Internet Contests and Promotions: A Primer for Online Retailers

By Greg Sater and Natasha Shabani

"CLICK HERE, and you could win a free trip to the next ERA Awards Show in Las Vegas!"

Are you running an online promotion? If so, are you familiar with the rules and regulations that apply?

As online promotions become increasingly popular tools used by retailers to attract customers to their websites, sign up for their mailing lists and to amass information to be used for marketing purposes, retailers must take care to structure their promotions properly. Companies sponsoring online promotions must comply not only with the multitude of laws that govern contests and sweepstakes in general, but they also must address particular issues that are involved in marketing over the Internet.

THE ELEMENTS

• Lotteries. First, sponsors must ensure that their promotions do not constitute illegal lotteries, since lotteries may be run only by the 50 states. A lottery is comprised of three elements: prize, chance and consideration. In order to avoid conducting an illegal lottery, it is necessary to eliminate at least one of these elements.
• Prize. A prize is anything of value awarded to a winner. Since consumers would likely be uninterested in a promotion that did not offer a prize, this element is difficult to eliminate.
• Consideration. Consideration is something of value to the promotion sponsor, which is provided by the consumer as a prerequisite to participating in the promotion. Consideration may be monetary (usually an entry fee, or having to purchase the sponsor's product in order to participate) or non-monetary (requiring the consumer to expend a significant amount of time or effort, which benefits the sponsor in some way). Traditionally, the most common way to eliminate consideration has been to provide an alternate method of entry (AMOE). This is the reason for the commonly seen "no purchase required" language, and consumers typically can enter the promotion by mailing in a postcard or calling a toll-free number. Sponsors must be careful to ensure that the AMOE provides equal chances of winning as the regular method of entry.

Recently, pending class action lawsuits in Georgia and California have posed a challenge to the AMOE as a way to get around the consideration issue. In each case, the promotion in question allowed viewers of a game show ("Get Rich With Trump" in one case and "Deal or No Deal" in the other) to enter a sweepstakes by sending a text message from their cell phone, incurring a premium charge of 99 cents on top of the standard text messaging rates charged by their cell phone providers. Alternatively, viewers could enter for free over the Internet. In fact, the majority of viewers in both cases did utilize the free Internet method of entry. The lawsuits allege that regardless of the Internet free entry method, an illegal lottery exists even if only some of the participants pay consideration for a chance to win the sweepstakes. The plaintiffs allege that the text message entrants, who are being charged the 99-cent premium, are not receiving anything of value for their 99 cents, and therefore, the promotion is merely a scheme to make money without providing value. The counter-argument is, of course, that the game show sponsors are providing entertainment value.

The outcome of these cases will determine whether the AMOE will continue to be deemed sufficient to eliminate consideration from promotional games.

• Chance. A common example of a game of chance is a random drawing. Chance may be eliminated by either awarding a prize to every entrant, or by instead conducting a game of skill, where winners are selected on the basis of some sort of ability, knowledge, creativity, judgment or expertise. Since a skill contest eliminates the element of chance, a sponsor may generally impose an entry fee or other consideration without creating an illegal lottery. Examples of skill contests are photography contests, essay-writing contests, athletic contests, cooking contests and mathematical contests. Skill contests must have objective criteria upon which entries are judged, and the judges must have sufficient qualifications to apply such criteria.

STATE LAWS
Once a marketer is confident that the promotion does not constitute an illegal lottery, it must still comply with the laws of each state in which the promotion is conducted, bearing in mind that Internet contests are accessible in all 50 states.

Unfortunately, state laws vary significantly and impose different procedural requirements. There are, however, a number of rules that have general applicability across the 50 states and should be included in virtually all contests' "Official Rules." These include entry instructions, the sponsor's name and address, eligibility and geographical limitations, odds of winning, prize descriptions and their approximate retail value, contest duration, entry deadlines, how and when winners will be selected, limitations on the sponsor's liability and a disclaimer for lost, late or damaged entries. A few states also require publication of a list of winners and awarding of all prizes, so these elements should be included in nationwide promotions as well. (There are also several states that have special procedural requirements for certain types of promotions, including Arizona, Florida, New York and Rhode Island.)

Some marketers opt to simply exclude residents of these states from participating in their promotions rather than comply with these somewhat burdensome procedural requirements--hence the commonly seen limitation, "Void where prohibited," or better yet, "Void in Florida, New York and Rhode Island."

INTELLECTUAL PROPERTY ISSUES
Although sponsors of all contests and promotions must exercise caution not to infringe upon the trademark, copyright or patent rights of others when running their promotions, this is an issue of particular concern in the online arena because promotions over the Internet generally are higher-profile than traditional media promotions and involve greater exposure for the sponsor.

Sponsors must be careful when advertising prizes by using their brand names without consent from the trademark owners. For instance, ERA would not be able to name a contest "The ERA iPod Giveaway," as it would suggest a false association between ERA and Apple. ERA would, however, be able to identify the iPod® by name as a prize in its materials.

Recently, many marketers have been soliciting user-generated content (UGC), as part of their promotions. For instance, Frito-Lay recently ran a contest in which consumers were invited to create and submit a commercial for Doritos, and the winning commercial was aired during the Super Bowl. UGC-soliciting contests such as this one implicate many intellectual property considerations, among other issues, such as whether the creator owns the rights to all material being submitted, whether releases for third parties appearing in the materials have been obtained and who will assume liability for claims of defamation, privacy violations, idea misappropriation and more.

PRIVACY ISSUES
The collection of personal information implicates privacy laws. A hyperlink to the sponsor's privacy policy should always appear on online promotion entry forms and on any page where personally identifiable information is collected.

In an effort to build e-mail databases, a common tool used by marketers is to require promotion entrants to agree to accept future promotional e-mail as a condition to entering the promotion. Regulatory scrutiny of this practice may soon occur.

Similarly, the concept of "viral marketing," where contest entrants must provide the names and e-mail addresses of others in order to become eligible to enter (e.g., "Refer your friends by submitting their e-mail addresses, and be entered into a drawing to win an iPod."), also raises concerns under privacy and spam laws.

COPPA, the Children's Online Privacy Protection Act (15 U.S.C. §6501 et seq.), also needs to be considered. It addresses the collection of online personal information from children under the age of 13. The statute requires a website operator to obtain verifiable parental consent before collecting personal information from children.
Thus, a promotion that requires disclosure of entrants' names, addresses, e-mail addresses, phone numbers and any other information that would allow someone to contact or identify the child, must either exclude children under 13 from participating or comply with the procedures set forth in COPPA.

Because compliance is fairly burdensome and requires several extra steps, many sponsors prefer simply to exclude children under 13 from participating in the contest.

OTHER SPECIAL CONCERNS
Material on the Internet is subject to malfunctions, errors and viruses, not to mention hackers who may attempt to take advantage of contest offers by, for instance, inundating the contest website with entries and thereby preventing others from accessing the site. Accordingly, online promotions should include a clause disclaiming liability for fraud, viruses or other events that compromise the integrity of the contest and reserving the right to terminate or modify the contest in such a situation. Additionally, contest rules should limit entries to a particular number, such as one per day, per entrant. The duration of the promotion and the deadline for entries should be stated not only in terms of dates, but also a precise time in a specific time zone--e.g., 1:00 pm EST. Sponsors should also ensure that the how-to-play instructions are clear and that any special technical requirements (e.g., if cookies must be enabled on the user's computer) are set forth in the rules.

Steering clear of illegal lotteries, complying with state laws, and respecting intellectual property and privacy laws are only a few of the issues facing the sponsors of online promotions. Retailers sponsoring such promotions should obtain proper legal counsel to ensure that they stay on the right side of the law. "CLICK HERE, and you could avoid liability for running an unlawful Internet promotion."

Greg Sater is an attorney with Rutter Hobbs & Davidoff Inc., a law firm based in Los Angeles. He can be reached at (310) 286-1700, or via e-mail at gsater@rutterhobbs.com. Natasha Shabani, attorney, specializes in transactional intellectual property law at the firm. She can be reached at (310) 789-1858, or via e-mail at nshabani@rutterhobbs.com.