Conducting lawful sweepstakes promotions may seem easy but there are a variety of issues that companies should be aware of in order to protect themselves from liability.

1) Aim for viral, but first, legal

Social media is a valuable marketing outlet for all businesses. It allows companies to advertise their products and services, and gives them chances to connect with the public, improve customer relations and strengthen their brand. A post or picture that goes viral could significantly increase notoriety. However, with the availability and convenience of social media, also comes numerous opportunities to run afoul of the law.

Setting a few procedural and legal limitations can go a long way. Most notably, understand that a sweepstakes is based on removing the consideration element.

A majority of states have adopted a pecuniary/economic value approach to analyzing consideration – some measurable economic value flowing from participants to promoters (e.g., transfer of money, purchase of a product, etc.). For example, a promotion requiring a purchase or payment to participate presents a clear example of consideration. A less clear situation exists where participants are required to expend some degree of effort that ultimately benefits the promoter. While no definitive standard exists, the rule of thumb is the more effort required (e.g., completing a 20-page questionnaire), the greater the likelihood it will be deemed consideration.

Failure to remove the consideration element can have grave consequences as the violation may cause the activity to be deemed unlawful gambling, which is often a criminal violation.

2) Equal dignity

The most common type of sweepstakes promotion involves participation by purchasing a product or service but also affords a free method of entry for those that do not want to purchase the good or service. Here, the non-purchase method of entry must be made clear and conspicuous (e.g., "no purchase necessary" displayed prominently on all sweepstakes materials). Keep in mind, non-paying participants must have "equal dignity" with purchasers (i.e., equal opportunity to enter, to win and to win the same prizes). Any material disparity (actual or perceived) can invalidate this model.

3) Official rules

Quality official rules are a must. At a minimum, official rules should include:

  • Promotion start and end date; (ii) eligibility restrictions; (iii) entry methods.
  • Winner selection details (including judging criteria if a skill-based contest).
  • Description and retail value of the prize(s).
  • Odds of winning; (vii) where to obtain a winners' list.
  • Limitations of liability; (ix) name and address of the sponsor.
  • Dispute resolution provisions.

Detail, clarity and accuracy are crucial in drafting rules. Claims for breach of contract, fraudulent misrepresentation and violation of false advertising statutes may arise if sweepstakes details are unclear or if the operator knowingly misled the participants in jest.

Two companies that attempted to make a joke out of their contests ended up having the joke backfire. Instead of a Toyota, a restaurant awarded a toy Yoda (Star Wars) and instead of a Hummer H2, a radio DJ awarded a toy model. Both contests resulted in lawsuits that could have been avoided.

4) Restrictions of social media platforms

If using social media, a company should know the applicable platform's restrictions and draft the official rules in compliance therewith. If not, a promotion could end prematurely for noncompliance with the platform's restrictions, which may lead to a violation of the law because the promotion did not follow the course as set forth in its official rules.

5) Bonding and registration

Several states require registration and bonding of the promotion if the prizes awarded exceed a set amount. To register with a state, among other items, the promotion's official rules and registration fees are required. In addition to registration requirements, separate bonds/trusts based on the total approximate retail value ("ARV") of all prizes are required for Florida and New York. When drafting a promotion, give sufficient time for registration and bonding. Failure to do so may result in the launch being postponed or result in the blocking of such states in order to start the sweepstakes on time.

There are numerous examples of companies using promotions to market their products and services. Companies using sweepstakes should know they are entering an intricate and specialized industry and must be conscious of the complex legal boundaries in which the company must operate. Hiring counsel familiar with promotional challenges and the appropriate safeguards, at a minimum, can help protect companies from humiliation due to poorly planned promotions or in more severe circumstances, criminal penalties resulting from improperly implemented promotions.

Originally published in Phoenix Business Journal

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.