Legal Issues Surrounding Sweepstakes and Games of Skill By David Klein

by FeedFront Staff on May 21, 2009

The use of “game promotions” is a popular and effective way for Internet marketing companies to create buzz. Even if it is only a nominal prize being offered, game promotions are effective in making would-be customers aware of your company and persuading them to register to use your products and/or services.

The purpose of this article is to provide a brief overview of some of the legal issues that you should be aware of prior to conducting a game promotion.

Game promotions generally fall into two categories, “games of chance” (commonly referred to as “sweepstakes”) and “games of skill.” “Games of skill” which, if structured correctly, are legal in every state, select their winners based upon the entrants’ skill.

In contrast, “games of chance” are considered illegal lotteries in every state unless one of the following three traditional elements of a lottery is removed: (1) prize; (2) chance; and (3) consideration.

For obvious reasons, the element of “consideration” is most often removed in order to run a legal sweepstakes promotion. To remove this element, an alternative means of entry that does not require the entrant to make a payment or sign up to receive goods or services, and that is accorded equal weight, must be offered.

If you are offering a non-cash prize, applicable state game promotion regulations require that the cash equivalent of any such prize also be offered. In connection with awarding the prize(s), you must maintain a list of all contest winners and make such list readily available at no charge to all entrants.

The list of winners must also be filed with Florida and New York at the close of the contest period (and provided to Rhode Island upon request).

One of the most common mistakes made by many businesses in advertising their game promotions is the misuse of the word “free.” If the consumer is required to incur any cost whatsoever, the game promotion cannot be labeled as “free.”

Another mistake that must be avoided is sending direct or electronic mail that informs the recipient that she is a “winner” or a “guaranteed winner.” Failure to follow these and other rules related to advertising may result in the commencement of regulatory proceedings against your company.

You must also be aware that three states – Florida, New York and Rhode Island – have specific sweepstakes registration and bonding requirements. For example, if the value of all of the prizes in your game exceeds $5,000, Florida and New York require that your game be registered and bonded.

In Rhode Island, the prize threshold for registration is $500, but there is no bonding requirement. To avoid having to adhere to these requirements, you can disallow residents from all or any of these three states from entering your game promotion.

Please note that this is only a brief overview of some of the legal issues surrounding game promotions. Remember to obtain guidance from a licensed legal professional prior to conducting a game promotion.

David O. Klein is a partner in the firm of Klein Zelman Rothermel LLP in New York, New York. Mr. Klein practices Promotional Law and Internet Marketing Law. He can be reached at (212) 935-6020 or via email at dklein@legal.org.

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