By Mark Sanborn, Esq.
Sweepstakes and contests can be potent marketing tools for dealerships. However, they come with a significant regulatory burden, primarily due to their potential for misuse as deceptive marketing practices. The pending FTC Rule CARS Rule also specifically addresses sweepstakes. This blog post explores the best practices for conducting sweepstakes and contests, to comply with the CARS rule and other relevant laws.
Understanding the Implications of Existing Law and the CARS Rule
The CARS rule includes a section that prohibits dealers from making either express or implied misrepresentations about material information about whether a consumer has won a prize or sweepstakes. This is consistent with prior FTC enforcement actions in recent years.
The rule’s essence is simple: do not give the impression of something that is not true. This principle is also crucial to avoid being flagged for deceptive marketing practices in general. Misrepresentations related to sweepstakes and contests have historically led to significant legal and reputational damages for businesses. In addition to the FTC, state and local law enforcement and regulatory agencies have targeted businesses engaging in unfair and deceptive practices concerning the operation of sweepstakes. On the consumer side, misleading practices concerning sweepstakes can result in claims of fraud and breach of contract being made against a dealer.
One recent example this year (2024) involved an East Coast dealer that sent out an allegedly deceptive mailer that included pull-tabs for several cash prizes, a portion of the mailer appears below:
A consumer who received the mailer pulled the tabs and believed that they had won the $5,000 prize. Upon visiting the dealership, they learned that the pull tab images did not correlate to the prizes, and only a code on the mailer determined if they had won. This important information was allegedly not disclosed on the mailer. Even if it was, the mailer risks violating the law by potentially giving a misleading impression that a prize has been won when the only way to verify is by visiting the dealership to have the code checked.
Avoiding the “Illegal Lottery” Trap
It’s essential for dealers to recognize the thin line between a legal sweepstakes and an illegal lottery. The basic legal framework categorizes an activity as an illegal lottery if it includes three elements: consideration (entry fee or purchase), chance, and a prize. To avoid transforming a sweepstakes into an illegal lottery:
- Ensure free participation: Make it clear that no purchase is necessary to enter or win.
- Consult legal counsel: Always work with legal advisors to tailor your sweepstakes to comply with both state and local regulations.
Best Practices for Conducting Sweepstakes
To ensure that your sweepstakes does not attract legal scrutiny, adhere to the following best practices:
- Clear Terms and Conditions: Clearly state the rules, eligibility criteria, prize details, and selection processes. Transparency in these areas can prevent misunderstandings and legal challenges.
- Accurate Representation of Prizes: Confirm that all advertised prizes are available as described and that they are awarded in a manner that matches promotional messages. Avoid phrases that suggest all participants will win a prize unless that is indeed the case.
- Disclosure of Limitations: If there are restrictions or conditions on receiving a prize, these should be clearly disclosed. For instance, if a prize can only be claimed in person at a specific location, or if there are a limited number of prizes, this information should be prominently displayed in all advertisements and promotional materials.
- Avoid Misleading Language and Images: Be cautious with the language and images used in promotions. Phrases that might imply a greater chance of winning than exists, or phrases that might imply that a consumer has won a prize when they have not, can be seen as deceptive under the CARS rule and other consumer protection laws. In addition, featuring images that show piles of cash, or high-value items (such as part of a scratch-off, or slot machine) could give a misleading impression to the consumer that they have won that item.
- Documentation and Record Keeping: Maintain thorough records of all sweepstakes, including participant entries, how winners are selected, and prize distribution. Under the CARS rule’s recordkeeping requirements, dealers will need to be prepared to retain “materially different” advertisements for 24 months. It is likely that separate sweepstakes will be considered materially different, so dealers should be prepared to retain copies of their sweepstakes advertisements and rules.
Final Thoughts
Car dealerships that leverage sweepstakes and contests as marketing tools must navigate a complex landscape of legal requirements. The CARS rule will additionally provide an additional mechanism to make it easier for the FTC to enforce misrepresentations concerning sweepstakes and prizes. By following best practices and consulting legal experts, businesses can use these promotional strategies effectively while staying within the boundaries of the law. As the regulatory environment continues to evolve, staying informed and compliant is more crucial than ever.
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