Launching a Sweepstakes or Contest – What You Need to Know (Part 1)

We’re passionate about all things brand related – and what better way to promote your brand than by running a sweepstakes or contest? At a time when we are seeing the “gamification” of every part of our lives, it should come as no surprise to see that many brands now include prizes and rewards as a significant component of their consumer outreach. Where once upon a time this was a niche explored by only a handful of large companies or fly-by-night operators, today, prize promotions are seen by many of our clients as among their most effective forms of advertising.

The concept is wonderfully simple: in a prize promotion, someone enters the promotion, and someone wins a prize. Yet this basic formulation encompasses a nearly endless number of variations, including sweepstakes, contests, games, trade promotions, sales incentives and viral engagement. Some of these variants are legal; some are not. And because we have been so passionate about sweepstakes and contests for so long, we’ve decided to explain the basics in a helpful, multi-post series on the topic. There’s a lot of nuance, and it would be impossible to cover it all in one place, but we think that once we’re done you’ll be as excited about this area of the law as we are.

So while we will get into the weeds next time, we’ll leave you with one important thing, and some definitions. The starting point for any discussion of promotion law is the long-standing prohibitions on illegal lotteries, the most basic form of gambling. All 50 states and the federal government currently prohibit lotteries, except those chartered by the states. Historically, an illegal lottery had three components: prize, chance and consideration. By removing any one of these three items, an “illegal lottery” can be rendered a legal promotion, sweepstakes or contest in most states.

So what did any of that mean?

• “Consideration” generally refers to payment or money, although it can refer to anything of value. In this context, it is important to remember consideration can refer to both monetary and non-monetary things of value.
• “Chance” exists when a winner is chosen based on random selection (i.e. a random drawing or winning game piece).
• “Prize” can be anything of value (monetary or non-monetary) going beyond that which is awarded to every entrant.
• “Lottery” is an activity that requires consideration to participate for a chance to win a prize. Unless you are a regulated gaming company, or a government entity, conducting a lottery is illegal in all 50 states and under federal law.
• “Sweepstakes” is an activity similar to a lottery, except consideration is not required to participate.
• “Contest” generally refers to a skill contest, which is an activity similar to a lottery, except the element of chance is eliminated and winners are instead selected by either bona fide skill OR chosen by qualified judges based on clearly defined criteria.
• “Promotion” is an umbrella term that includes both sweepstakes and contests, as well as other types of activities that further a company’s goals.

As you’ve probably gathered from reading the definitions above, it’s very important to make sure your sweepstakes or contest is structured in such a way that it avoids characterization as an illegal lottery. Doing this can be tricky, and even if you succeed, there are additional laws and regulations governing the operation of legal sweepstakes and contests, as well as best practices to help avoid issues that arise during administration of the promotion.

Sound complicated? After we’re done, you’ll feel much better! Here’s a look at some things future posts on this topic will cover:

• Drafting the promotion’s “official rules” and “short form” rules;
• Implementing a “free alternative method of entry” for sweepstakes;
• Determining what types of contests really qualify as “skills contests”;
• Determining a what types of payments really qualify as “consideration”;
• Special rules when running social media and mobile promotions;
• Special rules when running promotions in which user-generated content is submitted;
• State registration and bonding requirements;
• And more!