Credit Union Legal Update – November 2013

    By Stephen E. Story, Lender Representation, Credit Union

    Potential Legal Traps in Sweepstakes

    Sweepstakes are increasing in popularity with credit unions as key marketing tools. But, sweepstakes are highly regulated and can raise significant compliance issues. This article is designed as a very brief overview on the law governing sweepstakes.

    A sweepstakes is a promotional device where chance determines who wins prizes. Conversely, in a contest, skill determines who receives prizes. Unlike either a sweepstakes or contest, in a lottery, players must contribute something, usually a small sum of money, to receive a chance to win something of greater value. These distinctions matter. Different rules apply to each type of promotion. To avoid transforming a perceived sweepstakes into a contest, credit unions should not include elements of skill in a sweepstakes. Likewise, sponsors cannot require sweepstakes participants to pay anything to participate, or else they may inadvertently hold an illegal lottery instead of a sweepstakes. (Most states have criminal statutes classifying lotteries as illegal gambling).

    Federal law regulates sweepstakes by imposing disclosure requirements on sweepstakes’ entry materials sent by mail. To meet federal sweepstakes rules, entry materials must state in a readily noticeable, readable, and understandable manner:

    • that no purchase is necessary (on the mailing, on the entry form, and in the rules);
    • all terms and conditions of the sweepstakes;
    • the mailing sponsor’s contact information;
    • the estimated odds of winning;
    • the quantity, nature, and estimated value of each prize; and
    • the schedule of any payments made over time.

    Additionally, the mailing cannot: state that an individual has won a prize unless he has actually won the prize; contain a statement inconsistent with the contest rules; require the sweepstakes entry to include an order or payment; or state that individuals not purchasing products may be disqualified from future sweepstakes. If a mailing violates these rules, the Postal Service may seize it. The mailing’s recipient may also sue the sponsor to recover $500 or the amount of their damages from the mailing. For serious violations, a sponsor may be fined $10,000 for each mailing.

    Equally as important as these federal disclosure requirements, each of the 50 states also separately regulate sweepstakes. These state laws apply to sweepstakes that do not use the mail, such as increasingly common promotions using the internet. Under many states laws, promoters must make disclosures equivalent to or greater than those required under federal law. The patchwork of state sweepstakes laws imposes varying additional requirements on sponsors of multi-state promotions.

    Some states require sweepstakes promoters to register the promotion, in advance, with a state agency. These states often exempt from their registration rules sweepstakes with small prizes; however, Rhode Islands law covers sweepstakes with total prizes as low as $500. In addition to requiring registration, some state laws require sweepstakes promoters to post a bond or pay a fee before holding a sweepstakes. In many states, sponsors must also maintain a list of sweepstakes winners and make that list available to participants. Also, some state statutes mandate that a promoter award every prize unless the sweepstakes rules expressly state that unclaimed prizes will not be awarded. Finally, in many states, individuals may be held criminally liable for particularly egregious sweepstakes law violations.

    The wide range of federal and state sweepstakes laws which even a small-scale promotion may trigger compels credit unions to tread carefully in their promotions. Before holding a sweepstakes, sponsors should consider seeking legal advice to ensure compliance with applicable laws and consider at least the issues in the following checklist:

    Sweepstakes Checklist:

    1. Be sure no purchase is necessary – do not require participants to pay a fee to enter the sweepstakes. Do not require participants to purchase a product to enter the sweepstakes. Allow an alternate, free entry method.
    2. Be aware of, and comply with, the most restrictive state law applicable to a multi-state sweepstakes. If required, register your sweepstakes with the applicable state agency. If required, pay any fee or post any bond that an applicable state agency might require. Consider restricting eligibility to less than all states, if that strategy is consistent with your business purpose.
    3. Be clear and precise with sweepstakes rules. Problems with sweepstakes frequently arise from ambiguities in the sweepstakes rules. Any ambiguities will be construed against the sweepstakes promoter and in favor of the participant. Have multiple readers (including counsel) review the rules for clarity and precision.
    4. Avoid turning a sweepstakes into a contest. Chancenot the participants skillshould determine whether a participant wins a prize.
    5. Award all sweepstakes prizes. If you do not plan to award all prizes, the rules of the sweepstakes should state that unclaimed prizes will not be awarded.
    6. Do not make any misleading or deceptive statements about the sweepstakes, its rules, conditions, or prizes.
    7. Prepare, keep and retain records of the sweepstakes rules and sweepstakes award protocol, and disseminate a winners list.

    Consider retaining legal counsel to review the sweepstakes rules.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.