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Posted: December 20, 2012

“You may already be a winner!”

Beware of advertising traps

Cindy Wolf

Drawings, contests, raffles, incentive/loyalty programs – marketers love all of these promotional gimmicks. Why? Customers are attracted to the idea that they could win a new iPad if they buy something else they want. Churches, schools and nonprofits also find them to be great fundraisers. Everybody likes to win.

But all states and the federal government have laws governing games of chance. The government wants to make sure that Publisher’s Clearinghouse isn’t reincarnated as Joe’s Raffle and Scam. How different is buying a raffle ticket from your kids’ school from buying a lottery ticket from the state? In addition to the grand prize amount, legally they are worlds apart.

Marketing agencies are skilled at developing a media campaign, promotional materials and web design and may even run the drawing, contest or incentive program, but they don’t necessarily cover all the legal requirements. This is because the legal framework is complex and varies by state and country – and they aren’t law firms.

Raffles, drawings and contests fall under state restrictions on “illegal lotteries”. This means a promotion or game where a person has (1) paid for (2) a chance to win (3) a prize. You need to remove one of those three elements to not subject yourself to fines and potential criminal liability.

Payment can include the purchase of a raffle ticket, a soft drink, any good or service, or a requirement to do something more than fill out a brief survey or entry form. So most promotions allow people to enter the drawing without buying anything - that familiar “No purchase necessary to win” disclaimer. But this kind of promotion still needs Official Rules that describe who is eligible to enter, how to enter, a description of the prize(s) and value, the time frame of the promotion, when and how the prize will be awarded and other disclosures. All promotional materials making an offer to enter the drawing or contest need to contain a disclaimer with key terms. Some states also require registration, filing disclosures, posting a bond and qualifying for a license.

A less complicated way to avoid the illegal lottery problem is by eliminating the element of chance. If you will automatically get the prize for doing the required thing(s), there is no chance involved. These promotions run the gamut from “Buy one get one free” to complicated point programs to win free airline tickets. However, they are still subject to consumer fraud and FTC regulations on deceptive advertising.

If the program is a bit complicated, has restrictions, points expire if not used, etc., it’s recommended that those rules be clearly defined and readily available to the customers. Reserve the right to change the rules, but give fair warning if it means that participants may not be able to claim their freebie. BOGO’s and loyalty programs don’t become legal problems if they are clear and fairly run.

Another approach to eliminating the element of chance is to run a contest, but they can be tricky. Under the law, a “contest” requires actual skills to win – e.g., build a new app. If the judging requirements aren’t objective and disclosed, the contest becomes a game of chance and could be considered an illegal lottery if you charge an entry fee or require other consideration, such as requiring the participant to tweet about your contest.

And wait, there’s more. Have you noticed you don’t get “You May Already Be a Winner” mailings anymore? US postal regulations on mail fraud are strict. The disclosures and filing requirements under federal law are just too burdensome for most companies to go through the pain.

So have you forgotten by now about your church’s raffle and bingo games? Educational, religious and other nonprofit associations can apply for a raffle-bingo license from the State of Colorado, take mandatory training and then may run those games if they meet all the criteria and follow the law. It’s not a cake walk.

This is just a taste of the complicated rules. Violations of Colorado’s lottery law are a Class 2 misdemeanor and carry fines. Federal mail fraud convictions can mean five years’ imprisonment and a $250,000 fine. A group of Nevada companies running a scam sweepstakes operation settled with the FTC for $1.4 million a few years ago. Their names all sounded like legitimate marketing companies (e.g., Consumer Direct Enterprises LLC, Mega Marketing Group, Prize Distribution Center and more).

Internet promotions run the risk of reaching global participants which then brings in other country’s laws. Don’t run a risky promotion. Get the proper legal advice before you offer prizes to entice new customers and sales. 

 Cindy Wolf is a Colorado lawyer with more than 25 years experience representing large and small domestic and multinational companies. Her expertise is in corporate law and commercial contracting, with an emphasis on international issues, technology licensing and the Internet. She can be reached at cindy@cindywolf.com  or visit her blog at www.cindywolf.com

This publication is provided for informational purposes only. It does not constitute legal advice. There is no implicit guarantee that this information is correct, complete, or up to date. This publication is not intended to and does not create an attorney-client relationship between you and the author.

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