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In general, marketing a company’s goods and services is directly related to its success in the marketplace and its profitability. Sales promotions are one of many tools available to marketers. This article provides an overview of the general legal framework for these promotions.
Federal Law
The legal framework within which sales promotions must operate is many-layered. On a federal level, three agencies may have some say in any particular sales promotion, depending on the promotion structure and communication media employed. First, the Federal Trade Commission (FTC) regulates sales promotions and advertising under rules established under the Federal Trade Commission Act, 15 U.S.C. § 41 (FTC Act)[i]. Second, the Federal Communications Commission (FCC) regulates advertising and promotional activities delivered via those communication channels over which the FCC has regulatory authority (e.g., cable, radio, television, satellite, and wire)[ii]. Third, the United States Postal Service (USPS) regulates advertising and promotional activities delivered through the mail.
Under the federal Lanham Act[iii], a competitor can sue a company if any false or misleading statement is used in a sales promotion. The competitor must also show that the false or misleading statement either harms or increases the chance of harm to the competitor. 15 U.S.C. § 1125(a).
The FTC’s Policy Statement on Deception defines an advertisement as deceptive “if it contains a statement or omits information that is likely to mislead consumers acting reasonably under the circumstance and is important to a consumer’s decision to buy or use the product or service.”[iv]
State Law
All states have unfair and deceptive trade practices laws prohibiting false, misleading, and unfair trade practices. Further, many states, including Minnesota, have gambling, lottery, and promotion laws governing the conduct of contests and sweepstakes.
Many businesses incorporate an online presence in their marketing and advertising strategy. While this expands the market of potential customers, it can also open a local business to the laws of other states. This can be an important consideration to bear in mind while designing and implementing sales promotions, contests, and giveaways.
Contests and Sweepstakes
There is no single federal law governing—or even a single federal agency regulating—contests and sweepstakes. Instead, a patchwork of federal and state laws applies to contests and sweepstakes. Which particular law applies often depends on the medium used to communicate the promotion.
Perhaps the most important question when designing a contest or sweepstakes is, “how can this be structured so that it is not classified as a lottery for state law purposes?” Both federal and state laws generally ban the use of lotteries for marketing purposes.
Lotteries are defined as promotions that contain all three of the following elements:
- The outcome of the promotion depends on factors outside the control of the participants. States have different thresholds for determining what constitutes chance.
- A prize may be anything of value offered to participants.
- Consideration is “something of value (such as an act, a forbearance, or a return promise) received by a promisor from a promise.”[v] The requirement to pay money or purchase a product or service to enter a promotion constitutes consideration. Consideration can also be an action performed by a consumer that confers a benefit—even a very small benefit—to the company.
Because sweepstakes typically have a prize awarded through some type of drawing (chance), most contests and giveaways already meet the first two elements. Therefore, a company generally must eliminate the consideration element to conduct the promotion legally.
Eliminating the Consideration Element
Companies have been managing promotions for decades. Obviously, there must be a simple way to avoid the promotion being classified as a lottery. Perhaps the simplest way is not to require that a consumer do anything other than provide an entry for the promotion. In other words, the safest course is to provide an alternate method of entry, perhaps allowing consumers to enter by mail or online.
There is an important caveat to managing alternate methods of entry. All entries must be treated the same regardless of the consumer’s method of providing the entry. This is referred to as the “equal dignity rule.” Other important factors to consider when designing the promotion include:
- The alternate method of entry must be clearly and conspicuously disclosed in the promotion materials.
- Consumers must be able to enter the promotion using the alternate method the same number of times as they can by making the defined consideration.
- Consumers must have the same amount of time to enter for free as they do when making the defined consideration.
- The company sponsoring the promotion may not create separate prize pools for the different entry methods.
Official Rules
Most states require contests and sweepstakes to have official rules that are readily available to entrants. The details must generally include, but are not limited to, the following:
- Eligibility requirements for who can enter and win. Common requirements include age and residency; common exclusions include the sponsor’s employees and family members.
- Description of the entry methods, including the “no purchase” alternate method.
- Clear entry instructions for all methods of entry. The instructions should be written in clear English and should contain details about what the entrant needs to submit, the format to submit it, and where the submission must be sent.
- Promotion start and end dates.
- Complete description of the nature and number of prizes to be awarded and their approximate retail value.
- A description of how the winner(s) will be chosen.
- How and when a list of winners may be obtained
- Odds of winning. A statement that the odds of winning are dependent upon the number of entries received is sufficient when this statement is an accurate description of the odds.
- The company name and physical address of the sponsoring company
- A statement that no purchase is necessary to enter or win the promotion.
Tax Issues
Generally, sweepstakes prize winnings are taxable at the federal and state levels. The sponsoring company, or the agency running the promotion on behalf of the sponsor, will be responsible for sending the appropriate year-end tax statements.
The sponsoring company should require a completed federal form W-9[vi] from any prize winners where the prize value (retail) is $600 or more. The sponsoring company may need to send the prize winner a form 1099-MISC[vii] at the end of the calendar year for tax purposes.
[i] https://www.ftc.gov/legal-library/browse/statutes/federal-trade-commission-act
[ii] https://www.fcc.gov/about/overview
[iii] https://www.law.cornell.edu/wex/false_advertising
[iv] James C. Miller III, Chairman FTC. “FTC Policy Statement on Deception,” (October 14, 1983); available online at https://www.ftc.gov/legal-library/browse/ftc-policy-statement-deception
[v] Black’s Law Dictionary (Bryan A. Garner, ed., 7th ed. 1999).
