Running a Prize Promotion? Don’t Run Into Trouble

The defendants used deceptive practices to defraud consumers in connection with false prize notifications.

According to the FTC’s complaint, Mail Tree Inc. and several other named defendants mailed personalized letters to consumers notifying them that they had won prizes as large as $2 million and requiring them to send checks or money orders for between $20 and $30 in order to claim their prize. The defendants also told consumers that the claim fee had to be received within an urgent deadline, typically 10 days, or the prize would be forfeited. The bottom or back of the letters then contained “dense, confusing language” revealing that no prizes were to be awarded and that the defendants were only compiling so-called “reports” about promotions hosted by other parties. Even for paying individuals, the reports were never provided.
 
Not only did the defendants fail to provide clear and conspicuous disclaimers, but the disclaimers provided clearly conflicted with the primary claim of the letters, which were drafted as prize notifications. Each of these actions constituted a violation of well-established advertising laws. Given this behavior, the FTC seeks to permanently shut down the defendants’ operations and to return the ill-gotten gains to deceived consumers.
 
This is not the first time that the FTC has acted with respect to prize promotions such as contests (games of skill) and sweepstakes (games of chance). Just last year, the FTC contacted Cole Haan due to their failure to require entrants to properly disclose that their Pinterest posts were being made in connection with a Cole Haan promotion given that the company’s “wandering sole” hashtag that it entrants to use to identify their posts as entries failed to adequately disclose the connection. More information on that is available here. The FTC has jurisdiction to act whenever a promotion scheme utilizes unfair or deceptive practices and affects consumers across states. This recent action and the Cole Haan situation are but two examples of the FTC’s enforcement in this area.

In addition to the FTC, states are also very active in the area of prize promotions. Notably, state lottery, gambling, and unfair trade practice laws have numerous requirements pertaining to how to properly structure a promotion that targets state residents. For example, some states require that promotions be registered and bonded with their respective offices if the prize reaches certain thresholds and/or if the promotion is being hosted at a retail outlet. There are also certain disclosure requirements, including the well known “NO PURCHASE NECESSARY” language (see here). Failure to comply with these state requirements could subject marketers to trouble with state regulators.
 
Additionally, some states have also targeted marketers who have used text messaging as a method of entry where there were premium fees where such fees essentially require an entrant to pay to enter a “NO PURCHASE NECESSARY” promotion (see here). A poorly constructed text messaging promotion may also lead to liability under the Telephone Consumer Protection Act, with numerous consumers filing claims where they have not provided appropriate consent to receive automated text messages to their cellular devices. Given this, marketers must be careful to avoid violating consumer rights, and the laws of the states and federal government.
 
If the promotion scheme includes elements that trigger both state and federal laws, a marketer could face state and federal enforcement actions as well as consumer class actions based upon promotions schemes.

While the recent case demonstrates that the FTC is watching over unfair and deceptive trade practices in and affecting commerce, it should also stand as a reminder that there are laws governing prize promotions. All marketers interested in hosting a prize promotion should be sure to comply with the applicable laws given that these promotion models are regulated by the states. And, where a promotion model negatively impacts consumers across states and the marketers use unfair and deceptive practices to lure consumers, the FTC may also become involved. Further, if promotions are hosted on social media platforms, additional considerations are involved.
 
For these reasons, all marketers interested in hosting a prize promotion should take care to comply with all legal requirements when drafting the rules and advertising the promotion.