Contests, sweepstakes, and lotteries have historically been subject to many federal and state laws. As social media and the internet use is at an all-time high, online promotions and giveaways allow businesses the opportunity to reach a much broader group of consumers and potential participants. This article examines how traditional contest laws apply to online giveaways and new considerations specific to the online nature of the contests. Most notably, federal laws against online gambling and private lotteries require contests and sweepstakes to have particular rules and disclosures. In addition, different state laws and social media sites can define the parameters of online contests differently.
Federal Regulation of Online Contest Laws
Deceptive Mail Prevention and Enforcement Act
In the United States, the most significant federal law relating to contest and sweepstakes promotions is the Deceptive Mail Prevention and Enforcement Act, 39 U.S.C. 3001. However, this law only applies to those promotions made available via direct mail, and it therefore does not apply to online contests. Notwithstanding, the law does include best practices or helpful suggestions for hosting a sweepstakes or contest.
Federal Communications Commission
The Federal Communications Commission has a “Contest Rule” that applies to television and radio broadcasters and their sponsors. But like Section 3009 mentioned above, it does not apply to online contests. It is worth noting, however, that it has amended the rule, found within the Communication Act of 1934, to allow rules and disclosures required of on-air contests to appear on the website rather than announced on-air.
The Federal Trade Commission
The Federal Trade Commission protects against deceptive trade practices, which are those likely to mislead or otherwise affect consumer behavior related to the product or service. The FTC requires certain information, rules, and disclosures be officially published with regard to the giveaway such that participants have adequate information about the promotion. Such requirements include basic relevant information: the name and address of the sponsor, the duration of the promotion, how the winner is selected, the types of prizes and their retail value, and odds of winning. Rules should also disclose eligibility requirements, conditions for participants to enter, and limitations on the manner of distribution of prizes. It’s also important to include liability limitations and privacy policies.
Internal Revenue Service
The IRS requires that the sponsor of the sweepstakes or contest is responsible for issuing and IRS 1099-Misc. income tax form to the winner and the IRS if the prize won is valued over $600.
Online Gambling Laws
Finally, internet sweepstakes and contests are subject most relevantly to federal laws against online gambling. Giveaway hosts should ensure that their online promotions do not violate any online gambling laws and are not resemblant of private online lotteries, which are illegal.
Types of Contests
First, it’s important to classify the type of “contest” you plan to host in order to make sure you are complying with applicable laws. There are three general types of giveaway promotions: Sweepstakes, Contests, and Lotteries. Sweepstakes, the most common type of giveaway, result in participants winning by chance or luck. There is no form of methodical selection, rather, the winner is chosen randomly. Importantly, there is no form of consideration in a sweepstakes, meaning that participants do not have to give up anything of value to participate, such as pay money or making a substantial effort that benefits the sponsor. Contests require that participants submit some effort or demonstrate some skill or merit in order to win a prize. Unlike sweepstakes, contest winners are chosen according to particular criteria, and the element of chance must not exist in determining the winner. Finally, a lottery entails payment or other form consideration to enter, and winners are chosen by chance and given a prize. Only the state can host a lottery, so private lotteries are illegal. Put simply, a sweepstakes is comprised of Therefore, it is important that the rules of your “contest” describe either a sweepstakes or a true contest and not a lottery.
Put simply, a legal sweepstakes or contest is comprised of only two of three possible elements: chance, consideration, and prize. A sweepstakes is entails a free chance and a prize, without consideration. A contest entails consideration for a prize, but is not left to chance. An illegal lottery is comprised of all three elements, consideration, chance, and a prize. To ensure that your giveaway is not an illegal lottery, be sure to eliminate either the element of chance or consideration. The element that causes most disputes is that of consideration, since it can sometimes be an action that is easily overlooked and some states define it differently. U.S. Federal Lottery Law charges states to enact their own laws for regulating lottery-based promotions. In the majority of states, consideration requires a cash payment or other item of marketable value. In other cases, some states count any benefit to the promoter as consideration. For example, requiring a participant to simply “Like” or “Follow” you on a social media page can count as consideration. In Michigan, requiring a participant to be present at a place of business for a chance to win counts as consideration, so sweepstakes in Michigan must not require participants to be present to win. It is important to be aware of the state definitions of consideration in the case of a lottery that will apply to your giveaway and avoid the actions described, if running a sweepstakes.
No Purchase Necessary
For an online sweepstakes, there should be a clear indication that there is no purchase necessary. If payment is required for a chance to win, the payment constitutes consideration. Consideration combined with other elements of sweepstakes, chance and a prize, makes the giveaway an illegal lottery. To avoid the risk of accidentally being classified as a lottery, contest hosts should clearly state “No Purchase Necessary” or “Purchase does not enhance chance of winning.” On the other hand, in skill-based contests wherein winners are selected based on a particular criteria and not left to chance, contest hosts may ask for purchases or other consideration.
Alternate Means of Entry
If you hope to include participants in a sweepstakes after they make a purchase, such as automatic entry upon purchase of a promoted item, offer alternative ways to enter, such as by filling out a form. This offering should be included in the official rules and made clear to participants. As long as there is no purchase required to enter, the sweepstakes will remain a giveaway rather than a lottery.
Void Where Prohibited
Online contest laws vary by state, and the law in the state in which any given participant in the contest lives is the law that applies. Consequently, contests open to those from different states are subject to the laws of these various states. In case you overlook a particular state restriction, it is important to include the language “void where prohibited” in the language of your contest. Given the online nature of the contest, a promotion may reach jurisdictions worldwide, where it may have to comply with regulations of international jurisdictions. To avoid being subject to unknown jurisdictions, another best practice is to specify exactly in which jurisdictions the promotion is valid.
State Regulation of Online Contest Law
As previously mentioned, state laws regarding online contests, sweepstakes, and gambling can be different. After ensuring your promotion is compliant with federal law, be sure it is also legal under any state laws that apply.
Social Media Site Requirements
If the promotion is to run on a social media site, be sure to review the particular rules pertaining to the social platform. Each has its own rules about giveaways.
If you have legal questions about Online Contest Laws and how you or your business should comply with them, contact Revision Legal at 231-714-0100.
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