Running a contest or sweepstakes can improve customer engagement, create new leads for your business, increase sales, and provide valuable data for advertising campaigns. People love to win free stuff, and a contest can be a fun and cost-effective way to promote your business. However, if a promotional event does not comply with state and federal law, it could end up attracting the wrong kind of attention. Platforms such as Facebook and Twitter (now X) also have specific guidelines for conducting promotions.
Based on the value of your giveaway, where the promotion is available, and entrant eligibility, there is a long list of legal requirements to run through before launching a promotional campaign. Although it is best to have a business attorney vet your promotion prior to launch, business owners who want to run a contest will benefit from a basic understanding of contest and sweepstakes laws.
Contest or Sweepstakes: Which Is It?
Lotteries are illegal unless they are conducted by states or certain charitable organizations. State lottery and gambling laws generally consider a promotional giveaway to be a lottery if it involves three elements: prize, chance, and consideration (i.e., something the participant gives up to take part in a promotion, such as a cash payment, a purchase, or an expenditure of a certain amount of effort). For businesses, a promotion must therefore eliminate one of these elements to be legal.
- A contest is a skill-based promotion that eliminates the element of chance. In a contest, consideration takes the form of effort, for example, taking a photo or participating in a challenge. Contests may require more administration because submissions must be qualified and entries judged.
- Sweepstakes are luck-based promotions and do not require consideration, that is, the purchase of a product or service, to enter. Therefore, a sweepstakes should have a free method of entry and participants should have an equal opportunity to win. Sweepstakes tend to be easier to set up and run than contests and may appeal to a broader audience.
- The line between a contest and sweepstakes is not always well-defined. Many promotions are hybrids of the two and risk stepping into illegal lottery territory.
Setting Up Official Rules
Most states require official rules for contests and sweepstakes that are readily available to entrants and include information such as the following:
- Eligibility requirements, including age and exclusions
- Clear entry instructions for each method of entry
- Entry period start and end date
- Descriptions of the prizes to be awarded and their estimated retail value
- How and when to obtain a list of winners
- The name and address of the company sponsoring the promotion
It is important to check the applicable state law to determine the requirements that will govern your sweepstakes or contest. State law may additionally require disclosure of how winners are selected and the method for determining a winner if there is a tie.
State and Federal Promotions Laws
Contests and sweepstakes are governed by both state and federal consumer protection laws. The federal laws that apply depend on the means used to advertise the sweepstakes or contest: Thus, the Federal Trade Commission (FTC), the Federal Communications Commission, and the United States Postal Service may play a role in enforcing the applicable law depending upon whether you promote your contest by phone, internet, or email. Although you should consult an attorney to ensure you comply with all laws applicable to your contest or sweepstakes, the following general information may be helpful:
- In general, sales promotions and advertising are regulated by the FTC under the FTC Act.
- The FTC also regulates advertising practices and does not allow ads or promotions that contain false or misleading statements.
- Promotional messages must contain clear and conspicuous disclosures and promotional claims must be substantiated under FTC regulations. These regulations apply to disclosures made in digital advertising, which the FTC calls “.com disclosures.”
- The FTC has strict guidelines around use of the word free and similar representations in promotions.
- “Prizes, Sweepstakes and Lotteries” consistently rank among the top ten complaint types reported to the FTC.
- Other federal laws that may apply to promotions include the Telemarketing Sales Rule, the 900-Number Rule, the Communications Act of 1934, and the Deceptive Mail Prevention and Enforcement Act.
States have their own versions of the FTC Act known as unfair and deceptive trade practices laws. They also have gambling and promotion laws about how contests and sweepstakes must be run. In New York and Florida, for example, companies that sponsor sweepstakes and other games of chance with prizes exceeding $5,000 must register and bond the game.
Companies that run promotions in violation of state or federal laws could face injunctions, restitution, and civil penalties.
The following are some additional legal issues to keep in mind as you design and prepare to launch a contest or sweepstakes:
- Contract law. A public promotional offer that is fulfilled by a participant can create a legally binding contract. Contract law may also be relevant when third parties are used to administer or promote a contest or sweepstakes. Contracts should establish rules that indemnify the sponsor from third party actions, such as illegal advertising or promotion.
- Taxation. Prizes and awards count as taxable income for the recipient. And a company that makes a promotional prize payment worth $600 or more is subject to IRS filing requirements.
- Platform-specific rules. If running your promotion on social media platforms such as Twitter and Instagram, be aware of the platform’s promotional guidelines and rules.
Don’t Leave Compliance Up to Chance: Talk to a Lawyer About Your Promotion
Contests and sweepstakes are not all fun and games. They are potential legal minefields that must be carefully navigated to avoid negative attention from consumers—and regulators. For help with promotional compliance, reach out to our business attorneys.