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LAW: PRIZE PROMOTIONS AND COMPETITIONS IN THE UNITED STATES
Prize promotions (also known as free prize drawings and sweepstakes) and competitions can be invaluable for your business, particularly a new or startup business. There are many reasons you should consider a prize promotion or competition. Prize promotions and competitions can:
- create ‘buzz’ around your product or service;
- encourage people to visit your website;
- help to expand your email list;
- provide you with valuable market research;
- strengthen the relationship between you and your customers.
What laws and regulations apply?
At the federal level, the US Department of Justice is primarily responsible for enforcing criminal violations such as illegal lotteries. Other agencies, including the United States Postal Service (USPS) and the Federal Communications Commission (FCC), also enforce federal laws governing contests and prize promotions. Furthermore, each state has laws that may require that you make disclosures, seek licensing, or post a bond. Since state laws vary, you should check with the Attorney General’s Office in the state(s) in which you plan to run a prize promotion or contest. If a contest or promotion involves telephone calls, the FTC’s Telemarketing Sales Rule requires specific disclosures, including the odds of winning a prize, how to participate without purchasing anything, and that no purchase or payment is required to win. The Deceptive Mail Prevention and Enforcement Act aims to protect consumers from deceptive prize promotion and contest mailings, and therefore, does not apply to online or telephone prize promotions and contests.
Federal Laws and Regulations
Prize promotions in which there is an element of chance and a prize is to be awarded are permitted, but to avoid your promotion being an illegal lottery, participants should not be required to provide any consideration to take part. Consideration is any type of payment or purchase or a requirement that a “substantial expenditure of effort” be made. Prize promotions and contests that require a purchase by participants are illegal in the United States.
Under the Deceptive Mail Prevention and Enforcement Act, all prize promotion mailings must disclose, in the mailing, in the rules, and on the entry form and be easy to find, read, and understand:
- That a purchase is not necessary to enter, and will not improve the chances of winning;
- A name and business address where the sponsor can be contacted;
- The estimated odds of winning each prize. If the odds depend on the number of entries, the stated odds should be based on an estimate of the total number of entries;
- The quantity, estimated retail value, and nature of every prize; and
- A clear statement of the payment schedule of any prize.
Prize promotion mailings cannot:
- Say or suggest that if a person does not buy a product or service, he may not receive future promotion mailings;
- Require that an entry be accompanied by an order or payment for something previously ordered;
- Say that an individual has won a prize when that individual has not; and
- Say anything to contradict or limit the rules of the promotion or disclosures required by the Deceptive Mail Prevention and Enforcement Act.
In a skills competition, the winner must be chosen primarily based on skill and not on chance to be legal. An illegal lottery consists of three elements: 1) prize; 2) chance; and 3) consideration. In order to make your skill promotion legal, the element of chance must be eliminated.
All mailings for skills competitions must:
- State all terms and condition, including the rules and renty procedures in language that is easy to find, read, and understand; and
- Provide a name and the business address where the sponsor can be contacted.
All mailings for skills competitions must disclose:
- The number of rounds or levels of the competition and the cost to enter each;
- Whether subsequent rounds will be more difficult;
- The maximum cost to enter all rounds or levels;
- The estimated number or percentage of entrants who may win, or who have won the last three competitions:
- Qualifications of the judges, if the contest is not judged by the sponsor;
- The method used in judging; and
- The date prizes will be awarded, how many will be awarded, the nature and estimated value of each prize, and the payment schedule.
What are the risks of noncompliance?
The FTC can bring enforcement actions for unfair and deceptive trade practices under the Federal Trade Commission Act. These actions can include injunctions, civil penalties, and audits. Under the Federal Deceptive Mail Prevention and Enforcement Act, the US Postal Inspection Service can obtain a temporary restraining order, injunctions, or impose civil penalties of up to 2 million dollars. The FCC can impose fines as well, starting at $4,000 for each violation.
State Laws and Regulations
Much like federal law, most states prohibit illegal lotteries. A prize promotion can avoid being considered an illegal lottery by removing the element of consideration, however, states define consideration differently. The definition is defined by some narrowly as the payment of money and others more broadly as anything of value, which can include expenditure of effort or in some cases the provision of personal information. Most states prohibit the deceptive and misleading practice of informing participants that they won a prize if they have not. Some states also require that winners are reported to state officials and that the list of winners be available to all entrants for a certain period of time. Some states regulate the time period in which prizes must be awarded to the winners.
State laws differ regarding how much chance is allowed in a skill competition however, a majority of state apply the rule that the competition is not an illegal lottery as long as skill is the dominant factor in determining the winner. Other states only require that skill be a requirement, meaning a combination of skill and chance, rather than predominantly skill, is legally sufficient. Several states prohibit charging an entry fee for a skills competition.
For both prize promotions and competitions, some states have registration requirements, generally for prizes in excess of a certain dollar amount, bond requirements, and tax implications.
What are the risks of noncompliance?
In most states, violations are considered criminal and punishable by fines and imprisonment. In many states, the state Attorney General can also seek a permanent restraining order. Fines and penalties range from state to state from $100 per day to $10,000 per violation. Furthermore, some states allow consumers to file lawsuits for violation.
For detailed information on state-specific prize promotion and competition laws, see the specific state laws below.
KNOWLEDGE BASE Prize Promotion – Competition Law In The US
- Prize Promotions and Competitions Law in The United States »
- A Practical Guide to Sweepstakes and Contest Promotions »
- Raffle Laws in the US and Canada: How to Run a Legal Raffle – How to Avoid Legal Trouble When Running a Raffle »
- Contest and Sweepstakes Law »
How to Promote Scratch-Off Games for business.