Contests & Sweepstakes....and a Lawsuit?

By Melissa Grindel

Contest, sweepstakes, giveaways—they are all the same, right? Not exactly. While in our everyday language usage, we might use these terms interchangeably, from a compliance and regulatory perspective for lending institutions, these words have very different meanings.

So what exactly is the difference? And why should your compliance team care?

Is it a Lottery, Sweepstakes, or a Contest?

A lottery is where a group of 3 or more participants contributes money or credit to another in exchange for the expectation that one or more, but not all, of the participants will receive more than they have contributed. The winner may be selected: randomly, through a game/race/contest/, or record tabulation.

A sweepstakes is a game of pure chance. There is very little a person has to do to be eligible to enter and win the prize. It doesn’t require any skill and there is no purchase necessary to be considered.

A contest, on the other hand, is a little more involved. It requires skill or effort to enter and can also be awarded by judges according to established criteria (like an art or essay contest). Unlike sweepstakes, to win a contest, the person may have to provide information beyond just a name and phone number. The entry form may ask for additional information, like: marital status, occupation, or income. Some contests even require purchase to be entered. Though contests sometimes involve chance for winner selection, a contest whose outcome is determined by skill is not a lottery.

Why It Matters

By law, banks are prohibited from operating or even promoting lotteries. While the average person probably doesn’t see what a lottery has to do with them sharing their information with you in exchange for a chance to win a prize, regulators have a keener eye. Your institution runs the risk of entering lottery territory (including sweepstakes or contests) if it requires something of value from the entrant in exchange for a chance to win a prize.

    To avoid operating a lottery, your institution can offer: A prize for receiving something of value, or A prize for a contest winner chosen by skill or effort

NOTE: Value, also known as “consideration” doesn’t have to be money, even though that is the most recognized unit of value. Anything that ultimately benefits the business, could be thought of as consideration, such as consumer information like emails and phone numbers. See our article “The Value of a Like” for more insight.

The Risk of Fines or Lawsuits

Giving people something feels great! They are happy to receive it, we are happy to give it, what could go wrong? Quite a bit, actually. People often sue companies over sweepstakes and contests. Even if they don’t win, the company is left with the expense, headache and potentially bad press of having to defend itself in court.

There are also fines associated with violating sweepstakes and contest laws. The Federal Trade Commission (FTC) can assess fines for each violation between $5,000 and $50,000. The Federal Communications Commission can fine companies up to $4,000 per violation. Some sweepstakes also fall under the jurisdiction of the United States Postal Service and those fines are as high as $2 million. Each state also has regulations and corresponding fines. It can add up quickly.

Everyone must have a Terms and Conditions:

The terms and conditions must set forth the rules of the contest, how the rules are going to be govern, how the winner is chosen, and even the actual cash value of the prizes.

Platform Rules

Each social media site has their own rules for what types of contest can be run and how they can run them if a company posts a contest and doesn't follow the terms and condition rules they may find their social media account inactivated all of their followers wiped clean or worse a civil penalty or even a lawsuit.

For example, Facebook and Instagram require that your contest Terms & Conditions include sections clearing them from liability, and Twitter goes a step further to say that contest creators need to discourage users from fraudulent activity, like creating multiple accounts. LinkedIn is somewhat of a mixed bag, as it prohibits the use of contest and sweepstakes in ads on the platform altogether but has no clearly defined rules on individual users administering them.

The main takeaway: be sure to read each platforms terms of service before beginning a contest or sweepstakes. Below are links to some social media platform rules for further guidance:

Should you just skip having a sweepstakes or contest?

The answer is “no.” Sweepstakes, contests and giveaways are a great way to find new customers and potentially get valuable survey information for your brand. However, there are some things you should keep in mind to keep from drawing the attention of regulators.

1. Know the rules about lotteries. Remember: lotteries have:

  1. an element of chance
  2. consideration (or something of value in exchange for the chance) and
  3. a prize As long as your sweepstakes or contest has only two of these three things, your institution should be fine.

2. Have your legal department look over any contest your institution is sponsoring. Sometimes there are subtleties that the marketing can compliance team may miss, but a legal review will catch.

3. Make sure all the rules and regulations are clearly spelled out and there is no deceptive or misleading language. How do people enter? When will the prize be awarded and how will it be claimed? Time spent developing how the sweepstakes or contest will be administered is well spent.

4. Know the rules to avoid pitfalls. Bank and lending regulators immediately come to mind for your institutions, but contests, giveaways and sweepstakes may also regulated by the United States Postal Service, Federal Trade Commission, and Federal Communications Commission. Depending on the state you operate out of, there may be additional regulations to keep in mind. Be sure to follow all rules, regulations and guidelines.

Done right, a sweepstakes or contest can be a fun way to engage with the community and potentially find new customers. With a little forethought and planning, the Compliance Team can work with everyone to ensure success.