What’s in a Game? Promotions and Advertising on the ‘Net (Part 2 of 2)

As we mentioned in last month’s issue, sweepstakes, contests and promotions are primarily regulated by state law, although federal statutes and regulations must be considered. Jurisdiction and eligibility across borders, language, currency restrictions, licensing and export of technology, liability, billing and payment, whether a deposit to play might be construed an account for banking purposes, or whether gathering non-public, personally identifiable information about contestants may have privacy implications, are just a few of the issues that transcend the “gaming” aspects of any legal analysis.

On the U.S. federal level, although the FTC can take regulatory action and sue advertisers for deceptive or unfair acts and practices, it relies heavily on the states to regulate the industry. The FTC has, however, promulgated rules that do have significant impact on promotions. For example, the Children’s Online Privacy Protection Act (“COPPA”) was enacted to protect children from marketers who collect or use personal information obtained online from under-age children without parental permission, and authorized the FTC to develop a rule that requires “verifiable parental consent.” Because contests are extremely popular for Internet marketing, online advertisers must be cognizant of COPPA if a portion of their online traffic is, or is likely to be, children under the age of 13.

To illustrate the maze of legal and regulatory issues, let’s use an example: Joe’s Airline, Widget and Screen Door Company wants to conduct a contest on the Internet in which participants are charged $2 to play successive rounds of chess, with prizes at various levels and a grand prize of a million dollars. Our promotion is really a unilateral offer to enter into a contract, subject to terms and conditions (e.g., rules) agreed upon through some manifestation of acceptance. Participants accept the offer by performing a required act—registering, paying, selecting an “I ACCEPT” link—and a binding contract is formed. Point number 1: if Joe fails to adequately disclose the rules upon which the offer is made, the promotion could be construed as an illegal lottery, rather than a contest. Point number 2: Joe better get the rules right and disclose them properly because there are cases which indicate once a participant enters (“accepts”), Joe cannot change the rules (i.e., unilaterally amend the contract). Something to think about: Could each chess game be viewed as a new contest, permitting amendments prospectively?

In general, to qualify as a contest, skill, and not chance, must determine the outcome, and chance may not determine the winner or prize amount. Most, but not all, state laws distinguish games of skill from games of chance, although states do not use a uniform standard to differentiate between the two. While some states prohibit requiring consideration to engage in a promotion where a prize is awarded, most states do not prohibit the payment of money if the promotion is a bona fide contest of skill. What constitutes skill? Good question. The decision is often a question of fact, and when the Internet is involved, evidence can be complex and technology-based, straining judges and juries. Two criminal courts in New York judging the legality of a shell game and a card game reached opposite conclusions.

A number of states have disclosure statutes which apply. Some (e.g., California) arguably apply to skill-based contests, while others do not. Many prize notification statutes were not intended to apply to skill contests, but are worded broadly to include any promotion requiring an entry fee or a purchase. Joe should also be aware that some state gambling laws do not limit their application to games of chance, but focus on whether players are asked to risk or wager something of value. In those states, a skill-based contest that involves betting or offers prizes dependent on the number of entries or the amount of entry fees should be reviewed carefully against state gambling laws. Remember the three elements that constitute an illegal lottery? A prize, consideration and chance. By including an equal and alternate means of entry in which there is “no purchase necessary” to enter or win, and by avoiding a payment (i.e., consideration), Joe can introduce the element of chance in the determination of the winner and not be in violation of federal or state law.
Maybe!

What’s in a Game? Promotions and Advertising on the ‘Net (Part 1 of 2)

Marketing and promotional experts already know that with rare exceptions (e.g., the government), lotteries are illegal. An illegal lottery is a game or contest in which the outcome is determined by chance, the entry requires some form of consideration, and the winner is awarded a prize. Over the years, these three elements have been the subject of scrutiny, regulatory opinion and judicial decision. Although interpretive rules are not cast in concrete, a prize can be nominal in value; consideration can take the form of visiting a store or filling out a lengthy customer survey; and, if chance plays a material factor in determining the outcome, no amount of skill in any of the other elements of the promotion will save the day.

Marketing and promotional experts use “no purchase necessary” or “free alternate means of entry” as tools to avoid consideration—in general, promotions with a freely available alternate means to enter may be based on chance and may have a prize. Some promotions involve skill—eliminating chance. Shooting a hole in one at golf or solving a mathematical puzzle are examples of skill-based contests. Of course, the skill must be bona fide—guessing the number of beans in a jar is not a real skill, no matter how good one becomes at guessing.

Against this backdrop, advertisers, eager to get their message in front of consumers, are finding life increasingly difficult. Have you noticed increased advertising in movie theatres, outdoor signage or on uniforms of your favorite sports figures? Distribution technology and storage and recording media have given us the ability to fast-forward or avoid viewing messages that previously required you to physically leave the room or change the channel! Hmmm…so people are spending more time on the Internet—browsing, surfing—how about advertising there?

Well things seemed to be looking up for advertisers—cookies, pop-up ads, banners, above and below the fold advertising, mass commercial e-mail. Seemed like technology was coming to the rescue. But, enter their legal and technical counterparts—cookie disablers, pop-up blockers, spy-ware and ad-ware detection programs, SPAM and other filters, coupled with legislation and regulation over intrusive technologies or programs that invade privacy or transmit information without consent. Getting the message across is still getting tougher.

One approach is the increased use of “product placement”—insertion of branded products into actual programming “content.” Branded products become part of the action—someone is drinking a beverage, driving a car, using a computer—all branded. One of the most interesting developments in the world of product placement is taking place in interactive gaming. Interactive games require players to sit, often for hours, staring at a screen, paying close attention to the game. Background, backdrop, even music, contribute to making games realistic and become music to the ears of advertisers targeting a captive audience.

Can interactive, Internet-based games require a participant to pay to enter and participate—online “pay-to-play” games—and provide the winner cash or prizes? Here’s how such a game is typically structured: the participant downloads licensed programming for installation on his or her computer—the platform from which instructions and controls are transmitted. When combined with instructions and controls from team members or opposing players, the programming allows the game to be played. To enhance the gaming experience (and also to bolster the argument these are predominantly skill-based, not based on chance) many gaming platforms have sophisticated mechanisms to rate players and provide “matches” of comparable skill. Assuming games are skill-based, many (but not all) jurisdictions permit the payment of cash to play and the award of a prize. In some jurisdictions (but not all), the prize can even be derived from the number of players and the amounts paid by the participants. Check with Rimon before making any assumptions.

Regulation of Internet contests in the United States falls into four broad legal categories: (a) regulation of sweepstakes, contests and prizes; (b) regulation of unfair and deceptive trade practices; (c) regulation of gambling; and (d) consumer protection. We will turn to a more comprehensive legal review in next month’s issue, but we will tell you that if your game attracts children, you had better ensure there are mechanisms enabling you to comply with special regulations that apply. These are not limited to issues involving the age of majority and the ability of participants to legally enter into binding contracts (e.g., Alabama and Nebraska = 19; Mississippi and Puerto Rico = 21). Compliance with the Children’s Online Privacy Protection Act (“COPPA,” not to be confused with COPA or Copacabana—anyone still reading?), considerations of parental consent, propriety of content and a host of other regulations and legal considerations, come to mind.

Stay tuned for next month’s issue to find out more about these legal issues.