Regulations Abound in Offering Online Sweepstakes.

"FREE Stuff! Over 500 Prizes Awarded -- Enter Now!" trumpets one site on the Internet. "Hot Prize Giveaway!" and "Hello -- My Name is RICH!" proclaim still other Web sites. There are literally thousands of online promotions running on the Internet at any given time. Some sites offer regular cash prizes of $1 million and an occasional $10 million grand prize. A recently launched site now gives eligible entrants the chance to win a cool billion.

More modest online sweepstakes abound as well, offering electronics, cars, vacations, tickets, videos, T-shirts, computer software and gift certificates. In fact, Internet sweepstakes have become one of the most popular methods of driving traffic to a company's Web site and for collecting valuable consumer information. Some firms will administer sweepstakes for other e-businesses and even guarantee the payment of prizes.

Sweepstakes and contests are hardly trouble-free advertising, however. Because of the potential for consumer deception, the United States Postal Service and the Federal Trade Commission are on the lookout for unfair or deceptive promotions. In addition, every state's attorney general has the authority to investigate sweepstakes that may violate state consumer protection statutes.

Given the global reach of the Internet, businesses not only must be careful to comply with the strict federal and state laws regulating sweepstakes promotions in general; they must also anticipate the myriad issues that could arise if the sweepstakes is conducted online. The last thing any e-business needs before its long-anticipated IPO is a state attorney general investigation or a potentially costly class-action lawsuit.

A sweepstakes is basically a game of chance that awards a prize to a winner or winners selected from a random drawing. However, the addition of the element of consideration -- for example, a required purchase, the payment of a fee, or an expenditure of substantial effort by an entrant in order to enter -- would make the contest a lottery, not a sweepstakes. Except for those that are state-run, lotteries are prohibited by federal law and the laws of all 50 states. Thus, all sweepstakes, including online sweepstakes, must avoid requiring any kind of payment, entry fee or other consideration to enter.

For this reason, Internet sweepstakes typically are conducted at "free" Web sites, without any entry or subscription fees; or provide a free alternative method of entry. Could the fee that most Internet users pay to their online service provider convert a sweepstakes into an illegal lottery? Past enforcement patterns suggest that the answer is "no," but new e-businesses may be wise to follow the conservative approach adopted by certain major sweepstakes sponsors, who provide another way of entering the promotion (such as a mail-in entry form).

It's all in the rules

The Official Rules for a sweepstakes are the most important element of the promotion. They serve as the terms of the contract between the sponsor and the entrants. For this reason, an Internet sweepstakes should be governed by Official Rules that are as complete and comprehensive as possible. The rules should anticipate to the greatest extent possible the types of future disputes that could arise from the promotion in general and the fact that it is being conducted on the Internet in particular.

Generally speaking, the Official Rules should include details such as: a statement that no purchase is necessary; the odds of winning; how many prizes are available, what they are and how much they are worth; any restrictions on who may enter, including residents of particular states or countries; how one may enter; when the promotion will start and end, and the deadline for receipt of entries; how the winner will be chosen; how to obtain a list of the winners; a reminder that the winner will be responsible for all applicable taxes; what happens in the event of fraud or unforeseen glitches affecting the sweepstakes; what law will govern the sweepstakes in the event of a dispute; and that the sweepstakes offer is void where prohibited by law.

All of these provisions are essential for any sweepstakes, whether conducted on the Internet or otherwise. However, some of these rules are especially important for online promotions.

State laws vary with respect to what information must be disclosed in the rules for a promotion. States with special disclosure requirements include California, Connecticut, Florida, Iowa, Maryland, Massachusetts, Minnesota, New Mexico, New York, Rhode Island, Tennessee, and Texas.

David Halberstadter is a litigation partner in the Los Angeles office of Katten Muchin Zavis. He can be reached at [e-mail]. Leon Liu is an associate in the entertainment department. He can be reached at [e-mail].