Prize promotions

What kind of legal problems can prize promotions create?

If entry is free, does it matter how prizes are awarded?

If the event is pay to enter, how can I make it legal?

Is winning by a bit of skill and a bit of luck almost always illegal?

What is the usual way of meeting the skill requirement?

If I don't want the hassle of tie breakers what do I do?

Can free prize draws still promote product purchase as a way of entering?

If a payment from participants to enter a random draw doesn't benefit the promoter, is the event still a lottery?

How do you avoid the gaming/betting risk?

How does the National Lottery beat the fatal pay to enter/pure luck combination?

What kind of legal problems can prize promotions create?

There are 4 principal types of aggravation awaiting the unwary:-

1. Criminal prosecution under the Lotteries and Amusements Act 1976.

Companies and "consenting and conniving" directors or managers may be prosecuted.  "Conniving" can include turning a blind eye to or being reckless as to whether an offence is being committed.

The penalties can theoretically be high with the Crown Court having the power to levy an unlimited fine or commit convicted individuals for up to 5 years in prison.  In practice however a fine of up to £5,000 is more likely plus an order to pay prosecution costs which could be £5-10,000 or more.

Usually the Gaming Board initiates prosecutions.  These are not that common, but the next one could still be against you!

2. Civil proceedings for breach of contract

Whether or not a prize promotion is free to enter, the chances are there will be a contract between the event promoter and each participant. The contract is likely to be formed the moment the punter's entry is sent off.

The terms of the contract will be the information about the event and the prize which is supplied in material advertising the promotion.

Failure to honour promises made in this information may expose the promoter to breach of contract claims by disappointed entrants.

3. Criminal Proceedings under the Betting and Gaming Duties Act 1981

If the prize event is structured in such a way as to amount to gaming or betting, HM Customs & Excise may initiate a prosecution. This occurred recently in connection with various sports "Fantasy team" prize promotions where all the ingredients of betting were present.   This rendered the promoters liable to criminal prosecution unless they had a betting licence and were paying betting duty of 37.5% on the aggregate of the stake money paid by participants and the expenses and profits of the promotion.

4. The client/agency contract under which the promotion is supplied could be void

In a recent case (see Russell v Fulling & Page in Newsfeed section) an agency sued its client for fees invoiced in respect of the supply of a scratchcard promotion. The client defended, successfully arguing that as the promotion failed to conform to the requirements of the Lotteries and Amusements Act 1976, the contract for the supply of the promotion was one for an illegal purpose, thus rendering it unenforceable and enabling the client to walk away.

If entry is free, does it matter how prizes are awarded?

Yes, it does. There are only two legal prize promotion mechanics if entry is totally free:

• where prizes are awarded by pure luck, with no element of skill whatever; and
• where winning a prize depends to a substantial degree on the exercise of skill.

Remember, "substantial degree" does not necessarily mean that you can have a first stage which uses an element of skill and a second "names out of the hat" stage. So long as the skill threshold is sufficiently low to allow a significant percentage of entrants through to the second stage, the skill requirement will not pass the "substantial degree" test, rendering the event illegal – see s14 of the Lotteries and Amusements Act.

If the event is pay to enter, how can I make it legal?

By ensuring that the event is a competition not a draw.   You can do this with a mechanic in which success depends to a substantial degree on the exercise of skill.

Is winning by a bit of skill and a bit of luck almost always illegal?

Absolutely.

What is the usual way of meeting the skill requirement?

A "tie breaker" second stage following a first skill stage. Even if the first stage is so difficult that only two get to stage two, choosing which of them wins by means of luck may create legal difficulty. The preferred way of ending up with one winner by skill is to have entrants write some words and award the prize to the words which fulfil a non- scientific criterion such as "most witty, apt and amusing".

If I don't want the hassle of tie breakers what do I do?

Remove all skill elements and make the event free to enter.

Can free prize draws still promote product purchase as a way of entering?

It is possible, but the promotion must avoid the fatal "pay to enter/random win" combination. This is done by offering a parallel free (sometimes referred to as a "plain paper") entry route. This is a popular but nevertheless dangerous tactic because the judges have consistently held that if a combined pay/free to enter event is to avoid being an illegal lottery, the free entry route must be genuine, unlimited and prominently promoted as an alternative means of entry to such a degree that substantial numbers of those entering the event take that route. The risk therefore is that the free entry method is so under-promoted and/or so complicated that the vast majority of participants pay to enter, thus rendering the event illegal.

If a payment from participants to enter a random draw doesn't benefit the promoter, is the event still a lottery?

No. If the promoter does pocket all or some of the entry payment (e.g. by sharing the proceeds of use of a premium rate telephone line) it will certainly, from a public policy point of view, heighten the risk of the Gaming Board taking an interest in the event. It is not essential, however, that the promoter receives any payment from punters as part of the entry process. It is enough that some sort of payment has to be made, and believe it or not, it is not even completely settled law that a first or second class stamp, a short standard rate telephone call or the cost of being on-line to enter an event operated from the internet, will be disregarded for these purposes as de minimis.

How do you avoid the gaming/betting risk?

The gaming aspect should be relatively easy to work round. The licensing/tax obligations that come with gaming are unlikely to apply unless all participants are playing in the same location at the same time and there is such a level of interactivity between the participants that it could be said, without stretching the ordinary meaning of the phrase, that they were all "playing a game with each other".  Beware, however, the possible "gaming" risk of interactive, real time on-line games.

As for betting, the crucial elements are the payment of an entry fee (which could include a premium rate telephone call), the winning of prizes and entrants having the power to make a selection which could determine the winner. In the last few years, HM Customs & Excise have taken the view that a number of "fantasy team" type prize events possess all these characteristics and the courts have supported them in this view, holding that the running of the event was illegal without proper registration/licensing and the payment of betting duty.

How does the National Lottery beat the fatal pay to enter/pure luck combination?

There is a special statutory exemption for the National Lottery and other similar events licensed under the National Lotteries etc. Act. There are exemptions for small raffles/draws held as part of fetes and other small scale entertainments. There are also exemptions for lotteries registered with either the Gaming Board or local authorities, but these are unlikely to be available for commercial promotions with prizes.