August 8, 2015

The Law of Prize Drawings: It's All Fun and Games, Until...

photo by Elliotphotos / foter

Everyone loves a game. Games activate the creative, imaginative portions of our minds in ways that captivate our attention. Games can help organizations engage with people, which is why marketing professionals love games. Businesses, governments and nonprofits have found tremendous success in garnering attention through various sorts of contests and games. Ancient rulers used games to win the allegiance of their subjects.  In more recent times...well, who among us hasn't played McDonald's Monopoly?

The uncertainty of outcomes is part of what makes games fun. Unfortunately, nefarious characters have also used games in unethical ways, causing state and federal governments to enact laws governing the use of certain games. Anyone who wishes to sponsor a game should give thought to whether these laws apply, in order to avoid running afoul of regulatory authorities and being sued in a class action. The following is a basic overview of the federal and North Carolina laws governing games and contests.


State laws restrict lotteries for two primary reasons. First is the potential for harm to the public (especially "problem gamblers"). Second, a state may create a government monopoly on lotteries, which allows it to raise money without competition. The penalties for violating these laws can be significant.
A lottery is generally defined by three elements: a chance for a prize for a price. Not all lotteries are easy to identify. A cash entry fee is certainly a telltale sign of a lottery, however, purchase requirements and noncash entry "prices" can also cause a game to be deemed a lottery. If a purchase is required to enter into a drawing or other game of chance, the event may well be a lottery. Courts in some other states have held that merely requiring participants to travel to the sponsor's premises to register is a sufficient "price" to cause the promotion to be deemed a lottery, even if the participants are not required to buy anything. North Carolina courts have never gone that far, but it should be remembered that nonfinancial, performance-based conditions to entry might cause a promotion to be considered a lottery.
A "raffle" is nothing more than a specific type of lottery. It is a game in which the prize is won by random drawing of the name or number of one or more persons purchasing chances. For-profit entities are prohibited by North Carolina law from hosting a raffle. A tax-exempt nonprofit organization, candidate, political committee, or government entity is permitted to host up to two (2) raffles per year. If a nonprofit hosts the raffle, a certain percentage of the net proceeds must be used for charitable, religious, educational, civic, or other nonprofit purposes. There are also some specific items that the net proceeds of the raffle cannot be used to pay.
Sweepstakes/Prize Drawings
Under federal law, a chance to win a prize for which no money or other item of value is paid is called a "sweepstakes." (Often we see or hear these advertised on television or radio, and the announcer rattles off "no purchase necessary to enter.") There are federal requirements regarding the disclosure of terms and conditions, and other specific items. North Carolina law covers the same subject, although the term "sweepstakes" is not used. The requirements of North Carolina and federal law are similar, but there are a few differences. 
The sponsor of a prize drawing should disclose to each participant the following information: 
  • the name of the organization conducting the contest and its principal business address
  • all conditions that a participant must meet
  • an accurate description of each prize to be awarded
  • the retail value of each prize
  • the number of each prize to be awarded
  • the odds of receiving each prize
The law also contains requirements for the precise placement of certain disclosures on any advertisements.
A disclaimer should be included in all materials related to a sweepstakes or drawing that explains in clear terms that no purchase is necessary to enter or win, and that a purchase will not increase the chances of winning.
In addition to these statutory requirements, there are additional considerations that a drawing or contest sponsor will want to address in order to limit its liability under contract law and tort law. 
Tax Reporting Requirements
The Internal Revenue Code and U.S. Treasury regulations require an organization awarding a prize to file informational returns with the IRS when the prize is valued at a certain amount (currently $600), and to withhold a certain percentage of the winnings (currently 25%) if the value exceeds another amount (currently $5,000). Failing to file or withhold can result in the organization being held liable for the tax.
Alcoholic Beverage Law
North Carolina law addresses the sale or consumption of alcoholic beverages in connection with a game of chance. Sale or consumption of alcohol cannot occur in the same room while a raffle or bingo game is "being conducted." The statute does permit a drawing to occur in an adjacent room where alcohol is not sold nor consumed. Specifically, no alcohol may be sold, served or consumed in a room when any of the following activities are ongoing: when a "prize is won," a "random drawing by name or number" occurs, a person "purchases chances," winners are announces, or prizes are awarded.
Time to Play!
By complying with the applicable state and federal laws, an organization can reap the benefits of a game without the risks. An expert who knows these rules and how to implement them can help an organization quickly and efficiently plan an event that will be fun and effective for everyone.

photo by torbakhopper / foter

Raleigh Attorney Matt Cordell has been named among the best lawyers in North Carolina by numerous organizations and peer surveys.