unlike consideration, a condition precedent does not create an illegal lottery because, presumably, the condition was met before the start of the sweepstakes.

Prize details are important. Lawyers and clients should look carefully at what the prize being offered is, and then outline any and all restrictions that might attach to it. If the prize involves air travel, then black-out dates should be listed, as well as appropriate origination locations (can the person fly from Mammoth, Calif., or must travel originate in Los Angeles?). The rules should state what elements of a prize are not included, or else the sponsor may be on the hook for more than it expected.

If a promotion is advertised as "all expenses paid," the entrant can reasonably expect that all expenses are paid, unless the rules make clear restrictions. If there is a chance that the prize may not be available, then a provision should be included in the rules that provides for substitution of a prize of equal or greater value. The retail value of a prize must always be listed.

The rules should inform consumers what steps they will have to take to claim the prize, and whether there is a time limitation on collecting the prize. As a general rule, prize declarations are encouraged unless the prize is of negligible value. Declarations can also double as liability and publicity releases. For accounting reasons, lawyers should advise clients to limit the prize-redemption period.

The rules should also outline when a consumer can expect to hear from the sponsor, and how the consumer can get a copy of the rules and a copy of the winners' list. These are required in all 50 states. If the requesting method involves mailing in an envelope to the sponsor, Vermont residents need to be excluded from this requirement, as a self-addressed stamped envelope is deemed consideration.

Fraud is prevalent in the promotions world and companies contend with the problem repeatedly. Lawyers can add value by advising clients about how to protect themselves against fraudulent practices by consumers. One common practice is entering more than once under numerous e-mail addresses. A provision limiting entries to one per natural person can be helpful.

Another common scam is using a computer-generated entry method. That is popular when the sponsor does not limit the number of entries because it wants to encourage multiple visits to its Web site. The rules can include a provision that would disqualify anyone attempting to use a machine to enter. In the alternative, the sponsor may use an entry form that requires the entrant to hand enter text that is not machine readable.

Sweepstakes are big business in the world of con artists. There are usenet groups dedicated to pointing out weaknesses in rules and outlining how to get around certain rules. One company discovered a Web site where they provided a mathematical angle that could be used to determine if a bottle cap promotion had a winning cap. If sponsors are finding strange entries or unpredictable sales problems, they would do well to police the Internet and sleuth the problem.

Fraud also hits promotions that are not Internet-based, such as in-pack sweepstakes, or those involving game pieces. Employees in packing plants or other centralized distribution centers have been known to gather up the winning (rare) pieces and sell them on the black market. Companies who want to do in-pack promotions may wish to invest in security during the packing process.

Avoiding false winners can stave off a bad PR campaign. A false winner is someone who believes he or she has a winning game piece or number, but in fact it is the result of a typographical error. Language, commonly knows as "The Kraft Language," providing for this possibility should always be included in the rules.

As the competitive market puts increasing pressure on companies to put their product in front of potential consumers, and the digital age gives rise to new methods of pushing the marketing message, lawyers will be faced with trying to figure out the best way to implement their clients' latest ideas.

Without question, the law remains dynamic in this area, changing and growing with each new technology and gimmick. Advising clients on how to be good corporate citizens, while protecting them from the pitfalls of over-zealous promotions, will be a bigger challenge, but a firm foundation in the basics should guide clients in the right direction.
Abrahamson is with Cobalt LLP in Berkeley, Calif. Her e-mail is tsan@campcobalt.com.

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