BY MICHELLE BUTLER, SENIOR ASSOCIATE AND SRINIDHI KRISHNAN, INTERN
Companies have been using giveaways as a promotional tool for decades, but they have become increasingly popular as companies ramp up their digital marketing efforts. Running a giveaway online is much easier than administering a mail-in or in-person sweepstakes, and these online promotions can go a long way in creating hype for your company. It’s no wonder that they’ve become so popular. Companies may want to quickly roll out a social media giveaway campaign after the launch of a product or in a moment when online engagement is particularly high, but, before you do, there are some considerations to think through prior to jumping in. Here, we’ve highlighted a few key things to be aware of if your company is looking to start leveraging online giveaways.
Sweepstakes, Contests, and Lotteries—What’s the Difference?
Many people use these terms interchangeably but the differences between contests, sweepstakes and lotteries could (legally) make or break your plans. Let’s start with sweepstakes and contests. Sweepstakes are promotions where prizes are given away to randomly chosen winners at no charge to participants. Contests are competitive by nature and involve an element of skill; contest winners are chosen based on judgment of their submission or performance. Different rules apply to sweepstakes and contests, so it is important to identify whether you hope to run a giveaway with winners chosen at random or based on some degree of skill to determine how to structure your giveaway.
Lotteries look a lot like sweepstakes, with prizes awarded to winners that are chosen at random, but a key difference is that a lottery requires some type of entry fee or “consideration” in exchange for the chance to win. While giveaways are fair game in most jurisdictions as long as you comply with applicable law, private lotteries are strictly banned in every U.S. state and most promotional lotteries are considered illegal. Therefore, when running a promotion, you need to be very careful to avoid accidentally launching an illegal lottery. The easiest way to make this mistake is by requiring participants to pay a fee to enter your giveaway. However, even requiring a participant to expend substantial effort or time to enter the giveaway could be viewed as “consideration” that is sufficient to transform your sweepstakes into an illegal lottery. For example, if you require a participant to fill out a lengthy questionnaire that benefits your company in order to enter for the chance to win a prize in your sweepstakes, you may inadvertently be running an illegal lottery.
Unlike with sweepstakes, it is generally permissible to require an entry fee or some form of consideration for participants to enter a contest, but this should be analyzed on a case-by-case basis because some states have specific bans on consideration in contests, too. For example, Arizona prohibits contest sponsors from requiring any payment of fee from participants, and Maryland does not allow any consideration element at all.
Planning Your Giveaway
It is important to think through what you would like your giveaway to look like from the outset to avoid any surprises as you run the promotion. After you identify whether you want to run a sweepstakes or a contest (and ensure that you are not running an illegal lottery!), some additional questions you may want to ask yourself are:
Where will the giveaway be held? Will it be global or confined to the United States or even specific states within? With differing state laws and even federal programs that limit participation in specific jurisdictions, eligibility should not only be thought through, but also clearly stated in the Official Rules for the giveaway (more on this below). A giveaway with a broader reach may be favorable from a marketing and promotions standpoint, but keep in mind that you will need to comply with all applicable laws while running your promotion, which becomes more complicated the more jurisdictions you bring into the mix.
What platform will you use for the giveaway? Are you launching the giveaway on your website or on a third-party platform, and if the latter, does the platform have certain requirements for running giveaways?
How valuable will the prize be? What form will it take? We know you want your giveaway participants to be happy but offering prizes above certain value thresholds could have different legal compliance and tax implications (as discussed).
Official Rules for the Giveaway
One of the most important steps you should take when running a giveaway is preparing Official Rules that serve as a contract between you as a sponsor of the giveaway, and the participants of the giveaway. There are various requirements for what types of information these rules should include (such as disclaimers that no purchase is necessary to enter, eligibility requirements, entry method, the odds of winning, descriptions and value of the prizes, restrictions on receipt of the prize), as well as a few provisions discussed below that are advantageous to include in certain instances, so it is wise to have an attorney prepare these Official Rules rather than using a “one-size-fits-all (or more accurately, none)” unvetted online generator.
Additionally, you may face an enforcement action by the Federal Trade Commission or other liability if the Official Rules are found to be misleading or deceptive, or if you do not follow their material terms, so you will need to work closely with counsel to make sure your rules and descriptions of the giveaway are clearly and accurately described. It is advisable to post the Official Rules wherever you are promoting the giveaway. Where space is too limited to detail the full set of Official Rules, an abbreviated version of the Official Rules may be required if it contains the minimum required information.
Everyone’s Favorite Topic: Prizes
While you may want to give lucrative prizes to winners of your giveaway for various reasons, there are registration and bonding requirements in certain states when the total retail values of the prizes being given out exceed specific amounts. For example, both New York and Florida require registrations and posting bonds if the total retail values of prizes for a sweepstakes exceeds $5,000. Additionally, certain value thresholds could trigger IRS requirements for you and/or the participant. For example, if one participant receives a prize valued at $600 or more, you may have an IRS reporting requirement. We strongly encourage you to carefully think through the value of the prizes you are offering and consult with a tax attorney!
With the rise and popularity of nonfungible tokens (NFTs), some giveaway sponsors have been awarding NFT prizes. The valuation of an NFT is typically made up of three main factors: rarity, utility, and tangibility. As you can imagine, rarer and more functional NFTs are considered more valuable, which could again trigger the requirements discussed above. Regardless of the estimated starting value, it is important to make it clear in the Official Rules that the value of an NFT is subjective and could change.
Spotlight on Social Media
Different social media platforms have different rules for giveaways, and sometimes may even require a “statement of release” in the Official Rules to make clear that the platform is not liable for anything in connection with the giveaway. If you are running a giveaway on a third-party site, it is always a good idea to read through your chosen platform’s rules to make sure you are in compliance and to determine if the rules have any impact on the structure of the giveaway you hoped to run. For example, Twitter prohibits sponsors from encouraging participants to post duplicate updates, so if you had hoped to run a contest where the participant who Retweets your marketing message the greatest number of times wins, you’ll have to rethink your plans.
Additionally, the Federal Trade Commission (FTC) has their own guidelines to prevent misleading endorsements of companies and their products and services. These guidelines are the reason influencers on social media must make it clear when they receive money or something of value to endorse a product. If you require participants to share a promotion of your company or its products and services to enter your giveaway (by asking participants to retweet a promotional Tweet or post a video about why they love your company, for example), you should ensure that the participants make clear that they were incentivized to make the post. The FTC Endorsement Guide recommends requiring the use of specific hashtags as part of the giveaway entry in these instances, such as #contest or #sweepstakes. Something a bit more esoteric, like #spon or #bestsweepsever may not comply, so it is best to require clear, obvious hashtags.
Data Collection Considerations
As discussed, running a global giveaway (or a giveaway that spans multiple jurisdictions) can be very complex given the patchwork of different applicable laws and regulations. This is particularly true when it comes to highly-regulated practices, such as the use of personal information. There are many different state, federal, and international laws that govern how a company can collect, process and share personal information, which is often defined under the law broadly enough to include basic information that you may need to collect to administer your giveaway, such as participants’ names, email addresses or social media handles. Complying with some of the more stringent laws (such as the EU’s General Data Protection Regulation), may require you to obtain consent or post notices prior to collecting and processing personal information of the jurisdiction’s residents. Certain disclaimers may be included in the Official Rules (discussed above) to help minimize risk, but achieving perfect compliance with all applicable law may prove difficult for global giveaways, particularly where you hope to leverage information you collect from participants for marketing or other ancillary purposes. We recommend consulting with an attorney to identify and address key areas of risk.
Intellectual Property and Publicity Rights
When determining how to run, promote and leverage your giveaway, it is important to consider whether third parties may have any intellectual property or publicity rights in the entries submitted for the giveaway. For example, if the method of entry into your giveaway entails participants posting a 30-second video of themselves explaining why they love your company’s products, and you wish to use this video to market your products or announce the winning entry, you will need permission from the participant to do so. Those participants have both a copyright in their video and the right to prevent unauthorized commercial appropriation of their identity and likeness (e.g., name, image, voice, biographical information) so you will need a license to use the video for marketing and announcements. A license or release of liability can easily be included in your giveaway’s Official Rules if you have the foresight to require the right terms in connection with any submission of original creations or entries that include the name or likeness of any person or a third party’s trademark. An attorney can also help you draft provisions in the Official Rules to make clear that it is participants’ responsibility (and related liability) to ensure that their submissions do not violate the intellectual property rights or publicity rights of any third parties (or break any other rules, such as prohibitions against obscene or defamatory content).
We have walked you through various high-level considerations for structuring and running giveaways, but there are additional nitty gritty requirements to be aware of once the giveaway concludes as well. Several U.S. states require sponsors to make available a list of prize winners to anyone who requests it, while others require sponsors to go a step further and provide state agencies with winners lists and related information in connection with giveaways of certain prizes. U.S. state laws can impose longer term obligations as well. For example, certain states have record-keeping requirements in connection with giveaways that last for months after the giveaway ends. For example, New York requires retention of “complete records” of the giveaway for a period of six months and Florida law specifies that all winning entries must be held for 90 days. A lawyer can help you understand which of these prescriptive requirements may apply after your giveaway wraps up.