No Purchase Required; It’s the Law!

Law Breaking Contest run by Rackspace

I normally write about programming and Internet technologies, so this post about marketing and the law is a bit out of left field. But since I’ve had to consider the issue many times while running my prior company, and many of my readers are small business entrepreneurs, I thought this topic might be helpful. If this post can keep just one entrepreneur out of hot water, I’ll be happy I wrote it. (and if it helps you, let me know!)

Yesterday I got an email about a contest that Rackspace is offering: Win 8 months free Rackspace hosting, for up to $1000/month. Pretty good deal huh? All you have to do is sign up hosting account at Rackspace, and you might be the winner![1]

Bzzzt, wrong answer! Unfortunately Rackspace’s marketing department must not have realized they were violating a Federal Trade Commission law relating to games of chance; contest rules must include No Purchase Necessary otherwise the contest becomes a lottery and thus illegal! According to Polaris Marketing Research’s article entitled Keeping Sweepstakes Legal:

Sweepstakes are generally permitted in most states as long as participants are not required to pay for the chance to win.

Let’s take a look at an excerpt of their contest rules (85Kb PDF) (emphasis mine):

 

One winner will be drawn at random… The prize is a waiver of a customer’s monthly recurring fee specified on the Service Order Form up to $1,000 per month for eight months. The odds of winning the prize depend on the total number of qualified entries received.

To qualify for entry in the drawing all of the following requirements must be met: (1) the entrant must be a new customer… (2) the Service Order form must be for a term of at least 12 months, (3) the setup fee must have been paid by the entrant…

Limitations…apply as follows: (1) up to $1,000USD…on the winning customer’s Service Order Form will be waived each month… (2) the winning customer shall pay the amount of the monthly recurring fee in excess of US$1000 per month…

 

More to the point, from LawPublish.com’s Contests and Sweepstakes section of their Advertising FAQ for Small Business states:

Sweepstakes-type promotions that require a purchase by participants are illegal in the United States.

Just how serious is this? Someone in CVS Pharmacy’s marketing department was asleep at the switch evidently and New York’s crusading attorney general Eliot Spitzer managed to tag CVS for a $152,000 settlement on a sweepstakes violation. Excerped from the press release:

CVS … offered customers a chance to win a $1,000 … Gift Card … Consumers who … purchased Nicorette, NicoDerm or Commit, … were … entered in the sweepstakes. However, CVS did not make entry forms available … for consumers who did not purchase … and did not inform shoppers how to enter … without a purchase. "State law requires that consumers, regardless of whether they make a purchase, should have equal access and opportunity to enter and win sweepstake offers," Spitzer said.

The blog Resonable Basis offers an analysis of the CVS sweepstakes violation (emphasis mine):

…having an alternative or cost-free entry method is one factor that distinguishes a sweepstakes from a lottery. A lottery typically has three elements: (1) a prize, (2) chance, and (3) consideration (some cost) to enter. If operated by a private entity, a lottery is generally illegal. … Those that want to use a promotion must structure it as a sweepstakes and not a lottery. … Thus, a company that wants to use a sweepstakes to generate interest and sales must make sure that one of the three elements of a lottery — a prize, chance, and consideration — is absent. Those companies that want to offer a prize, which most do, cannot require consideration to enter and must give consumers an alternative — cost free — method of entry.

What’s even more painful was that CVS had gotten caught in the past! From the same press release:

The settlement with CVS follows a prior settlement in June 2004 in which CVS agreed to resolve similar allegations related to its "Trip of a Lifetime" sweepstakes with the grand prize trip to Oahu, Hawaii.

And if all this semi-legal mumbo jumbo get’s you down, the FTC has a consumer protection article entitled Prize Offers: You Don’t Have to Pay to Play! that puts it in simple terms most of use humans can understand. And the relevant point here is:

Legitimate sweepstakes don’t require you to pay or buy something to enter or improve your chances of winning … If you have to pay to receive your "prize," it’s not a prize at all.

So you can bet that Rackspace doesn’t use the Lustigman Law firm as their counsel, the authors of Experience and Peace of Mind (in) Promotion / Sweepstakes Marketing. Or if by some strange chance they do, Rackspace’s marketing department certainly didn’t run this contest by them!

Bringing this topic to a close, you might wonder why this law exists? After all, I’m sure many a legitimate market department has conceived a contest to spur sales. But even if it is done with the best of intentions, if it is a game of chance and you have to pay to play it becomes gambling, and that’s just not something most governments want to allow for many great reasons. And those that do won’t allow gambling without significant regulation and, of course, taxes!

On the other hand, if it were allowed, I can just see the spam now:

Pay only $100 for your subscription to any of the following magazines, and you’ll be entered to Win ONE BILLION DOLLARS!

Your chance to win is 1 out of 1 trillion.

 

After posting this, my next step will be to contact Rackspace’s CEO and let him know he needs to quickly send out a correction. Wanna bet someone’s head is going to roll in the Rackspace marketing department?

AND FINALLY, don’t let this be you.

  1. I won’t even mention that at first glance the email implied that everyone could get eight (8) months free…