While regulatory compliance is central to giveaways and contests, other areas of potential liability include tax, privacy and intellectual property (IP) issues. This is extremely important to highlight since most people stop thinking about these events at the active stage. We’ve helped steer many clients through this maze of considerations - from regulatory compliance to privacy and IP issues - here at LawTrades
Contests and sweepstakes are strictly governed by federal and state laws, which demands full compliance. What’s crucial is to understand that each of these events is different, so you need to define your goals and understand what the differences are in order to avoid exposure to financial penalties or criminal prosecution.
Using the right names
Contests generally require some skill. For instance, if you’re in a singing contest, presumably the winner is the person with the most talent.
A giveaway is essentially another term for sweepstakes. In contrast to a contest, no skill is required and the winner or winners are randomly selected.
What you need to know is that it’s of the utmost importance to not inadvertently create an illegal lottery. A lottery by legal definition consists of three main ingredients: (1) Consideration (the “contestant” needs to offer value to enter - could be money but could be something else, like investing time to complete an application or viewing a presentation); (2) Chance (it’s random and no skill is required); and (3) Prizes.
Whether you want to run a contest or sweepstakes, there are some key things you’ll want to remember:
- Make sure that no purchase - whether it’s in the form of money, time or something else - is required in order to minimize the chance of inadvertently creating an illegal lottery. Sweepstakes by law are prohibited from seeking something of value in exchange for entering; contests may or may not be permitted to ask for consideration depending on the state, though even where allowed, it’s best avoided.
- Use the proper nomenclature: there is no legal animal called a “giveaway.” This can be confusing and misleading. Whether it’s a contest or sweepstakes, make sure to use the correct terminology and then comply with all required regulations governing your event.
- There are certain items and industries that are always off limits. For instance, alcohol, tobacco and gasoline should never be included in your event. Check with federal and state law to ensure industry compliance since there are others that involve costly compliance or are otherwise completely unavailable.
Giveaways (or sweepstakes) are regulated by the US Post Office, the Federal Communications Commission, the Federal Trade Commission, the Internal Revenue Service and the Department of Justice. They are also strictly regulated by state law, which means compliance with every jurisdiction in which you hold your sweepstakes.
Regulation requirements include registering with the designated state agencies, posting bond and many other items that vary from state to state.
Both contests and sweepstakes share a common set of legal elements that must be adhered to. These include making the official rules widely accessible, advertising the event, and obtaining written releases from winners. One more thing: a sponsor will remain legally obligated to award prizes even if a vendor or supplier fails to provide the prize. Accordingly, executing contracts with all participating suppliers and vendors is a key element.
Contests will require a specific description of what skill is involved. The nature of the skill and how it will be judged must be disclosed and carefully tailored to state law. Be aware that any requirement to purchase or pay for entrance could be deemed a lottery and should therefore be avoided.
Playing by the Rules
Both contests and sweepstakes require clear, conspicuous and easily understood disclosures about the rules, eligibility, dates, winner selection, and terms and conditions. In other words, sponsors must be completely transparent about all aspects of the event, or risk potentially substantial federal and state law fines and criminal penalties. For example, under the Deceptive Mail Prevention and Enforcement Act of 2000, civil penalties can reach as high as $2,000,000.
States with exceptionally stringent regulations include New York, Rhode Island and Florida. Other states, like Vermont, prohibit requiring participants to pay for postage since it would constitute some form of consideration (something of value), which is not permitted for sweepstakes.
An event sponsor will likely want to use prize winners when promoting future contests or sweepstakes. Ensuring that all licenses and rights have been secured from a winner can be easily overlooked, but is vital to full compliance.
This includes liability and publicity waivers. Additionally, minors - especially those below 13 years old - are given extra protections. For example, some kids under 13 may attempt to circumvent the rules, but a sponsor is still responsible for total compliance. Therefore, if information is collected from individuals below 13, an event sponsor is still legally required to comply with the Children’s Online Privacy Protection Act (COPPA).
Trademarks, service marks and copyrights are the most common forms of IP associated with marketing and advertising - particularly with respect to sweepstakes and contests. Here again it’s crucial to obtain licenses and all other rights that give you permission to use others’ brands in the manner specified, being vigilant to observe all limitations.