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Keeping Social Media Promotional Campaigns Legal

The settlements of the long-running class-action lawsuits over the legality of allowing consumers to enter sweepstakes offered by popular television shows such as The Apprentice, American Idol, America’s Got Talent, and Deal or No Deal underscore the importance of having legally compliant social media promotional campaigns and demonstrate how even innocuous-looking sweepstakes entry mechanisms can backfire.

In “Get Rich With Trump” sweepstakes, viewers watching the NBC show, The Apprentice, voted for the contestant whom they believed would be the target of Donald Trump’s “You’re Fired!” by either sending a premium SMS text-message costing 99 cents, plus any applicable standard text messaging charges, or by entering for free online. Correct answers earned the participant a chance to win a prize.

Likewise, viewers of American Idol and America’s Got Talent, for example, were allowed to send their predictions on the outcome of the show via a premium text message, costing 99 cents. Viewers who guessed correctly earned sweepstakes entries.

Prior to the class-actions lawsuits, such network program sweepstakes were rapidly rising in popularity and the promoters of these sweepstakes were amassing fortunes from the entry fees (collected as premium text message charges paid by viewers), without giving the entrants anything of value in return.

However, unlike promotions where a consumer is asked to purchase a product as a condition of entry (a soft drink, for example), consumers participating in these network program promotions received nothing in exchange for their .99 cents, other than a chance to win.

This method of entry quickly came under attack as constituting an illegal lottery, in violation of various states’ anti-gambling laws, even though a free AMOE was also available to the participants.

In the lead case of Karen Herbert v. Endemol USA, Inc.,7 the plaintiff challenged the play-at-home sweepstakes promoted by various game/reality shows in which viewers were allowed to register and be given the opportunity to be awarded both cash prizes and merchandise, either via an SMS text message sent from a wireless device or online via the program’s website. No fees were charged to persons entering via the Internet, but entrants who registered via text message had to pay a $.99 premium text message surcharge in addition to the standard text messaging fees charged by the viewers’ wireless carriers.

In denying the defendants’ motions to dismiss, the U.S. District Court for the Central District of California held that the plaintiffs had sufficiently alleged that the defendants’ actions constitute illegal gambling as a matter of law, despite the fact that the defendants offered a free AMOE:

The critical factual distinction between cases in which a lottery was not found ... and those in which a lottery was found ... is that the former “involved promotional schemes by using prize tickets to increase the purchases of legitimate goods and services in the free market place” whereas in the latter “the game itself is the product being merchandized.” ... The presence of a free alternative method of entry in the leading cases made it clear that the money customers paid was for the products purchased (gasoline or movie tickets), and not for the chance of winning a prize.

The relevant question here, therefore, is whether the Games were nothing more than “organized scheme[s] of chance,” in which payment was induced by the chance of winning a prize. The relevant question is not, as Defendants contend, whether some people could enter for free. In [cases where a lottery was not found], the courts concluded that those who made payment purchased something of equivalent value. The indiscriminate distribution of tickets to purchasers and non-purchasers alike was evidence thereof. Here, however, Defendants’ offers of free alternative methods of entry do not alter the basic fact that viewers who sent in text messages paid only for the privilege of entering the Games. They received nothing of equivalent economic value in return.8

—U.S. District Court for the Central District of California (11/30/07)

Pursuant to the terms of the settlement, the defendants agreed to:

  • Refund any premium text message surcharges paid by consumers if the consumers did not win a prize.
  • Reimburse the plaintiffs more than $5.2 million in legal fees.
  • Submit to a 5-year injunction enjoining them from “creating, sponsoring, or operating any contest or sweepstakes, for which entrants are offered the possibility of winning a prize, where people who enter via premium text message do not receive something of comparable value to the premium text message charge in addition to entry.”9

Although the settlements are not binding on companies that are not parties to the lawsuit, the settlements are nonetheless instructive. As a general rule, it may be best to avoid premium-SMS-entry promotions altogether. For companies that decide to conduct premium text promotions, it is critical that a free AMOE (for example, entry by mail or 1-800 number) is made available and that paid entrants are given something of verifiable equivalent retail value in return for what they paid to enter.

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