Is Sweepstakes Software Legal?
I. Introduction
Potential clients of our law firm often ask us about the legality of “sweepstakes software”. The games offered in this software typically include slot machine displays such as spinning wheels, fruits, numbers, or poker card symbols. Sometimes the games claim to involve some level of skill in determining the winner. The games can be licensed directly by the developer, or from any number of intermediary vendors or operators under a master license with the developer. Social media is full of ads offering users the opportunity to play these casino-themed games with the opportunity to win real money prizes. Therefore, we are frequently asked whether such “sweepstakes” software is legal?
II. Legal Overview
Sweepstakes, or “game promotions” are often created by state statutes and typically allow a for-profit business to promote its products or services using a game of chance or skill. Such promotions are not considered gambling, since players are not charged for entry into the games and entries must be provided with no purchase necessary. Customers who enter the sweepstakes without making a purchase must have the same opportunity to win the prizes as those who receive entries in accordance with their purchases. Some states have no specific laws relating to sweepstakes, but regulatory authorities do not consider the activity to be gambling since no consideration is paid by the player to enter the game.
As the world became more focused on computer games, numerous internet cafés popped up which allowed customers to purchase long distance telephone time or internet access, and receive “credits” that could be used to play games on desktop computer terminals offering a chance to win cash prizes. These machines were powered by software that replicated the experience of playing a slot machine. However, instead of using a random number generator to determine the winner, each “spin” corresponded to an “entry” into a sweepstakes pool, with predetermined winning entries. Players could instantly learn whether their entry was a winner, or players could opt to view an entertaining computer display which included the familiar spinning wheels of a slot machine. These internet cafés often sold telephone time or internet service, while separately offering free chances to win prizes in order to promote the sale of those services. This fit neatly within the concept of a sweepstakes or game promotion – until authorities began questioning the legitimacy of the services being sold.
The market value of these paid services became questionable as more cell phones came with free nationwide long distance, and free public Wi-Fi became readily available. Some courts have found that such business models constitute a “sham” or “ruse” designed to get around traditional gambling prohibitions. Various states and counties passed laws specifically designed to shut these businesses down by prohibiting “simulated gambling devices” that resembled slot machines. Other jurisdictions banned internet cafés entirely or zoned them out of existence. While some internet cafés still operate, the sweepstakes software developers have identified a new market for their gaming service – internet players. By offering access to the games directly to online users, the developers have cut out the retail store middleman.
However, the legal requirements for a running a sweepstakes remain consistent, and these obligations must be followed by operators who offer the sweepstakes games to players. The games must still be used to promote a separate, legitimate product or service, and players cannot be charged for entry into the game. To determine the legitimacy of the products or services, the courts often consider whether they have real market value and / or whether the products or services are available for free, or at lower cost, from vendors that do not offer game promotions. Actual use by the consumer is also considered in evaluating legitimacy.
For example, any customer that purchases a Big Mac during the Monopoly game promotion at McDonalds may earn a sweepstakes entry. McDonalds does not charge more for a Big Mac during the promotion, and the price of the Big Mac is comparable to hamburgers at other fast-food restaurants. Further, the customer is not buying the Big Mac solely because he or she wants a chance to win a prize. Instead, the customer buys the Big Mac because he or she is hungry and intends to eat it. In other words, the sweepstakes merely promotes the sale of more Big Macs. In this instance, the product sold by the business is legitimate, and the sweepstakes game is lawfully used to promote the sale of that product.
III. State Law Considerations
The state statutes allowing for sweepstakes promotions can impose additional requirements. For example, some laws specifically require that entries must be made available with no purchase necessary, and that such alternative methods of entry be conspicuously disclosed to the player. Some states or local governments completely prohibit the use of casino style games even when used in a sweepstakes business model. Certain jurisdictions even impose regulatory obligations on sweepstakes operators such as registration with a state authority, obtaining a bond, and/or submission of winners lists. Often, state statutes prohibit arbitrarily eliminating entries or manipulating the games to favor certain players or entrants in specific geographic locations. The specific laws of any state where the operator offers the services must be consulted to evaluate any unique restrictions or obligations.
IV. Games of Skill
Some sweepstakes software separately provides access to “games of skill.” The legality of skill games is not determined with reference to sweepstakes law but is based on whether the prize is awarded by skill or by chance. The level of skill required to be considered a non-gambling skill game varies from state to state, since the courts use different legal tests. For further information on skill gaming, see our article here. A particular skill game may be legal in some jurisdictions but illegal in others. However, some states prohibit wagering on all games of skill in addition to games of chance.
V. Conclusion
So where does that leave the legal status of sweepstakes software? As with most gaming law issues, it depends. Games of chance can be used to promote the sale of products and services so long as the player is not paying to enter the game. Sweepstakes software can be used legally or illegally by operators. The business using the software must ensure that players are purchasing a separate product or service with legitimate market value and be prepared to show that customers actually use the products or services. Otherwise, the business may be deemed a “ruse” or a “sham” designed to get around gambling prohibitions. Players cannot be required to pay to play the games. Again, entries must also be provided free of charge, with no purchase required. It is important to note that that federal law prohibits acceptance of any funds for the purposes of illegal interstate, online gambling, with limited exceptions.
In sum, the legality of any gaming software involves a nuanced evaluation of the type of game and how it is used by the operator. Some businesses can legally and successfully incorporate games of chance as a legitimate sweepstakes promotion of their goods or services. Operators can also offer certain skill games, so long as they are not prohibited in the states where they are offered. A full legal evaluation of any business model incorporating games of skill or chance is strongly encouraged to mitigate risks.
Walters Law Group represents clients involved in all aspects of gaming, gambling, and sweepstakes law. Nothing in this article is intended as legal advice. Please contact an experienced gaming attorney with any legal questions.
Are sweepstakes games legal?
The US, Canada, and individual US states all have laws covering sweepstakes. So there are special rules depending on where the entrant lives. The U.S. Federal Trade Commission exercises some authority over sweepstakes promotion and sweepstakes scams in the United States.