Generating publicity through competitions

Competitions can be a great form of below-the-line advertising. But if they are not run properly, or in accordance with the law, then they can badly backfire causing reputational damage and regulatory action as well as financial loss. Nigel Miller, a Commerce and Technology partner at City law firm Fox Williams LLP explains the main things you should think about when running a competition. The first issue to consider is whether your competition is legal. With the exception of the National Lottery and certain other exceptions for non-commercial purposes lotteries are illegal. On the other hand, genuine prize competitions and free draws are lawful. The Gambling Act 2005 seeks to clarify the distinction and the newly formed Gambling Commission will monitor the boundary between lotteries and competitions and take action where a scheme is promoted which, in its view, amounts to an unlicensed and, therefore, illegal lottery.

Lottery Versus Prize Competition?

A lottery may be either a simple lottery or a complex lottery: Simple lottery

• you have to pay to take part
• prizes are awarded
• prizes are allocated wholly by chance.

Complex lottery

• you have to pay to take part
• prizes are awarded
• prizes are allocated by a series of processes, the first of which relies wholly on chance.

If a scheme falls within the definition of a lottery, then it will not be lawful unless it has been licensed by the Gambling Commission. This will include a requirement that at least 20% of the proceeds are contributed to a good cause. Prize competitions (where prizes are allocated in a test of skill and not wholly by chance) and free draws (where there is no payment to take part) remain free of statutory control and can be run by businesses for their own commercial purposes. However, they may come under the control of either Ofcom (where they use broadcast media) or ICSTIS where they use premium-rate telecommunications services.

Free Prize Draws

Free draws that do not involve payment always have been and will remain exempt from statutory control. A draw is normally considered to be free if the cost of entry is:

• the cost of a letter by ordinary first-class or second-class post
• a normal-rate telephone call, then this will not amount to a payment.

A prize draw is considered to have had payment if:

• participants have to make a premium-rate call
• participants have to paying for goods or services at an inflated price
• participants have to pay any more than normal delivery costs to collect the prize>

Where there is a choice of how to enter (e.g. by phone, by post or by internet), it will not be treated as a payment where there is 'free' route of entry that is no more difficult than the 'paid' route. Other considerations:

• Reasonable personal information (such as a simple survey), is not considered as payment
• A more complex survey where large quantities of data are requested - particularly if it will be sold to third parties - may be considered as payment
• Product promotions are permitted - so long as entry involves no cost beyond the normal price of the product
• A product linked to a promotion that is charged at a price that bares little relation either to its cost of production or to comparable products may be considered an illegal lottery
• An increase in price just before or at the same time as the promotion may not be a problem if it can be shown that the price rise is unrelated to the promotion.

Skill Element

A key element to the distinction between a lottery and a competition is that, in competitions, success depends, at least in part, on skill, judgement or knowledge by the participants. Many competitions have exploited the current lack of clarity in the law to run what are in effect unlawful lotteries. For instance, many competitions involve questions that are so simple to answer that in reality they do not require any genuine skill or knowledge. Under the new Gambling Act the element of skill required must be such as may reasonably be expected to deter a significant proportion of people from entering the competition or eliminate a significant proportion of those who do.

• A competition that asks just one simple question, the answer to which is widely and commonly known, will fail to meet the test and will be classed as an illegal lottery.
• Word and number puzzles, where entrants have to solve a number of clues, would be lawful, even if those who successfully complete the puzzle are subsequently entered into a draw or tie-breaker to pick the winner.
• The fact that the answer to a question could be discovered by basic research, on the internet or elsewhere, will not mean that it lacks the necessary element of skill.

Now that the law of competitions and prize promotions has been clarified, we can expect to see less tolerance of schemes that could be viewed as unlawful lotteries. Before launching your competition, make sure that it is on the right side of the law.