LAWREVIEW
Don’t Take Chances
with Prizes
This Law Review was written by
Maurice E. Finnegan III, and edited
by Jed Mandel, the Association
Forum’s General Counsel. Maurice
is an Intellectual Property attorney,
and practices with Jed at Neal,
Gerber and Eisenberg, LLP.
Q: Can we hold a prize drawing to encourage people to come to our next conference?
A: Yes, so long as it is structured to avoid
being considered an illegal lottery. Lotteries are a form of gambling and are illegal,
or severely regulated, under most state
and federal, as well as local, laws.
Lotteries have three elements: ( 1) a
prize, which means anything of value
(even nominal value) that is awarded to
winners; ( 2) chance, which means a
process where winners are selected at random; and ( 3) consideration, which basically means anything of value given in
return for a chance to win. Making people
attend the conference to get the chance to
win a prize would be an illegal lottery.
If one of those elements is missing,
however, then the game or promotion is
legal. The element most easily removed is
the element of consideration. So, you can
encourage people to attend the next conference for a chance to win a prize, but
you can’t force them to attend. In other
words, subject to certain disclosure
requirements (discussed below), you can
advertise the prize drawing as an incentive
to attend the conference, but you also
must provide those who don’t want to
attend an opportunity to enter even without having to register (and pay for) the
conference. For example, one “alternate
method of entry” may be sending in a
postcard with certain required information. That is also why the rules and advertising for a prize drawing generally should
say “No purchase necessary.”
Holding sweepstakes,
prize drawings and
contests is complicated
and requires compliance
with multiple laws.
Furthermore, it’s not enough simply to
make the prize drawing free to enter. While
some states specifically define “
consideration” as “money paid to enter a drawing,”
(i.e., the conference registration fee), others
define “consideration” broadly. For example,
“consideration” could include requiring an
entrant to complete a survey or questionnaire to enter the drawing, or holding a
sweepstakes in which the Internet is the only
means of entering. Similarly, requiring in-store visits or having a “members-only” promotion where the members have to pay an
initiation fee could all be treated as requiring “consideration,” and, therefore, illegal.
One way to avoid a lottery is to hold a
“contest” or “game of skill” and award the
prize for some bona fide, demonstrated
skill, rather than as a random drawing. In
other words, contests are legal because
they remove the element of chance.
Examples include essay contests, write-the-best-jingle contests, golf “hole-in-one”
contests, and the like. In many states, it’s
fine to require entrants to pay a fee or
provide another form of consideration to
enter a contest. But some states prohibit
even an entrance fee, so each state law
must be carefully considered.
Under limited circumstances, “raffles”
may be allowed. In a typical raffle, an
entrant pays money for a chance (ticket) to
win a prize, with the money benefiting some
charity or noteworthy cause. Although raffles have all three elements of a lottery, federal and many state laws allow some
not-for-profit organizations to hold raffles
for charitable fundraising purposes. Each
statute has its own peculiarities, and raffles
are not necessarily exempt from all regulation of lotteries nor are they always allowed
for charitable purposes. Local laws further
may require the organization to obtain a
license or register to conduct a raffle.
Because each state has different rules
related to games of chance and how they
may be advertised, in most cases clear
written rules with specific disclosures must
be made available to the entrants. Moreover, if you are holding or advertising a
sweepstakes online, there are even greater
restrictions than for “paper” promotions.
Finally, in some states, if the total prize
value is over a certain amount, the sponsor may have to obtain a license from
and/or place a bond with state authorities.
In addition to preparing rules and
obtaining necessary licenses or registrations, administration of the prize drawing
is important. Many states have specific
laws covering how and when a drawing
may be conducted, and the length of time
the list of winners’ names must be kept.
For games of skill, states may have specific requirements about who can be a
judge. For example, not just anyone can
determine the winner of a “best jingle”
contest — states’ laws require that the
judges meet specific criteria. Also, many
states restrict what an organization can
require of a winner — an organization
may not always be allowed to require a
winner to sign a publicity release before
receiving his or her prize.
Holding sweepstakes, prize drawings
and contests is complicated and requires
compliance with multiple laws. Because
organizations typically market beyond
their local state or other area, and
because it’s difficult to limit the reach of
print and online advertising, every state’s
laws could potentially apply to any promotion. Don’t take a chance — get legal
advice and follow the steps necessary to
create a “winning” promotion.
The answers provided here should not be construed
as legal advice or a legal opinion. You are urged to
consulta lawyerconcerning anyspecificsituations or
legal questions you may have.
