By Kevin M. Goldberg
A great thing about the Legal Hotline is that it gives me insight into the day-to-day concerns of AAN members and trending issues within the industry. After seeing the same topics come up on a repeated basis, you come to realize that maybe it’s time to get proactive in addressing a specific issue.
One such issue is the new overtime rules under the Fair Labor Standards Act that will become effective in December. I’ve been fielding questions on that one since the changes were proposed over a year ago. Despite discussing the topic at the 2015 Convention in Salt Lake City, the 2016 Digital Convention in San Francisco and again at the 2016 Convention in Austin, I’ve also written about this on the AAN website and my law firm’s blog. And, in case you haven’t heard, we’re presenting a webinar for AAN members on Thursday, August 25 at 2 pm.
That’s why I’m not writing about the FLSA again now.
Instead, I’d like to address another recurring question: how to run a safe contest that benefits you promotionally or even financially.
Before starting, I’d like to reiterate my general disclaimer with regard to the legal hotline and my posts on the AAN website. What I’m writing here should not be construed as legal advice nor should you use this as a substitute for consulting with a lawyer. That disclaimer might even apply with more force to this topic than it does with regard to my general legal hotline responses.
I was asked by at least one member to draft some generic rules that members could plug and play into their contests. However, in addition to everything I’ll discuss below, you should know that the first rule of talking about contest rules is to acknowledge that there is no such thing as a one size fits all contest rule (OK, technically, that’s the second rule of talking about contest rules, since we all know what the first rule of talking about contest rules is).
If there is one important takeaway regarding contests, is that the easiest way to get in trouble is to not follow your own rules. Therefore, you need to write rules that you can follow and implement which also consider any possible contingency that may arise. Keep that in mind, always.
Thus, rather than providing any generic rules you can use, I’ll instead focus on “best practices” that you should try to follow when running a contest.
But even before focusing on those best practices, I’d like to provide some additional background that may help keep you out of trouble. Laws regarding legal and illegal contests are pretty complex and require you to navigate federal laws implemented by multiple agencies (primarily, though, the Federal Trade Commission), as well as the laws of all 50 states. Ultimately, though, we can boil everything down to four general themes:
- You cannot operate a contest in a way that qualifies as an illegal “lottery”.
- Your rules must be fair, non-biased and non-confusing.
- You must engage in significant disclosure in terms of the contest itself and the promotion of the contest.
- In addition to federal laws, registrations might be required in one or more jurisdictions (usually at the state level), with the requirement to register often dependent on the prize value
Avoiding an illegal lottery.
This is obviously an extremely important consideration. If the contest itself is illegal, the rest doesn’t matter. An illegal lottery exists anytime three elements are present: prize, chance and consideration.
- Prize: This one is pretty easy. Offer anything to the winners and you’ve got a prize.
- Chance: On one end we have games of pure skill – if you have one of these, you can offer a prize and require consideration to enter without fear of being an illegal lottery. On the other end, we have games of pure chance: a straight drawing, for instance. If you have this, you either can’t give a prize or must allow people to enter without payment or significant burden on their part.
- Consideration: This can often be the most complex and variable. While most states require that consideration exists only when there is something of value paid for entry or a significant effort expended by the entrant, a minority of states say “consideration” for contest purposes is basically equivalent to that found in a contract situation: any type of reliance, effort, giving up of rights or change in position is probably enough to constitute “consideration”.
Thus, the easiest way to ensure you have a legal contest rather than an illegal lottery, certainly where a prize is involved, is to make sure you have a fully judged competition
Ensuring a fair, non-biased and non-confusing contest.
This will often will require the most brainstorming and perhaps even consultation with legal counsel. It’s also what I meant when I wrote “you need to write rules that you can follow and implement which also consider any possible contingency that may arise” above.
The key is to really think out how the contest will operate from start to finish because the last thing you want – certainly from a legal standpoint, though it’s true in general – is to have a situation arise once everything has started that leaves you saying “we never thought of that”. Suddenly, you’re scrambling, there are accusations of favoritism in how you resolve the conflict and you’re in a lot of hot water. Whatever you say will happen must actually happen. This is why the concept of judging, while helpful to the overall legality of the enterprise, can make things a little harder, as a key element of judging a contest fairly is to fully declare and disclose standards under which the judges will operate and the winners will be chosen.
You should also need to keep detailed records regarding the contest and, especially, all entries in the event challenges arise.
Disclosures are the embodiment of the “fair, non-biased and non-confusing” element.
There’s some variation among the states as to what is required here but we all know, for the most part, what is required because we’ve all seen contest rules a million times. We’re also generally aware of what “material” terms and conditions should be addressed, including:
- The prize description, including actual retail value of the prize, number of prizes awarded and odds of winning (which can simply be “depends on how many entries are received”).
- The “who, what, when, when, why and how” of entry: eligibility, method and means of entry, start and end dates of entry period, number of entries permitted and the information required from and about each entrant (OK, maybe there’s no why).
- How the winners will be chosen and notified, including all criteria (with specific categories and the value allocated to each), qualifications of judges and provisions for tiebreakers or multiple rounds (note: having a tiebreaker that is based on chance converts the whole thing back into a game of chance).
- How protests will be handled.
- How the winners can claim their prize.
- Identification of any sponsors
- Any restrictions, limitations and conditions and disclaimers, including, but not limited to:
- A disclaimer of responsibility for certain “Act of God” type situations that might occur in the entry process (mis-delivery of mail, Internet connectivity problems).
- A reservation of the right to change certain rules or procedures with adequate notice (though they cannot be changed in a manner that disfavors entrants generally or clearly favors any individual entrant).
- The usual disclaimers of implied or express warranty regarding non-cash prizes.
- A reservation of the ability to substitute another prize of equal or greater value should the designated prize not be available (but it’s a good idea to have prizes in hand before the contest starts to prevent this from becoming an issue, as this always leads to problems; for some reason, people really feel strongly about getting THE prize they were promised)
- Some kind of statement that all decisions on interpretation of the rules and selection of winners are final and binding.
- A stated requirement that the prize winner accept the prize without modification or substitution
- If applicable, a requirement that entrants and/or winners sign certain releases to allow you to use their likenesses, identities and entries and/or releases, warranties or waivers limiting your liability in case they engaged in plagiarism, in case the entrants don’t clearly identify themselves, or if other issues arise.
- A requirement that the winner to pay all required taxes on the prize.
Obligation to Register to Engage in Charitable Solicitation
As I indicated above, certain states have requirements that you register all promotional and supporting materials and submission of the rules before starting the contest. You should research the laws of every state in which the contest will be held.
Additional Privacy Considerations
So, as you can see, contests, while fun and potentially profitable, present a minefield of legal concerns with no easy answer in sight. When running a contest, it pays to plan ahead.
Kevin M. Goldberg is AAN’s legal counsel.