Sweepstakes and contests have been a popular form of promotion and marketing in the United States for many years. With the rise of the internet and social media, online sweepstakes and contests have become even more prevalent as companies seek new ways to engage with customers and gather data. However, running a sweepstakes or contest also carries legal obligations under federal and state laws. The main federal law governing sweepstakes and contests is the Deceptive Mail Prevention and Enforcement Act, also known as the Federal Sweepstakes Law.
Some key questions about the federal sweepstakes law include:
What is considered a sweepstakes or contest?
A sweepstakes is a game of chance where a prize is awarded based on random drawing or selection. No purchase or payment is required to enter. A contest involves entrants using skill or ability to compete for a prize, such as submitting an essay or photo.
When does a promotion need to comply with sweepstakes laws?
If a promotion offers a prize and requires some level of chance to win, it likely needs to follow sweepstakes regulations. Elements of chance include random drawings, scratch-off games, or entries based on completing an action like liking a Facebook page. Skill-based contests without a chance element may not need to adhere to sweepstakes laws.
What are the key requirements of the federal sweepstakes law?
The federal sweepstakes law has requirements around disclosure, handling of prizes, and prohibitions on certain practices:
Disclosure Requirements
One of the main purposes of the federal sweepstakes law is to prevent consumer deception about the true odds of winning a prize. Sweepstakes sponsors must disclose specific information in their official rules and advertising:
Odds of winning each prize
If a sweepstakes has multiple prizes, the odds of winning each one must be clearly stated. Typically this is expressed as “1 in X” odds.
Total number of prizes and value
The overall number of prizes being offered and their retail value must be disclosed. If prizes will not be awarded due to lack of eligible entries, this must be stated.
No purchase necessary
Sweepstakes must include a free method of entry, and the official rules and ads must state “No purchase necessary” or similar wording. Instructions for the free entry method must be provided.
Restrictions on eligibility
Any geographic, age, or other eligibility restrictions must be clearly disclosed. Most sweepstakes limit entrants to U.S. residents age 18 or older.
Sponsor and timeframe
Official rules must state the name of the sweepstakes sponsor and the relevant dates including when the promotion starts and ends as well as the deadline for entries.
Taxes
If prizes are valued over $600, winners may owe taxes. Disclosure language stating winners are responsible for taxes on prizes is recommended.
Proper disclosure of all these details is required under the federal sweepstakes law. The information cannot be hidden or obscure.
Prize Awarding and Handling
The federal law also regulates how sweepstakes prizes must be handled:
Award prizes as promoted
Sponsors must award all prizes as described in the rules and advertising for the number of winners at the specified odds. Prizes cannot be changed or substituted unless specifically reserved in the rules.
Verify winner eligibility
Sponsors must follow eligibility restrictions and verify winners meet all requirements before awarding prizes. Winners are often required to sign an affidavit of eligibility.
Report prize winners
For prizes over $600, sponsors must collect a winner’s social security number and report them to the IRS on a Form 1099 for tax purposes.
Set timeline for winner selection and notification
Official rules must state when winners will be selected and how they will be notified with a reasonable timeframe. Many require winners to respond within 2-4 weeks to claim a prize or an alternate winner may be chosen.
Adhering to these requirements ensures the fair and lawful handling of sweepstakes prizes.
Prohibited Practices
The federal sweepstakes law prohibits certain unfair practices:
Misrepresenting odds of winning
Sponsors cannot inflate or misrepresent the actual odds of winning a prize. Any disclosures about odds must reflect real probabilities.
False or deceptive statements
All sweepstakes advertising and communication must be truthful and not deceive entrants about chances to win or prize details.
“You are a winner” ads
Ads cannot claim someone has already won a prize or is guaranteed to win if they respond. This is considered deceptive.
Changing rules mid-promotion
Official rules cannot be changed or amended once a sweepstakes has started, unless specifically reserved in the original rules.
Violating these prohibitions can lead to federal law enforcement actions and penalties. Sponsors must take care to avoid unfair, dishonest or misleading practices in their sweepstakes.
State Sweepstakes Laws
In addition to federal law, individual U.S. states have their own laws around sweepstakes:
Registration and bonding
Some states require sponsors to register a promotion and file a bond before conducting a sweepstakes with their residents. This includes states like Florida, New York and Rhode Island.
Age restrictions
While most sweepstakes set age limits at 18, some states regulate participation by minors differently. In Nebraska minors can enter but require guardian consent to claim a prize.
Restrictions on games of chance
A few states prohibit games of chance or certain gambling-style sweepstakes. Alabama has strict laws limiting sweepstakes.
Disclosure statements
Many states mandate specific disclosure language be included in official sweepstakes rules available to residents. Common statements relate to releasing the sponsor from liability.
Navigating individual state laws adds complexity for sponsors running national sweepstakes. Consulting legal counsel is recommended when operating in multiple states.
Sweepstakes Enforcement and Oversight
The Federal Trade Commission (FTC) is the main regulatory authority that enforces federal sweepstakes law. Both the FTC and state attorneys general can take action for violations.
Typical enforcement actions include:
Issuing warning letters
Regulators frequently issue warnings to sponsors about non-compliant promotions before taking further action. Warning letters outline violations and expect prompt corrective action.
Seeking injunctions and cease & desist orders
For serious or repeated violations, the FTC can seek a court order to halt an illegal sweepstakes and stop any prohibited practices.
Fines and settlements
In cases with willful or egregious legal violations, regulators may pursue financial remedies through fines and imposed settlements. Large brands have paid millions in civil penalties for sweepstakes infractions.
Criminal prosecution
Intentional fraud or gross misconduct can trigger criminal charges. Individuals can face jail time and serious federal felony charges for egregious sweepstakes scams and deception.
The FTC and state authorities actively monitor sweepstakes and contests for compliance issues. Sponsors must ensure they meet all disclosure, advertising, and conduct standards to avoid enforcement actions.
Best Practices for Legal Sweepstakes
To run a lawful sweepstakes and avoid problems, sponsors should adopt the following best practices:
Obtain legal review of official rules
Have an attorney familiar with sweepstakes laws review the official rules before launching a promotion. They can help craft rules that comply with federal and state regulations.
Make complete disclosures
Carefully disclose all required information about prizes, odds, eligibility and other details per FTC guidance. Avoid fine print and legalese to promote understanding.
Advertise honestly
Marketing and ads for a sweepstakes should be truthful and clear. Refrain from hype about winning that could mislead entrants.
Limit promotions to appropriate platforms
Be cautious about using social networks and other sites allowing underage users. Either restrict eligibility or use age-gating to limit minor participation.
Use reputable third-party services
Vet any promotional partners like prize suppliers, drawing services and advertising networks. Prioritize reputable companies with compliance experience.
Careful sweepstakes planning and compliance practices can help minimize risks and avoid problematic promotions that violate regulations. However, mistakes can still happen even with the best intentions.
How to Respond to Sweepstakes Compliance Issues
If a sweepstakes sponsor learns of potential problems or receives a regulatory inquiry, prompt action is required:
Consult legal counsel
Experienced sweepstakes attorneys are equipped to handle compliance matters and should guide any response. Rely on counsel for direction.
Investigate immediately
Fully investigate the nature and scope of any identified issues. Collect documentation and verify facts. Report findings to legal team.
Suspend problematic activities
If warranted, pause a sweepstakes to address any activities that violate regulations or fall into a gray area.
Respond to regulators cooperatively
If regulators make inquiries, be responsive and transparent with information related to the issue. Demonstrate willingness to comply.
Implement corrective measures
Determine appropriate actions to resolve problems, such as changing ad disclosures, altering eligibility rules or terminating a sweepstakes altogether.
Enhance compliance processes
Analyze root causes of compliance failures to prevent recurrences. Improve internal review procedures and training.
With the right response, minor hiccups can often be addressed constructively, and major violations mitigated before causing material harm.
Sweepstakes Enforcement Actions and FTC Cases
The FTC frequently brings enforcement actions against companies running afoul of sweepstakes regulations. Some notable cases include:
Warner-Lambert – $1.35 million civil penalty
The maker of Listerine mouthwash paid one of the largest FTC fines for sweepstakes violations in 1991. The company misrepresented odds of winning trips and cars in a major promotion.
Reader’s Digest – $8 million settlement
In 1998, Reader’s Digest agreed to pay $8 million in consumer refunds and penalties to settle charges of deceptively promoting sweepstakes. The company claimed entrants were “guaranteed winners.”
Publishers Clearing House – $3.4 million penalty
The popular sweepstakes company settled FTC charges in 2000 over misleading direct mail and television advertisements about odds of winning.
USData Corporation – contempt charges
Operators of online sweepstakes faced criminal contempt proceedings in 2011 after violating multiple court orders regarding deceptive promotions.
OfficeMax – $850,000 settlement
OfficeMax’s “A Million Reasons” sweepstakes drew charges of deceiving consumers on odds disclosures and prize promotions. The retailer settled FTC allegations in 2016.
These and other FTC cases demonstrate the real legal risks of non-compliance for prominent brands and companies. Playing by the rules is critical.
Conclusion
The federal sweepstakes law establishes important standards for fair play and transparency when companies use contests, drawings and giveaways to market products. Strict legal requirements govern disclosures, advertising, prize handling, and allowable conduct. Failing to adhere to regulations can trigger FTC enforcement action and stiff civil and criminal penalties. With careful planning, compliance practices and avoiding prohibited behaviors, companies can effectively use sweepstakes while mitigating legal risks under federal requirements and state laws.
