09-18-2014 | Intellectual Property

Don’t Gamble With Your Business . . . Tips on Running a Lawful Prize Promotion

By: Brian McCormac

Prize giveaway promotions are a great way to generate publicity and promote your company and its products.  However, media reports that your promotion is illegal disprove the notion that the only bad publicity is no publicity.  Indeed, an unlawful promotion can damage your brand, hurt your business, and expose you to substantial legal liability.

As the University of Iowa recently learned, it is crucial to structure promotions lawfully.  The University sought to promote student football ticket sales by offering free tuition to a randomly selected purchaser of season tickets.  Shortly after the promotion began, an article on the front page of the Des Moines Register reported that the University suspended the promotion due to questions over its legality.  Specifically, regulators believed that the promotion constituted an unlawful raffle because entrants needed to purchase tickets to participate. 

A few weeks after it suspended its season ticket promotion, the University of Iowa offered refunds to all students who purchased tickets during the promotion.  Then, it restructured the promotion by offering a free entry method, so it no longer qualified as a raffle.   

A raffle consists of three elements: a prize, random winner selection, and a requirement to pay money, purchase something, or expend substantial effort to enter.  It is unlawful to operate a raffle without a state-issued license.  To avoid this licensing requirement, sponsors typically remove the pay to enter requirement by offering an alternate free method of entry.    

A free entry method, such as accepting postcard or online entries, converts a raffle into a sweepstakes.  Sweepstakes are generally permissible, but many state and some federal laws regulate sweepstakes.  These laws provide a myriad of sometimes inconsistent disclosure requirements.  Some require sponsors to register and post a bond as a condition for operating a sweepstakes.

To comply with this patchwork of legal requirements, a sponsor should provide a set of “Official Rules” that act as a road map for the promotion.  The Official Rules must contain certain disclosures, such as the familiar “magic words” NO PURCHASE NECESSARY, along with a description of the eligibility requirements, entry and winner selection process, prizes, and odds of winning.  Additionally, the Official Rules should include a host of disclaimers to protect the sponsor against typographical errors, fraud, and other circumstances that may jeopardize the fairness of the promotion.

After the winner is chosen, it is advisable to obtain written confirmation that the winner complied with the Official Rules and releases the sponsor from all liability relating to the sweepstakes and use of the prize.  A sponsor may also need to issue a 1099 to the winner.

As the University of Iowa learned the hard way, promotions need to comply with the law from the start.  Suspending and revising a promotion after it has begun is legally risky and potentially embarrassing.  Indeed, a well-planned promotion can be an effective way to advertise your brand and market your products, while keeping you in compliance with law and off the front page of the newspaper.