January 1, 1900

by Denise M. Bowman

Although the term “sweepstakes” may bring to mind visions of oversized checks and life-changing sums of money, more often than not, sweepstakes involve much smaller prizes, such as a free lunch or a one month free membership to a gym or karate studio offered as part of an overall marketing plan to promote a business, brand, product or service.

For example, a restaurant seeking to attract a larger lunch crowd, and business professionals in particular, may advertise a weekly drawing of business cards for a free lunch. Similarly, a karate studio may offer a month of free tuition for the student whose name is randomly drawn from a box of referrals.

Because most businesses, especially those who deal directly with the public, have and are actively using their respective websites, it is important to consider the legal implications that online advertisement of such sweepstakes may have on these businesses. For example, does requiring a participant to obtain Internet access and apply for the sweepstakes online violate the golden “no purchase necessary” rule?

The vast majority of states have enacted statutes regulating sweepstakes and related areas of the law, including gambling and illegal lotteries. Each of these statutes is slightly different; however, each one expressly requires that a participant not be required to provide the sweepstakes promoter any “consideration” to enter the sweepstakes. It is this “no purchase necessary” requirement that distinguishes a legal sweepstakes from an illegal lottery.

But what exactly constitutes consideration? It is well established that payment of any sum to the sweepstakes promoter, other than nominal postage, is consideration. However, beyond the prohibited payment of money, the concept of consideration is less clear. For example, some states have held that requiring a participant to visit the store or place of business to enter the sweepstakes does not constitute consideration. Other states, however, have taken the contrary position that any conduct required of the participant that provides a benefit to the sweepstakes promoter is consideration and renders that sweepstakes unlawful gambling.

When requiring a participant to obtain Internet access to enter the sweepstakes, the law is even less clear, even among administrations within the same state. For example, several years ago the Florida Department of State deemed Internet access to constitute consideration. As a result, promoters of sweepstakes that triggered the Florida statute began offering a free method of entry as an alternative to the online option. In recent years, however, Florida has changed its position.

In addition to the “consideration” issue, which becomes more complicated with online sweepstakes, those businesses which choose to use the Internet to advertise their sweepstakes must be careful not to otherwise run afoul of the many state statutes that may be triggered by their particular prize promotion. Businesses that utilize the sweepstakes or prize promotion as a marketing tool and advertise locally through a newspaper or in their own places of business may have some level of comfort that potential participants will be limited to residents of the state in which the business is located and/or perhaps a neighboring state, and, accordingly, only the statutes of those particular states may be triggered.

However, once a business chooses to utilize the Internet to advertise the sweepstakes and solicit online entries, that business may trigger the laws of several states and even international law if it does not expressly exclude residents outside of its particular home state from participating. Because of the significant time and expense associated with assuring compliance with other nations’ laws, most often it is preferable to limit entries to only residents of the United States. Additionally, because several state statutes are particularly problematic and in some instances require the promoter to register with the State, post a bond and/or pay filing fees, it also is worthwhile in many cases to limit participants to only residents of the state in which the business is located and possibly another state if its border is located nearby.

Sweepstakes have been, and remain, an important marketing tool for many types of businesses, especially those which are community - based. Accordingly, it is important that businesses take appropriate measures to maximize the positive effect of the sweepstakes as a marketing device while minimizing the potential for running afoul of applicable state and federal statutes and related case law regulating this and related areas of the law. To accomplish this goal, such business owners should consult legal counsel to do the following:

1. Identify which statutes, if any, are triggered by the particular sweepstakes involved and the requirements;

2. Determine whether advertising the sweepstakes on the Internet broadens the scope of potentially triggered statutes; and

3. Provide an interpretation of all potentially triggered statutes to permit the business to determine whether it is worthwhile to advertise on the Internet and accept applications online and/or specifically exclude residents of certain states from participating in the sweepstakes.

The gaming attorneys of Hill Wallack LLP are well versed in sweepstakes matters and stand ready to assist you before you launch your next promotion.

Denise M. Bowmanis an associate of the Business & Commercial Law Practice Group of Hill Wallack LLP in the Newtown, Pennsylvania Office.