Under terms of the settlement, consumers who paid 99 cents to enter a sweepstakes via their mobile phone (the free method of entry was using the computer), may submit a claim for a refund. The Plaintiffs will also receive $5.2 million. Finally, the defendants agreed to a 5 year injunction from offering a promotion where people who enter using the Premium text messaging method will not receive something of value. Presumably, NBC figures the law will change by then. We’re not so sure.

Practice Note: This case follows on the heels of a line of cases known as the “phone card” cases wherein people were given a chance to win a large cash prize if they bought a calling card (there was also a free method of entry). The problem was, the price for the calling card was outrageously high for the number of minutes a consumer received, making it clear people were merely buying a lottery ticket. Clients should be advised that the pay-to-play method of entry must confer something of reasonable value to the consumer.

Last week, according to the Promotions Marketing Association, state legislators in North Carolina ratified House Bill 80, which bans the “use of electronic machines and devices for sweepstakes purposes.”

The bill is intended to fully foreclose the use of video poker machines (and other gambling machines); the language contained in previously passed legislation presented a loophole: sponsors could still offer “sweepstakes” using the gambling machines (free method of entry), but still entice players to use a pay-to-play options for betting.

The bill specifically excludes consumer-owned electronic devices that could be used to enter sweepstakes, such as home computers, mobile smart phones, and mobile phones.

Practice Note: Video Poker is considered a “game of skill” in some states, and a “game of chance” in other states. Clients should seek careful legal analysis relating to online poker before setting out gaming machines or creating an interactive internet presence.

Click here for text of bill.

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.

Llamas, who pleaded guilty in late 2007, was charged with conspiring to defraud U.S. residents, mostly seniors, of millions of dollars. According to the indictments, Llamas and his co-conspirators made calls to U.S. residents from Costa Rica (using VoIP technology to disguise the call’s origin). Victims were told they had won a “sweepstakes contest” and were being contacted by the “Sweepstakes Security Commission” to ensure the safety of the award. The bogus calls requested the victims wire thousands of dollars as a “refundable insurance fee.” In many cases, victims were asked to wire additional money.

Practice Pointer: The United States does not have a Sweepstakes Security Commission, or any other government entity tasked with awarding money to individuals. In addition, legitimate prize providers will not request an actual winner wire funds to insure a safe transfer of a prize. Finally, if you didn’t enter a sweepstakes, and someone wants to award you money, it’s likely a scam.

The “Get Rich With Trump” sweepstakes is a watch-and-win promotion where entrants watch the television show and, at the prompting of the announcer, text in which Apprentice contestant should be sent to “Tent City.” The rules state that in addition to any mobile phone text charges that may apply, Sponsor will charge entrant a $.99 “premium” charge per text entry. The rules also allow for a free method of entry online.

Perhaps the sweepstakes attorney who vetted this promotion should be sent to Tent City instead. Many states carry laws on their books that clearly state that a free method of entry does not cure an otherwise illegal lottery. If the pay-to-play method of entry does not provide the entrant with something equal in value to what was paid, the lottery is still illegal. In this case, an entrant gets no more for its money that does an entrant who chooses to use the Internet entry method.

Federal law prohibits free distribution of cigarettes when it is done in federal buildings, but does not place bans on cigarette distribution in other locations. California health and safety law prohibits the giving of cigarettes on public property and private property open to the general public. Reynold’s lawyers argued that the six instances in which it gave away cigarettes (on pulic property) were not violative of Federal law, which has the exclusive right to regulate tobacco promotions, and that the California law was over-reaching. The California Supreme Court disagreed.

While acknowledging that Federal law regulated tobacco “promotions”, the Court found that Reynolds’ distribution of cigarettes in public places where minor were present, constituted a a health hazard and was therefore subject to state regulation based upon its health and safety laws.

Both state and Federal law contain exceptions to the tobacco give-away provision that do allow distribution of cigarettes in places where minors are not present (such as bars and nightclubs). In the Reynolds case, the company was handing out cigarettes and street fairs and auto shows, at which minors were allowed. Reynolds argued that the cigarettes were being handed out from a tent, that the tent was open only to people 21 years of age or older, and each recipient of the free cigarettes was required to prove (s)he was an existing smoker by producing a pack of cigarettes. Attorney General Bill Locker argued that such precautions were not sufficient to keep cigarettes out of the hands of minors and that, under California law, the entire event had to be off-limits to anyone under 21.

The old scam works like this: you receive an email from a “National Sweepstakes” representative, typically in Canada, who informs you that you’ve won a million dollar lottery. All that’s needed to transfer the money to your account is a wire transfer of a few hundred dollars for “handling.” The wire transfer is a favorite of con artists because once the cash leaves the mark’s account, it’s often impossible to trace.

The new scam still involves a wire transfer, but instead of an email from a representative of a country showering you with sweepstakes winnings, an exiled royal family member begs for your help in reuniting her with her money. In exchange for accepting her funds into your U.S. account, she will split it with you. She assures you that a small fee will be charged from your account, but only if you provide a confirmation code. The code is bogus, and so is the royal family member. But the get-rich-quick scheme is enticing enough that many consumers are forking over their cash without asking questions (like why it is that the princess is writing to you).

The same rules apply to sweepstakes and money schemes that always have: don’t accept candy from strangers.

Increasingly, marketers and companies are adding language to their sweepstakes rules that state that those entering are specifically granting permission to receive a home phone call from the sponsoring organization, despite the fact that they are not on the do-not-call list. While a change in promotions law may be imminent (especially in Michigan, where similar cases have been brought), currently, it is not a violation of promotions law to require a person to be contacted by the sponsor in order to enter. Moreover, the do-not-call list only affects home numbers. Thus, at trade shows, where consumers are asked to drop their business card in order to be eligible to win a prize, there is generally no proscription against companies using that information to market their services.

Practice Pointer: It is certainly legitimate for companies to ask for contact information in order to reach potentially new customers and doing so through a promotion is a time-tested way to drive numbers. The fallout, however, for burying such requirements in the fine print can be worse than never having asked for the information in the first place. Companies should be clear about their desire to use the information they collect for marketing purposes, even if it reduces slightly the number of entries they receive.

Prior to the enactment of this modification, under Florida Statute 849.094, advertisers were required to print the full entry rules in each an every advertisement that promoted a sweepstakes, even when the ad was quite small, such as in a magazine. Under the modification, Florida will now allow advertisers to print just the “material” elements of the contest, so long as there is a mailing address, website, or toll-free number listed for consumers to get a complete copy of the sweepstakes rules.

Both the old and newly modified statute were applicable to sweepstakes (games of chance) where the aggregate prize value was $5000.00 or more, so promotions that award smaller prizes will not be affected by this. Defining what is a material will be subject to administrative hearings, but in all likelihood, material disclosures will include the dates of the sweepstakes, to which residents the promotion is open, the prizes (and odds, if known), and the age of entrants.

Connecticut’s Attorney General sued Reader’s Digest on behalf of consumers, and focused on seeking restitution for “high activity” consumers – those who spent more than $2,500 a year on Reader’s Digest products between 1997 and 2000. The settlement money is intended to go right back into the hands of the consumers that were deceived, through a claims administration process.

In addition to the settlement, the Attorney General secured an injunction preventing Reader’s Digest from engaging in deceptive marketing practices for its sweepstakes in the future. From now on, Reader’s Digest agrees to disclose the odds of winning, set forth clear entry deadlines, inform consumers that purchases do not increase the likelihood of winning, and clearly state in all solicitations that consumers have not yet won a prize.

Reader’s Digest resolved similar claims with 33 other states in 2001 in a multi-state settlement.

According to the Seattle Police Department, the “mark” is sent a letter and a check (drawn on a real bank). She is told that she has won $300,000.00 and in order to verify that the mark is really the winner, she is asked to deposit the check in her account and then send back a check for the same amount to cover the taxes. The victim’s check is real; the sweepstakes check is counterfeit. When the sweepstakes check bounces, the victim’s bank charges the victim for the $4,000.00.

Sweepstakes Pointer: No legitimate sweepstakes will ever charge an entrant to collect winnings. In addition, a verification process usually involves a written declaration. Finally, consumers should be suspect of any sweepstakes in which they do not remember entering.

The advertising for the promotion, which appeared on television and in print, implied that consumers must purchase Tylenol for a chance to win. Although the ad did note that there was no purchase necessary, it was written in tiny “mice-type” printing, while the words BUY TYLENOL were prominently displayed in the ad. The fact that 84% of the people who entered the sweepstakes had actually purchased a Tylenol product suggested that the alternative free entry provision was not significantly prominent to be effective. To insure that McNeil used a bigger font, it was required to amend their current and future advertising and to pay $52,000.00 in damages.

practice pointer: Advertisers should consider the type size and placement of the “no purchase necessary” provision, especially when promoting in New York.