Netflix, the web based DVD rental service, launched as contest in 2006 offering a 1 million dollar prize to team that develops a recommendation algorithm that is shown to be 10% better that Netflix’s current recommendation engine. To those in the programming community, the challenge has been compared to scaling Mount Everest. Has the summit been reached?

It seems the two contest front runners, Team Pragmatic Theory and Team Bellkor in BigChaos, have joined forces and submitted an algorithm that was 10.05 percent better than the one Netflix uses to recommend movies to its subscribers. The result was published on the Netflix Prize leader board on June 26, 2009.

From a promotion law point of view, the contest winner must grant to Netflix, an irrevocable, royalty free, worldwide non-exclusive license under the contest entrant’s copyrights, patents or other intellectual property rights in the winning algorithm. In addition, a description of the algorithm, but not the source code, will be published on the Netflix site. I.e., the winners will “describe to the world how [they] did it and why it works.” Like all well conceived contests, the official rules provide a mechanism for determining the contest entrants actually created the entry submitted. It appears however, that the winners are not prohibited patenting their entry and winners are not prohibited from charging others for the use the algorithm.

This contest, where competitive incentives are offered as an alternative to in-house research and development, looks like a new, workable model to foster innovation.

The FTC has, since the 1980’s, been actively involved in regulating endorsement and testimonial advertising that is designed to entice consumers into choosing products based upon “real life” experience (or the promise of success from a reputable source). Its guidelines help define the scope of testimonial and endorsement advertising. They point out, generally, if a single user’s experience is not typical of the average consumer, then a company may not imply that potential buyers of the product will get the same result. Now, the FTC has determined its rules about testimonials and extreme results need to be updated.

In an attempt to keep up with consumer complaints about dishonest advertising, online social networking and other internet venues that reach consumers, according to the Financial Times, the FTC is proposing legislation that could make companies liable for testimonials written by bloggers and parties who receive free samples or other incentives to try products and subsequently write good reviews.

According to Richard Cleland at the FTC, these new updated guidelines are designed to curb the use of terms like “Results Not Typical,” to justify putting up extreme and untested consumer outcomes for products and services. The new guidelines are also designed to hold companies responsible both for encouraging third party testimonial information it knows to be false, or for using spokespersons who have achieved extreme results for products, knowing the results are outrageous.

If the new guidelines are adopted, companies will not only have to consider how they use spokespersons and social networking sites, but also how they develop their “influencer” programs. Influencer programs are those programs designed specifically to attract a certain target market by paying (or giving free samples to) loyal product users in exchange for spreading the word about their personal experience through social networking (both online and offline) groups. At the very least, it’s likely that contracts between companies and third party influencers will see some changes.

Notwithstanding the spotlight that has hit the FTC proposal and the resultant uproar from many companies and marketing associations, there have been other attempts to regulate third party claims about products and services. Law professor and prolific blogger (and Twitter®er), Eric Goldman, has cited to other attempts at third party testimonial regulation.

For instance, points out Goldman, the Florida State Bar treats consumer reviews of attorneys as regulated testimonials. Goldman even remarks on his Technology and Marketing Blog that the SEC’s recent proposed hyperlinking guidelines may contravene 47 U.S.C. 230 which immunizes websites from liability for third party content.

Regardless of what happens in the short term, issues of agency will be important if the FTC truly wishes to hold companies and bloggers liable for third party content. It is impractical (and likely impossible) for companies to police what third parties write about their products. In all likelihood, therefore, the FTC would limit liability to cases where the company links to or endorses information on a third party site, or where the influencer is retained without a contract provision about outlandish statements.

The biggest challenge, depending on how the guidelines are written, may ultimately be to advertisers who use spokespersons with unusual outcomes, who have until this point, gotten by with a disclaimer of “Results Not Typical,” or “Your Results May Vary.” The long running commercials involving Jared, who claims to have lost hundreds of pounds by eating Subway sandwiches, may have seen their last days.

Practice Note: Despite the current feeling about the proposed guideline changes, the sky is not falling. Advertisers have weathered advertising regulation in the past, and at the end of the day, we still manage to get a fair number of commercials (and testimonials) out there. In truth, and regardless of whether there will ever be another Jared to enable Subway to point to a pattern of weight loss, he won’t go away, and the FTC is not going to find liability with companies or bloggers that are generally engaged in appropriate disclosure practice.

Following the trend started by Hyundai Motor Co., and even going one better, automakers Ford are offering a bailout of their own: buy any new car from them between April 1st, and April 30th, and if you get pink-slipped GM will pay your car tab for up to 9 months and up to $500.00; Ford will pay up to $700.00.

But wait! There’s more: If you buy a car, drive it, make payments on it, and then bring it back for a trade-in, GM will credit you for what you own on the car, even if the National Automobile Dealers Association says the value is lower. You also get free On-Star service and a host of other little perks (including a low finance rate).

If you’re looking for a catch, there really isn’t one. So long as the buyer is employed at the time of purchase and the lay-off notice does not pre-date the car purchase (and the employee is not self-employed), the companies are ready to deal.

A similar program was offered by Hyundai this February wherein new car buyers could return their vehicles to Hyundai without further payments due in the event they were laid off within the first year of the purchase. Of course, Hyundai was footing the bill for its promotion: (and getting back the car). In the case of Ford and GM, the tax papers appear to be subsidizing the purchases.

Practice Note: Clients who wish to do “big splash” promotions should remember to review carefully all of the terms and conditions of the promotion, to make certain there are no ways for participants to take advantage of the program. Of primary importance is the institution of an “end date,” so that if there is a problem, the promotion has a limited life. Similarly, for a promotion such as this, there should be a limit on the number of cars one person can purchase. Provisions should be placed in the terms and conditions of the promotion that make clear the program will not be offered if, in the sole discretion of the sponsor, a person is trying to deliberately undermine the intent of the promotion.

Stephen Colbert has won NASA’s International Space Station module naming contest. NASA held a contest allowing the public to decide on the new “living room” module aboard the orbiting outpost of the International Space Station. In keeping with the other modules, called Unity and Harmony, scientists and space employees were urging the name Serenity.

Problem was, the contest allowed write-in suggestions. Leave it to Colbert to game the system. Using his daily faux-news show, he urged his supporters to write-in the name Colbert. According to the Guardian, Colbert received more than 40,000 more votes than the name NASA scientists preferred.

Hedging a little, a NASA spokesperson has stated that the name Colbert will be given the most consideration, but he stated, NASA reserves the right to give the module a more appropriate name.

Practice Pointers:
• Promotion sponsors should always assume that someone is going to “game” their promotion, as Stephen Colbert did, and make adjustments to the rules accordingly.
• In this case, if NASA really didn’t want write-in names, it should not have given voters the option; clients should be advised to only put forth the contest they can tolerate.
• In promotions that involve public voting, such voting should be limited to an intermediate round of voting with the top 5 winners going to a final round, judged by the sponsor.

Don’t forget to check the fine print (with your attorney). If you don’t want to view the entire episode, read below:

Michael Scott wants to sell paper. Borrowing an idea from the Roald Dahl book, Charlie and the Chocolate Factory, he decides to put 5 Golden Tickets in pallets of paper to be randomly shipped to existing clients. The tickets allow a company getting the ticket to receive 10% off its paper order. Problem is, Michael decides to seed them himself and all the tickets end up with the same company. Worse, there are no restrictions: no limit to the number of tickets one company can have; no time restrictions; no restriction on the number of orders to which the ticket applies; no limitation on minimum or maximum orders. There go the Dunder-Mifflin profits (and Jim’s commission).

Like a Curious George book, it all works out in the end, but in difficult economic times, clients often make rookie errors when rolling out a promotion that can be easily dispensed with by first “role playing” the promotion, and then, spending a little time with an attorney, who may know about various state and local laws that could affect the outcome. At a minimum, the client should ask itself these questions before proceeding:

– Does this promotion attract the right clientele?
– If I where the target, would I care?
– Is it impossible to “game” the promotion (take advantage of a loophole)?
– Will this have an overall positive impact on the bottom line?

If a client can answer the foregoing questions affirmatively, it’s taken the first step to a promising promotion.

For the holidays, Lucky Brand has issued what it believes to be the first User-Generated coupon, where your discount depends upon your level of skill. A unique way to drive users directly to its online presence, the company asks you to “Buck Your Way To Holiday Savings” by playing a game in which users control Santa’s bucking reindeer. The more items he bucks off (get it?), the bigger a users discount will be. If you like, you can even upload a picture of yourself so you can buck your own way to savings.

This particular concept meets a number of marketing goals. First, it drives customers directly to the website, where they can view the products for sale. Second, it creates stickiness on the site, which makes users more likely to buy over time. The uniqueness of the promotion suggests users will send the webpage to a friend, encouraging viral marketing.

Practice Pointers:

1. Although not legally required, a good rule of thumb for a promotion such as this is to allow users to play repeatedly until they receive the maximum discount. Such a provision creates goodwill and keeps customers on the site longer.
2. As with any discount promotion, make certain to post restrictions including time for use, maximum amount, number of coupons available per person, and whether or not the coupon can be combined with other discounts.

Winter 2009. Reebok, in conjunction with the National Hockey League, is hoping consumer recognition of its brand will translate to money in the bank. Reebok will run a “Find the Lost Logo” promotion during the NHL Winter Classic, where it will ask fans to find the hockey player who is not displaying the Reebok logo on his jersey.

Entrants can play by watching the Classic on television and submitting their answer via text message or online; or attendees of the game can submit their answers via text message. All answers submitted will have an opportunity to win four tickets to the Stanley Cup final game. The winner will be announced at the 3rd period.

Practice Pointers:

1. The law is still not clear regarding whether a proper alternate method of entry for a text-messaging sweepstakes can be an online entry. Currently, the matter is being litigated in California courts.
2. This sort of promotion is categorized as a “treasure hunt” and is generally considered a sweepstakes, not a contest.

In an promotion that sounded more like a Wacky Packages spoof, Nestle promoted its new Butterfinger Comedy Network by making fun of its own brand. Claiming on April Fool’s Day that it was shirking the “clumsiness of the Butterfinger brand” and renaming its brand ‘The Finger,’ the promotion was designed to promote Yahoo’s YouTube alternative. The promotion includes links to local 7-Eleven stores where consumers can actually purchase the candy bar with the fake packaging.

Practice Note: Offering a rare product is a very good way to create stickiness on a website. In this case, in order to find out which stores are carrying the specially branded product, consumers must register with the site. Better than a sweepstakes, which only rewards a few winners, Butterfinger drives consumers to its website, and if consumers want the candy bar, they have to pay for it.