Legal Pitfalls to Avoid with Online Promotions

Though the U.S. federal laws governing marketing promotions have been in place for decades, the advent of digital and social media tools have evolved much more quickly than the laws that govern them. This has created a complex legal framework for businesses to navigate when it comes to their online promotions. Add to that the emergence of online do-it-yourself promotion solutions, and you have a situation where business owners can access the tools to run an online promotion, but aren’t given adequate information on how to do so compliantly. It’s sort of like selling someone a power tool without the instruction manual and safety guidelines. And, just as with filing income taxes, the federal government does not give leeway when it comes to marketing promotions rules.

Legal Considerations when Running a Marketing Promotion

Here are a few things a consumer brand should consider when running a promotion:

1. Determine what kind of promotion you’re running. Under U.S. law, there are two types of promotions that marketers can use to give stuff away: games of chance and contests. Though promotions go by many different names, legally they all fall into one of these two categories.

Games of chance are either sweepstakes or instant win games.

Sweepstakes involve giveaways where people submit or earn entries into a drawing, and winners are randomly selected from all entries received. The vast majority of marketing promotions that run in the U.S. are sweepstakes.

Instant Win Games randomly seed winners into the population of game plays. As people play the game, they find out if they have won. This can be done both online and through printed game pieces.

Contests determine winners based on some kind of skill, whether it’s an essay, photo, video, or recipe. In order to determine the winner, you have to set predetermined criteria. Contests can rely on a judging panel that reviews each entry and evaluates them against the criteria, or they can be a popularity contest by which consumers vote for their favorite.

The primary differences between games of chance promotions and contests are that games of chance campaigns have a random component by which the winner is determined, and contests determine winners based on skill.

2. Determine the value of the prize. The cash value of a prize will determine if any other government regulations will apply. High-value prizes will require the winners to submit a Form 1099 to the IRS during tax time. Most sweepstakes involve low-value prizes, however, high-value prizes often increase engagement, like this $100,000 prize from Raising Cane’s One Love Adventure campaign.

3. Determine state and country specific regulations. In the U.S., not all states regulate games of chance promotions and contests the same way. Ever noticed the fine print on some official rules that exclude participation of people from certain states? This may be because the business running the promotion does not have consumers in those states, or it could be because some states have stricter regulations than others. Additionally, countries differ in their regulations as well. So, if you wanted to offer a sweepstakes in North America, you would also need to navigate Canada and Mexico’s laws.

Official Rules

Speaking of official rules, this is where most businesses can get themselves into legal trouble either by not having them or having inadequate ones. Sometimes a business owner may find a template of rules online. While this is better than nothing, they generally will not incorporate promotion-specific variances such as types of prizes (different rules apply to giving away a trip versus something that could be dangerous, like a set of knives). If you do use a template, you should always have it reviewed by legal counsel. Though most entrants will never read the official rules, if a challenge should come up about why someone did not win, the rules are the guiding document to resolve that challenge. Think of the official rules as your contract with entrants. You want to make sure that contract protects your business and the customers you are trying to engage with during your marketing promotion.

Software Solutions to Run an Online Promotion

There are software as a service solutions (SaaS) available to business owners to help run online games of chance and contests. These out-of-the-box solutions offer several options for managing your own online promotion. However, they can present a risk because they may require that you include a set of official rules, but they do not give any direction or governance to ensure that the official rules are adequate. These companies will also not indemnify you should something go wrong—opening the door to legal liability.

Protect Your Business from Legal Liability

One way to protect yourself from any potential legal liability is to engage with a third-party administrator, like MRI, to help you run the promotion. This accomplishes two things: first, we know the laws governing marketing promotions very well and can help you navigate common pitfalls; second, should your promotion run into any legal hot water, a third-party administrator can provide you with an argument of plausible deniability. Plausible deniability is a legal defense that protects you because it puts the burden on the third-party agency. You can defensibly say that you were not aware of the particulars because you engaged the services of an administrator that provides an expertise in running these types of promotions.

Whatever you decide is the best course of action when running a marketing promotion, make sure you do your due diligence to protect you and your business from any potential liability. Also, always seek legal counsel to review the rules and marketing materials before running any type of marketing promotion.