Franchise System Marketing: Factors to Consider when Structuring a Sweepstakes
Customer promotions / "sweepstakes" are a popular marketing tool for promoting franchise systems sales and growth. However when considering the implementation of these marketing programs, franchisors and lawyers need to be aware of "hidden pitfalls" and regulations associated with both federal and state regulation. Recently when discussing this issue with Kenneth A. Goss, Esq. - an in-house franchise to a national franchisor - Mr. Goss raised some interesting points that I believed would be helpful to our readers. The following is Mr. Goss' guest post on this important topic:
(Guest Post: Kenneth A. Goss, Esq.) The issue of franchise system promotions involving "consumer oriented" sweepstakes is an issue that franchisors and franchise lawyers must carefully evaluate and are a powerful and effective marketing tool franchisors often used to increase franchise system sales of its product. However, a franchisor that does not comply with applicable law risks possible litigation, administrative action and criminal penalties if, for example, the franchisors seemingly innocuous sweepstakes turns out to be an illegal lottery governed by state gambling laws. The following is a brief overview of some of the important factors that franchisors should consider before conducting a sweepstakes.
A sweepstakes is defined by federal law as a game of chance for which no consideration is required to enter. Typically, franchisors use sweepstakes to incentives consumers to buy a particular product by offering customers a chance to win a prize. There is no single uniform law applicable to sweepstakes. Instead, franchisors interested in conducting a nationwide sweepstakes face having to comply with both federal law and the law in each state where the sweepstakes will be conducted.
A starting point in evaluating a sweepstakes is the federal Deceptive Mail Prevention and Enforcement Act (the "DMPEA"). The DMPEA applies to sweepstakes entries sent through the mail, which, in most cases, is necessary to satisfy the "no consideration" element of a sweepstakes. The DMPEA states that any sweepstake entry is deemed "non-mailable" if it does not "clearly and conspicuously" disclose certain information including, among other things, the terms and conditions, the sponsor and sponsor's address, the odds of winning, and all relevant particulars about the prize(s) being offered. The DMPEA gives district courts the authority to enjoin a franchisor that fails to comply.
After evaluating the DMPEA, franchisors and franchise legal counsel must evaluate applicable law in each state in which the franchisor intends to conduct the sweepstakes. While state law will vary, at a minimum, franchisors will be required to issue official rules and disclose the terms and conditions of the sweepstakes. Florida, New York and Rhode Island each require sponsors of sweepstakes to register with the state if the total retail value of all the prizes is greater than a certain dollar threshold. Florida and New York also require the posting of a bond and submission of winner lists. California and Texas regulate sweepstakes to the point where compliance in those states may be cost prohibitive to most franchisors. In each case, records must be kept in accordance with applicable law.
State laws applicable to sweepstakes vary widely from state to state. The good news for franchisors is that many of the requirements overlap, meaning that a franchisor with a properly structured sweepstakes can be compliant in more than one jurisdiction and realize the marketing benefits that sweepstakes can have for a franchise system.
