Most states and the federal government have specific laws that prohibit unlicensed gambling and lotteries, which are typically defined as “risk[ing] something of value upon the outcome of a contest of chance or a future contingent event not under his control or influence, upon an agreement or understanding that he will receive something of value in the event of a certain outcome” (See NY Penal Law – PEN§225.00 et seq.).  In fact, only state governments, where permitted, are allowed to run lotteries and many states outright prohibit them.  As a general matter, a lottery has three determinative, core elements: consideration (usually the payment of money), chance and prize.  Accordingly, for example, under California law Penal Code Sec. 319 , which is typical of most state anti-lottery laws, a contest or a sweepstakes becomes an illegal lottery when all three of these elements are present.  Therefore, in order to run a legal promotion (such as a sweepstakes or contest) one of the three elements of a lottery must be absent.

Sweepstakes generally enjoy an “exemption” of sorts from the lottery and gambling laws by virtue of the fact that there is no purchase required in order to enter (leading to the “NO PURCHASE NECESSARY” language that accompanies sweepstakes rules), thus eliminating the “risking something of value” element described above.  In contrast, a contest will often retain the consideration element but instead require some demonstration of skill from the participant, thus removing the core element of chance from equation.

Against this backdrop, the first slew of promotion-type apps taking advantage Apple’s revised developer terms have been sweepstakes as opposed to contests.  Specifically, these new applications are allowing entry into games where the winner is selected purely on a randomized basis, without having to demonstrate any skill in participating.  Therefore, laws applicable to the administration of sweepstakes, as opposed to contests, are at issue.

Historically, the largest legal hurdle and source of the most debate regarding the operation of sweepstakes has been over the removal of consideration from the equation.  Merely removing the requirement of an entry fee will not always satisfy the “no consideration” requirement as consideration can come in many forms, including the purchase of a product, an SMS text, subscription fees or otherwise engaging in activities that require substantial time or effort, such as completing an online survey, etc.  And even when some amount of consideration exists, promoters have generally avoided having their sweepstakes classified as unlawful lotteries by providing a universally-available, free alternative method of entry (“AME”) (such as a mail-in postcard, etc.) that provides equal treatment to entrants who use the AME.  Thus far, the sweepstakes applications available on the App Store (whether free or for a fee), such as “Scratch Off Now” from Thought Quarry LLC, which enables marketers to include their branding, messages and products on the app, are coupled with an AME on a corresponding website, allowing entrants the opportunity to participate in the sweepstakes without downloading the particular application.

However, providing an AME may not be enough, under some state laws, to make the promotion legal if the entrants that have paid consideration do not receive something of value for the payment.  An end user may not pay just for a chance to win a prize and state anti-gambling laws may be invoked (as is the case with online poker, sports betting and other forms internet-based gambling) if an end user is required to purchase (a) an app itself or (b) entry in a sweepstakes via such app and does not receive some value in return.  That “return value” needs to only be equivalent to the value paid for the app or the entry.  To take a recent example, paying entrants in a recent sweepstakes promotion tied to the Iron Man 2 movie release received a can of Dr. Pepper.

In addition to providing something of value to entrants, a sweepstakes can avoid classification as an illegal lottery if it clearly promotes the sale of “real” products or services, distinct from the game itself.  Accordingly, it is no surprise that Apple has limited its developers to creating “promotional” sweepstakes and contests. Even Facebook, which similarly allows third parties to run contests and promotions on its platform, continued to refine and post increasingly specific guidelines throughout the past year in an attempt to ensure that these gaming-style promotions are run in accordance with applicable law. In fact, Facebook now prohibits promotional sweepstakes that condition entry upon the purchase of a product, completion of a lengthy task, or other form of consideration.

Needless to say, the risks are real for both social networking sites and device manufacturers housing applications, particularly when both virtual and credit card transactions are occurring on and through the sites and platforms, including where credit card data is maintained (e.g., purchasing raffle tickets via an iPad app where the credit card charged is on file with Apple via iTunes), as the potential exists for liability to extend beyond the app developer.  Ultimately, social networking sites and platform developers need to ensure that their marketing partners, sponsors and developers carefully structure their promotions and apps to comply with anti-gambling laws.

As always, we will keep an eye out for developments in this area of the law, particularly as the lucrative and viral nature of these promotions continue to expand exponentially across new media platforms and devices.

On April 21, 2008, the Georgia Supreme Court rejected an argument that a promotional contest sponsored by NBC in connection with its hit show, “Deal or No Deal” violated Georgia’s anti-gambling laws. Because of the proliferation of text message-based promotional contests, this decision will likely have wide-reaching impact on the digital entertainment space.

The game at issue – the “Lucky Case Game” – encouraged viewers of “Deal or No Deal” to guess which of six briefcases is the “lucky case” by submitting their guesses online for free or via text message for a fee of $0.99. After the winning briefcase is revealed at the end of the show’s broadcast, the entrants who correctly chose the “lucky case” are entered into a random drawing, the winner of which receives a prize.

The plaintiffs, who are Georgia residents, submitted their guesses via text message but did not win. They sought to bring a class action against NBC Universal and the producers of “Deal or No Deal” claiming that the contest was an illegal gambling operation. Specifically, plaintiffs argued that the $0.99 fee charged for the text message entry represented “consideration” for a gambling contract, which is void under Georgia’s anti-gambling statutes.

The Georgia Supreme Court, however, rejected this claim and determined that the text message fee was not, in fact, “gambling consideration”, and therefore no “gambling contract” existed. In addition, the Georgia court rejected the plaintiffs’ claim that the “Lucky Case Game” constitutes an illegal lottery (which is considered “commercial gambling” under Georgia law and provides a civil cause of action to recover the money paid out or lost in the operation of a lottery). The court agreed with the defendants’ assertion that the game was used as a promotional tool and is not a lottery.

Under Georgia law, in order for a plaintiff to successfully recover “gambling consideration” (which implies that a gambling contract exists), one party needs to be certain to win, and the other party certain to lose, based upon the happening of a specific event. In this case, the Georgia Supreme Court agreed with the district court that the $0.99 text message fee did not constitute a bet or wager, that neither the defendants nor any participant were certain to lose, and the alleged consideration did not hang in the balance of the outcome.

This decision by the Georgia Supreme Court may provide comfort to mobile carriers and any organization that is currently offering, or planning to offer, similar types of contests and/or promotions. Many states have similar anti-gambling statutes and regulations governing promotional contests and games. While future claims will be fact-specific, the court’s reasoning that text message fees should not be considered a bet or wager likely strengthens the hand of any contest or promotion sponsor facing a similar challenge as to the legality of text message-based entry fees.