Before you launch a contest, understand the legality between the different types of giveaways, namely contests, sweepstakes, and lotteries.
Businesses have relied on sweepstakes or contests to attract customers, build traffic, and increase brand awareness for decades.
Traditionally, these contests or sweepstakes were part of in-store promotions. But in today’s digital age, businesses are increasingly going online and using social media to reach a wider audience.
A customer can go to some of the more popular platforms like Facebook, Twitter, Instagram, and Pinterest, and with a few clicks, participate in a contest or enter a sweepstakes.
While social media has certainly simplified this process, running a giveaway – online or offline – is not without risk. Indeed, in order to avoid running afoul of the law, it is important to understand the differences between the different types of giveaways, namely contests, sweepstakes, and lotteries.
Image via Strategy Online
Eliminating the Chance of Illegal Lottery
As a starting point, a company running a promotion must make sure that it is not creating an illegal lottery. A lottery consists of three elements:
- Consideration (payment), and
In short, a participant pays for the chance to win a prize, like purchasing a ticket in the hopes of winning millions of dollars in a state-run lottery. To avoid an illegal lottery and run a legal contest or sweepstakes, a company generally must eliminate one of the three lottery elements.
A lawful sweepstakes, for instance, will typically involve the chance to win a prize, but does not require consideration to enter. A popular way around the consideration requirement for sweepstakes is the free alternative method of entry option.
Available under most state laws, this allows companies like McDonald’s to give away monopoly tickets to paying customers – consideration – because McDonald’s offers an alternative free method to enter the sweepstakes. In addition, it is important to keep in mind that consideration can be more than a monetary payment.
If too much work to enter is required of the customer, this work and time put into the submission can turn into consideration and convert the sweepstakes into an illegal lottery; time is money, after all.
Image via SP Times
Defining a "Contest"
Conversely, a contest awards prizes based on skill or merit, such as art contests, cook-offs, or trivia contests. Because the element of chance is eliminated, companies can require consideration for entry into a contest subject to applicable state laws. Further, although the entry requirements are somewhat relaxed when prizes are earned, not awarded, contests must also be administered within the confines of the law.
One Florida Hooter’s found this out the hard way. In an effort to increase beer sales, the business ran a contest among its servers in which it promised the winner a new “Toyota.” However, on the day she was supposed to be awarded the prize, she was blindfolded and escorted to the restaurant parking lot where she was given a “toy Yoda.”
Unsurprisingly, the winner was not happy. She quit and filed suit against the company to get her Toyota, alleging breach of contract and fraudulent misrepresentation. She won and Hooter’s bought her a new Toyota of her choice. While this is an extreme example, it provides a cautionary tale that demonstrates the importance of planning a contest before jumping in head-first with a giveaway.
Related Article: Does Your Business Need Insurance for Social Media?
State Laws Governing Promotions
Complicating matters more is the fact that each state has its own set of laws governing promotions, and each law is different.
For example, Florida, New York, and Rhode Island require sweepstakes offering prizes over a certain value to be registered. Similar laws also apply to contests, especially if a purchase is required to enter. Arizona requires the company to register the contest with the attorney general’s office, including a sworn statement that no additional fee was added to the purchase price in connection with the contest.
Moreover, the official rules of the sweepstakes or contest must fully disclose information about the prize offerings, method of entry, and selection of winners. These are just samples of what may be required, so a company must always check the applicable state’s laws before engaging in a promotion.
Platform-Specific Legal Considerations
Typically, a site requires acknowledgement that it does not endorse, promote, or administer the promotion. Facebook requires that any promotion should be run through specific pages or apps, and not on any personal pages. Twitter requires contests to discourage the creation of multiple accounts and posting the same tweet repeatedly. A business that ignores the rules or fails to abide by them could find its promotion suspended, or worse, its entire social media account de-activated.
If this sounds like an arduous process—especially when running the promotion is so much easier online—that’s because it is. Despite low barriers to entry, the risks associated remain as high as ever. This is not to say that running an online sweepstakes should be avoided. Indeed, the opposite is arguably true; one study found that when it comes to successful marketing, social media has a 100% higher lead-to-close rate than traditional outbound marketing, such as direct mail or print advertising.
Therefore, while fully vetting the legality of a contest or sweepstakes may seem like a costly endeavor, the reality is that doing so is a necessary evil that can be worth it in the end.