The Legal Side Of Promotions

The Legal Side Of Promotions

A common strategy for increasing engagement for a variety of marketing campaigns is by utilizing various promotions that usually take the form of a contest, sweepstakes, or lottery. These are used on an increasingly frequent basis because they can radically increase campaign performance. With that said, several issues arise when employing such contests. 

One of the most confusing aspects of promotions is the distinctions from a legal perspective between a contest, sweepstakes, and lottery. A contest is a promotion that involves choosing a winner based on skill (Dominant Factor Test), whereas a sweepstake is when the winner is selected by chance with no consideration 1 in return. On the other hand, a lottery is a game of chance where there is consideration exchanged. Lotteries are strictly regulated and are almost always illegal for private actors to run. Because these are terms of art with specific legal ramifications, being cognizant of the terms used and the corresponding requirements under the law is essential.

A common risk when it comes to running promotions revolves around ensuring that if the winner is chosen by chance, then there is no consideration given by those entering the promotion. If all else is equal, in a scenario where there is no consideration and the winner is chosen by chance, the promotion would be a sweepstake, which is the desirable classification. On the other hand, if there is deemed to have been consideration exchanged for the opportunity to win, the promotion may be considered an illegal lottery. For this reason, the term “No Purchase Necessary” has become synonymous with promotions, and also where an alternative method of entry (AMOE) comes into play. That wording allows entrance into the promotion without the prerequisite of purchase. The consequence of requiring a purchase is an increased risk of being deemed a form of consideration and of touching the proverbial third rail of being classified as a lottery.

Besides being mindful of ensuring that a promotion is not at risk of being classified as an illegal lottery, there are state-specific regulations that must be followed. These rules vary in a significant manner from state to state. They may apply in scenarios where the promotion is deemed as a contest or sweepstakes. For the most part, the state regulations center around the common theme of ensuring accountability, honesty, and transparency toward consumers taking part.

A starting point for formulating compliant promotions is to create official rules that act as the agreement between the promoter and any entrants. The rules cannot change once the promotion has begun.

Official promotion rules should contain at least some of the following information:

  1. No purchase is necessary
  2. Promotion start and end dates
  3. Eligibility requirements, including minimum age and residency requirements
  4. Methods of entry into promotion – including a “no purchase necessary” means of entry
  5. Any limitations on the number of entries per person or household
  6. Odds of winning
  7. Description and value of the prize(s)
  8. How the winner(s) are selected and notified
  9. Restrictions on receiving the prize
  10. Promoters name, address, and contact information

Additional disclosures and terms may be required depending on the state(s) where the promotion runs in as well as the nature of the promotion. For example, there are registration, bonding, and record-keeping requirements in some states, including New York, if the prize is over a certain amount.

Charitable Raffles

One of the exceptions to the general prohibition of private actors running a lottery is in the context of charities operating a raffle. There are a variety of compliance considerations for these kinds of raffles run by non-profits that range from state to state but include registration requirements, among other legal obligations.

Promotions & Privacy Law

Since promotions often collect personal information when entering the contest or sweepstakes, several privacy law implications and associated compliance requirements exist. For promotions with an international scope, data privacy and protection laws such as the GDPR need to be accounted for. In the United States, though there is not a comprehensive privacy law on the federal level, there are state-specific laws. For example, California’s Consumer Privacy Act (CCPA) and successor, the California Privacy Rights Act (CPRA), the Colorado Privacy Act (CPA), and the Virginia Consumer Data Protection Act (VCDPA) impose various legal obligations on those in the scope of the law who collect consumer information. In addition, there are other laws to account for in specific contexts, such as the Children’s Online Privacy Protection Act (COPPA).

Additional International Considerations

In addition to US federal and state-specific laws concerning promotions, there are international legal considerations for promotions spanning beyond the borders of the United States. For example, Brazil does not allow for a cash prize, while other jurisdictions such as Taiwan limits prize amounts.

A Changing Landscape

As we continuously progress into the digital world, new questions are raised around promotions and their legal consequences. One of the most recent and prominent questions center around in-game loot boxes and whether they are an illegal lottery. There was divergence among the courts, but Apple scored a victory in 2022 when a court ruled that the loot box in question did not violate California’s gambling laws. Therefore, it is critical to examine new promotional strategies and how they may fit into existing regulatory frameworks.