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Do sweepstakes and contests sponsors have to award all prizes?

Prize problems

Most people would think that giving the prizes away in a sweepstakes or contest would be the easiest and most enjoyable part of being a sponsor. While in most instances that is correct, there are times when giving a prize away can be very difficult or maybe even impossible.

Recently, a client called and told me that they had received only one entry in a contest they sponsored. To make matters worse, the entry they received did not meet the criteria set forth in the official rules. They told me that their official rules state that “all prizes will be awarded” and asked if they had to give the prize to the only entrant, despite the fact that its entry did not meet the contest’s requirements.

There are several scenarios that can cause problems with awarding a prize. One common situation is a winner who does not want to accept the prize because of the taxes she or he will be responsible for paying. This usually occurs when a prize is a car, boat, vacation package, or another high-value prize that has significant tax implications.

Another situation that crops up is the same one this client encountered: At the conclusion of a promotion, no entry meets the requirements set out in the rules. The problem again drives home the importance of creating clearly written rules. If it is obvious that the entry does not satisfy the requirements contained in the rules, it is much easier to refuse giving the prize to a sole entrant. If the rules are vague or ambiguous, it is more likely that the entrant could challenge such a decision.

Other scenarios that may make it difficult to give prizes away are promotions that involve scratch off cards, matching pre-determined numbers, or other types of promotions where it may be clear that not every prize will be awarded.

Unfortunately, this is not a well-settled area of the law. Several states have statutes that require that all prizes must be awarded. But some of these states require only that the sponsor must award all prizes “in accordance with the terms of the Official Rules,” which allows the sponsor to include a provision in the rules stating that unclaimed prizes will not be awarded. Other states require in certain circumstances that unclaimed prizes must be awarded in a second chance drawing.

In 1999, Florida’s Attorney General sued retailer Service Merchandise, alleging it had violated the Florida gaming statute that states it is unlawful to fail to award prizes offered in a promotion. Despite the fact that Service Merchandise had a provision in its rules that stated that unclaimed prizes would not be awarded, Florida took the position that at least all of the “major prizes” needed to be awarded. Although Florida has not brought additional cases based on this premise in subsequent years, this case could be used to argue that a sponsor should be required to conduct a second chance drawing for any unclaimed major prizes in Florida. 

Questions about when it is permissible to not award all prizes described in the Official Rules, need to be reviewed by a lawyer who is experienced in sweepstakes and contest law. Whether a statement in the rules such as “all prizes may not be awarded” protects a sponsor must be analyzed in a case by case basis.

Dale Joerling is the chair of Thompson Coburn’s Advertising, Marketing and Promotion Law group. He is editorial director of the Sweepstakes Law Blog. You can find Dale on  and Twitter, and reach him at (314) 552-6058 or joerling@thompsoncoburn.com.

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Sweepstakes nightmares: Your prize provider drops out

A staffer at our law firm is not feeling amused by a certain amusement park. She recently won a sweepstakes for a fully-paid trip for four to this park. But now two weeks out from the trip, she and her family have no plane tickets, no room key and a growing animosity for the company.

The amusement park is providing the prize, but it’s an L.A. broadcast company that sponsored the sweepstakes. And it’s that company that will be in the lurch if this woman’s trip falls through and she takes her grievances to Twitter.

This PR nightmare could unfold for any corporation that launches a sweepstakes. And the fallout could be serious: Companies beware the wrath of a consumer with social media savvy and a serious axe to grind.

The bright side for business marketers? The nightmare can be averted with a little advanced planning. Namely, a good written agreement between the sweepstakes sponsor and the prize provider.

While most of our clients are sweepstakes sponsors, we do represent prize providers. Prize providers typically don’t want to be cosponsors of the promotion. They also want to avoid being subject to any liability if the promotion runs into trouble.

Sweepstakes sponsors have their own concerns. They depend on prize providers to supply prizes that are precisely as described in the official rules. Sponsors also want to sidestep any risk associated with the prize or the use of the prize by the winners. (If a lucky sweepstakes winner contracts food poisoning from his lifetime supply of hotdogs, the sponsor wants the prize provider to be on the hook for the hospital bill.)

For these reasons, it’s usually in the best interest of both the sponsor and the prize provider to enter into a written agreement that sets forth the details of the arrangement.

There is no one-size-fits-all agreement that can be rolled out for every sweepstakes. However, here’s  several items that sweepstakes and contest sponsors should consider adding to any prize provider contract. 

8 contract elements that could save your sweepstakes

      1. Prize description

      This description should duplicate the prize description contained in the promotion’s official rules. But add specific details about who will deliver the prize, when it will be delivered, and any other restrictions. For example, if travel for an amusement park promotion won’t apply if the winners live within 250 miles of the park, get that down in writing.
       
      2. Approximate retail value

      Figure out the approximate retail value of the prize and include it in the rules. And remember to spell out that winners are responsible for paying taxes on their prizes when Uncle Same comes knocking.

      3. Legal releases

      Litigation looms for any online sweepstakes that goes bad, so make sure your agreement includes the proper mutual indemnity provisions and release of liability clauses. Sponsors and prize providers typically split up the liability. Sponsors step up and take responsibility for making certain that the sweepstakes is legal and complies with all federal and state laws. Prize providers typically assume responsibility for delivering the prize and honoring the warranty for the product.

      4. Copyright clearance
       
      Secure a license for the use of any trademarks, copyrights, and other intellectual property connected to the promotion. If your online sweepstakes is giving away a Hunger Games archery set plastered with Katniss’ likeness, make sure you’ve got the official OK from Lions Gate Entertainment.

      5. Timeline

      Include a clear schedule and time table for delivering the prize. We advise against a “30 minutes or less or it’s free” claim.

      6. Tax warnings

      Remind prize winners that it’s up to them to comply with state and federal tax laws. Many consumers subscribe to the incorrect belief that they owe no taxes if the prize is less than $600. Sweepstakes sponsors have an obligation, too: If the prize worth more than $600, then they must send the winner an IRS form 1099-Misc. at the end of the year.

      7. Contingency plan

      Don’t forget to spell out exactly what happens if the promotion is cancelled, if the winner refuses to accept the prize, or if the entries have become compromised in some respect.

      8. Exit strategy

      For all the promotion and buzz you create for an online sweepstakes, the last thing you want to see is your prize provider go kaput or file for bankruptcy. But if the worst happens, detail which party will be responsible when the winners come calling. 

Avoid the vitriol from a sweepstakes winner who starts bashing your company on Facebook, Twitter, or the highly populated message boards of online sweepstakes clearinghouses like Sweeties Sweeps. Tuck these provisions into the fine print of your prize provider agreement and save yourself from some serious headaches if your sweepstakes goes south.

Dale Joerling is the chair of Thompson Coburn’s Advertising, Marketing and Promotion Law group. He is editorial director of the Sweepstakes Law Blog. You can reach Dale at (314) 552-6058 or djoerling@thompsoncoburn.com. 

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The IRS wins every sweepstakes

Aside from the winners, there’s no one more excited about sweepstakes prizes than the IRS. States that collect income taxes get pretty tickled, too.

Many sweepstakes winners don’t realize they have partners when it comes to accepting their prize. The IRS and state treasurers don’t care who wins the prize because they are guaranteed to receive a share of virtually every prize awarded. (They may, however, root for a winner in the highest tax bracket.)

Thompson Coburn’s tax gurus can speak to this more specifically, but here are some basic facts about state and federal tax laws that sweepstakes creators need to know.

The IRS and many states consider the value of a sweepstakes prize as “other income” for the winner and treat it like his or her salary. If a sweepstakes has a cash prize, the “income” is obviously the dollar amount of the prize. If the prize includes non-cash items or services, it’s the sponsor’s responsibility to determine the approximate retail value (ARV) of each such prize.

If the ARV of the prize is $600 or more, the sponsor (or the prize provider if the sponsor is not furnishing the prizes) must notify the winner of the amount of “income” they will receive and send the winner an IRS Form 1099-Misc. at the end of the year. 

One of the questions that I routinely receive is whether a person who wins a prize valued under $600 has to pay any tax. It’s a widely held but incorrect belief by many that if the prize value is less than $600, the winner isn’t required to pay any income tax. This myth may be based on the fact that a winner will not receive a Form 1099 Misc. But that doesn’t release the winner from paying income tax. Sweepstakes winners are required to pay taxes on the value of the prize they have won, regardless of the value of that prize.

Sponsors should make it clear to all persons entering the sweepstakes that the winner will be responsible for all taxes. At a minimum, this language should be included in the official rules. I generally like to put this disclosure in bold type so that it is very conspicuous even if an entrant doesn’t read other portions of the rules.

Also, I don’t believe the sponsor of a sweepstakes should provide advice to a winner concerning tax laws and regulations. The better practice is to tell winners that any such questions should be directed to the winner’s tax lawyer or advisor. Similarly, because tax laws are constantly changing, I want to remind all readers of this blog to consult with your own tax advisor before creating your next sweepstakes.

Dale Joerling is the chair of Thompson Coburn’s Advertising, Marketing and Promotion Law group. He is editorial director of the Sweepstakes Law Blog. You can reach Dale at (314) 552-6058 or djoerling@thompsoncoburn.com.

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