In this article, a noted authority on promotion law answers the questions asked most frequently by marketers who put together consumer and dealer promotions.

What follows is not intended to be a complete coverage of all the laws and regulations concerned with incentive marketing or the use of premiums. That would require a full-text opus. This is considerably more than a mere introduction to the subject, however. It's a comprehensive sampling of what one should know before embarking on any type of sales promotion.

One caution: Don't enter into a program without consulting competent legal counsel. The consequences of failing to do so can be severe. Violations can result in heavy fines and, in extreme cases, imprisonment. The penalties vary in different jurisdictions, as does the extent of the enforcement.

In addition, if the rules that you communicate for a promotion are not clear, you risk litigation, especially where consumers are the target of the promotion. Since you, the sponsor or promotion agency, drew the rules, courts will interpret any such ambiguity against you and in favor of the complaining consumer. In these litigious times, there are many such consumers who welcome an opportunity to put your feet to the fire. Knowledgeable counsel can save you thousands of dollars, prevent bad publicity, and forestall monumental business headaches.

Q: In what jurisdictions are there statutory enactments or regulations affecting the use of incentive marketing or premiums?

A: Every state has legislation concerning this area of law, and some are more comprehensive than others. Puerto Rico also has its own rules. In addition, there are numerous federal agencies involved, such as the Federal Trade Commission (FTC), the Bureau of Alcohol, Tobacco and Firearms, the Federal Communications Commission, the Internal Revenue Service (IRS), the Office of Thrift Supervision, the Postal Service, the Food and Drug Administration, and the Securities and Exchange Commission. If you plan to launch a promotion in Canada, Canadian federal and provincial statutes should be reviewed, as a true skill element must be included.

Q: Which of the federal agencies is most concerned with this area of enforcement?

A: The FTC exercises the greatest influence. Its regulations cover, among other things, sweepstakes in the gasoline and food industries, telemarketing, merchandise warranties, fraudulent advertising, and telephone and mail-order sales. Protection of the consumer in all of these areas is a prime concern of this agency.

Q: In addition to the various state enactments and agency oversights referred to in this article, is there any specific federal legislation covering sweepstakes and games?

A: Yes. As a result of the national unfavorable publicity resulting from reports of alleged misconduct on the part of several major sweepstakes sponsors, the United States Congress reacted with sweeping legislation. In December, 1999 the Deceptive Mail Prevention and Enforcement Act was passed by Congress and signed into to law by the President. Most of its provisions will be effective as of April, 2000. A brief summary of highlights of this new law follows.

Sweepstakes mailings, among other provisions must clearly and conspicuously display:

• A statement in the mailing, including the rules and order form, that no purchase is necessary.
  
  
• A statement that a purchase would not improve the recipient's chance of winning.
  
  
• All terms and conditions of the promotion, including the rules and entry procedures, in language that is easy to find, read and understand.
  
  
• Statements of the estimated odds of winning each prize, the quantity, estimated retail value, and nature of each prize.

In addition, it requires any promoter that mails a sweepstakes to establish and maintain a notification system that provides for any individual to notify said system of the individual's election to have his or her name and address excluded from all lists used by that promoter. It also grants wide subpoena and nationwide stop mail authority to the US Postal Service and the ability to impose civil penalties from $25,000 to $1,000,000, or even double these amounts under limited circumstances. The legislation also specifically sets forth that it does not preempt any more restrictive state statutes.

Q: What constitutes the difference between a legal chance promotion, such as a sweepstakes or a game, and an illegal lottery?

A: Three elements, when combined in one promotion, constitute a lottery, which is illegal in all of the states and under federal law. They are chance, consideration, and the award of a prize. Chance and prize are obvious. Consideration is not so simple.

A: Here's the legal definition: something of value given in return for a performance by another for the purpose of forming an agreement. Consideration represents the element indicating that a party agrees to surrender something or forbear from doing something in return for that which will be received. In incentive marketing, if a prospective prize winner pays, purchases merchandise, sells merchandise in a trade promotion, or performs any act other than merely completing an entry blank, this constitutes consideration. It thus could transform a promotion into an illegal lottery, if chance is the determining factor in the selection of a prize winner. Sweepstakes should always give consumers the option to enter in writing without making any purchase.

Q: Do different restrictions exist for consumer sweepstakes as contrasted with dealer or trade promotions?

A: No, the same rules apply to both, and it is necessary to avoid the creation of an illegal lottery in all cases. However, bonding and registration statutes apply only to consumer promotions.

Q: In what states are bonding or trust accounts and registration required for consumer sweepstakes?

A: In New York and Florida if the total prize structure exceeds $5,000, bonding or establishment of a trust account for the total value of all the prizes is necessary, and registration is required. Registration is mandatory in Rhode Island for retail sweepstakes whose prizes total more than $500. In Florida, bonding may be avoided if the operator conducting the promotion has done so for at least five years in that state and has had no action instituted for violations. In 1998, Florida took the questionable position that registration and bonding would be required even if a promotion was not being offered in the state. It would therefore appear that a wise precaution, in order to avoid litigation and possible fines, would be to include in the rules the statement, "Void in Florida," if the sweepstakes was not actually directed to or advertised in Florida.

Q: Since sweepstakes are affected by so many different statutes and opinions of attorneys-general in the different states, are there certain rules which should appear in all sweepstakes promotions?

A: Yes. Although there are many other rules which should be included, the following are generally mandated in most states: no purchase necessary; alternate means of entry (where appropriate); random drawing of winners; void where prohibited by law; the odds of winning; prize description and valuation; termination date and deadline for submission of entries; how a list of winners may be obtained.

Q: Are there restrictions in some states concerning promotions in specific trades or industries?

A: Yes. Care must be taken before preparing a promotion in some states for such things as gasoline, dairy products, alcoholic beverages, cigarettes, banking, supermarkets, and time-share sales.

Q: Do alcoholic beverage promotions constitute a special problem?

A: Yes. Sufficient lead time must be allowed to clear a promotion with the various alcoholic beverage agencies in the states in which the promotion is to be offered. These regulatory agencies differ from state to state, and merely reviewing the statutes will most likely not be enough. Some states actually require prior approval before the promotion may be launched. Tread very carefully, because the field is littered with land mines. Careful preparation must be taken to avoid detonating your promotion and suffering the legal consequences as well.

Q: Are there any tax consequences for the employer and employee to be considered with respect to employee recognition awards?

A: Yes. Certain tax savings may be achieved but only for awards to employees for seniority or safety achievement. Awards for productivity are specifically excluded. The Tax Reform Act of 1986 extensively revised the taxability of gifts by employers to employees. Unfortunately, the IRS has failed to issue regulations to date. But bear in mind the following:

• Length-of-service awards of more than nominal value may be given to any one employee only once every five years and not during the first five years of employment.
  
  
• Safety achievement awards of more than nominal value may be given to no more than ten percent of eligible employees in any one year.
  
  
• Qualified plan awards, defined as awards provided for in an established plan or program which does not discriminate in favor of highly compensated employees, are deductible and excludible for tax purposes to the extent that the aggregate cost to the employer in a tax year for all achievement awards to any one employee does not exceed $1,600 and that the average cost of all awards given during the year does not exceed $400.
  
  
• In nonqualified plans, awards are deductible to the extent that the aggregate cost of all awards to any one employee does not exceed $400 during a tax year.
  
  
• Other technical restrictions apply.

Q: Are there any FTC requirements concerning delivery of telephone and mail-order merchandise?

A: Yes, the following regulations apply:

• A mail-order company must send goods ordered within the time period specified or within 30 days if no shipping date is set forth. The time requirements begin to run when the company has received a complete order and has been paid (including by charge to a credit account) and has the information needed to process and ship the order. In cases where a buyer applies for credit upon placing the order the seller has 50 days rather than 30.
  
  
• If the company cannot meet the shipping deadline, it must notify the buyer and offer the buyer the option of receiving a refund or agreeing to a delay.
  
  
• If the buyer agrees to a new shipping date and the seller misses it again, the seller must send a second notice as soon as possible. Unless the purchaser signs and returns the postpaid notice, the seller must cancel the order and issue an immediate refund. If the consumer chooses to cancel, the seller must send the refund within seven business days.

Q: Do these rules apply to self-liquidator offers?

A: Yes. In fact, in 1986 a major canning company had to pay $100,000 in a consent decree for failing to comply with them.

Q: Are there FTC requirements with respect to the use of the word "free"?

A: Generally, the following rules must be followed:

• The purchaser must not pay anything for the free item.
  
  
• Use of the word "free" is prohibited if used in conjunction with merchandise usually sold at a negotiated price.
  
  
• If a purchase is required in order to receive the free item, all the terms and conditions of the offer must be set forth clearly and conspicuously.
  
  
• A free offer cannot continue in a trade area for more than 6 months in any 12-month period, and at least 30 days must elapse before another such offer is promoted in the same trade area.

Q: Are there any state or local laws or regulations regarding the word "free"?

A: Yes, in Connecticut, Florida, New York, Ohio, and Oregon.

Q: What are some of the specifics with respect to the FTC's telemarketing regulations that went into effect in December 1995?

A: These disclosures must be made:

• The total cost of the product.
  
  
• If no refunds are possible, this policy must be stated.
  
  
• If a prize is involved, the telemarketer must set forth the odds of receiving the prize, the fact that no purchase is necessary, how the consumer can participate without making a purchase, and any costs that the consumer must incur or conditions that he or she must fulfill to receive a prize.
  
  
• Disclosures may be made either orally or in writing.
  
  
• Telemarketers must identify their company and inform the customer that the purpose of the call is to sell goods and services. If the telemarketer obtains payment by check or other negotiable instruments, the consumer's express written authorization or express oral (tape-recorded) authorization must be obtained by the telemarketer before submitting it for payment.

Q: Is there any obligation on the part of a recipient of unordered mailed merchandise?

A: No. The FTC and many state statutes hold that there is no requirement for the recipient to either return or pay for such merchandise. Companies which attempt to collect from the consumer after sending unordered merchandise can be fined up to $1,000 for each violation.

Q: How do I find an attorney experienced with the promotion statutes in my business or geographic area?

A: The Promotion Marketing Association at 212-420-1100 (or go to http://www.pmalink.org) has a directory that includes names of attorney members. PMA publishes a compendium on promotion law, but the $350 volume is available to members only.

OTHER RESOURCES

Incentives in Marketing & Motivation, by George Meredith and Robert P. Fried Ph.D., is a comprehensive text on the incentive marketplace. The content is illustrated and includes numerous case studies that reveal the breadth and potential of the incentive marketplace. Available through the Incentive Marketing Association, $34.95. Call Karen Renk, 630-369-7780.