LAW SEMINARS INTERNATIONAL

Unique Issues and Trends in Online and Electronic Contests and Games

By William Heberer

Manatt, Phelps & Phillips LLP

The Basics

Lottery

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Lotteries are illegal under federal and all state laws

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Lottery: a promotion containing all three elements of

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Prize

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Chance

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Consideration

Lottery

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Prize

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Anything of tangible value, no matter how nominal

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Chance

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Random selection of winner

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Consideration

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Product purchase

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Any payment (except postage)

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Substantial expenditure of effort

Sweepstakes v. Contests

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Sweepstakes:

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Prize and chance are present

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Legality depends upon eliminating consideration

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Contests:

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Prize and skill are present

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Consideration may be required except in a few states provided skill is bona fide

Eliminating Consideration: “AMOE”

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Availability of a viable AMOE eliminates consideration element

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AMOE must:

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Be a free mechanism

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Have “equal dignity” with pay method of entry

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Be clearly and conspicuously disclosed

The Hypothetical

SKINNY DIP INTRODUCING SKINNY DIP: The New Low Fat Carb Candy:

Lose Weight While You Snack!

Skinny Dip Campaign

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Fully integrated marketing campaign targeted to adults

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On pack instant win game

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Daily text message sweepstakes

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Music video contest

On Pack Instant Win Game

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Five digit code inside specially marked packages of Skinny Dip

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Codes entered online or via text message to S-K-I-N-N-Y to find out if you are an instant winner

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Free game codes available online (only) - limit one game code per day

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Bonus game codes awarded for e-mail referrals

On Pack Instant Win Game

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Prizes range from $5.00 gift cards to grand prize trip to Final Four

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Online and text message entrants must accept promotional emails from marketing partners

Daily Text Message Sweepstakes

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One text message entrant randomly selected each day

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Must respond within fifteen minutes of winner notification

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Standard text messaging rates apply

Music Video Contest

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Consumers invited to submit 3-5 minute music video showing folks enjoying Skinny Dip

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5 proofs of purchase required to enter

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Entries posted online

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Public judging and cash prizes to entries with highest scores

The Issues

Internet Access Issues

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On pack game entrants must use Internet to enter codes

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Only way to find out whether you’ve won other than text messaging

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Internet is being used as sole AMOE for on pack game

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Only way to obtain free game pieces

Internet as AMOE

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Skinny Dip On Pack Game uses Internet as sole AMOE

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Only way to obtain a game piece without purchase

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Can Internet be relied on as AMOE?

Internet Access as Consideration

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Requirement that consumer have (pay for) Internet access = consideration?

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Early view: Internet access could be deemed to constitute consideration; offline AMOE required

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Today: Internet access as consideration not seen as an issue

• While no definitive ruling, fully integrated promotions are common • Lack of enforcement activity

Internet Access Issues

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Disclosure of Internet Access Requirement

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Internet access is a material condition of participation

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If Internet access is required for promotion offered offline, must disclose prior to purchase

• On packaging • In all advertising materials

Internet as AMOE

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AMOE Requirements:

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Must be a Free Mechanism

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Must Have Equal Dignity with Payment Method of Entry

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Absence of consideration satisfies the “free” requirement

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Issue is Equal Dignity

Internet as AMOE

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Equal Dignity means free entrants have same opportunity to compete on same basis as pay entrants

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AMOE universally available to all who would otherwise sign up via pay method

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Parallel deadlines

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Same odds of winning

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Free entrants not disadvantaged in any way

Internet as AMOE

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Last year NYS AG challenged similar Tylenol promotion where “free” game pieces only available online

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New York AG: AMOE must be “universally” available – Internet is widely but not universally available

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Other problems with promotion so unclear if AG would have challenged on AMOE issue alone

Internet as AMOE

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Where are we today?

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No new/recent challenges, but some risk remains, particularly in NY

• Assess risk tolerance level: i f risk averse offer second offline AMOE -

Practical risk may be lower for certain promotions:

- E.g., fully integrated promotion where Internet access is required anyway

Internet as AMOE

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Equal Dignity: Equal No. of Chances

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Skinny Dip cannot limit game pieces via AMOE to one per day

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Those who enter for free must be afforded same number of chances as those who purchase or pay

• Limit of one free game piece per day is fatal, although a common mistake made by marketers

Text Message Fees as Consideration

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Skinny Dip Daily Instant Win Sweepstakes

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Open to text message users only

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Daily winner randomly selected and notified via text message

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Winner must claim prize within 15 minutes

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No AMOE

Text Message Fees as Consideration

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Text Message/SMS charges clearly constitute consideration

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Unlike Internet access, each entry incurs a separate charge

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Third party consideration is no defense (900 # sweeps)

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Cost of text message is irrelevant-If its not a postage cost its consideration

Text Message Fees as Consideration

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Thus, text message/SMS sweepstakes require AMOE

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Internet can be the AMOE

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Internet as AMOE is lower risk here than for offline game with product purchase

• Issue is “universal availability” • Vast majority of mobile users have Internet access

Text Message Fees as Consideration

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Text messaging technology can create a challenge in structuring an AMOE with equal dignity

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AMOE players can’t be disadvantaged

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If it’s a daily game with daily prizes you must be able to enter for free every day

• Snail mail won’t work

Text Messages and Gambling Laws

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Text message sweeps with a “premium” charge may raise gambling issues

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Game-for-games sake and AMOE

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Some regulators have suggested that those who “pay” to play receive no product or service in exchange other than chance to win may be engaged in gambling – even if there is an AMOE

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Recommendation: offer a premium item to those who “pay” to play

Issue: Refer a Friend Program

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Additional instant win game pieces earned for e-mail referrals

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Key issue:

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Can Spam- Is the referral e-mail a commercial solicitation subject to requirements of Can-Spam Act?

Refer a Friend Program

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Can-Spam applies to any commercial e-mail message whether solicited or unsolicited

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Status of Refer-A-Friend e-mails was originally unclear

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Status was clarified in recent FTC Rulemaking

Refer a Friend Program

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Refer-A- Friend e-mail message WILL be considered a “commercial” message subject to Can-Spam if any inducement is provided by the seller

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A sweepstakes entry IS an inducement

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Can Spam applies whether the “refer a friend” email is sent by seller or set up as E-Card that consumer sends

Can-Spam Requirements

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Must provide Internet based opt-out mechanism-directed to seller

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Must include seller’s name and address

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Must honor opt-out within 10 days

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Must clearly disclose that it is an advertisement

Waiver of Opt-Out Rights

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Skinny Dip instant win games requires entrant to accept promotional e-mail/text messages

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Does this constitute consideration?

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Under traditional lottery law analysis answer is NO

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No purchase

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No payment

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No substantial expenditure of effort

Waiver of Opt-Out Rights

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However, entrant is giving up something of personal value a “privacy” right

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NY AG indicated that waiver of rights under DNC is consideration

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Query whether this is the emergence of a new “consideration theory -- the giving up a legally protected right?

• Proposed bill in NJ would prohibit waiver of opt-out rights as a condition of entry

Prize Issues

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Types of Prizes

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$5 Gift Cards as Prizes

• Gift Card Legislation • Post Consideration –

Final Four Trip

Types of Prizes - Gift Cards

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Gift Card Legislation

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State regulation of gift cards is steadily increasing

• Over 16 states currently regulate issuance and terms of gift cards –

Most states prohibit dormancy fees or expiration dates

Types of Prizes - Gift Cards

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Post Consideration

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Many states prohibit conditioning a prize on the purchase of a product or service

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Value of gift card awarded as prize should be high enough to permit redemption of at least some items in the store

Types of Prizes – Final Four

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NCAA and professional sports leagues aggressively enforce IP and other rights

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Refer to event generally

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Avoid prominent use of marks

Advertising of Instant Win Game

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Two disclosure issues

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Disclosure of AMOE

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Full Rules Disclosure

Advertising: Disclosure of AMOE

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General Rule: AMOE must be clearly and conspicuously disclosed

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NY AG challenged AMOE disclosure in Tylenol promotion and CVS/A&P ads

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Ads prominently highlighted purchase method of entry with “no purchase necessary” disclaimer in smaller type

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Tylenol settlement requires disclosure of AMOE with “equal prominence” if product purchase is mentioned

Advertising: Disclosure of AMOE

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NY AG: not looking to change standard; all 3 promotions had other problems:

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A&P- promotion was not registered

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CVS- website directed consumer to store for free entry-no entry forms were available in store

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Tylenol- Internet used as the AMOE

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Standard remains “clear and conspicuous” not “equal prominence”

Advertising: Disclosure of AMOE

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Where are we today?

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What constitutes clear and conspicuous will depend on the context of the ad

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More prominent the emphasis on product purchase, the more prominent the disclosure of the AMOE should be:

• It’s the net impression that counts –

NY AG sued CVS for violating AVC

• Believes free entry disclosure must be available at POS

Advertising of Full Rules

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Florida used to require, but no longer

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Material terms and conditions must be disclosed in advertising for game:

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Start and end date of promotion

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Name of promotion and sponsor

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No purchase is necessary

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Disclosure of where promotion is void

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Age/geographic eligibility restrictions

Skinny Dip Instant Win Game: Risk Management Issues

Risk Management: Patent

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Consult patent counsel

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Online game methodologies subject to increasing number of patents

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Patents on wireless technology likely to be next

Tips For Game/Contest Rules

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“Kraft Clause”

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Limit liability in the event of error to offered prizes

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Recent DL Blair/Daily News cases – if you follow the contingencies in your rules, the courts will support you

Skinny Dip Music Contest

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Consumers invited to submit music video

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Five proofs of purchase required

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Entries posted online

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Entries judged by the public

Is This a Bona Fide Skill Contest?

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Consideration is required to enter

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Status as bona fide skill contest is critical to legality

Criteria For Bona Fide Skill Contest

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Tasks entrants are being asked to perform must constitute bona fide skill

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Entrants must possess the requisite skill and have opportunity to exercise it

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Standard of skill must be known to the participants

Criteria For Bona Fide Skill Contest

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Must be objective entry criteria

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Judges must be qualified to apply the criteria

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If there is a hybrid skill/chance game, skill must dominate and control

Criteria For Bona Fide Skill Contest

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Examples of bona fide skill contests:

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Knowledge based games

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Essay or jingle contests, creative submissions

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Memory games

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Athletic ability contests

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Manual dexterity games

Criteria For Bona Fide Skill Contest

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Games not general considered to constitute bona fide skill

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Guessing Games

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Predicting the outcome of a Single event

• Distinguish from fantasy games –

Fast 50/First xxx to respond

Criteria For Bona Fide Skill Contest

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Hybrid games: review case by case

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Trivia - depends on structure of game

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Computer/video games

• Does practice improve scores?

• Are there random computer elements that impact game play?

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Card games

• What type of game, does skill dominate

Skinny Dip Music Video Contest

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Composing music video is a skill

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Issue is in structuring the judging of videos and selection of winners

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Objective judging criteria

• Need to set forth objective criteria by which entries will be judged

Skinny Dip Music Video Contest

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If Public Judging is involved

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Establish criteria that public can apply

• E.g. Audience appeal, entertaining etc.

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Limit impact of public judging on final outcome

• Remember the dominant factor test • Limit public judging results to only a percentage of the score

Skinny Dip Music Video Contest

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Scoring System

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Pick winners based on highest average rather than total score

• Rewards “best in class” rather than those who are voted on most frequently

Public Judging: Risk Management

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Limit entries to one per person to avoid ballot stuffing

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Include strong disclaimers to deter violators

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Prohibit use of robotic/automated devices

Skill Contests: State Issues

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Skill contest requiring consideration prohibited in certain states

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Application of state laws vary depending on nature of contest, consideration and media

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Entry fee vs. Product purchase

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Direct Mail vs. Mass media

Skill Contests: State Issues

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Arizona

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Gambling statute prohibits entry fees for skill contests California

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Special disclosures for puzzle contests

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Florida

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Pay to play skill contests may violate gambling laws

Skill Contests: State Issues

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Iowa

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Prohibits pay to play skill games in which sponsor benefits

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Louisiana

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Gambling statute prohibits fee-based skill contests

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Maryland

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Gambling statute arguably prohibits fee-based skill contests

Skill Contests: State Issues

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New Jersey

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Appears to apply an “any chance” standard to hybrid games

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Vermont

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Prohibits any consideration for skill contests

Issue: User Generated Content

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Set forth clear standards for entry

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Prohibit use of 3 rd party materials/likenesses

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Strong warranties of non-infringement

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Strong rights to disqualify

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Releases

LAW SEMINARS INTERNATIONAL

Unique Issues and Trends in Online and Electronic Contests and Games

By William Heberer

Manatt, Phelps & Phillips LLP