Ad Law Access : Washington D.C. Advertising Lawyer & Attorney : Kelley Drye & Warren Law Firm : New York, Chicago, Connecticut, New Jersey, Brussels

Last week, plaintiffs filed a class action lawsuit against McDonald's and two of its agencies, arguing that the companies violated the Illinois Prizes and Gifts Act in the context of the "2011 Monopoly Game at McDonald's."

Among other things, the Prizes and Gifts Act requires sweepstakes sponsors to make a list of up to nine disclosures in any "written promotional prize offer," a term that is not defined. The plaintiffs argue that the small Game Stamps consumers collect as part of the Game constitute written promotional prize offers, and that McDonald's failure to make all of the relevant disclosures on the Game Stamps constitutes a violation of the Act. As a result, the plaintiffs claim that they suffered a loss and are entitled to damages.

Although McDonald's did not include the disclosures on the Game Stamps, Game materials referred consumers to the Game's Official Rules for details, and the Official Rules included the required disclosures. This suit challenges a practice that is common in the industry, so companies that offer these types of instant win games should pay attention as they case develops. 

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The Missouri Attorney General recently filed a suit against Gridiron Fantasy Sports and its owner for allegedly defrauding consumers by failing to award prizes to the winners of fantasy sports leagues.

Participants in the fantasy football and baseball leagues were required to pay entry fees for a chance to win prizes. At the end of the 2010 season, the company notified winners and told them how much they had won. During the investigation, however, the AG discovered that the company failed to pay out at least $151,261 of the promised prizes. The suit alleges, in part, that the company used the fantasy baseball entry fees to pay the fantasy football winners and the football entry fees to pay the baseball winners. Because the amount of money available would depend on the number of participants, the company could not guarantee the prizes.

The AG is asking the court to issue injunctions prohibiting further violations of the law, to require the defendants to provide full restitution to victims and pay all court and investigative costs, and to require the defendant to pay the state a civil penalty and an amount equal to 10 percent of total restitution ordered. 

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Social media has revolutionized the way companies run sweepstakes, contests, and other promotions. Not only does social media make it possible to do things that weren’t done a few years ago, it also makes it easier. Maybe too easy. Because of that, some companies forget that these promotions are subject to various laws, special requirements, and unique risks. Click here for an article that gives an overview of what you need to know before you run a social media promotion.

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This week, Google launched Google+ Pages, a place where companies can post content and interact with consumers. In many ways, Google+ Pages is similar to Facebook Pages, but it also includes some unique functionality and integrations with Google’s search engine. Companies that are considering establishing a presence on Google+ should note, however, that Google imposes at least one limitation that Facebook does not: Google prohibits companies from offering various types of promotions on the site.

The Google+ Pages Contest and Promotion Policies states, in part: “You may not run contests, sweepstakes, offers, coupons or other such promotions (“Promotion”) directly on your Google+ Page. You may display a link on your Google+ Page to a separate site where your Promotion is hosted so long as you (and not Google) are solely responsible for your Promotion and for compliance with all applicable federal, state and local laws, rules and regulations . . . .”

Google reserves the right to block or remove pages that violate the Policies, so companies should be careful to ensure they comply.

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In 2007, several companies offered text-to-win sweepstakes in conjunction with the American Idol, The Apprentice, Deal or No Deal, and 1 vs. 100 television shows. Soon thereafter, plaintiffs filed class action lawsuits arguing that the sweepstakes violated gambling laws in Georgia and lottery laws in California. The Georgia case was decided favorably in 2008, when the Georgia Supreme Court determined that the sweepstakes did not constitute gambling. The California case had been pending until the parties announced a settlement last week.

Although the defendants deny that the sweepstakes were unlawful, they agreed to settle the cases. As part of the settlement, the defendants agreed to refund all premium text messages fees paid by members of the class, to pay more than $5 million in fees and costs, and to consent to a five-year injunction barring them from offering any sweepstakes in which people who enter by paying premium text message charges do not receive something of comparable value to charges in addition to the entry.

Because the case settled, we don’t have a definitive court ruling that examines whether or not the sweepstakes were lawful. Nevertheless, the lawsuit and settlement highlight that there are a number of risks associated with text-to-win sweepstakes. To reduce the risks of challenge, companies that offer text-to-win sweepstakes with premium fees should consult with their legal teams early in the planning process. At a minimum, each sweepstakes should include a free method of entry and consumers who pay premium fees should get something of value for those fees.
 

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Last year, we posted about a lawsuit alleging that the NCAA’s method of distributing Final Four tickets was an unlawful lottery. According to the complaint, each person who applied for tickets could submit an application with up to ten entries and a non-refundable handling fee. People who didn’t win tickets would give up the handling fees they had paid. (A more complete description of the process appears in our first post.) The Seventh Circuit ruled that this could constitute an unlawful lottery, but later vacated the opinion and certified three questions to the Indiana Supreme Court.

Last month, the Indiana Supreme Court unanimously ruled in favor of the NCAA. At the outset, the Court determined that under Indiana law, a lottery is “a scheme for the distribution of prizes by lot or chance among those who provided or promised to provide consideration.” Under this definition, a promotion must include each of the following three elements for it to constitute a lottery: (1) a prize; (2) chance; and (3) consideration. In the decision, the Court focused only on the prize element.

The Court determined that a prize is something of more value than the amount invested. In this case, consumers invested the price of the tickets plus a handling fee, and would receive in exchange either the tickets minus the handling fee or the price of the tickets minus the handling fee. Thus, because those consumers who receive tickets would not get anything of greater value than those who receive refunds, the tickets were not prizes. Because there was no prize, there was also no lottery.

The decision is good news for the NCAA and other companies that run similar promotions. Nevertheless, companies should be careful any time they offer a promotion that requires people to pay money for an uncertain benefit. Indeed, the Court also noted that the decision “would not prevent a prosecutor or plaintiff from attacking a similarly structured scheme that is merely a ruse for a traditional lottery.”  

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Yesterday, Facebook modified the Guidelines that govern how companies can run or advertise sweepstakes, contests, and other promotions on the Facebook platform. Following is a summary of the key provisions:

• Promotions on Facebook must be administered within Apps on Facebook.com, either on a Canvas Page or an app on a Page Tab. You cannot use Facebook features or functionality as an entry mechanism. For example, you cannot give people entries simply by liking a page.
• You must make certain disclosures. For example, you must disclose that the promotion is not sponsored by Facebook, that entrants are not providing information to Facebook, and that entrants release Facebook of liability. You cannot use Facebook’s name or trademarks other than to make those disclosures.
• You cannot condition entry upon a person taking any action using Facebook features or functionality, other than liking a Page, checking in to a Place, or connecting to your app. For example, you cannot condition entry upon a person uploading a photo on a Wall.
• You cannot notify winners through Facebook, such as through Facebook messages, chat, or posts on profiles or Pages.

The complete Guidelines are available here. Keep in mind that complying with the Guidelines does not guarantee that a promotion will be lawful. As Facebook points out, “promotions are subject to many regulations and if you are not certain that your promotion complies with applicable law, please consult with an expert.”

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This afternoon, the FTC announced that the manufacturer of Rascal Scooters has agreed to pay $100,000 to settle charges that it illegally called millions of consumers whose phone numbers were on the national Do Not Call Registry.

The company asked consumers to provide their numbers on sweepstakes entry forms so that the company could contact them if they won. According to the FTC, however, the company also contacted non-winners with sales calls. Although the Telemarketing Sales Rule generally allows a company to call a consumer on the Do Not Call Registry for up to 18 months if it has an “established business relationship” with the consumer, the FTC has warned that companies may not rely on a sweepstakes entry form as the basis for that exception.

This case serves as a reminder that companies cannot misrepresent the reason for collecting phone numbers or assume that just because a consumer gives the company a phone number, the company can place a sales call to the consumer.  

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Last year, Facebook introduced Promotions Guidelines that governed how companies can run sweepstakes and contests on the Facebook platform. Among other things, the Guidelines stated that a company could not administer a promotion -- in other words, collect entries, conduct drawings, judge entries, or run any other aspect of a promotion -- on the platform unless the company first obtained written permission from Facebook. Written permission was only granted to companies that spent money advertising on Facebook.

Yesterday, Facebook updated the Promotions Guidelines. The most significant change is that companies no longer need to obtain written permission before administering a promotion on the Facebook platform.

Companies still have to comply with a number require requirements, though. For example: (a) people can only enter on the canvas page of an application or the application box in a tab on a Facebook Page; (b) companies have to include specific disclosures on the entry form and in the official rules; (c) companies cannot condition entry on taking certain actions on Facebook; and (d) promotions cannot be open to people who are under 18 or to residents of certain countries. The complete Guidelines and a list of do’s and don’ts are available on the Facebook site.

The revised Guidelines -- particularly the absence of requirement that Facebook approve promotions -- will make it much easier for companies to run promotions on the platform.
 

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Earlier today, the Florida Attorney General announced a settlement with Systemax and its subsidiaries, Tigerdirect and Onrebate, over allegations that the companies failed to pay rebates to consumers, as advertised. Consumers complained that the rebate program was difficult to navigate and that the companies often mailed the rebates late, or not at all.

As part of the settlements, the companies generally agreed to (a) ensure that outstanding complaints are resolved, (b) process rebates in the time advertised, and (c) initiate procedures that allow for the proper handling of rebate submissions. In addition, the companies will pay $200,000 in attorneys' fees and costs and donate $100,000 to the Florida Alliance of Boys and Girls Clubs.

Over the past few years, various states have passed new laws regulating rebates and, as a result, offers that were lawful a few years ago may now be unlawful. In addition, regulators have become more active in challenging companies who fail to follow these laws. Companies that issue rebates need to pay close attention to these developments to ensure that their practices comply with applicable laws.

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Earlier this year, we posted that the Seventh Circuit Court of Appeals had ruled that the method by which the NCAA distributes Final Four tickets could constitute an unlawful lottery. This week, the Seventh Circuit vacated their previous opinion and certified three questions to the Indiana Supreme Court.

According to the complaint, each person who applied for tickets could submit an application with up to ten entries and a non-refundable handling fee. People who didn’t win tickets would give up the handling fees they had paid. (A more complete description of the process appears in our previous post.) Under Indiana law, an unlawful lottery consists of three elements: (1) prize; (2) chance; and (3) consideration. The Seventh Circuit held that the promotion was a lottery because plaintiffs allegedly paid a fee (consideration) to enter a random drawing (chance) in hopes of obtaining the tickets (a prize).

Following that decision, the NCAA filed a petition for rehearing arguing that the case involved issues of “exceptional importance” and that the decision conflicts with an Indiana Court of Appeals decision. Upon consideration of the NCAA’s petition, the Court of Appeals vacated its previous opinion and certified three questions for determination by the Indiana Supreme Court. How the Indiana Supreme Court answers the questions will determine whether the NCAA violated lottery laws. It could also determine whether other types of promotions that include fees are lawful.

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This afternoon, 32 states and the District of Columbia announced a stipulated supplemental judgment with Publishers Clearing House ("PCH") over how the company markets its sweepstakes. The judgment modifies the terms of earlier settlements over allegations that PCH advertised sweepstakes in a way that misled consumers into believing that purchases would increase their chances of winning prizes.

After reviewing recent consumer complaints and PCH mailings, the states determined that consumers could still be misled. According to the agreement, PCH will, among other things, have to: (a) pay $3.5 million to cover the cost of the states' investigation; (b) make significant changes to its mailings to avoid the implication that a purchase will increase chances of winning; and (c) increase consumer surveys to ensure that consumers understand that purchasing does not increase their chances of winning.

It is unlawful to require people to make a purchase to enter a sweepstakes. Moreover, laws in many states and on the federal level specifically require advertisers to clearly and conspicuously disclose that no purchase is necessary. Over the past few years, many companies have been challenged for advertising sweepstakes in a way that suggested a purchase was necessary or advantageous. Be careful to ensure that your ads do not create that impression.
 

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This month, the Seventh Circuit Court of Appeals ruled that the method the NCAA has used to distribute Final Four tickets since at least 1994 could constitute an unlawful lottery.

According to the complaint, each person who applied for tickets had to submit an application with up to ten entries. Each entry was a chance to win up to two tickets and required payment of a $6 non-refundable handling fee. An applicant could win only once but was required to submit the full face value of the tickets for each entry. In order to maximize the chances for winning a pair of tickets, an applicant would have to submit $3,060 (the face value of ten pairs of tickets plus a $6 handling fee for each entry). A successful applicant would receive a pair of tickets and a $2,700 refund (the total ticket price for the remaining nine entries). The $60 in handling fees would not be refunded. An unsuccessful applicant would receive a $3,000 refund (the price of the tickets minus the handling fees).

Under Indiana law, an unlawful lottery consists of three elements: (1) prize; (2) chance; and (3) consideration. The NCAA argued that its ticket distribution process only granted an opportunity to purchase tickets at full price, which was not a prize.  The court rejected this argument, holding that the plaintiffs alleged all elements of a lottery. The plaintiffs allegedly paid a per-ticket or per-entry fee (consideration) to enter a random drawing (chance) in hopes of obtaining scarce, valuable tickets (a prize). Accordingly, the Seventh Circuit reversed the lower court’s dismissal and allowed the case to go forward.

Be careful about any promotion in which people have to pay money for the chance to win something of value. Lottery laws across the country are similar in scope to the law in Indiana, so a promotion that includes prize, chance, and consideration is vulnerable to challenge in all jurisdictions. In most cases, it is essential to ensure that consumers have a way to participate without paying any money.

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Last year, KFC introduced its Kentucky Grilled Chicken, a healthier alternative to the restaurant chain's fried chicken, and promoted it heavily on the Oprah Winfrey show. As part of the promotion, Oprah invited consumers to download online coupons for a free Kentucky Grilled Chicken meal.  KFC was soon overwhelmed with requests for free meals and prematurely ended the promotion.

According to a class action lawsuit filed against the company, KFC “began almost immediately to refuse to honor the coupons” and stopped the promotion after only two days, advising customers to apply for an online rain check, instead. Less than half of the 10.2 million coupons that were downloaded were ever redeemed.  Among other things, the plaintiffs charged KFC with breach of contract, common law fraud, and violation of consumer protection statutes. This month, the court denied KFC’s motion to dismiss and allowed the case to move forward.

Marketers need to think carefully about how to structure coupon offers and take steps to anticipate redemption rates. Everyone loves a “free lunch” -- in this case, literally -- so online coupons for free products usually enjoy very high redemption rates. And once a coupon goes viral, it can be very difficult to control. These issues need to be addressed before the coupon is launched. As KFC’s experience shows, it can be difficult, if not impossible, to address them after problems start to arise. At that point, complaints and lawsuits are almost sure to follow. 

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On May 21, 2010, Virginia Governor Bob McDonnell signed into law a gambling bill that also regulates games, contests, and other promotions. The law provides that companies sponsoring promotions must meet the following requirements: (1) consumers may not be asked to pay any money to participate, other than to purchase a product; (2) consumers must also be able to participate for free; and (3) consumers who play for free must have equal chances of winning as consumers who make a purchase, if applicable.

Companies must make various disclosures in official rules for the promotion, all of which are fairly standard. In addition to the disclosures required in rules, all advertisements for promotions must also include the following disclosures: (1) the name of the sponsor; (2) a statement that no purchase is necessary; (3) the start and end dates; (4) the eligibility requirements; and (5) a disclosure of where the promotion is void.

The law goes into effect July 1, 2010.
 

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On March 10, Kelley Drye will host an encore presentation of the seminar, "A New Legal Frontier for Social Media," at our New York office.

The legal landscape for social media and user-generated content is changing. Make sure you understand the risks and rewards. Companies engaged in blogs, social networking, and other types of interactive marketing campaigns face increased scrutiny in light of recent cases and sweeping changes to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising. These developments have increased the scope of activities and content for which advertisers may be liable.

Join the Association of Corporate Counsel and Kelley Drye for a discussion about the important legal issues and best practices for leveraging social media. Topics will include:

• Ways that companies are using social media in the form of sweepstakes, contests, blogs, wikis, and other promotions involving user-generated content;
• Legal risks and the impact of recent cases and the FTC Guides on your advertising and marketing campaigns; and
• Practical advice on how to minimize legal liability associated with social media websites and campaigns with user-generated content.

SPEAKERS:

David J. Ervin
Partner, Kelley Drye & Warren LLP
Advertising and Marketing Practice

Gonzalo E. Mon
Associate, Kelley Drye & Warren LLP
Advertising and Marketing Practice

Josephine Belli-Marinos
Associate General Counsel & Litigation Counsel
Combe Inc.

Reginald M. Rasch
General Counsel
LinkShare

WHEN:  March 10, 2010, from 3:00 - 5:00 PM

WHERE:  Kelley Drye, 101 Park Avenue, 27th floor, New York, NY, 10178

REGISTER:  email admin@accgny.com
 

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RegHardware reports that Apple recently changed the terms of its iPhone Software Development Kit ("SDK") to allow companies to offer certain promotional games on apps. Although some reports circulating online suggest that Apple is allowing companies to run "lotteries" on the iPhone, that is not exactly right.

Section 3.3.17 of the SDK states: "Your Application may include promotional sweepstakes or contest functionality provided that You are the sole sponsor of the promotion and that You and Your Application comply with any applicable laws." In addition, developers must "clearly state in binding official rules for each promotion that Apple is not a sponsor of, or responsible for conducting, the promotion."  (As we discussed in a previous post, Facebook included a similar requirement in its Promotions Guidelines.)

Keep in mind that laws in the United States -- and laws in most foreign jurisdictions -- prohibit private parties from running lotteries. In general, a lottery includes the following three elements: (1) a prize; (2) awarded on the basis of chance; (3) to people who were required to pay consideration. Therefore, you can't require people to pay money to enter a chance-based promotion.

Although Apple's SDK does give developers more flexibility, it doesn't permit them to violate laws.

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This week, the New York Attorney General announced a settlement with PlasmaNet, the owner of FreeLotto.com, for using deceptive and misleading advertisements. Consumers can enter sweepstakes on FreeLotto.com for free if they agree to receive e-mails from PlasmaNet and visit the site every day. Consumers do not have to visit the site daily if they purchase the “FreeLotto Automatic Subscription Ticket” (“F.A.S.T.”) service, for $14.99 per month. With the F.A.S.T. service, consumers can program PlasmaNet to automatically enter the sweepstakes for them.

The Attorney General alleged that PlasmaNet sent misleading e-mails to FreeLotto.com players notifying them of “pending” prizes and directing them to claim their winnings. The players had not actually won these prizes -- instead, they were unwittingly led to purchase the “F.A.S.T.” service. The Attorney General also alleged that PlasmaNet ran banner ads that falsely stated that a consumer had already won a prize. PlasmaNet did not, however, disclose that the consumer had to register with FreeLotto.com and agree to receive advertising from PlasmaNet in order to collect it.

Under the agreement, PlasmaNet will pay $1.5 million in penalties, costs, and fees and will make refunds available to eligible consumers over the next six months. PlasmaNet must also significantly reform its advertising practices.

This settlement serves as a good reminder that companies need to clearly and conspicuously disclose the material terms and conditions of their offers and that they cannot hide costs in the fine print. Also remember that consumers cannot be required to pay money to enter sweepstakes and that it is unlawful to give any advantage to people who enter by making a payment.
 

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On February 9, Kelley Drye will host the seminar, "A New Legal Frontier for Social Media," at our New York office.

The legal landscape for social media and user-generated content is changing. Make sure you understand the risks and rewards.  Companies engaged in blogs, social networking, and other types of interactive marketing campaigns face increased scrutiny in light of recent cases and sweeping changes to the FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising. These developments have increased the scope of activities and content for which advertisers may be liable.

Join the Association of Corporate Counsel and Kelley Drye for a discussion about the important legal issues and best practices for leveraging social media. Topics will include:

• Ways that companies are using social media in the form of sweepstakes, contests, blogs, wikis, and other promotions involving user-generated content;
• Legal risks and the impact of recent cases and the FTC Guides on your advertising and marketing campaigns; and
• Practical advice on how to minimize legal liability associated with social media websites and campaigns with user-generated content.

SPEAKERS:

David J. Ervin
Partner, Kelley Drye & Warren LLP
Advertising and Marketing Practice

Gonzalo E. Mon
Associate, Kelley Drye & Warren LLP
Advertising and Marketing Practice

Josephine Belli-Marinos
Associate General Counsel & Litigation Counsel
Combe Inc.

Reginald M. Rasch
General Counsel
LinkShare

WHEN: February 9, 2010, from 3:00 - 5:00 PM

WHERE: Kelley Drye, 101 Park Avenue, 27th floor, New York, NY, 10178

REGISTER: email nycle@kelleydrye.com

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Last month, we posted an entry that discussed the new Promotions Guidelines issued by Facebook. The Promotions Guidelines specify what types of promotions can and cannot be run on the Facebook platform, as well as what types of activities will require companies to obtain prior written approval from Facebook.

This month, Metropolitan Corporate Counsel published an article by Gonzalo E. Mon, Christopher M. Loeffler, and David J. Ervin that discusses the Guidelines in more detail. Click here for a PDF copy of the article.

If your company wants to take advantage of Facebook to publicize or administer a promotion, you need to make sure that you comply with the Facebook Promotions Guidelines, as well as all applicable laws. Failure to do so can result in termination of your company’s rights on Facebook.
 

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As Facebook continues to grow in popularity, more companies have started to run various types of sweepstakes, contests, and other promotions on the Facebook Platform. Whenever a company runs — or even advertises — a promotion on a third-party platform, such as Facebook, the company must ensure that the promotion complies not only with applicable laws, but also with the platform’s terms and conditions. Up until recently, though, there wasn’t any clear guidance on what companies could or could not do on the Facebook Platform. That all changed in November when Facebook issued a detailed set of Promotions Guidelines.

The Promotions Guidelines specify what types of promotions can and cannot be run on the Facebook platform, as well as what types of activities will require companies to obtain prior written approval from Facebook. If your company wants to take advantage of the popularity and reach of Facebook to publicize or administer a promotion, you need to make sure that you comply with the Facebook Promotions Guidelines, as well as all applicable laws. Failure to do so can result in termination of your company’s rights on Facebook.

Click here for a summary of the Promotions Guidelines and here for a copy of the Promotions Guidelines themselves.
 

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Companies that offer sweepstakes in the United States usually exclude residents of Puerto Rico from participating. In most cases, the decision to exclude residents of Puerto Rico have been driven by the onerous requirements that have been imposed on sweepstakes sponsors in that jurisdiction. For example, Puerto Rico has required sponsors to do the following: (a) translate rules into Spanish; (b) publish rules in newspapers or magazines; and (c) have a notary public certify drawing and game pieces. In addition, the regulations had contained some ambiguities about what activities constituted impermissible consideration.

Effective November 27, 2009, most of the requirements that have led companies to avoid running promotions in Puerto Rico have been eliminated. For example, the new regulations issued by the Puerto Rico Department of Consumer Affairs only require rules to be in Spanish if the sweepstakes is advertised in Spanish. Rules may now be published online, rather than in print, and a notary is not required to certify any aspect of the promotion. In addition, the regulations now limit consideration to include a payment or some other act that financially benefits the sponsor.

These changes make it a lot easier for companies to run sweepstakes in Puerto Rico. Although there may be cases in which a company has to exclude Puerto Rico, most of the legal barriers have been removed.

Click here for a copy of the new regulations.

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