With a global reach of over a

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1 The following article originally appeared as Internet Sweepstakes, Contests and Games, Bloomberg Law Reports-Intellectual Property, July Internet Sweepstakes, Contests and Games Article contributed by Anthony Cabot and Jennifer Van Kirk, Lewis and Roca LLP Anthony N. Cabot and Jennifer Van Kirk are partners at Lewis and Roca with offices in Las Vegas, Phoenix, Reno, Tucson and Albuquerque. Mr. Cabot, chair of the Gaming Law Practice at Lewis and Roca. He is an adjunct faculty member at the Boyd College of Law, University of Nevada, Las Vegas and a past president of the International Association of Gaming Attorneys. In 2001, CyberEsq. Magazine named him as one of the suite 16 lawyers at the leading edge of new media work. Mr. Cabot is a prolific author on gambling law and the founding editor of the Internet Gambling Report. He is recognized in Best Lawyers In America, for both Information Technology and Gaming Law and in Chambers USA, as a Leading Lawyer for Business for Gaming Regulation. Ms. Van Kirk is a partner and Co-Chair of the Lewis and Roca s Intellectual Property and Technology Practice Group. She counsels clients on all aspects of brand protection including trademark clearance, prosecution and licensing matters, advertising and promotions, and copyright issues generally and in the online context. She is listed in the International Who s Who of Business Lawyers Trademarks. Anthony N. Cabot [email protected] Jennifer Van Kirk [email protected] With a global reach of over a billion persons, Internet entrepreneurs are consistently looking to adopt traditional promotional and business models to this broader audience. Business and promotional activities like sweepstakes, promotions and contests that appeal to the gambling instinct have had a sordid legal history as most U.S. states have laws that generally prohibit gambling. Not all such activities, however, are illegal. For example, retailers have long understood the value of sweepstakes to help sell products. Likewise, skill games for prizes have lined the midways of the country s state and county fairs for decades. Both activities rely on the public s desire to play games where they can ultimately win prizes. As long as the public has an unfulfilled demand for a gambling experience, entrepreneurs continue to test the boundaries of legal sweepstakes and contests to meet these demands. The variations of sweepstakes and contests are bound only by human imagination and unbound by tremendous leaps in technology. Those wishing to use the Internet as a method to conduct sweepstakes and contests face a daunting legal challenge. They must comply with federal law as well as the laws of all the states where they accept participants. It is not enough that they comply with the laws where the company has its offices or houses its servers. Most states have some commonality in the general approach to gambling. Prohibited gambling typically involves any activity in which a person pays consideration, usually money in an attempt to win a prize in an activity determined by chance. Nevertheless, as the discussion below will illustrate, analysis of these three elements is not entirely uniform in all jurisdictions, nor must all elements be present for an activity to be deemed gambling in a particular state. Many states have state authorized lotteries and commercial casinos, but this is an exception to the general rule that prohibits commercial gambling. If you take away any one of the three elements of gambling consideration, prize or chance, you generally have an activity that is lawful in most states. A sweepstakes always contains the elements of chance and prize, so the element of consideration must be eliminated to avoid violating the various prohibitions against lotteries. A skill contest can require that persons pay a fee to win a prize but the contest must not be based on chance to pass legal muster. Finally, an Internet site can offer games of chance to paying subscribers that seek entertainment but cannot award prizes to the winner. This article will examine these general categories of gambling instinct driven activities and the legal issues that they face.

2 Internet Sweepstakes For any Internet activity to qualify as a sweepstake, the site must remove the element of consideration from a promotion. What exactly is consideration? States fall into three general categories when evaluating this element. Approaches to Consideration Pecuniary/Economic Value Jurisdictions. Federal regulators and most states have adopted a pecuniary/economic value approach. The rationale under this approach is that consideration requires some measurable economic value flowing from the participant to the promoter. Consideration is usually in the form of the transfer of money. A promotion that requires participants to buy a product or pay a monetary amount to participate in the game clearly contains the element of consideration. A less clear situation exists where a promotion requires participants to expend some degree of effort that ultimately benefits the promoter. For example, a lottery among those who refer at least 10 paying subscribers to a website probably contains consideration. In contrast, advertising value or requiring an action that is a mere inconvenience to the participant is insufficient to qualify as consideration. 1 Unfortunately, neither federal nor state law specifies how much effort is required before it is deemed consideration. If the effort required is minimal, it generally will not be deemed consideration. The more effort that is required, the greater the chance it will be deemed consideration. Expenditures of effort generally not deemed to be consideration include the following: Mailing in an entry form (but Washington and Vermont deem requiring a self-addressed stamped envelope consideration); Telephoning a toll free number; Visiting a store (but Ohio deems store visits consideration, Michigan deems multiple store visits consideration, while California requires additional disclosures when a store visit is required); Watching a television program; or Completing a simple survey (Some websites that make money from the sale of personal data for marketing purposes may end up testing the bounds of this rule. The greater the degree of difficulty, or the more personal the information discussed, the greater the chance it will be deemed consideration). Expenditures of effort that are more problematic include disclosure of proprietary information, filling out credit card applications, registering for subscription sites or the like. Traditional Contract Principals Jurisdictions. A few states may still follow traditional contract principals on consideration and have taken the view that any consideration sufficient to support a simple contract will be deemed the consideration necessary to find illegal gambling activity. As examples, the slightest inconvenience in the method of entry or an indirect benefit derived by the sponsor have been deemed sufficient to meet the consideration element. Whether any state courts will still follow this rule is unknown, but some states still have early cases that have not been overruled or statutorily abrogated. Any Consideration Jurisdictions. Finally, a few courts have held that any economic consideration flowing to the sponsor, regardless of where it came from, is sufficient to meet the consideration element. For example, one court found that consideration existed in grocery store s bonus bingo game, which required patron to visit store to get prize slip, which was available without charge or purchase, and noting that [t] he players... wagered their time, attention, thought, energy, and money spent in transportation studying Safeway s advertising and in journeying at least once per game to a Safeway Store for a chance to win a prize -- all of which, we think, amounted to a valuable consideration moving from the players to the promoter ). 2 These decision, however, tend to be older and have often be abrogated by statutes that specifically permit sweepstakes that are used solely to services, goods, wares, and merchandise of a business. 3 Removing Consideration Two methods of removing consideration are typical. The first method is not to charge any participants for the right to enter the sweepstakes. In this business model, revenues must derive from the increased sales of goods created by advertising value of the sweepstakes or collecting fees from third parties such as sweepstakes sponsors. For example, an Internet electronics site may hold a sweepstakes where anyone visiting its site can enter a raffle to win a television. The hope is that the sweepstakes will assist in branding. Another example is a permanent sweepstakes site where the prizes for the chance-based games are provided by sponsors whose advertising is prominently displayed on the site. The sweepstakes does not need to be a traditional raffle or instant win promotion. It could extend to any game of chance including most casino style games. These more interactive forms of sweepstakes are often referred to as advergaming. A second revenue model is based on some participants paying consideration but providing an opportunity for anyone to enter the sweepstakes for free. In more traditional retail settings, a common example is where the purchase of fast food or beverages comes with the chance to win a prize. In most states, if page 2

3 you must purchase an item to gain entry to a chance-based activity, then consideration is present. Only a few states permit entry into chance-based promotions if the purchaser paid fair value for the product purchased. To avoid the general prohibition, promoters can offer an alternative method of entering the game for free. This is permitted in most states even though most people receive their entries into the game through the purchase of the product being promoted. Examples of popular alternate methods of entry ( AMOE ) are mail-in entries or entry via an 800 telephone number. Disclosure of the AMOE must be clear and conspicuous, so that consumers are adequately informed of the existence of a non purchase method of entry. 4 The AMOE also must have equal dignity with the purchase method of entry: any material disparity (actual or perceived) between paying and non-paying entrants can invalidate the AMOE. This means that nonpaying participants must have equal opportunity to both enter and win the sweepstakes. Equal opportunity to enter requires that the entry mechanism for nonpaying participants be comparable to those of paying participants. It would not be acceptable for paying participants to be able to enter over the Internet but nonpaying participants to enter only by visiting the retail store. Likewise, a person that enters by paying cannot get a disproportionate number of entries compared to nonpaying entries. Moreover, deadline dates should be identical for paying and non paying participants. Equal opportunity to win means that a non-paying customer has equal chances to win all prizes offered. For example, separate prize pools may invalidate the AMOE because the non-paying participants do not have the opportunity to win any prize. Likewise, nonpaying participants should not face greater odds or obstacles to winning the prizes. For example, the non-paying participants cannot be forced to qualify for the rounds in which paying participants can buy entries. Some Internet sites have models where they hope to use the AMOE rules to their benefit. For example, a site could offer subscription-based gaming services. These sites allow a person to play games on the site and to win prizes or money. Most participants agree to pay a monthly subscription fee for such services, but the promoter offers non-paying participants the opportunity to play on the site through an AMOE. Another variation on this theme is where entry can be made through an SMS entry or for a nominal processing fee. Promotions requiring a telephone call to a 900 number meet the element of consideration. Thus, a free alternative method of entry is required in these promotions. In addition, the FTC and the Telephone Disclosure and Dispute Resolution Act ( TDDRA ) require certain advertising disclosures in these promotions. 16 C.F.R Some states completely prohibit 900 number promotions while others require disclosures in addition to those required by the FTC. These interactive activities where the participants directly or indirectly pay fees to play a game tend to come under greater legal scrutiny. In these games, the promoters are attempting to make money not from the sale of a product unrelated to the sweepstakes but from paying customers desiring to win prizes in the sweepstakes. This is a very real distinction in court cases. As one court recently noted: A distinction exists between promotion of a primary business of selling a meal or a drink for valuable consideration together with a chance to win a business related prize, in kind or, albeit, as a sweepstakes prize which attracts sales, and promotion of a non-primary business related and incidental activity for valuable consideration together with a chance to win a prize unrelated to either the primary business activity or attraction of sales. The difference in the distinction is in the essence of the product: [t]he former promotes sales of the primary business product, e.g., food, while the latter promotes the prize and the product (coupon) is unrelated to either the primary business purpose of the promoter, of the distributor. 5 Over the years, various promoters have attempted to use the AMOE exception to devise schemes that prosecutors often describe as a thinly veiled lottery. Perhaps the most well known of these schemes was the Lucky Shamrock. In the late 1990s and through the first part of the current decade, several court opinions and attorney general opinions addressed the Lucky Shamrock phone card sweepstakes and mechanical dispensers. The Lucky Shamrock emergency phone card was a one or two minute long distance phone card, usually sold at market value, that also had a sweepstakes entry attached to the card. The Lucky Shamrock emergency phone card dispensers came in two varieties: one which dispensed the cards with a pull tab sweepstakes entry, and one that displayed the sweepstakes results in a display as the card was dispensed. Regardless of delivery and sales method, the Lucky Shamrock sweepstakes offered an alternative free method of entry. 6 Courts in South Carolina, Ohio, Texas, North Dakota, New York and the attorneys general of Alaska, South Carolina, Illinois, Louisiana, Kansas and Texas looked at the Lucky Shamrock promotion and dispenser with regard to whether such sweepstakes and dispensers violated criminal gambling laws in their states. 7 Only the Kansas Attorney General provided an opinion that the sweepstakes was likely to be legal because the contest would lack consideration if the AMOE was free, not overly burdensome and offered an equal chance of winning to non-paying page 3

4 contestants. In every other instance, the AMOE was held to be ineffective or likely to be ineffective. A good example is this quote from the Illinois Attorney General: although the scheme has been carefully designed to appear to meet the criteria generally prescribed by the courts in approving giveaway schemes, a review of the underlying purpose of the scheme leads inexorably to the conclusion that the Lucky Shamrock sweepstakes is but a thinly veiled lottery. In other words, even though the Lucky Shamrock sweepstakes was designed to avoid the consideration element by using an AMOE in a manner consistent with court opinions in Illinois, the Illinois Attorney General still felt it was an illegal gambling game. Automated Telephone Calling Card with a Free Sweepstakes Game Piece as a Lottery, File No (July 13, 1998) Another type of Internet promotion is where the site notifies a person that he or she has won a prize, but requires a purchase before that person may collect the prize. The FTC has ruled that this type of promotion does not constitute a lottery even though all three elements chance, prize and consideration are present because the element of chance is removed before the consideration is requested. Some states, however, prohibit these types of promotions, while others regulate them via Prize Notification Statutes. Offering a coupon or other discount off of future purchases as a prize is technically a post consideration promotion covered by these statutes but is, however, rarely challenged. Skill Games Skill games differ from sweepstakes in that they require persons to pay to play the games and have the opportunity to win prizes. They attempt to avoid the general prohibition against gambling by eliminating chance. About eight states, including Florida and Arizona, do not make a distinction between games of chance and most skill games and prohibit risking any money on either type of game. Predominance Jurisdictions. In most states, the determination of whether a (pay-for-play) skill game (with prizes) is a permitted game as opposed to a prohibited game (of chance) is based on the relative degrees of skill and chance present in the game. Most states and federal law use the predominance test. In other words, if the element of skill in a particular game predominates over chance, then the game is permitted. On the continuum, games such as chess would be on the almost pure skill end, while traditional slot machines would be on the pure chance end. Between these ends of the spectrum, many games contain both skill and elements of chance. In this area, a legal risk exists because it is a subjective assessment as to where a game that is part skill and part chance lies on the continuum. Material Role Jurisdictions. In some states, a game is prohibited if chance plays a material role in the outcome. In a small number of states 8, courts have examined the element of chance by determining whether a particular game contains chance as a material element affecting the outcome of the game. Such a test recognizes that although skill may primarily influence the outcome of a game, a state may prohibit wagering on the game if chance has more than a mere incidental effect on the game. This is a lesser standard than the predominance test and effectively makes it more difficult to offer skilled based gaming to residents of those states if the games in question resort to a chance component in determining the outcome. Any Chance Jurisdictions. In a small number of states, courts have examined the element of chance by determining whether a particular game contains any chance affecting the outcome of the game. As virtually every game has some element of chance, most skill games will not survive scrutiny in these states. This is generally true even if the game does not have any random events. If the game has any elements not known to the player such that the player can guess the answer, then an element of chance is available. For example, a multiple choice trivia question with five possible answers has a chance element because a completely unskilled person has a 20% chance of selecting the correct answer. These states include Tennessee, Montana, Colorado and, perhaps, Vermont. Analyzing Skill Games These cases are not the definitive body of work in this area, but are useful. Collective wisdom suggests the following analysis when analyzing a skill game. 1. Skill games should have defined rules without predetermined odds of success. Skill games must have specific criteria for determining winners that are clearly communicated to participants. These criteria must then be used by qualified judges in determining the winners. In addition to providing specific criteria, it is good practice to disclose in the rules how each criterion will be weighed. 2. Skill games should have genuine skill elements whereby persons possessing the requisite skills have a consistent and decided advantage over non-skilled players and the format of the games allows the skilled player to exercise these traits. In such case, provided that each player has the same opportunity to win and the same difficulty level, skill will be the predominant factor in determining the outcome of such games. Beware that chance may be present when questions asked or puzzles provided are so difficult that respondents must guess the correct answer. page 4

5 3. The player s skill should be the determining factor in the outcome of the game and not fortunate circumstances in receiving an easier game or draw. 4. The standard of skill must be known to the participants and must govern the result. 5. No stage of any skill game should be determined predominately or wholly by chance including tie breakers. 6. The designers of skill games should strive to remove as many random events in the game as possible. For example, games may provide the opportunity for players to begin the games with the same initial setup as their competitors. Random events could include (1) random number generators, (2) information relevant to the play of the game that is not random but is not known or subject to reasoned analysis by the players, and (3) the awarding of prizes that is randomly or otherwise not subject to determination before the commencement of the contest. The outcome should not in any way be a result of actions outside of the players control. For example, random number generators should play no role in determining the outcome of the games. Endnotes 1 ACF Wrigley Stores, In. v. Olsen, 102 N.W.2d 545 (Mich. 1960) (potential for increased advertising revenue insufficient to render television giveaway an illegal lottery) Opinion of the Justices, 397 So.2d 546 (Ala. 1981) ( fact that the business enterprise may be expected to gain some benefit by way of increased sales insufficient to establish consideration ) (internal quotation omitted) 2 Washington v. Safeway Stores, Inc., 450 P.2d 949 (Wash. 1969) 3 Wash. Rev. Code (3). 4 See Deceptive Mail Prevention and Enforcement Act, 39 USC F.A.C.E. Trading, Inc. v. Carter, 821 N.E.2d 38, 43 (Ind. Ct. App. 2005) 6 See, e.g., Miss. Gaming Comm n v. Six Elec. Video Gambling Devices, 792 So. 2d 321 (Miss. Ct. App. 2001) 7 See, e.g., Black North Assocs. v. Kelly, 281 A.D.2d 974 (N.Y. App. Div. 2001); Midwestern Enters. v. Stenehjem, 2001 ND 67 (N.D. 2001); Freedom Concepts, Inc. v. Ohio Liquor Control Comm n, 2003 Ohio 4686 (Ohio Ct. App. 2003); Sun Light Prepaid Phonecard Co. v. State, 360 S.C. 49 (S.C. 2004); F & H Invs., Inc. v. State, 55 S.W.3d 663 (Tex. App. 2001) 8 Alabama, Alaska, Minnesota, Missouri, New Jersey, New York, Oregon, and Washington. 6. Skill games should contain patterns, such as the route traveled in a road racing game, that are either solvable or possess an equal opportunity for each player to prevail over others. Pay For Play Games Without Prizes Doubters that people will pay for the opportunity to be part of a game that does not award prizes need only look to the masses that pay to vote for contestants on the hit television show American Idol. Moreover, several Internet business models exist where persons pay a fee to play a variety of games including interactive video like City of Heroes even though no traditional prizes are awarded. Like the last category, this category contains significant ambiguity as to whether nontraditional prizes like free plays, avatars or items useful in the game constitute a prize under the various state statutes and case decisions. Many states simply do not define what constitutes a prize for purposes of the statute prohibiting gambling and have no case law. Only a few states are like Alabama where free plays are expressly mentioned in the statute. The states most likely to find free plays to be unlawful prizes because of case law or broadly written statutes (prize means something of value) include Alabama, Alaska, California, Hawaii, Kentucky, Maine, Massachusetts, Mississippi, Missouri, Nebraska, New Jersey, New York, Ohio, Oklahoma and Washington. page 5