This is a chapter from the Bloomsbury Professional book Promotional Marketing Law: A Practical Guide, 6th Edition, which offers comprehensive and practical advice on the law as it relates to promotional marketing activities such as prize promotions, coupons and sampling. Written by one of the foremost authorities on marketing law, who has many years of practical experience, this book ensures that you are aware of any potential legal pitfalls when devising and executing promotional marketing campaigns. The text offers straightforward, no-nonsense advice, using a practical question-and-answer format that covers questions regularly raised by marketing professionals. Formerly called Sales Promotion and Direct Marketing Law: A Practical Guide.
Table of Contents
Question: The law in this area changed significantly in 2007—why?
Answer: A sea change has taken place in the attitude of our society to lotteries and other games of chance. Historically, lotteries in particular, were seen as a way of exploiting the poor. In the case of Reader's Digest v Williams , the then Lord Chief Justice observed that the purpose of the law had been to prevent those poor people who only had a few pence to buy food for their children from losing money. The law until 2007 reflected this view.
Question: Why the change?
Answer: The change has been a reflection of changed attitudes. Many factors are responsible. The launch of the National Lottery was one of the most significant because gambling ceased to be a minority pursuit and instead became an activity in which the majority of the population have participated to some degree. An activity once seen as a risk to the poor and disadvantaged had suddenly become a significant part of the leisure industry.
Question: But what about promotional marketing?
Answer: The situation was unsatisfactory. Linking games of chance directly to product purchase, as with an instant win, gave rise to the spectre of an illegal lottery. To cope with the legal problem, free entry routes were developed so that nobody was obliged to purchase. But this was never sanctioned by either statute or case law. Legally doubtful, its acceptance was simply part of a policy laid down by the Crown Prosecution Service (CPS). The public never understood why chances were given to non-purchasers. It was clear that the public did not understand why promotional games of chance linked to the purchase of goods or services were tainted with illegality and this was much of the reasoning behind the CPS policy not to challenge such promotions if there was a genuine and realistic free-entry route.
As a result of a comprehensive review of gambling legislation, the Government made the Gambling Act 2005. This came into force in 2007.
Question: How does the Act affect promotional games of chance?
Answer: The Gambling Act redefines 'lottery' so as not to include a produce purchase obligation. For the first time, there is a statutory definition of lottery, but one based on previous case law—essentially the offer of prizes in a game of chance in which people are required to pay in money or money's worth in order to participate. However, Sch 2(2) makes it clear that an obligation to pay for goods or services will not count as payment within the definition of a lottery unless one is paying at a price or rate which reflects the opportunity to participate. In other words, it is only if the price is 'loaded' to take account of the promotion that the scheme will constitute an illegal lottery.
Question: What is the effect of this on promotional marketing?
Answer: It means that unless the price has been inflated on account of the promotion, any promotional game of chance is legal without the need for a free entry route.
Question: What about postage or telephone costs?
Answer: The Act makes it clear that the ordinary cost of postage or telephone calls will not constitute payment. However, if the cost is more than the basic, as in the case of a premium rate 'phone call, it will be regarded as payment. This reflects the understanding that grew up in relation to the previous legislation.
Question: What happens if a charge is made, not for formal entry into a prize promotion, but in order to ascertain whether one has won and, if so, the identity of the prize?
Answer: Both situations are covered in Sch 2, paras 6 and 7 to the Act. Any payment to discover whether a prize has been won or to claim a prize will be regarded as a payment to take part in the arrangement making such schemes lotteries.
Question: But what if I offered a 50% discount off the price of a world cruise? Does that mean my promotion will be an illegal lottery?
Answer: This question troubled many of us before the Bill was passed. And it is an issue that encompasses many other situations. What is the position, for example, in relation to a prize of a ticket to a pop concert where one has to pay the cost of travel to the event? And what about a car that will need to be taxed and issued before it can be driven?
When ministers were challenged on this they argued that such arrangements did not contravene the statutory provisions. They argued that where a 50% voucher was the prize, one took possession of the prize when one received the voucher. They argued similarly in relation to the other examples. More importantly, perhaps, the Gambling Commission the dedicated enforcement body under the Act also appears to have taken this view. Since they are responsible for enforcement, one can presumably take a relaxed view of the issue.
Question: What is the difference between a prize and a gift?
Answer: I do not know of any case law defining the term 'prize' in contradistinction to 'gift'. The British Code of Advertising, Sales Promotion and Direct Marketing does not define 'prize', but says that gifts should not be described as prizes if they are given to a significant proportion of those taking part in the promotion. Accordingly, if everyone 'wins' something of comparable value, they are gifts and not prizes.
Question: What if a retailer offers, say, to refund the purchase price to all those who spend £50 or more in their shop during the month of May if England subsequently wins the World Cup that year?
Answer: It has always seemed to me that such a scheme is not caught by the legislation on lotteries, because either everyone will receive something, or everyone will receive nothing. Each purchaser stands in exactly the same position as all other purchasers. There is no drawing of lots, which would suggest that prizes are to be distributed to each winner according to chance. The outcome of the World Cup is determined by the skill of the teams and is not, therefore, a result based on chance.
This scheme clearly is not a competition, because of the absence of any skill or dexterity by participants. Neither can the participants said to be playing a game. This rules out the application of gaming -legislation.
However, the conundrum lies in whether such a promotion can be said to be a wager or a bet. When the Institute of Promotional Marketing sought leading counsel's advice on this point, his advice was that such a promotion did not fit into case law definitions of 'wager' and 'bet'.
The final arbiter of such matters will be the courts. However, given the backing of leading counsel's opinion, I see no reason why promoters should be dissuaded from running such promotions.
Question: What is the situation if participants did not appreciate that they acquired a chance when they spent money?
Answer: It used to be the case that if people spent money unaware that they were obtaining a chance, that payment did not constitute contribution from the point of view of the definition of a lottery. This principle arose in the case of Minty v Sylvester , the basis of which was if that there was no 'allurement' there was no contribution. The ruling in Minty v Sylvester has now been done away with as a result of Sch 2, para 4, which says 'It is also immaterial for the purposes of s 14 and this Schedule whether a person knows when he makes a payment that he thereby participates in an arrangement.'
Question: I have heard about customer lotteries. What are they?
Answer: The Government has established a new category of exempt lottery. Apart from traditional exemptions for the National Lottery, private lotteries and society lotteries, there is a new category of 'customer lottery'. This is a lottery promoted by a person who occupies business premises provided that nobody wins more than £50 as a prize and the lottery is organised in such a way as to ensure that no profits are made. It is therefore a small non-profit-making method of creating interest for customers.
Question: Does the Gambling Act apply to Northern Ireland?
Answer: No, the Act only covers Great Britain, (ie England, Wales and Scotland). This means that Northern Ireland operates on the basis of the old legal framework that previously operated in Great Britain prior to the Gambling Act 2005. That law is contained within the Betting, Gaming, Lotteries and Amusements (Northern Ireland) Order 1985. At the time of writing, a review of Northern Ireland's gambling laws is underway, but no decision has been made to extend the provisions to Northern Ireland.
Question: How then should we deal with the situation in Northern Ireland?
Answer: It is extremely unlikely that a promotion in Northern Ireland which complied with the law in the rest of the United Kingdom would be challenged. After all, to do so would be to deny the wish of the people of Northern Ireland to be an integral part of the UK and would be politically embarrassing.
In any event, recent decisions of the European Court of Justice concerning the EU Unfair Commercial Practices Directive are such that the restrictions in Northern Ireland are no longer legally valid, so there is no sound basis for objecting to promotions in Northern Ireland that meet the legal requirements of Great Britain (see detailed discussion of this point in Chapter 11).
Question: What about games of chance and other promotions that make reference to the National Lottery?
Answer: Many promotions have referred to the National Lottery, in ways too varied to describe in detail. They range from 'Sorry you were not successful, but your ticket is worth 50p off your grocery bill this week' to 'You may not have won on the Lottery with only one number, but with us you have won…', etc. The law is stated in s 16 of the National Lottery etc Act 1993, which prohibits any false indication that a scheme is part of the National Lottery or otherwise connected with it.
The problem is what is meant by 'otherwise connected with it'. Personally, I think it means any false suggestion of an official link (eg a suggestion that Camelot has licensed the scheme in some way). It is a difficult area and each scheme has to be looked at separately.
What one can say is that if a promoter is in doubt, it is probably a good idea to institute a formal disclaimer such as 'This promotion is not connected with the National Lottery in any way whatsoever.' Such disclaimers have been used for some promotions in the tabloid press.
Question: What about National Lottery tickets as prizes and as premiums?
Answer: The thorniest issue, and the one with the greatest impact on the promotions industry, is the question of giving National Lottery tickets or scratch cards as prizes or premiums. Dealing in Lottery tickets is prohibited under the terms of Camelot's licence to run the National Lottery and under the published game rules, and the view has been taken that buying lottery tickets and giving them away in a promotion would amount to dealing in lottery tickets.
At a meeting, Camelot told me that they may not pay out in respect of prizes won on promotional lottery tickets or scratch cards. The courts have not ruled on this issue but I, for one, would not be prepared to take the risk.
Question: What does the Act say about competitions?
Answer: Very little in fact. The Act is solely concerned with gambling in its various forms. Accordingly s 339 provides that a prize competition is not gambling for the purposes of the Act unless it is either:
gaming within the mean of s 6;
participation in a lottery within the meaning of s 14; or
betting within the meaning of ss 9–11.
Question: When will a prize promotion amount to gaming?
Answer: Section 6 tells us that gaming means playing a game of chance for a prize. Playing a game was taken by the Gaming Board, and presumably will also be taken by the Gambling Commission, to mean an active game rather than one involving merely passive participation. The former would cover, for example, a game involving throwing a dice or spinning a wheel, whereas the latter might involve merely rubbing off a scratch card.
Question: When will a prize promotion amount to a lottery?
Answer: This is more complicated. Section 14(5) provides:
'A process which requires persons to exercise skill or judgment or to display knowledge shall be treated for the purposes of this section as relying wholly on chance if:
(a) the requirement cannot reasonably be expected to prevent a significant proportion of persons who participate in the arrangement of which the process forms part from receiving a prize, and
(b) the requirement cannot reasonably be expected to prevent a significant proportion of persons who wish to participate in that arrangement from doing so.'
Question: What does this amount to?
Answer: It means that what is supposedly a game of skill will be regarded as a game of chance if the skill required cannot reasonably be expected to prevent a significant proportion of participants from winning a prize or from wishing to participate. In other words, a competition has to have about it a sufficient deterrent effect, both in terms of people receiving a prize and people wishing to participate in the first place for there to be considered a sufficient level of skill. If there is any doubt, the Gambling Commission recommends that, before organising a competition, the promoter should run what is in effect a controlled experiment to see whether the level of skill does indeed have the necessary deterrent effect. However, in the absence of case law, there remains doubt as to how the skill test will be interpreted legally in actual cases.
Question: What about multi-stage promotions?
Answer: This was always the most difficult aspect of the old law and in many ways remains so. If the first stage relies wholly on chance, the whole scheme will be regarded as a game of chance. However, so long as the first stage meets the skill test in s 14(5) of the Act, it doesn't matter if the second stage is based on chance. Accordingly, so long as the first stage is a valid skill test, the second stage could be a draw.
Question: When will a prize promotion amount to betting?
Answer: Under the old law, the forecasting of the result of a future event or of a past event, the result of which was not yet ascertained or generally known, would make a prize promotion an illegal competition. In the new law, that element is reflected within the statutory provisions on betting. Betting, in s 9, is defined as:
'…making or accepting a bet on:
(a) the outcome of a race, competition or other event or process;
(b) the likelihood of anything occurring or not occurring; or
(c) whether anything is or is not true'.
Question: What happens if a promotion involving the forecasting of, for example, a race, is free to enter?
Answer: To be covered by the sections on betting, one has to consider whether there is payment within the meaning of Sch 1 to the Act. Schedule 1, para 2 makes it clear that the definition of payment excludes paying for goods or services at a normal market price which has not been inflated to reflect the opportunity to participate.
Question: What about 'spot the ball' competitions?
Answer: The legal status of 'spot the ball' competitions was never satisfactorily and definitively settled under the old law. The problem is that whilst skill would probably get you to the general area in which the ball is located, where precisely the ball is must be a matter of pure chance.
In view of the wide preponderance of 'spot the ball'-type schemes and the absence of any clear challenge on the point of legality it is probably safe, in practice, to run such schemes. However, the best advice may be to ask competitors where the ball most logically would be, rather than where the ball actually was. However, the author believes that 'spot the ball' competitions, however they are run, are likely to satisfy the test of skill set out in s 14(5) of the Gambling Act 2005.
Question: Do ranking competitions present any special problems?
Answer: Ranking competitions, or factoral competitions as they are sometimes known, involve putting a list of factors in order of importance. They are a popular form of competition, but they pose problems for both consumers and promoters alike.
Depending on the number of factors, it can be virtually impossible to win a ranking competition due to the huge number of possible variants. Some unscrupulous competition organisers have therefore, organised ranking competitions knowing the chances of winning are very small. They then offer a substantial prize, say £1 million, and cover the very slight risk of winning by means of an insurance policy.
To deal with this problem, the Committee of Advertising Practice has advised that, if some advertised prizes may not be won, this fact should be made clear, and if the winning of a prize is distinctly unlikely, that fact should be given special prominence.
It is advisable for a promoter to give a small pen picture of the sort of person whose judgment would be relevant to the list of factors. So, instead of saying 'List these factors in order of importance', one should be more specific: 'List these factors in order of importance from the point of view of the modern busy housewife.' This makes the competition more focused. It is then less open to the danger of the scheme being regarded as an illegal lottery, as happened in the case of Hobbs v Ward  where the court concluded that all one could do to take part was to make a guess at the right order.
Finally, in ranking competitions promoters should ensure, if they are awarding prizes to nearly correct listings, that this is to be judged in descending order. There is a lot of difference between the transposing of the bottom two factors and the transposing of the top two.
Question: And what about estimating-type competitions?
Answer: Competitions that involve estimating distances and amounts are particularly problematic in that their judging is much more likely to be challenged. One professional 'comper' regularly challenged the judging of estimating-type questions, particularly when they involved distances between two points. There is no reason in law why a promoter should not run such a competition, but it should be aware of the risks. It is very important to avoid describing the outcome of the judges' deliberation as 'the right answer' or 'the correct answer': there will be people who will have bought thousands of bars of chocolate just to see how many fit into the back of a Mini. Accordingly, promoters should make it clear that the answer is as determined by the panel of judges, and that the judges' decision is final.
Question: How important were the changes?
Answer: It would be no exaggeration to say that it was one of the most profound changes to the regulatory framework affecting promotional marketing. Certainly, by effectively allowing lotteries in sales promotion, it has had major consequences for the business. Most importantly it meant the end of the necessity for free entry routes in relation to on-pack games of chance such as instant wins. This change has further diminished the use of skill competitions in the industry, particularly since, as a rule, games of chance can be easier to administer and bring a greater response.
In fact, the legislation creates for promotional marketing a very unrestricted environment. As we have seen, the consequence of not meeting the skill test in the Act is that a promotion is seen totally as chance and not skill. Similarly, where the first stage is chance the whole promotion is seen as chance. However, as we have also seen, provided the price of a product or service is not 'loaded', such promotions are legal in any event. What this means is that provided the price of a product is not increased because of the promotion, then any combination of skill or chance will be legal.
Question: What about premium rate promotions?
Answer: In any case where under the terms of the Act there will still be payment to take part, a game of chance will constitute a lottery. The best example of this is the case of a premium rate promotion. Not being the basic cost of a telephone call, the additional cost will be regarded as payment and in the context of a game of chance such as a draw this will make the scheme a lottery. The only way to avoid a lottery arising is to institute a free entry route.
Question: I thought free entry routes were no longer needed?
Answer: For most purposes, yes. But in a few cases it will be the only way to prevent a scheme constituting an illegal lottery. Paragraph 8 of Sch 2 provides that an arrangement is not to be regarded as a lottery if there is a genuine choice to pay or not to pay. The promoter's alternative route must not involve charging more than the ordinary cost of a letter. Alternatively, it can involve another method of communication, neither more expensive nor less convenient than paying to enter the promotion. Some might reasonably argue that a free entry route is always less convenient than buying a product. The Gambling Commission and the courts have called for a practical view.
Question: I understand there are new regulations affecting commercial practices generally. What are they?
Answer: In 2005, the EU promulgated the Unfair Commercial Practices Directive (UCPD) on the basis that the countries of the EU needed a more general approach to unfair commercial practices to be able to deal effectively with fast moving changes in the market place. As far as the UK is concerned, the approach in the past has been very much a case of having sector-specific legislation dealing with abuses as and when they arise.
The Directive has been implemented in the UK in the form of The Consumer Protection from Unfair Trading Regulations 2008. These Regulations introduce a general prohibition on traders in all sectors engaging in unfair commercial practices against consumers. They do this by introducing a general prohibition on traders treating consumers unfairly and by banning misleading actions, misleading omissions, aggressive practices and a number of specific prohibitions listed in the schedule to the Regulations.
Question: Are any of these specific prohibitions related to prize promotions?
Answer: Yes, there are three specific prohibitions that have a relevance to prize promotions.
'Claiming that products are able to facilitate winning in games of chance'—I have no doubt that this is about products (ie books etc) that claim to be able to increase people's chance of winning, say the National Lottery. Sometimes, these advertisers claim to have some sort of method that increases peoples' chances of winning. That I feel sure is what is aimed at, and rightly so.
'Claiming in a commercial practice to offer a competition or prize promotion without awarding the prizes described or a reasonable equivalent'—This is clearly aimed at scams where prizes are promised and they are simply not awarded. But what about an instant win scheme on-pack where although the chances are in the pack, some of those chances are not redeemed? In some cases, something like 40% of in-can chances are not redeemed. And then we have the problem of a competition where prizes are offered to those who answer certain questions or complete a skill test and nobody successfully answers the skill test, therefore the prize isn't awarded.
I believe that the key to interpreting this is the word 'Awarding'. I would argue that in all these genuine cases the prizes have been awarded, or are available to be awarded, but through no fault of the promoter circumstances arise which result in them not being claimed.
'Creating the false impression that the consumer has already won, will win, or will on doing a particular act win, a prize or other equivalent benefit, when in fact either: (a) there is no prize or other equivalent benefit; or (b) taking any action in relation to claiming the prize or other equivalent benefit is subject to the consumer paying money or incurring a cost'—The particular problem here is in relation to (b). I understand the scams for which this is designed. But what about a prize that involves a concert ticket and which necessarily involves the cost of a train fare to the location of the concert? Is that paying money in order to claim the prize, and, if so, would such a promotion be automatically unfair under the new regulations? When the Gambling Bill was going through Parliament, Ministers argued that the prize was the ticket and one took possession of the prize when one received the ticket.
I believe that this view is the correct interpretation of the Regulations and it is clearly the view of the Gambling Commission, as well.
Question: The Gambling Act 2005 gives rise to a criminal prosecution. Are there no civil law implications in respect of competitions?
Answer: Yes. When people enter a competition there is a contract between the participant and the promoter. This is one reason why it is so important to spend time on drafting the rules of the competition. Even free-entry competitions can create a contractual relationship if some 'consideration' is involved. Breach of contract could be occasioned by a failure to run the competition properly, (eg by failing to follow the published methodology for selecting winners). For instance, in the case of Chaplin v Hicks  a woman was awarded damages for the loss of a chance to win a beauty contest; she had lost that chance because of a breach of contract by the organisers.
Since the rules set out the basis of the contract between the promoter and the consumer it is important to ensure total accuracy. Promoters have come unstuck by claiming that a panel of judges was independent when only one member was. And do not say 'Proof of postage will not be taken as proof of delivery' if what you mean is 'Proof of posting will not be taken as proof of delivery'.
Another area of civil law that may be relevant is -product liability. If a product supplied as a prize is defective and causes injury then a civil action will lie.
Question: Now I have established the basic legality of my promotion. What's next?
Answer: You must next make sure that the scheme meets all the requirements of the British Code of Advertising, Sales Promotion and Direct Marketing ('the Code').
Question: What about the rules of the promotion?
Answer: Rules 8.17 and 8.28 of the Code give guidance on the construction of rules for competitions and other promotions with prizes. Getting the rules right is critical for the interests of the promoter, as well as the consumer. Many subsequent arguments can be avoided if more attention is given to making sure that the rules are set out clearly, comprehensively and unambiguously. The issues that should be covered by the rules are as follows:
(a) the closing date;
(b) any restriction on the number of entries or prizes that may be won;
(c) any requirements for proof of purchase;
(d) description of prizes;
(e) any age or other personal restrictions, or any geographical restrictions;
(f) how and when winners will be notified and results published;
(g) the criteria for judging entries;
(h) where appropriate, the ownership of copyright in entries;
(i) whether and how entries are returnable by the promoter;
(j) how participants may obtain any supplementary rules which may apply—although these should not be rules which would reasonably affect the decision to purchase in the first place;
(k) if a cash alternative to any prize is available;
(l) any permissions required (eg from parent or employer);
(m) any intention to use winners in related publicity.
Finally, in common with all promotions there should be a clear statement of the promoter's name and normal business address unless this is clear from the context.
Question: Can I short-circuit the process?
Answer: Sometimes it may not be possible to include all the necessary rules, and competitors may have to be directed towards an address from which they can get the full rules. If this is done, the rules given 'up-front' must be those that have a direct bearing on whether the consumer decides to purchase and participate in the promotion. The Code says that the items that should be made clear before purchase or participation are:
(a) the closing date for receipt of entries;
(b) any geographical or personal restrictions such as location or age;
(c) any requirements for proofs of purchase;
(d) the need, if applicable, to obtain permission to enter from parents, employers or others;
(e) the nature of the prize(s);
(f) the identity of the promoter.
Question: What happens if I realise that I have misjudged things after the promotion has started?
Answer: Usually there is little that can be done. Sometimes the competition does not generate enough interest, for any number of reasons. Even so, the competition must be completed and prizes awarded—even if all the entrants qualify for prizes. Slippage of dates may be excusable if there is some good reason for it. Although it will rarely, if ever, be acceptable to delay the closing date, the date by which winners will be notified may slip because of unforeseeable circumstances. However, unless there is a very good reason indeed, such slippages could result in an infringement of the Code.
In addition, it is worth remembering, as we have already noted, that when competitors take part in a promotional competition there is a legally binding contract between the participants and the promoter. The rules are part of the contract and failure to abide by them is a breach of contract.
Question: Should a promoter continue to advertise a prize promotion, such as an instant win, knowing that the only prize has already been claimed and is therefore no longer available to be won?
Answer: This is a difficult question in practice. It is the reason why some promoters have been known to make sure that the winning scratch card only makes its appearance towards the end of the promotion. What one can say is that there should be several other valuable prizes within the promotion so that if a main prize is claimed there is still a legitimate reason to continue with the promotion.
Question: How can I try to ensure that I get a publicity return from my promotion?
Answer: Two rules are particularly relevant here:
(1) It is important to state, as required by the Code, whether or not there is a cash alternative to the prize. Failure to make it clear that there is no cash alternative to a prize has in the past led some competitors to refuse to attend a ceremony for the award of a prize.
(2) The rules should, if appropriate, state that winners may be, or will be, required to take part in related publicity.