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Text Sweepstakes Settlement Illustrates Best Practices but Answers Few Questions

4 Oct, 2011 By: Melissa Steinman, Jeffrey D. Knowles, Venable LLP’s Advertising

The recent settlement of three California consumer class actions sheds light on several issues that sponsors and others involved in premium text message-based contests should consider when planning such promotions. In these contests, consumers pay a small fee each time they send an entry via text message. The suits alleged that such sweepstakes run in conjunction with popular television programs such as Deal or No Deal, American Idol, 1 vs. 100 and America’s Got Talent constituted illegal lotteries and violated state laws in Georgia, California, New York and Massachusetts.

The California class action cases were resolved last month with a single settlement. While denying all allegations made by the plaintiffs, the defendants, which included Fox, NBC and other companies that produced, administered, sponsored and broadcast the promotions described in the lawsuit, settled the cases to avoid the time, risk, and expense of litigation defense.

The suits raised several interesting legal questions. The plaintiffs’ attorneys challenged the established proposition that an alternative method of entry eliminates the element of consideration from promotional games. They also raised the question of whether the Internet can be relied on as a free alternative method of entry. While the settlement does not address that question, it does, however, address whether consumers should receive anything of value in return for the premium rate paid for each text message entry. The settlement requires that in future similar promotions, the defendants provide something of value to entrants, in addition to the entry, in return for their payment of the premium.

While the settlement does not conclusively resolve legal issues or prevent future litigants from filing similar suits, the court’s approval of the settlement provides some measure of reassurance because a court should not approve a settlement that is clearly illegal or contravenes the law.

Although the specific facts of each marketer’s situation will dictate what actions they should take, there is general consensus among promotions lawyers on how to manage risk when running promotions that utilize entry via paid text message. Sponsors should provide an online or mail-in alternative method of entry for those that do not elect to enter by purchasing a text message entry. Sponsors should also offer something of equal value (e.g., free ring-tone or t-shirt) in return for the entry. This item should be a real product or service, otherwise available for sale at the same or greater verifiable fair market value.

Because the California settlement left questions about whether premium text-messaging promotions comply with state gambling and lottery laws, it has alerted plaintiffs’ firms to the potential for success in this area. The suits also demonstrated that litigation resulting from these promotions is costly, time-consuming and broad-reaching. Nearly everyone involved in these promotions (even if they are not listed in the official rules) can be subject to suit. Companies considering such promotions should take proactive measures to mitigate risk by cutting off the lines of attack used by plaintiffs’ counsel in these cases.

Jeffrey D. Knowles and Melissa Landau Steinman are partners in Venable LLP’s Advertising, Marketing and New Media Group. They can be reached at (202) 344-4000, or via E-mail at [email protected] and [email protected].

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