Recent Sweepstakes and Contest Promotion Disasters

1. SMS Class Actions

A series of class actions have been launched against contests incorporated into popular shows such as American Idol, Deal or No Deal, 1 vs. 100, and The Apprentice. These shows have generated lawsuits by people claiming the promotions are illegal lotteries. Now that four lawsuits have survived the first round of attempts to have them thrown out, it appears they will become part of a new reality for producers of these shows. The recently issued decisions out of the federal court in Los Angeles, California denying defendants' motions to dismiss class and representative action claims demonstrates the risk in having a "pay to play" component in sms game promotions. This is true even where there is a free no-purchase alternative method of entry that is readily taken advantage of by consumers. Rather, the risk appears when the entrant has a pay component and there is a claim of insufficient economic value provided in return for the payment. The four cases at issue involve premium text message sweepstakes offered in connection with the four popular reality shows. The promotions were included as supplemental contests in connection with these shows where entrants were offered the opportunity to enter either a trivia contest or guessing game either through text messaging or a designated website. Although the website entry method was free, if an entrant wished to enter via text messaging, there was a 99 cent charge per entry (plus standard text message rates). Consumers from around the country filed lawsuits as representative actions under California's liberal Business and Professions Code as well as class actions under Connecticut and Massachusetts law. The suits were filed against the television networks, producers, and game promoters. The plaintiffs have alleged that because they were charged a fee to enter without receiving anything of substance in return, the contest sponsors were violating the law by running an illegal lottery.

A similar lawsuit (Hardin et al. v. NBC Universal et al.) was filed in Georgia against Deal or No Deal under the state's qui tam statute in which an individual is entitled to recover gambling losses from the winner. The question involves the applicability of the Georgia state qui tam statute in which an individual is entitled to recover gambling losses from the winner. Here, the plaintiffs are not seeking to get their money back from the winner, but instead from the organizer, NBC Universal, and companies affiliated with the show "Lucky Case Game", which is based on a game where viewers were invited to choose one lucky case out of six on-screen gold briefcases. Persons could enter either for free via the Internet or through a text message that cost 99 cents. At the end of the program the winning briefcase was revealed, and the winners were entered into a random drawing. The winner of that drawing received a prize of as much as $10,000. The applicability of the qui tam law has been certified to the Georgia Supreme Court, with oral argument on February 26, 2008. The question that have been certified are, does Georgia Law (O.C.G.A. s. 13-8-3(b)) authorize the filing and maintenance of a civil suit to recover money paid out or lost on account of one's participation in an illegal lottery? Second, if the answer is in the affirmative, may the plaintiffs recover from the lottery's promoter or organizer?

2. Fantasy Sports Leagues Not Considered Gambling

In Humphrey v. Viacom, Inc., a federal district court in New Jersey ruled that certain fantasy sports games played for pay and run by major sports web sites do not constitute illegal gambling. The court also ruled that an individual could not pursue a claim under the state's qui tam statute - which allows an individual to recover gambling losses from a winner - because he had no personal connection to the unspecified losses. A fantasy sport is a game played by an estimated 16 million adults in the U.S., in which users build a fantasy sports team. In the leagues at issue, users are required to pay a fee in order to participate and a prize is awarded to the winning team manager/users. However, the prizes offered were not based upon the payments received by the sponsors or participants, rather the prizes were offered without regard to how many people played or how much money was generated. The federal court ruled that the entry fee payments in the fantasy games at issue are not considered wagers or bets, and as a result, fantasy sports games do not constitute illegal gambling. The court held that "entry fees do not constitute bets or wagers where they are paid unconditionally for the privilege of participating in a contest, and the prize is for an amount . . . that is guaranteed to be won by one of the contestants." In particular, the court noted that the element of risk, a necessary element to constitute gambling, was missing from fantasy sports leagues. In the court's view, the fact that each contestant was required to pay an entrance fee, where the entrance fee did not specifically make up the purse or premium contested for, did not convert the contest into a wager. Thus, the element of risk necessary to constitute betting or wagering was missing.

3. Search Engines Settle Charges of Promoting Illegal Gambling Activities

In December 2007, three major Internet search engine companies - Google, Yahoo, and Microsoft - entered into settlements with the United States Department of Justice resolving claims that they promoted illegal gambling by delivering advertising for online gambling businesses. The government alleged that the conduct violated the Federal Wire Wager Act, federal wagering excise tax laws, and state and local anti-gambling laws. The settlements totaled $31.5 million and various public service campaigns designed to inform that online gambling is illegal under US law.

4. Quiznos/Subway User Generated Content Litigation

Subway has sued Quiznos over a user generated content promotion where the rules made it clear that entries should depict Quiznos sandwiches as being superior to Subway's sandwiches. Although Quiznos did not make the challenged submissions, Subway sued Quiznos charging that the submitted entries made false claims about Subway and otherwise disparaged the brand. Quiznos initially relied upon the Communications Decency Act (CDA), which potentially immunizes providers of interactive computer services from the responsibility of user postings on their sites. The court refused to dismiss the action under the CDA, and the action is proceeding, with trial scheduled for 2009.

5. Craftmatic FTC AG Actions

According to the FTC, Craftmatic - (the direct to consumer marketer of beds) and three of its subsidiaries ran sweepstakes promotions offering consumers who filled out an entry form the chance to win the prize of a Craftmatic bed. The sweepstakes form indicated that the consumers' telephone number was their entry number as well. Using this information, Craftmatic allegedly placed tens of thousands of calls to consumers who entered the sweepstakes, even though the form did not indicate that by filling it out they would receive sales calls, and the company did not seek their express consent to call them. In addition, the Commission's complaint charged Craftmatic with placing millions of abandoned calls to consumers. That is, the company did not connect consumers to a live representative within two seconds of when consumers said "hello," leaving them to find only dead air upon answering. Finally, the FTC alleged Craftmatic ignored consumers' requests to be placed on the company's entity-specific do not call list. In settling the complaint, Craftmatic has agreed to pay a $4.4 million civil penalty, the second largest ever for DNC-related violations.

6. Hanna Montana/Club Libby Lu Promotion Disaster

A six-year old girl and her mother submitted a fake essay in order to win the grand prize of tickets to a sold-out Hanna Montana concert. The essay writing contest asked entrants to write why they deserved to see Hanna Montana in concert. The mother and daughter wrote that the child's father had died that year in Iraq. In January 2008, the sponsor learned that the story was fake and revoked the prize based, in part, on a provision in the rules, which prohibited "acting in an unsportsmanlike or disruptive manner." The contest rules did not specify the criteria for the essay or state that the essay must be true.

7. Publishers Clearing House/Iowa Settlement

In December 2007, Publishers Clearing House entered a settlement with the Iowa Attorney General. The Letter of Understanding with the Attorney General's Office requires PCH to implement a program to identify elderly consumers at various points, such as when an Iowan age 65 or over has spent $500 or more in a calendar quarter for PCH products. PCH was also required to refund more than $60,000 to elderly Iowans, including some with refunds over $10,000, and to agree to a liquidated damage penalty for future contacts to persons that were to have been suppressed from its mailing list.

8. FACE Trading Actions

Maryland and Michigan state courts have ruled that discount coupons, which could be purchased from a vending machine for $1 and then offered purchasers a chance to win cash prizes, constituted illegal gambling under their respective state statutes. The court in Michigan found that a "no purchase necessary" method of entry did not render the transactions free of consideration, and the promotion of the coupons through games of chances was not "occasional promotional activity" permitted under the statute.

9. FTC International Sweepstakes Mailing Settlement

The FTC recently announced a settlement with sweepstakes promoters relating to the marketing of sweepstakes reporters to residents of the United States, Canada, and the UK. The FTC alleged in its complaint that the defendant's mailings, which incorporated an "everybody wins" as part of an offer for a sweepstakes newsletter, created the impression that consumers had won the large prize instead of the nominal $1 prize. As part of the settlement, defendants agreed to pay $1.375 million to the FTC and $125,000 to the Postal Service and accepted a ban from any involvement in prize promotions. The settlement is noteworthy based on the fact that the FTC included, as part of the charging conduct, mailings to foreign citizens.

10. CARU Nickelodeon Magazine

CARU challenged print advertising for Nickelodeon Magazine's NickMagPromos Sweepstakes that failed to disclose how many or which of the products one of the lucky ten winners would win through the sweepstakes. Nickelodeon responded to CARU's inquiry, stating that the lucky ten winners win all of the prizes displayed, with the exception of one, which is noted. CARU determined that the advertiser did not need an additional disclosure and that the claim was substantiated.

11. Fraud Derails Stock-Picking Contests

CNBC conducted a stock-picking contest where the player with the most valuable portfolio at the end of 10 weeks would win $1 million. In the contest, participants were given $1 million in fictional "CNBC Bucks" to trade in an imaginary stock portfolio, based on the actual closing prices of stocks traded on the New York Stock Exchange, Nasdaq Stock Market, and American Stock Exchange. The winner would receive $1 million in real money and an opportunity to appear on CNBC. However, CNBC recently announced that it was looking into allegations of fraud with regard to the winner. CNBC indicated it is investigating whether one or more finalists wrote and executed computer program scripts to bypass the contest's security measures and whether some contestants were able to change their trades after the markets closed at 4 p.m. ET, but before the trades were processed by CNBC.

Similarly, theStreet.com recently canceled the first round of its "Beat the Street" stock-picking competition because some of contestants were cheating. TheStreet.com did not disclose the methods of cheating, but resolved the problem by announcing that all participants of the first contest could enter a new contest and the $100,000 prize money from the canceled contest would be used to increase the amount awarded in the second contest to $150,000.

12. Malibu Caribbean Rum User Consumer-Generated ContestPromotion

The New York Times recently reported that a controversy arose with respect to the award of the winner in a Malibu Caribbean Rum user-generated advertising contest. The contest, which began in early May, solicited videos about Malibu Banana Rum and offered a prize of $25,000. While the official rules indicated that the winner would be selected by June 30, 2007, the winner was announced earlier, causing some contestants to claim that the game was rigged. The manufacturer of Malibu Rum denied any wrongdoing.

13. Radio Station Pays Out After DJ Jokes About Offering $1,000 Prize

A radio DJ at a Chicago area radio station jokingly offered $1,000 to the first listener who could identify the name of the writer of a song he had just played. Not surprisingly, the listener who called in with the correct answer did not believe the offer was a joke, and demanded his prize. The station manager ultimately awarded the $1,000 cash prize to the winner to avoid any litigation. Earlier this year in a similar situation, the FCC fined a Kansas radio station $4,000 for not giving away a prize offered in connection with a different radio station contest, as well as for not broadcasting the contest rules on the air. The winner, who did not receive her prize, complained to the FCC.

Gift Cards and Rebates

1. FTC Settles Deceptive Gift Card Sales Cases

The FTC has approved a final consent order with respect to Kmart's gift card program, which outlines that Kmart must reimburse the dormancy fees for eligible consumers and must publicize the refund program on its website. Consumers may contact Kmart to determine if they are eligible for a refund; to obtain a refund, consumers must provide their gift card number, mailing address, and phone number. If the consumer is found eligible, Kmart will mail consumers a new gift card with a balance equal to the improperly deducted fees.

The FTC obtained an injunction against Darden Restaurants, owner of the Olive Garden, Red Lobster, Smokey Bones, and Bahama Breeze restaurant chains. According to the FTC, when advertising its gift cards, Darden failed to disclose that the cards had a $1.50 monthly fee that would be deducted from the card's value if the card was unused for a certain period of time. The FTC reported that many consumers did not learn of the fees until they used their cards and discovered the fees were already deducted. Although the fees were disclosed in fine print on the back of the cards, the FTC felt the disclosure was obscured by other miscellaneous information. Darden has not charged a dormancy fee since October 2006, and as part of the settlement, has agreed to mark any expiration or fees on the front of the card and to clearly and prominently disclose fees at the point of purchase and prior to the card's sale.

2. FTC Settles Alleged Rebate-Fulfillment Violations with InPhonic and Soyo

The FTC recently announced settlements in two separate cases where it had alleged that companies had engaged in unfair practices by failing to provide rebates to many consumers. In its suit against InPhonic, a marketer of wireless telephone packages, the FTC alleged that InPhonic advertised mail-in rebates, many of which were for a value equal to the purchase price of the phone being purchased. InPhonic required that consumers submit their first four bills, with the last showing all amounts being paid in full, within 120 days of purchase. These terms were not disclosed prior to purchase. Moreover, the fourth bill was often not received by the consumer 120 days after purchase, thereby making it impossible for the consumer to make a timely submission of the required rebate materials. InPhonic did not honor requests received late, nor did it honor requests where the forms were incomplete (even if the missing information was found elsewhere in the submission). In a similar complaint against Soyo, the FTC alleged that although Soyo indicated that rebate checks would be mailed within 10 to 12 weeks of receipt or of purchase, in actuality consumers experienced substantial delays, with some up to a year or more.

3. Court Declines to Dismiss False Advertising Claim for Gift Cards Given As "Rebates"

A California federal court (Faigma v. AT&T Mobility, LLC, 2007) declined to dismiss charges against a large cellular provider for claims of misleading rebate advertising. The plaintiffs contend that the advertising gave the impression that once a customer completed and mailed in a rebate form, he or she would receive the value of the rebate "in cash or by check." In place of rebate checks, however, the company distributed "VISA Rewards Cards" to customers who purchased phones and submitted rebate forms. The VISA cards function like debit cards but are subject to a number of restrictions, none of which were disclosed in the advertisements. When consumers actually received the VISA cards, they were already under contract with the company and had to pay an early termination fee if they wished to cancel their wireless service. The court ruled that the relevant standard is "what a reasonable consumer would expect" and found that "a reasonable consumer, upon seeing an advertisement that promises a 'rebate' of a certain amount, would generally understand that advertisement to mean that the amount will be returned to the consumer in cash, check or its equivalent."

4. CVS Pharmacy Settles Florida Investigation Into Its Extra Care Rewards Program

The Florida Attorney General and CVS Pharmacy have entered into an agreement, whereby CVS will modify its "Extra Care Rewards" program and advertising to make prices clear and avoid confusion about rewards. Consumers complained that they were unable to access their account balance, advertised prices were not available at checkout, and rewards program points were delayed. Under the agreement, CVS will clearly and conspicuously alert consumers to conditions and limitations of any offer, including but not limited to, membership requirements, program terms, mail-in rebates, instant rebates, specific items to be purchased, or quantity of items to be purchased. CVS will also contribute $30,000 to a "Seniors vs. Crime" program.