Sales promotions, such as sweepstakes and contests, can be an important marketing tool for many businesses. Promotions can increase sales by growing brand awareness and creating incentives for consumers to buy products. While these promotions can be a smart marketing option, they also come with legal hurdles that can create extensive liabilities for companies (see Practice Note, Sales Promotions, Contests and Sweepstakes: Regulatory Framework). For example, a court might determine that a sweepstakes is in fact a private lottery, which is generally illegal in most states.

A class action recently filed against New York Road Runners, Inc. (NYRR), the organizer and operator of the New York City Marathon, illustrates these legal hurdles and should encourage businesses to review their own sweepstakes and contests to ensure they comply with federal and state laws prohibiting private lotteries (Konopa v. New York Road Runners, Inc., 1:16-cv-00450-KBF (S.D.N.Y 2016)).

This legal update includes practical tips and resources to help businesses plan promotions and comply with federal and state laws.

On January 21, 2016, Charles Konopa and Matthew Clark filed a class action lawsuit against NYRR for allegedly violating New York's law against privately operated lotteries. Like most states, New York prohibits private lotteries, which include any promotion with the following three elements:

The plaintiffs specifically alleged that NYRR violated New York's law against lotteries by charging prospective runners a non-refundable, $11 processing fee to enter a random, chance-based drawing to run in the NYC Marathon.

As part of this class action, the plaintiffs have requested that NYRR:

NYRR is not the first major organization to face recent allegations that it is operating an illegal lottery based on how it structures its promotion. In 2015, the World Triathlon Corporation (WTC), the company that organizes and promotes Ironman triathlons, agreed to forfeit almost $3 million in lottery proceeds to the US government (see DOJ: World Triathlon Corporation (Ironman) Forfeits More Than $2.7 Million in Lottery Proceeds). The Department of Justice alleged that WTC held private lotteries prohibited by Florida law (Fla. Stat. § 849.09) and violated the Illegal Gambling Business Act (18 U.S.C. § 1955). The specific terms of the lotteries varied, but in each case WTC charged certain athletes $50 for the chance to be randomly selected to compete in the Ironman World Championship. The government stated that WTC was permitted to give away the chance to participate in the competition, but violated the law when it charged athletes money for the chance to win.

Many companies rely on sweepstakes (a promotion in which prizes are awarded based on chance) and contests (a promotion in which prizes are awarded based on skill) to encourage consumers to interact with their brands. However, as the NYRR and Ironman cases demonstrate, companies must be careful not to structure these promotions as illegal lotteries.

If a business is running a sales promotion in which it offers a prize, the business should structure the promotion so that it does not include all three elements of a lottery (consideration, chance, and a prize) by either:

On September 9, 2016, NYRR entered into a settlement agreement with two of the plaintiffs in this suit. The settlement requires NYRR to: