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.

Of course, in the alternative, AT&T claims that to the extent AT&T is not directly liable, secondary liability attaches via the doctrines of inducement, vicarious and contributory liability—essentially, liability for contributing to and benefiting from the unlawful performance of ringtones by AT&T customers. This argument is likely designed to cut against the exemption codified in the Copyright Act allowing the “performance of a nondramatic literary or musical work … to the public without any purpose of direct or indirect commercial advantage… if there is no direct or indirect admission charge.” (see 17 U.S.C. § 110(4)). This would, in theory, prevent ASCAP from proceeding against individual consumers who, although they may be publicly performing a musical work according to Copyright Act, are doing so without commercial advantage and thus not infringing.

ASCAP also reveals in its motion that it has consistently licensed other mobile carriers’ sale and distribution of ringtones, charging “2% of revenue and an alternative usage-based fee calculation.” In fact, ASCAP claims that prior to the Second Circuit’s 2007 decision that digital downloads of sound recordings do not trigger the public performance right (see United States v. ASCAP, 485 F. Supp. 2d 438 (S.D.N.Y. 2007)) (the “Download Decision”), “very few parties ever questioned or challenged ASCAP on the question of whether ringtones required public performance licenses.”

For business people and transactional lawyers alike, perhaps the most notable takeaway from ASCAP’s motion stems from AT&T’s claim that the ringtone providers (e.g., Jamster, ThumbPlay, etc.), not AT&T, “bear contractual responsibility for securing public performance rights.” In other words, AT&T is stating that if public performance royalties are due, it is the responsibility of content providers, aggregators, and ringtone creators to make payments to the performing rights organizations, not distributors like AT&T and other mobile carriers/network operators. Put simply, this contention highlights the need for parties to these types of agreements to be more explicit than ever about which party will be responsible for performance royalties if and to the extent any public performance rights are implicated. Here, AT&T is pointing the finger at the providers, and to the extent this tactic works, the providers would be responsible for paying royalties based not only on their own revenue, but the mobile carriers’ revenue, which, according to the ASCAP’s standard licensing agreements, is deemed part of the provider’s “client revenue” that is included in the “royalty base” for calculating provider payments to ASCAP. Moreover, any party ultimately saddled with responsibility for making performance payments would not only be required to pay 2% of revenue to ASCAP, but would also be required to remit similar amounts to the two other major performing rights organizations in the U.S. (i.e., BMI, SESAC), raising the total performance royalty rate to more than 6% of revenue–a sizeable payment, and in addition to the mechanical reproduction fees due to those same publishers and writers that are members of the performing rights organizations.

Ultimately, ASCAP, in its attempt to receive royalties from AT&T, devotes the majority of its motion to arguing the extensive nature of ASCAP’s control over the ringtone in an effort to distinguish ringtones from full-audio downloads addressed in the Download Decision, as the outcome of this case may very well turn on the question of the party responsible for triggering the performance. In other words, if an ongoing connection is maintained or required whenever the ringtone is played on a consumer’s phone (e.g., similar to the connection required when a sound recording is streamed over the internet), then the second kind of public performance (i.e., the digital transmission performance) may be triggered. On the other hand, if AT&T can successfully argue that the ringtone is downloaded only once to a consumer’s phone (similar to an iTunes track) without simultaneous or near simultaneous playback and continues to reside on the device exclusively, then merely prompting the playback of same by AT&T for an incoming call should fall more squarely within the confines of the Download Decision.

No matter what side you come down on, ASCAP’s PR machine has been slammed in the past for seeking payment from less than profit driven adversaries, including campfire balladeers such as the Girl Scouts. This time around though, eager to combat a slew of negative news reports trashing ASCAP’s pursuit of ringtone monies, ASCAP moved quickly to address the matter with its own membership, dispatching the following clarification to its writers and composers:

“Bottom line, ASCAP is striving to license those that make a business of transmitting its members’ music. This holds true for any medium where businesses have been built by using this music as content or a service – whether terrestrial broadcast, satellite, cable, Internet or wireless carriers providing audio and video content. To be completely clear, ASCAP’s approach has always been to license these businesses – not to charge listeners/end-users.”

Also, noteworthy in ASCAP’s response, is the fact that ASCAP states that it is “in Federal Rate Court with the two largest U.S. wireless carriers,” evidencing that ASCAP will be staging this battle for ringtone royalties on multiple fronts, including with Verizon, AT&T and possibly ringtone providers supplying the mobile carriers.

Needless to say, this will be a long, hard-fought battle and the public performance organizations, still reeling from the Download Decision (which incidentally is still in the appeals process), will not go quietly when the mobile carriers continue to enjoy revenue in the billions from the sale of ringtones. As always, we will continue to closely monitor this case given the potential impact on our clients’ businesses and the need for licensing and distribution contracts that accurately delineate each party’s roles and responsibilities in this constantly evolving digital space.

• E-commerce sites, especially Amazon, the biggest of them all, got some bad news as the New York Supreme Court upheld the validity of a law requiring e-tailers to collect state sales tax. Amazon and Overstock.com sued based on a 1992 Supreme Court ruling that a company had to have a physical presence in the state to collect taxes.  Appeals are likely but for now, it looks likely that sales tax on e-commerce is inevitable.  More information is here.
• A task force has been formed by four Madison Avenue trade groups, with the support of the Council of Better Business Bureaus, to develop industry guidelines for new forms of online behavioral advertising and to lobby the government regulators and policymakers on the benefits to consumers.  The initiative is in response to potential government regulations that would limit new forms of online user targeting.  More details here.
• Reports out of Washington say that Julius Genachowski is being considered to take the chair of the Federal Communications Commission.  Although he was a former general counsel at the FCC and knows the agency well, he is better known as a digital media veteran, a longtime executive at InterActiveCorp and founder of a D.C.-based VC firm which has invested in numerous Web companies.  Here’s a piece from all things digital.com discussing the proposed appointment and industry reaction.
• Two consumer groups are set to appear before the FCC to seek an investigation into mobile ads.  The Center for Digital Democracy and US Public Interest Research Group claim that mobile ad firms don’t fully disclose the extent of the information they collect from consumers.  Here’s an article from the San Francisco Chronicle detailing the debate.

According to the MMA, an Ad Impression is the measure of the delivery of an advertisement from an ad delivery system in response to a user request, whether it is an active or passive act on behalf of the user. The definition specifically includes commentary on key concepts to be considered in defining a valid ad impression, including: (1) an acknowledgement that an ad request is NOT the result of robotic activity, (2) a recommendation that cache-busting techniques should be utilized to prevent undercounting of impressions due to delivery of cached responses to user ad request, (3) a recommendation that measurement of ad impressions should occur as late in the ad delivery process as possible to ensure users have the greatest possible opportunity to view the ad and (4) that advertisements delivered to mobile users without an accompanying request for the ad (such as in the case of pushed content) should not be counted unless there is evidence that a user accesses such ad (which, the MMA points out, should apply to idle screen ads, offline ads and cached ads).  The MMA also calls for more “responsible” reporting on behalf of the measurement organizations to identify any deficiencies/limitations in accurately capturing ad counts.

In defining Streaming Video Advertising, the MMA encourages ad counters to pay attention to the buffering that occurs upon the initial delivery of a video commercial, in order to maintain the concept of counting only when the user has the greatest “opportunity” to view the ad (i.e., a valid streaming video ad impression should only be counted once the video ad begins to appear to the user).  The MMA also encourages the development of functionality for media players to be able to identify the buffering prior to the display of the video ad, and points out the importance of adhering to certain caching principles (as outlined in the definition of Ad Impression), as significant caching functions are often used to facilitate the delivery of streaming videos.  As with display Ad Impressions, the MMA says that the measurement of a Rich Media Ad Impression should occur as late in the process as possible, and encourages movement towards client-side implementation for counting mobile Rich Media ads. 

Lastly, MMA defines Click Measurement in the context of ad impressions that include clickable content, i.e., content that a user may click on to obtain additional content or initiate a transaction, and states that in the event a click transaction may be initiated by user activity that is in proximity to the clickable ad, the specific parameters used for measurement of the associated clicks should be disclosed.  Moreover, the MMA says that regardless of the differing methods used for click counting, these methods should be fully disclosed to users and that development and use of unique click identifiers, as well as establishing processes to filter and exclude invalid clicks from measurement counts, should be encouraged.

The MMA’s efforts call for a more consistent, globally applicable measurement process, which they say is essential for the continued growth of mobile advertising campaigns and future industry standardization.  In effect, the MMA is clearly looking to inspire building a strong currency that can be independently measured and audited.  The recommendations reflected within the new definitions will also bring a level of culpability and transparency to establishing standards for mobile ad currency that the industry has not yet seen, which will inevitably impact how companies structure their agreements with third parties with respect to calculating ad impressions for purposes of minimum advertising commitments, revenue shares based on CPM and CPC, promotional placements, etc.   It will be interesting, and important, to take note of how the movement towards standardization plays out in practice, and if it means our clients can look forward to a sense of predictability and uniformity when striking deals that have mobile ad sales components.  

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.

  Pending Class Action Points to Potential Pitfalls

While not directly involving mobile digital content provides, a class action lawsuit pending in Federal court in Massachusetts has brought into focus a practice that such providers must be aware of and protect themselves against. At issue in Knox and Esparza v. m-Qube, Inc. is “cramming” pursuant to which a cellular subscriber is automatically billed for mobile content services that were not purchased.

The plaintiffs in Knox allege that m-Qube, a third-party provider of billing services for wireless carriers, unlawfully billed for services that the plaintiffs did not order. Specifically, the plaintiffs allege that m-Qube continued to bill for services that had been purchased by prior subscribers using their mobile phone numbers, which were “recycled” or “refurbished” after the prior subscriber terminated his or her cellular contract. The parties have briefed a motion to dismiss, on which oral argument is scheduled to be heard at the end of the month.

Curiously, while the complaint alleges wrongdoing on the part of the content mobile digital providers themselves (in particular, negligently failing to determine when authorization was provided for billing for the mobile content), no content providers were named as defendants. Notwithstanding that fact, the allegations of the case do provide critical guidance to mobile digital content providers when entering into agreements with wireless carriers.

Typically, wireless carriers and/or their third-party billing vendor(s) assume primary responsibility for obtaining authorization from subscribers to bill such subscribers for the content purchased, whether on a subscription, per-view or per-download basis, as well as for managing the billing and collections. The content provider is paid a portion of the revenue remitted by the subscriber and collected by the carrier and/or third-party vendor for the content purchased.

But what happens when, as in Knox, the subscriber claims he or she did not request the content and/or authorize being billed for it? Could the content provider be held liable under those circumstances, where it has received the economic benefit of such unauthorized transaction?

The law currently is unclear on this subject. However, mobile digital content providers may mitigate their risk under these circumstances by ensuring that their content license agreements with wireless carrier and mobile content aggregator partners clearly provide that the carrier or aggregator, as applicable, will indemnify the content provider for any claims that may arise as a result of such billing practices and that such partners’ independently procure and maintain sufficient insurance coverage for losses incurred in connection with any such claims .

While an argument could be made that the indemnification provisions of many content license agreements can be broadly construed to cover such a situation (e.g. where the carrier must indemnify the content provider for claims arising as a result of the carrier’s wireless service generally), a better practice would be to expressly cover claims related to billing and other potential disputes that may arise between the subscriber and the carrier and/or its agents.