Marketers Beware: Your Social Media Sweepstakes or Contests Could Be an Illegal Lottery
- A current marketing trend is to use social media sweepstakes for promotion purposes. But with many advertising and promotional campaigns, the law may complicate things.
- Social media sweepstakes and contests raise several important legal issues that businesses must consider when launching a sweepstakes or contest, or businesses run the risk of violating state lottery laws and other applicable laws relating to lottery and gambling operations.
- This Holland & Knight alert discusses how states define lotteries and ways that businesses can structure sweepstakes or contests to comply with various lottery laws.
A current marketing trend is to use social media sweepstakes for promotion purposes, e.g., "Like and Share Our Facebook or Instagram Post For a Chance To Win a $100 Gift Card!" or "Take Our Five-Minute Survey For a Chance To Win a Free Month of Gas!" But with many advertising and promotional campaigns, the law may complicate things. Social media sweepstakes and contests raise several important legal issues that businesses must consider when launching a sweepstakes or contest, or businesses run the risk of violating state lottery laws and other applicable laws relating to lottery and gambling operations.
Why Discuss "Lotteries" When Marketing Wants to Only Create a "Sweepstakes" or "Contest"?
The answer is simple: If a sweepstakes or contest does not comply with applicable laws, the promotion runs the risk of being considered an illegal lottery and could subject the business to regulatory action, including civil and criminal exposure. States usually define lotteries as having three elements: 1) a prize, 2) chance and 3) consideration. Stated another way, an illegal lottery occurs when participants provide something of value (consideration) for the chance to win a prize.
If your sweepstakes or contest has these three elements, it is likely a lottery and may violate applicable lottery laws unless it falls within a recognized exception. This article provides more detail on these three elements of an illegal lottery. A prize, which is the primary reason (along with consumer engagement) that businesses conduct these promotions, is self-explanatory. Chance and consideration require more explanation.
The Chance Element
When chance is involved in a promotion, this means that winning (or selection of the winner) is dependent on chance (in some manner), not necessarily dependent on skill. For example, winning a sweepstakes is dependent on chance because winners are drawn at random. On the other hand, a golf tournament is dependent primarily on skill because the golfer who played with the most skill during the tournament wins. The line between a game of skill and game of chance can become blurry in games such as poker, which have both a material chance and skill component.
States generally use one of three different tests to determine whether mixed games with skill and chance – e.g., poker – are legally considered a game of chance or skill: 1) The predominant factor test; 2) the material element test; and 3) the any-chance test. The predominant factor test, which is the most common one that states use, analyzes whether the predominant factor in the game is chance or skill. States using the predominant factor test for poker might hold that although the random cards that players receive are chance, skill predominates that chance because knowing how to play the cards, reading other players and a strategically placed bet is skill. As such, states using the predominant factor test may hold that poker is either a game of chance or game of skill. Second, the material element test holds that if chance is a material element in a game, then the game is one of chance. States using the material element test would likely hold that poker is a game of chance because the chance element of random cards is material to poker. Lastly, the any-chance test, which is the least common test that states use, holds that games with any element of chance are games of chance. Hence, a poker contest may be a game of skill under the predominate factor test and a game of chance under the material element and any-chance tests. This is important because chance is an element of an illegal lottery, which companies must avoid.
The Consideration Element
Consideration is a legal concept. In nonlegal terms, consideration is either 1) doing something you are not legally required to do, or 2) promising not to do something you have the right to do. To explain consideration, let's use a social media sweepstakes that requires entrants to like and share a post to win a company gift card.
The issue with "consideration" in social media sweepstakes is whether requiring participants to "like," "comment" or "share" a post reaches the level of "doing something you are not legally required to do" – or "consideration." On one end, someone without social media would have to make a social media account, like a post and share the post – doing something that they are not legally required to do (not to mention the effort required to create an account along with the valuable personal identifying information that the participant would have to provide). On the other end, so many people have social media accounts nowadays that a regulator or court may hold that liking and sharing a post does not satisfy the "consideration" element of illegal lottery laws, even though users are technically doing something that they are not legally required to do. Again, the lines are blurry here. The conservative approach is to analyze consideration under contract law. If a sweepstakes requires entrants to like, comment on or share a post on social media, it is likely consideration because the promotion is requiring participants to complete an action or tasks that they are not legally required to do. Luckily, there is an easy workaround to minimize and, potentially, avoid consideration issues when conducting social media and other sweepstakes.
Best Practices to Avoid Illegal Lottery Issues when Conducting a Sweepstakes or Contest
Making Your Sweepstakes Legal
As discussed above, it is an easy mistake for a business to fail to identify that all three elements of an illegal lottery are present in a proposed sweepstakes. Again, following a conservative viewpoint, a typical social media sweepstakes has 1) a prize, 2) chance and 3) likely consideration because entrants typically have to do something – e.g., like, comment and share a post – to enter. To make your sweepstakes legal, you must remove one of these elements. Because prize and chance usually can't be removed, businesses typically remove the consideration element.
The workaround to remove consideration is to add an option in the terms and conditions to enter the sweepstakes via an "alternative method of entry" (AMOE) or "free form of entry" that eliminates consideration. A common AMOE is permitting entrants to mail the sweepstakes sponsor a 3-by-5-inch notecard with the entrants personal information, which courts have previously held is not consideration. Although this AMOE technically requires entrants to do something they are not legally required to do, courts typically hold this method is too minimal to constitute consideration. In legal terms, this is a "token" amount of effort that is not consideration. Another potential AMOE could be to permit entrants to submit their contact information online, requiring nothing more. With that said, it is important for businesses to note that AMOE entrants must be treated with equal dignity as other participants – hence, the AMOE entrants' odds of winning must be the same as the paid or consideration entrants. In addition, businesses should avoid implementing any procedures or similar requirements that restrict or deter AMOE entrants. Engaging in any such activity not only presents illegal lottery concerns, but potential claims that the business has engaged in unfair and deceptive trade practices.
Yes, you heard right. You can ask entrants to do almost anything on social media (that wouldn't otherwise violate the law) that could be consideration as long as there's an alternative method of entry option that "cancels out" consideration. As such, sweepstakes generally need AMOEs to eliminate consideration in connection with their proposed sweepstakes. These AMOEs are why businesses routinely use the language "no purchase necessary to enter" in connection with the promotion of sweepstakes.
Making Your Contest Legal
Unlike sweepstakes where the main issue is removing consideration, the main issue in contests is the chance element (contests have a prize, and consideration is requiring entrants to participate in the contest). To make a contest legal, therefore, businesses usually remove the "chance" element.
With that said, companies must consider where they will host a contest because there are three different analyses that states use to evaluate whether a game is one of chance or one of skill: 1) the predominate factor test; 2) the material element test; and 3) the any-chance test. As such, it is extremely important to understand which test is used in the state where the contest will be held because the contest's legality differs by test.
Lastly, regardless of how the contest is conducted, it is important to have concrete, clear and objective criteria by which the contest winner will be selected. This criteria helps affirm that the contest is indeed a contest and not a sweepstakes because the winner is determined by objective criteria, not by chance. Otherwise, the contest runs the risk of being deemed a sweepstakes.
While sweepstakes and contests are commonplace in social media (and online) and present great opportunities for businesses to engage with customers and consumers, these promotions present unique legal risk considerations. It is important for businesses to implement policies and procedures (along with official rules) relating to such promotions. And, finally, while businesses may have sufficient policies and procedures, it is always important for businesses to consult a lawyer prior to conducting any such promotions as there may be unique requirements imposed by state law (and applicable federal law) – such as registration, bonding, required disclosures and notices, and other reporting obligations – based upon the structure and prize of the promotion.
For more information or questions about the specific impact that your sweepstakes or contest may have on your company, contact the authors.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.