Make Sure Your Promotion Is Legal

While at Search Engine Strategies New York, I had a nice conversation with attorney Baruch Bebchick. As his Web site says, Baruch focuses on “intellectual property and corporate matters, with a focus on technology transactions.”

He was kind enough to answer some questions about the legal ins and outs of doing promotions. Here are the findings from our interview.

Sage Lewis: What’s the difference between a contest and a promotion?

Baruch Bebchick: I’m not sure about the distinction made in your questions between a “promotion” and “contest,” but for purposes of our discussion let’s just refer to all such items broadly as “promotions” (which obviously can take various forms as discussed below). In a nutshell, the key legal issues in running a promotion is to set smart ground rules for participants and to avoid violating applicable lottery or gaming laws.

SL: What can you require a person to do in order to be entered into a promotion? Also, what can you not require a person to do (i.e., buy something)?

BB: An illegal lottery (i.e., one that is not state run or otherwise authorized) consists of 3 elements:

1. A prize (i.e., something of tangible value).
2. Chance (i.e., random drawing).
3. Consideration (i.e., money or some type of substantial time or effort required to enter).

To be legal, a promotion must eliminate one of these three elements. The element commonly eliminated in many promotions is consideration, which makes the resulting promotion (no entry + prize + chance) a “sweepstakes”. The element of consideration can be eliminated by providing participants with a free alternate method of entry (i.e., fill out form, etc.) even if some consideration is otherwise required.

If a promotion sponsor wants to charge all participants (and therefore keep the element of consideration), the sponsor would need to eliminate either the element of having a prize (which wouldn’t result in much of a promotion) or chance (i.e., determine the winner based on skill, like a baking or essay contest). This type of promotion (consideration + prize + no chance) is commonly referred to as a “skill contest.”

SL: How do you deal with different state laws (or international laws) when you are holding an online promotion?

BB: Because of the myriad of different laws and regulations in the U.S. and internationally that may apply to promotions, they are best limited to specific geographical locations (i.e., open to U.S. residents only). Depending on the type of promotion being run, certain states may have different rules about how such a promotion can be conducted, so a promotion sponsor may also want to exempt the residents of certain states from participation.

Some states also have registration requirements for sweepstakes in certain situations. For example, in New York and Florida, registration is required if the value of the prize exceeds $5,000 (and a bond in the amount of the value of the prize must be submitted along with the registration), and in Rhode Island sponsors must register for retail promotions in excess of $500.

SL: Do you need to have written policies on your Web site about your promotion? And if you do, is there a place, or a blanket statement, that would work for a small business that was dong a promotion?

BB: One of the most important things (from a legal perspective) that a promotion sponsor can do in launching a promotion is to have participants agree to its rules of the road. This should be done by having each participant agree to the sponsor’s “official rules” or “term of use” prior to participating in the promotion.

There is not real any one form of official rules that a promotion sponsor can use, but there are certain items that should be included in most official rules, such as: eligibility requirements (i.e., age and no employees), start and end dates and times of the promotion, approximate retail value of prize (be careful not to exaggerate), chances of winning (for sweepstakes that have no set number of entries say “odds of winning depend on the number of eligible entries received,” how winners will be notified, and if a sweepstakes — alternate method of entry and stating “no purchase necessary.” All legal terms (official rules and privacy policy) should be conspicuously placed so that participants can review and agree to them prior to participating.

Promotion sponsors also should keep in mind certain issues in dealing with promotion winners. The awarding of prizes often raises tax issues and sponsors may find that they will have to issue winners a Form 1099. In many cases, promotion sponsors also will want winners to sign a waiver of liability and permit using the name and likeness of the winner for promotional purposes.

If the promotion is being conducted online and will be open to children under the age of 13 (or if it will be attractive to such children), promotion sponsors will also need to consider how to comply with the Children’s Online Privacy Protection Act (COPPA). Any legal terms in effect between the sponsor and participants cannot be unilaterally changed by the sponsor.

Promotion sponsors also should post a carefully considered privacy policy, which explains how the personal information collected from participants will be used.

The above obviously should be considered only as a general overview — each promotion is likely to contain various elements which may raise specific legal issues that not covered above. While this sounds like a cliché pitch for my firm, it is not intended as such; rather, I feel that it is very important for your readers to understand that unfortunately there is no one-size all approach to running promotions.

Jumping into sponsoring a promotion without first thinking through the potential legal issues involved (including an unsophisticated start-up classic: “borrowing” a form of official rules from a reputable company as a quick fix) is fraught with potential problems that can result in significant liability for the promotion sponsor.