New Jersey Law Journal

Volume 191, No. 4   January 28, 2008

AMELIORATING INTERNET SWEEPSTAKES LIABILITY

PROPER NOTICE AND IMPLEMENTATION ARE NEEDED TO KEEP WEB SWEEPSTAKES LEGAL

BY JONATHAN BICK   Bick is counsel to WolfBlock Brach Eichler of Roseland and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of 101 Things You Need To Know About Internet Law Random House

2000].

Internet contests regularly attract Internet visitors and are and economical way to obtain personal information used for marketing. Typically, Internet contest participants are offered an opportunity to participate in a random drawing for a tangible reward, such as an iPod, in exchange for some form of consideration, such as having a friend visit an Internet site. Internet sweepstakes are the most popular Internet contest. Proper notices and implementation actions may dramatically ameliorate legal liability for Internet sweepstakes.

The employment of Internet sweepstakes is escalating. Both sponsors and participants find Internet sweepstakes are typically quicker and easier to enter, provide faster and more economical administration, and require less investment than traditional sweepstakes. The use of public computers and free e-mail services may eliminate the direct costs for a participant associated with Internet sweepstakes. From the prospective of an Internet sweepstakes sponsor, Internet contests are more efficient than traditional contests because Internet technology allows lower cost advertising and contest processing.

Internet sweepstakes (also called prize promotions or games of chance) are normally composed of a prize draw anticipated to generate publicity for a product. They are popular because they are a cost-effective process for building customer loyalty and collecting valuable demographic information about potential consumers. Certain legal difficulties must be addressed to make certain that Internet sweepstakes are profitable.

Typically, the first legal issue associated with most Internet sweepstakes is to ensure that the offering is not a lottery. A lottery is defined as a contest or promotion that contains a prize, a chance and a consideration. Non-state-operated lotteries are illegal under federal law. To avoid conducting an illegal lottery, it is necessary to eliminate at least one of these three elements.

For lottery assessment purposes, a prize is anything of value awarded to a winner of the contest. That prize can be monetary or non-monetary, such as a free product or a trip. In the example contest, the prize is an iPod. Eliminating this element is difficult because it generally provides the motivation for participation; however, eliminating the other two is relatively simple.

A sweepstake is a promotion in which a prize is awarded to a participant on the basis of chance, not skill. A sponsor may eliminate chance by conducting a game of skill in which winners are selected on the basis of some sort of ability, knowledge, creativity, judgment or expertise. Skill contests can involve photography, essay writing, athletics, cooking or mathematics. Skill contests must have objective criteria upon which entries are judged, and the judges must have sufficient qualifications to apply such criteria. Alternatively, the chance element may be eliminated by awarding a prize to every entrant. For example, chance could be eliminated by awarding an iPod to every person who gets at least one friend to access an Internet site. The elimination of the chance element allows the sponsor to impose an entry fee or other consideration without creating an illegal lottery.

A sweepstakes sponsor cannot require people to purchase a product or to invest 'considerable' time or effort to enter the sweepstakes. Common examples of non-monetary consideration include filling out a registration form, completing a short survey or providing the sponsor with personal information. Requiring a nominal degree of effort has generally been deemed not to constitute consideration. Requiring the entrant to refer a friend to the Internet site is likely to constitute consideration.

Fortunately, it is relatively easy to remove consideration from a promotion, and sponsors often do so to avoid operating an illegal lottery. The most common way to eliminate consideration is to provide an alternate method of entry. The most common way to achieve this result is to give notice of a no-purchase-required option. In the 'refer a friend' example, the sponsor may provide a procedure to allow people to enter the drawing without referring their friends by mailing in a postcard or calling a toll free number.

The people who take advantage of the alternative method for winning the prize must have an equal chance of winning. Thus, games in which the first 100 people to respond win a prize could pose a problem, as responders who do not use the Internet would be at a disadvantage relative to Internet responders.

A question has arisen whether needing Internet access to enter an online contest constitutes consideration. Some state regulatory authorities previously answered this question in the affirmative, and contest sponsors had to provide mail-in methods of entry. However, this position has now been generally reversed. State regulatory authorities no longer consider the mere requirement of having Internet access as constituting consideration for two reasons. First, the sponsor does not directly benefit from the consumer's payment of fees for Internet access. Moreover, it is unlikely that the consumer was induced to purchase Internet access for the purpose of participating in the sponsor's promotion.

Once a company is confident that its promotion does not constitute an illegal lottery, it must still comply with the laws and restrictions of each state in which the promotion is conducted, bearing in mind that Internet contests are accessible in all 50 states. International access must also be considered.

Unfortunately, state laws vary significantly and impose different procedural requirements. There are, however, a number of rules that have general applicability across the 50 states and should be included in the official rules of all contests. These include entry instructions, the sponsor's name and address, eligibility and geographical limitations, odds of winning, prize descriptions and their approximate retail value, contest duration and entry deadlines, how and when winners will be selected, limitation on the sponsor's liability, and a disclaimer for lost, late or damaged entries.

State laws may require additional disclosures and may vary based on the value of the prizes offered and the channels through which it is offered. Internet promotions will have additional requirements. Telemarketing sweepstakes have mandatory oral disclosures, whereas direct mail sweepstakes have written disclosure requirements.

Records of the prize winners must be retained for a period of no less than four years, and entry materials may also need to be retained. A few states require publication of the winners' list, including Florida, Georgia, Maryland, Massachusetts, Minnesota, New York, Rhode Island, Tennessee, Texas and Wisconsin.

In Arizona, skill contests that entail a purchase to enter must be registered with the state attorney general's office. Ariz. Rev. Stat. §§ 13-3301 (1)(d)(III), 13-3311. In Florida and New York, games of chance with total prizes exceeding $5,000 must be registered and a bond must be posted. Once the winners are announced, a winners' list must be provided in order to release the bond. Fla. Star. Ann. § 849.094; N.Y. Gen. Bus. § 369-e. Rhode Island requires registration of games of chance conducted through retail outlets with prizes in excess of $500. R.I. Gen. Laws §§ 11-50-1.

For many Internet content sponsors, it is simpler to prohibit certain states' residents from participating in the contest than to comply with these extra, somewhat burdensome procedural requirements. This is the rationale behind the common limitation in many contest rules, 'void where prohibited,' or more specifically, 'void in Florida, New York and Rhode Island.'

Since the Internet is accessible worldwide, Internet sweepstakes sponsors may want to limit participation to United States residents only. Alternatively, the sweepstakes must address each country in which someone could access the promotion. The laws and regulations of contests and sweepstakes vary widely from country to country. For instance, certain countries (Belgium, Malaysia, Norway) prohibit sweepstakes altogether, while other countries (including France and Spain) require registration and payment of fees. Limiting contest access can be done through legal notices or computer technology capable of identifying the geographical local of the proposed participant. Additionally, the duration of the contest, and especially the deadline for entries, should be stated in terms of dates and precise times in a specific time zone.

Internet sweepstakes must also avoid being classified as gambling. The Unlawful Internet Gambling Enforcement Act of 2006, which prohibits online gambling enterprises' acceptance of payments from banks and creditors in the United States. Consequently, the Internet contest sponsor must avoid contests which could be construed as gambling, such as any contest advertising that a person will receive something of value based on an outcome predominantly subject to pure chance. The sponsors must also avoid accepting credit card payments as part of their offerings.

Although all sponsors of contests and promotions must exercise caution not to infringe upon the trademark, copyright or patent rights of others when running their promotions, this is an issue of particular concern in the on-line arena. Promotions over the Internet generally are more high profile and involve greater exposure for the sponsor than more traditional media contests.

However, as noted in the foregoing example, the sponsor is able to identify the iPod by name as a prize in the official rules. Contest sponsors may even be able to use brand names in promotional materials for their contests, so long as the trademarked brand is used in a factual manner. In particular, it is best to identify the trademarked term in a sentence in which all the words are of the same font and prominence and avoid use of the trademark in the name of the promotion.

Another area of law that must concern Internet sweepstakes sponsors is privacy. The use of a notice to inform a potential Internet sweepstakes participant of the type of data intended to be collected, the use of Internet cookies and the use of that data will allow informed consent and ameliorate liability. It is recommended that a hyperlink to the sponsor's privacy policy appear on the Internet entry page and other pages where personal information is collected.

Another area of concern for game sponsors relating to privacy is COPPA, the Children's Online Privacy Protection Act. 15 U.S.C. §§ 6501 et seq. The act requires a Web site operator to obtain verifiable parental consent before collecting personal information from children under the age of 13. Rather than attempting to comply with the onerous COPPA rules, must Internet sweepstakes exclude children under 13 from participating.

Internet sweepstakes are subject to errors, viruses and hacker manipulation. Accordingly, Internet sweepstakes should include notices that disclaim liability for errors, fraud or other events that compromise the integrity of the contest and reserve the right to terminate or modify the contest in such a situation. Additionally, contest rules should limit entries to a particular number, such as one per day, per entrant to limit exploitation.