Social Media Marketing Contests: Know the Law or Pay the Price

By: Michael Daigle and Gina Malandrino
Published: January 8th, 2014

Despite all its advantages, technology has made it harder to capture consumers' attention and easier for them to bypass advertising messages. Television viewers use DVRs and TiVo to fast-forward through commercials, while paid services like On Demand and XM/Sirius satellite radio eliminate commercials altogether. So how can a company effectively market its business in this modern media world? The answer for many companies is social media, and for many, it's pairing social media with contests and sweepstakes.

The possibilities are endless and run the gamut from traditional random sweepstakes drawings to popularity contests. A system of doggy day care centers and boutiques might, for example, devise a Facebook promotion that allows people to submit pictures of their dogs. Each picture is added to the promotion's page, and anyone who "likes" the page can vote on their favorites. At the close of voting, the picture with the most votes wins a prize. By requiring participants to "like" the Facebook page, the franchisor builds its database of people to whom it can directly market. Simple, perhaps. Low cost, definitely. But promotions like this are regulated and care must be taken to follow the applicable legal rules.

Lottery, sweepstakes, or contest?

To get the best intended result while not running afoul of applicable state and federal laws, promotions must be appropriately structured. Promotions like these typically fall into one of three categories, and the distinctions can be critical.

• Lotteries. Lotteries, which are reserved to the states, are generally characterized by requiring a payment for the chance to enter a random prize drawing. The "payment" component can be tricky. For example, customers of the doggy day care system may be able to purchase products online and, while checking out, may be prompted to enter the promotion. Because the entry occurs at the time of sale, the franchisor risks the purchase being viewed as a payment to enter the drawing. One way to avoid being seen as a lottery might be to also clearly and conspicuously provide a way to enter the promotion without consideration, perhaps by mailing in an entry form or "liking" the promotion's Facebook page.
• Sweepstakes. Sweepstakes are generally characterized by using random drawings to select the winners. Since winners are selected randomly, no consideration can be required to enter (and avoid being a lottery).
• Contests. Contests are generally characterized by selection of the prize winners based on the skill of the entrants. Since winners are not selected randomly, consideration to enter might be required but could be counterproductive to the objective of the promotion.

Applicable regulations

Sweepstakes and contests are heavily regulated. For national promotions, the laws of each state in which the promotion is available will be involved. All promotions of this type must have official rules and privacy policies readily available. The official rules must include certain mandated disclosures. Care should be taken to conform to the required disclosures and to anticipate and draft around how the promotion might be "gamed" by entrants. When participants will be submitting user-generated content, the official rules should include a representation by each participant that they own the submitted content, that it does not infringe any third party's intellectual property rights, and that they have obtained permission from third-party owners.

While most states do not require the promotion sponsor to file anything with the state, some do. For example, Florida, New York, and Rhode Island regulate sweepstakes with prizes greater than a specified amount ($500 or $5,000 depending on the state), requiring the sponsor to pre-register the sweepstakes and post a bond. Some states require the sponsor to file the list of winners, while others have laws that regulate the use of direct mail to advertise the promotion (e.g., Colorado), or that restrict the ability to require the use of the winner's name or likeness for advertising and promotional purposes (e.g., Tennessee).

Certain federal laws will likely apply as well. Where advertising the promotion by email, care must be taken not to violate the CAN-SPAM Act, which establishes requirements for commercial messages and gives recipients the right to opt out. When the contest is conducted online, the sponsor must avoid unlawfully collecting information from minors in violation of the Children's Online Privacy Protection Act. Advertising the promotion by direct mail calls into play the Deceptive Mail Prevention and Enforcement Act (the "Sweepstakes Law"), which is intended to stop direct mail pieces that give the impression that the recipient "is a winner," or that the promotion is somehow connected to the U.S. government. Finally, IRS rules may require the sponsor to report winners and provide the recipient with a Form 1099.

Although compliance with all the applicable rules and regulations may seem tedious, more and more franchisors are "liking" the value that can be delivered by pairing contests with social media. To win, however, they must be done properly from both a marketing and a legal perspective.

Cheng Cohen LLC is a full-service boutique law firm providing practical legal advice to franchise and distribution clients. Contact Michael Daigle at michael.daigle@chengcohen.com or Gina Malandrino at gina.malandrino@chengcohen.com. To learn more about Cheng Cohen, visit www.chengcohen.com.

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