Sweepstakes or Illegal Lottery?

Tom Wolfe Headshot
Tom Wolfe Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

A sweepstakes can be an effective marketing tool, but credit unions need to know the law to make sure that well-intentioned promotions do not inadvertently cross the line into an illegal lottery.

Lottery Defined
A lottery is any scheme that contains all three of the following elements and is, by definition, illegal:

1. Distribution of a prize (something of value to the winner)

2. Determined by chance (distribution of the prize by chance, random drawing, etc.)

3. To a person who pays consideration (paying or doing something, more than de minimis, to participate).[1]

There are limited statutory exceptions, such as the official state lottery and charitable raffles operated by eligible organizations, which do not include credit unions. Absent an exception, operating a lottery is a misdemeanor and subject to civil penalties.

Lawful Alternatives
The key to a lawful promotion is to ensure that it falls outside the definition of a “lottery” by removing one of the three elements.

1. Distribution of a prize: While avoiding the lottery classification, eliminating the prize also tends to remove any incentive to participate.

2. Determined by chance: Eliminating chance means either distributing a prize to everyone who participates or operating a skill “contest.” A contest must comply with other specific statutory requirements.[2]

3. To a person who pays consideration: Eliminating consideration means allowing anyone to participate without making a purchase or giving anything of value, also known as a “sweepstakes.”[3] The California Supreme Court has held that the determination of whether something constitutes consideration turns on what the participant parts with, not what the sponsor receives While merely requiring someone to visit a local branch might or fill out an entry form would not likely constitute consideration, requiring that person to open an account or apply for a loan generally would. Courts interpret consideration broadly to even include substantial expenditures of time (e.g., filling out lengthy surveys, driving to a remote location).

A sweepstakes must meet the statutory requirements described below.

Sweepstakes

A sweepstakes is any promotion for distributing anything of value by lot or chance. It must not violate any provision of law, including lottery law.

Solicitation Materials

Solicitation materials (e.g., brochures, letters, posters, web pages, etc.) containing sweepstakes entry material must meet the following requirements:

  • Materials must not represent that a person is a winner or has already won a prize unless that person has in fact won a prize.
  • Materials must include a clear and conspicuous statement in the official rules included in those solicitation materials that “NO PURCHASE OR PAYMENT OF ANY KIND IS NECESSARY TO ENTER OR WIN THIS SWEEPSTAKES.” If the official rules do not appear, the statement must be included on the entry-order device included in the solicitation materials. Under federal law, if sweepstakes information is mailed, this statement must be more conspicuous than other required disclosures and appear in the solicitation letter, on the order/entry form, and in the Official Rules. Federal law additionally requires that mailed sweepstakes information include a clear and conspicuous statement that “PURCHASE DOES NOT IMPROVE AN INDIVIDUAL’S CHANCES OF WINNING.”
  • Materials must not represent that an entry accompanied by an order for products or services (e.g., a loan application) will be eligible to receive additional prizes or be more likely to win than an entry not accompanied by an order or that an entry not accompanied by an order will have a reduced chance of winning a prize. Sweepstakes entries not accompanied by an order may not be subjected to any disability or disadvantage in the winner selection process.
  • Materials must not represent that a person has been specially selected in connection with a sweepstakes unless it is true.
  • Materials must not represent that the person receiving the solicitation has received any special treatment or personal attention from the sweepstakes sponsor, or any officer, employee, or agent of the sweepstakes sponsor, unless true.
  • Materials must not represent that a person is being notified a second or final time of the opportunity to receive or compete for a prize unless that representation is true.
  • Materials must not represent that a prize notice is urgent or otherwise convey an impression of urgency unless there is a limited time period in which the recipient must take some action to claim, or be eligible to receive, a prize, and that date is clearly and conspicuously disclosed in the solicitation materials.
  • Materials must not simulate or falsely represent that they are a document authorized, issued, or approved by any court, official, or agency of the United States or any state, or by any lawyer, law firm, or insurance or brokerage company.
  • Materials must not create a false impression as to their source, authorization, or approval.

Official Rules

Each sweepstakes solicitation containing entry materials must contain a copy of the official rules. The official rules must include the statement: “NO PURCHASE OR PAYMENT OF ANY KIND IS NECESSARY TO ENTER OR WIN THIS SWEEPSTAKES.” This statement must appear in a separate paragraph, printed in capital letters in contrasting typeface not smaller than the largest typeface used in the text of the official rules. The official rules must also contain information about the date(s) the final winner(s) will be determined. The official rules must be prominently and consistently identified in any solicitation materials.

Credit unions should generally draft the official rules as clear as possible both to minimize the risk of conflicting interpretations and to limit the credit union’s potential liability. They are effectively the “contract” between the credit union and the consumer. We suggest ensuring that the official rules include the following information:

  • Name of event or promotion.
  • Legal name and address of the credit union (the “sponsor organization” of the sweepstakes).
  • Key contact person’s name and contact information.
  • Both the start date and time, and end date and time, of the promotional period during which entries will be accepted.
  • Qualifications or eligibility requirements or restrictions (e.g., age 18, not employed by credit union, etc.).
  • Specific method(s) of entry or participation.
  • Any limitations on the number of entries by a single person or household.
  • Description of each prize, number to be awarded, and value.
  • Odds of winning for each individual prize, or a calculated estimate.
  • How and when winner(s) will be selected.
  • How and when winner(s) will be notified.
  • Any restrictions on receiving the prize.

Prohibited Acts and Practices

California law prohibits particular acts, practices and omissions when conducting a sweepstakes and requires certain disclosures. When drafting the official rules, credit unions should be mindful that California law prohibits the following:

  • Misrepresenting the odds of winning any prize.
  • Failing to disclose the exact nature and approximate value of the prizes offered.
  • Failing to award and distribute all prizes of the value and type represented.
  • Representing that the number of participants has been significantly limited, or that any particular person has been selected to win a prize, unless true.
  • Representing that any particular person has won any money, prize, or thing of value without disclosing its exact nature and approximate value.
  • Using the word “lucky” or representing that any number, ticket, coupon, symbol, or other entry confers an advantage, that the recipient is more likely to win a prize than are others, or that the entry has some value that other entries do not have.
  • Failing to obtain the express written or oral consent of individuals before their names are used for a promotional purpose in connection with a mailing to a third person.
  • Using or distributing simulated checks, currency, or any simulated item of value unless the words “SPECIMEN - NONNEGOTIABLE” is clearly and conspicuously printed on it.

Record Retention

Records of sweepstakes prize winner(s) and all entry and promotional materials should be retained for at least four (4) years.

[1] Calif. Penal Code §319.
[2] Calif. Bus. & Prof. Code §§17539.1, 17539.2, 17539.3(e), 17539.35.
[3] Calif. Bus. & Prof. Code §§17539.1, 17539.15, 17539.5.

Article by Tom Wolfe Managing Partner of Moore Brewer Wolfe Jones Tyler & North.

 

 

 

 

Pin It