Internet Sweepstakes, Contests and Games - Lewis and Roca LLP

The following article originally appeared as “Internet Sweepstakes, Contests and Games,”
Bloomberg Law Reports-Intellectual Property, July 2007.
Internet Sweepstakes,
Contests and Games
Article contributed by Anthony Cabot and Jennifer Van Kirk, Lewis and Roca LLP
Anthony N. Cabot and
Jennifer Van Kirk are partners
at Lewis and Roca with offices in
Las Vegas, Phoenix, Reno, Tucson
and Albuquerque. Mr. Cabot,
chair of the Gaming Law Practice
at Lewis and Roca. He is an
adjunct faculty member at the
Boyd College of Law, University
of Nevada, Las Vegas and a past
president of the International
Association of Gaming Attorneys.
In 2001, CyberEsq. Magazine
named him as one of the “suite
16” lawyers at the leading edge
of new media work. Mr. Cabot is a
prolific author on gambling law and
the founding editor of the Internet
Gambling Report. He is recognized
in Best Lawyers In America, for
both Information Technology and
Gaming Law and in Chambers
USA, as a “Leading Lawyer for
Business” for Gaming Regulation.
Ms. Van Kirk is a partner and
Co-Chair of the Lewis and Roca’s
Intellectual Property and Technology
Practice Group. She counsels clients
on all aspects of brand protection
including trademark clearance,
prosecution and licensing matters,
advertising and promotions, and
copyright issues generally and in
the online context. She is listed in
the International Who’s Who of
Business Lawyers – Trademarks.
Anthony N. Cabot
ACaobt@LRLaw.com
702-949-8280
Jennifer Van Kirk
JVankirk@LRLaw.com
602-262-0203
www.LRLaw.com
With a global reach of over a
billion persons, Internet entrepreneurs
are consistently
looking to adopt traditional promotional
and business models to this broader audience.
Business and promotional activities
like sweepstakes, promotions and contests
that appeal to the gambling instinct
have had a sordid
legal history as
most U.S. states
have laws that generally
prohibit gambling.
Not all such activities,
however, are illegal. For
example, retailers have
long understood the value
of sweepstakes to help sell products.
Likewise, skill games for prizes have lined the
midways of the country’s state and county
fairs for decades. Both activities rely on the
public’s desire to play games where they can
ultimately win prizes. As long as the public
has an unfulfilled demand for a gambling
experience, entrepreneurs continue to test
the boundaries of legal sweepstakes and
contests to meet these demands. The variations
of sweepstakes and contests are bound
only by human imagination and unbound by
tremendous leaps in technology.
Those wishing to use the Internet as a
method to conduct sweepstakes and contests
face a daunting legal challenge. They
must comply with federal law as well as the
laws of all the states where they accept participants.
It is not enough that they comply
with the laws where the company has its
offices or houses its servers.
Most states have some commonality in the
general approach to gambling. Prohibited
gambling typically involves any activity in
which a person pays “consideration,” usually
money in an attempt to win a prize in an activity
determined by chance. Nevertheless, as
the discussion below will illustrate, analysis
of these three elements is not
entirely uniform in all jurisdictions,
nor must all
elements be present
for an activity to be
deemed gambling in
a particular state.
Many states have
state authorized lotteries and
commercial casinos, but this is an exception
to the general rule that prohibits commercial
gambling.
If you take away any one of the three elements
of gambling – consideration, prize or chance,
you generally have an activity that is lawful
in most states. A sweepstakes always contains
the elements of chance and prize, so the
element of consideration must be eliminated
to avoid violating the various prohibitions
against lotteries. A skill contest can require
that persons pay a fee to win a prize but the
contest must not be based on chance to pass
legal muster. Finally, an Internet site can offer
games of chance to paying subscribers that
seek entertainment but cannot award prizes
to the winner. This article will examine these
general categories of gambling instinct driven
activities and the legal issues that they face.

Internet Sweepstakes
For any Internet activity to qualify as a sweepstake, the site
must remove the element of consideration from a promotion.
What exactly is “consideration?” States fall into three general
categories when evaluating this element.
Approaches to Consideration
Pecuniary/Economic Value Jurisdictions. Federal regulators
and most states have adopted a pecuniary/economic value
approach. The rationale under this approach is that consideration
requires some measurable economic value flowing from
the participant to the promoter. Consideration is usually in the
form of the transfer of money. A promotion that requires participants
to buy a product or pay a monetary amount to participate
in the game clearly contains the element of consideration.
A less clear situation exists where a promotion requires participants
to expend some degree of effort that ultimately benefits
the promoter. For example, a lottery among those who refer at
least 10 paying subscribers to a website probably contains consideration.
In contrast, advertising value or requiring an action
that is a mere inconvenience to the participant is insufficient to
qualify as consideration. 1
Unfortunately, neither federal nor state law specifies how much
effort is required before it is deemed consideration. If the effort
required is minimal, it generally will not be deemed consideration.
The more effort that is required, the greater the chance it will
be deemed consideration. Expenditures of effort generally not
deemed to be consideration include the following:
• Mailing in an entry form (but Washington and Vermont
deem requiring a self-addressed stamped envelope
consideration);
• Telephoning a toll free number;
• Visiting a store (but Ohio deems store visits consideration,
Michigan deems multiple store visits consideration,
while California requires additional disclosures when a
store visit is required);
• Watching a television program; or
• Completing a simple survey (Some websites that make
money from the sale of personal data for marketing purposes
may end up testing the bounds of this rule. The
greater the degree of difficulty, or the more personal the
information discussed, the greater the chance it will be
deemed consideration).
Expenditures of effort that are more problematic include disclosure
of proprietary information, filling out credit card applications,
registering for subscription sites or the like.
Traditional Contract Principals Jurisdictions. A few states
may still follow traditional contract principals on consideration
and have taken the view that any consideration sufficient to
support a simple contract will be deemed the consideration
necessary to find illegal gambling activity. As examples, the
slightest inconvenience in the method of entry or an indirect
benefit derived by the sponsor have been deemed sufficient to
meet the consideration element. Whether any state courts will
still follow this rule is unknown, but some states still have early
cases that have not been overruled or statutorily abrogated.
Any Consideration Jurisdictions. Finally, a few courts have
held that any economic consideration flowing to the sponsor,
regardless of where it came from, is sufficient to meet the
consideration element. For example, one court found that
consideration existed in grocery store’s bonus bingo game,
which required patron to visit store to get prize slip, which
was available without charge or purchase, and noting that “[t]
he players . . . wagered their time, attention, thought, energy, and
money spent in transportation studying Safeway’s advertising
and in journeying at least once per game to a Safeway Store
for a chance to win a prize -- all of which, we think, amounted
to a valuable consideration moving from the players to the
promoter”). 2 These decision, however, tend to be older and
have often be abrogated by statutes that specifically permit
sweepstakes that are used solely to “services, goods, wares, and
merchandise of a business”. 3
Removing Consideration
Two methods of removing consideration are typical. The first
method is not to charge any participants for the right to enter
the sweepstakes. In this business model, revenues must derive
from the increased sales of goods created by advertising value
of the sweepstakes or collecting fees from third parties such as
sweepstakes sponsors. For example, an Internet electronics site
may hold a sweepstakes where anyone visiting its site can enter
a raffle to win a television. The hope is that the sweepstakes will
assist in branding. Another example is a permanent sweepstakes
site where the prizes for the chance-based games are provided
by sponsors whose advertising is prominently displayed on the
site. The sweepstakes does not need to be a traditional raffle or
instant win promotion. It could extend to any game of chance
including most casino style games. These more interactive forms
of sweepstakes are often referred to as advergaming.
A second revenue model is based on some participants paying
consideration but providing an opportunity for anyone to enter
the sweepstakes for free. In more traditional retail settings, a
common example is where the purchase of fast food or beverages
comes with the chance to win a prize. In most states, if
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you must purchase an item to gain entry to a chance-based
activity, then consideration is present. Only a few states permit
entry into chance-based promotions if the purchaser paid fair
value for the product purchased. To avoid the general prohibition,
promoters can offer an alternative method of entering the
game for free. This is permitted in most states even though most
people receive their entries into the game through the purchase
of the product being promoted. Examples of popular alternate
methods of entry (“AMOE”) are mail-in entries or entry via an
800 telephone number. Disclosure of the AMOE must be “clear
and conspicuous,” so that consumers are adequately informed
of the existence of a non‐purchase method of entry. 4
The AMOE also must have “equal dignity” with the purchase
method of entry: any material disparity (actual or perceived)
between paying and non-paying entrants can invalidate the
AMOE. This means that nonpaying participants must have equal
opportunity to both enter and win the sweepstakes. Equal
opportunity to enter requires that the entry mechanism for
nonpaying participants be comparable to those of paying participants.
It would not be acceptable for paying participants to
be able to enter over the Internet but nonpaying participants
to enter only by visiting the retail store. Likewise, a person
that enters by paying cannot get a disproportionate number
of entries compared to nonpaying entries. Moreover, deadline
dates should be identical for paying and non‐paying participants.
Equal opportunity to win means that a non-paying customer has
equal chances to win all prizes offered. For example, separate
prize pools may invalidate the AMOE because the non-paying
participants do not have the opportunity to win any prize.
Likewise, nonpaying participants should not face greater odds
or obstacles to winning the prizes. For example, the non-paying
participants cannot be forced to qualify for the rounds in which
paying participants can buy entries.
Some Internet sites have models where they hope to use the
AMOE rules to their benefit. For example, a site could offer
subscription-based gaming services. These sites allow a person
to play games on the site and to win prizes or money. Most
participants agree to pay a monthly subscription fee for such
services, but the promoter offers non-paying participants the
opportunity to play on the site through an AMOE. Another
variation on this theme is where entry can be made through an
SMS entry or for a nominal “processing fee.”
Promotions requiring a telephone call to a 900 number meet
the element of consideration. Thus, a free alternative method
of entry is required in these promotions. In addition, the FTC
and the Telephone Disclosure and Dispute Resolution Act
(“TDDRA”) require certain advertising disclosures in these
promotions. 16 C.F.R. §308. Some states completely prohibit
900 number promotions while others require disclosures in addition
to those required by the FTC.
These interactive activities where the participants directly or
indirectly pay fees to play a game tend to come under greater
legal scrutiny. In these games, the promoters are attempting to
make money not from the sale of a product unrelated to the
sweepstakes but from paying customers desiring to win prizes
in the sweepstakes. This is a very real distinction in court cases.
As one court recently noted: “A distinction exists between promotion
of a primary business of selling a meal or a drink for
valuable consideration together with a chance to win a business
related prize, in kind or, albeit, as a sweepstakes prize which attracts
sales, and promotion of a non-primary business related
and incidental activity for valuable consideration together with
a chance to win a prize unrelated to either the primary business
activity or attraction of sales. The difference in the distinction
is in the essence of the product: [t]he former promotes
sales of the primary business product, e.g., food, while the latter
promotes the prize and the product (coupon) is unrelated to
either the primary business purpose of the promoter, of the
distributor.” 5
Over the years, various promoters have attempted to use the
AMOE exception to devise schemes that prosecutors often
describe as “a thinly veiled lottery.” Perhaps the most well known
of these schemes was the “Lucky Shamrock.” In the late 1990s
and through the first part of the current decade, several court
opinions and attorney general opinions addressed the “Lucky
Shamrock” phone card sweepstakes and mechanical dispensers.
The Lucky Shamrock emergency phone card was a one or two
minute long distance phone card, usually sold at market value,
that also had a sweepstakes entry attached to the card. The
Lucky Shamrock emergency phone card dispensers came in
two varieties: one which dispensed the cards with a pull tab
sweepstakes entry, and one that displayed the sweepstakes
results in a display as the card was dispensed. Regardless of
delivery and sales method, the Lucky Shamrock sweepstakes
offered an alternative free method of entry. 6
Courts in South Carolina, Ohio, Texas, North Dakota, New
York and the attorneys general of Alaska, South Carolina, Illinois,
Louisiana, Kansas and Texas looked at the Lucky Shamrock promotion
and dispenser with regard to whether such sweepstakes
and dispensers violated criminal gambling laws in their states. 7
Only the Kansas Attorney General provided an opinion that the
sweepstakes was likely to be legal because the contest would
lack consideration if the AMOE was free, not overly burdensome
and offered an equal chance of winning to non-paying
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contestants. In every other instance, the AMOE was held to
be ineffective or likely to be ineffective. A good example is this
quote from the Illinois Attorney General: “although the scheme
has been carefully designed to appear to meet the criteria generally
prescribed by the courts in approving giveaway schemes,
a review of the underlying purpose of the scheme leads inexorably
to the conclusion that the Lucky Shamrock sweepstakes
is but a thinly veiled lottery.” In other words, even though the
Lucky Shamrock sweepstakes was designed to avoid the consideration
element by using an AMOE in a manner consistent with
court opinions in Illinois, the Illinois Attorney General still felt
it was an illegal gambling game. Automated Telephone Calling
Card with a Free Sweepstakes Game Piece as a “Lottery,” File
No. 98-010 (July 13, 1998)
Another type of Internet promotion is where the site notifies a
person that he or she has won a prize, but requires a purchase
before that person may collect the prize. The FTC has ruled
that this type of promotion does not constitute a lottery even
though all three elements – chance, prize and consideration –
are present because the element of chance is removed before
the consideration is requested. Some states, however, prohibit
these types of promotions, while others regulate them via Prize
Notification Statutes. Offering a coupon or other discount off
of future purchases as a prize is technically a post‐consideration
promotion covered by these statutes but is, however, rarely
challenged.
Skill Games
Skill games differ from sweepstakes in that they require persons
to pay to play the games and have the opportunity to win prizes.
They attempt to avoid the general prohibition against gambling
by eliminating chance. About eight states, including Florida and
Arizona, do not make a distinction between games of chance
and most skill games and prohibit risking any money on either
type of game.
Predominance Jurisdictions. In most states, the determination
of whether a (pay-for-play) skill game (with prizes) is a
permitted game as opposed to a prohibited game (of chance)
is based on the relative degrees of skill and chance present in
the game. Most states and federal law use the predominance
test. In other words, if the element of skill in a particular game
predominates over chance, then the game is permitted. On the
continuum, games such as chess would be on the almost pure
skill end, while traditional slot machines would be on the pure
chance end. Between these ends of the spectrum, many games
contain both skill and elements of chance. In this area, a legal
risk exists because it is a subjective assessment as to where a
game that is part skill and part chance lies on the continuum.
Material Role Jurisdictions. In some states, a game is prohibited
if chance plays a material role in the outcome. In a small
number of states 8 , courts have examined the element of chance
by determining whether a particular game contains chance as
a material element affecting the outcome of the game. Such a
test recognizes that although skill may primarily influence the
outcome of a game, a state may prohibit wagering on the game
if chance has more than a mere incidental effect on the game.
This is a lesser standard than the predominance test and effectively
makes it more difficult to offer skilled based gaming to
residents of those states if the games in question resort to a
chance component in determining the outcome.
Any Chance Jurisdictions. In a small number of states, courts
have examined the element of chance by determining whether
a particular game contains any chance affecting the outcome of
the game. As virtually every game has some element of chance,
most skill games will not survive scrutiny in these states. This
is generally true even if the game does not have any random
events. If the game has any elements not known to the player
such that the player can guess the answer, then an element of
chance is available. For example, a multiple choice trivia question
with five possible answers has a chance element because
a completely unskilled person has a 20% chance of selecting
the correct answer. These states include Tennessee, Montana,
Colorado and, perhaps, Vermont.
Analyzing Skill Games
These cases are not the definitive body of work in this area,
but are useful. Collective wisdom suggests the following analysis
when analyzing a skill game.
1. Skill games should have defined rules without predetermined
odds of success. Skill games must have specific criteria
for determining winners that are clearly communicated
to participants. These criteria must then be used by
qualified judges in determining the winners. In addition to
providing specific criteria, it is good practice to disclose in
the rules how each criterion will be weighed.
2. Skill games should have genuine skill elements whereby
persons possessing the requisite skills have a consistent
and decided advantage over non-skilled players and the
format of the games allows the skilled player to exercise
these traits. In such case, provided that each player has the
same opportunity to win and the same difficulty level, skill
will be the predominant factor in determining the outcome
of such games. Beware that chance may be present when
questions asked or puzzles provided are so difficult that
respondents must guess the correct answer.
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3. The player’s skill should be the determining factor in the
outcome of the game and not fortunate circumstances in
receiving an easier game or draw.
4. The standard of skill must be known to the participants
and must govern the result.
5. No stage of any skill game should be determined predominately
or wholly by chance including tie breakers.
6. The designers of skill games should strive to remove as
many random events in the game as possible. For example,
games may provide the opportunity for players to begin
the games with the same initial setup as their competitors.
Random events could include (1) random number generators,
(2) information relevant to the play of the game that is
not random but is not known or subject to reasoned analysis
by the players, and (3) the awarding of prizes that is randomly
or otherwise not subject to determination before
the commencement of the contest. The outcome should
not in any way be a result of actions outside of the players’
control. For example, random number generators should
play no role in determining the outcome of the games.
Endnotes
1
ACF Wrigley Stores, In. v. Olsen, 102 N.W.2d 545 (Mich. 1960) (potential for
increased advertising revenue insufficient to render television giveaway an illegal
lottery) Opinion of the Justices, 397 So.2d 546 (Ala. 1981) (“fact that the business
enterprise may be expected to gain some benefit by way of increased
sales” insufficient to establish consideration”) (internal quotation omitted)
2
Washington v. Safeway Stores, Inc., 450 P.2d 949 (Wash. 1969)
3
Wash. Rev. Code § 9.46.0356(3).
4
See Deceptive Mail Prevention and Enforcement Act, 39 USC 3001.
5
F.A.C.E. Trading, Inc. v. Carter, 821 N.E.2d 38, 43 (Ind. Ct. App. 2005)
6
See, e.g., Miss. Gaming Comm’n v. Six Elec. Video Gambling Devices, 792 So. 2d
321 (Miss. Ct. App. 2001)
7
See, e.g., Black North Assocs. v. Kelly, 281 A.D.2d 974 (N.Y. App. Div. 2001);
Midwestern Enters. v. Stenehjem, 2001 ND 67 (N.D. 2001); Freedom Concepts,
Inc. v. Ohio Liquor Control Comm’n, 2003 Ohio 4686 (Ohio Ct. App. 2003); Sun
Light Prepaid Phonecard Co. v. State, 360 S.C. 49 (S.C. 2004); F & H Invs., Inc. v. State,
55 S.W.3d 663 (Tex. App. 2001)
8
Alabama, Alaska, Minnesota, Missouri, New Jersey, New York, Oregon, and
Washington.
6. Skill games should contain patterns, such as the route
traveled in a road racing game, that are either solvable or
possess an equal opportunity for each player to prevail
over others.
Pay For Play Games Without Prizes
Doubters that people will pay for the opportunity to be part
of a game that does not award prizes need only look to the
masses that pay to vote for contestants on the hit television
show “American Idol.” Moreover, several Internet business
models exist where persons pay a fee to play a variety of games
including interactive video like City of Heroes even though no
traditional prizes are awarded. Like the last category, this category
contains significant ambiguity as to whether nontraditional
prizes like free plays, avatars or items useful in the game constitute
a prize under the various state statutes and case decisions.
Many states simply do not define what constitutes a “prize”
for purposes of the statute prohibiting gambling and have no
case law. Only a few states are like Alabama where free plays
are expressly mentioned in the statute. The states most likely
to find “free plays” to be unlawful prizes because of case law
or broadly written statutes (prize means something of value)
include Alabama, Alaska, California, Hawaii, Kentucky, Maine,
Massachusetts, Mississippi, Missouri, Nebraska, New Jersey, New
York, Ohio, Oklahoma and Washington.
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