FTC COPPA Enforcement Against Sony BMG Music

On December 11, 2008, the FTC announced the settlement of a $1 million civil action against Sony BMG Music Entertainment. According to the FTC, Sony had violated the Children’s Online Privacy Protection Act (“COPPA”), the COPPA Rule, and Section 5 of the FTC Act by knowingly collecting personally identifiable information from over 30,000 children under the age of 13 on 196 of the company’s music sites without first obtaining parental consent. In addition to the $1 million fine, the consent order requires Sony to delete all personal information collected and maintained in violation of COPPA, and to include a link to certain FTC consumer education materials on web sites it operates that are subject to COPPA or that offer users the opportunity to create publicly viewable profiles.

California Beefs Up Sweepstakes Solicitation Law

n a bill signed into law on September 30, 2008 the California State Legislature sought to expand the scope of §17539.15 (“Solicitation materials containing sweepstakes entries; advertising; definitions”) in various ways. The new version of the law covers solicitation materials selling information regarding sweepstakes (e.g., sweepstakes club newsletters) in addition to solicitation materials containing sweepstakes entry materials.  The law now also prohibits the use of special selection language or representations as to special treatment unless they are true; similarly, solicitation materials cannot indicate or imply that a prize notice is urgent if the recipient of same does not have a limited amount of time to act. Further, the law bans simulating or falsely representing the endorsement by a governmental unit, an attorney or insurance/brokerage company or otherwise creating a false impression as to the source, authorization or approval of solicitation materials. Conversely, the law stipulates that the official rules (which must be included in the solicitation materials) must feature the date(s) of winner determination. Also, the mandated “No Purchase Necessary” statement must be in the following or any substantially similar format:  “No purchase or payment of any kind is necessary to enter or win this Sweepstakes.” 

Earlier versions of the bill would have addressed other topics, including a limitation on   a sweepstakes sponsor’s ability to share or sell the names or other personally identifiable information of sweepstakes participants. But, the final version only made the above-indicated changes to existing law.  

Child Protection Registry Acts: Michigan and Utah

Both Michigan and Utah have Child Protection Registry Acts that establish a state "Child Protection Registry." Both are fraught with potential problems, in their interpretation and application. Each state’s Registry contains minor’s information (or contact points) used by a minor or to which a minor has access. It is free to register the contact points, but an advertiser who wishes to have access to the Registry must pay per contact point.

Briefly, Michigan's law is directed to advertisers (and not ISPs). Advertising certain products is prohibited using a minor's contact point registered for more than 30 days on the Registry, including the minor's email, instant message, cell phone, or facsimile number. Michigan's statute prohibits sending, causing (or conspiring with another to send) messages whose "primary purpose is to, directly or indirectly, advertise or otherwise link to a message that advertises a product of service that a minor is prohibited by law from purchasing, viewing, possessing, participating in, or otherwise receiving." Thus, the statute is designed to prohibit the sending of messages regarding for example, alcoholic beverages, gambling, pornography, illegal substances.

Utah's law is vague and much broader and appears to implicate not only commercial communications that "advertise a product or service that a minor is prohibited by law from purchasing", but also potentially non-commercial communications (chat rooms or private emails) because it then states, "or contains or advertises material that is harmful to minors as defined in Sec. 76-10-1201." Which latter provision lists and defines nudity, sexual conduct, sexual excitement or sadomasochistic abuse.

Text Message Promotions

Text message promotions conducted in conjunction with popular “reality television” programming (such as, The Apprentice or Deal Or No Deal) have been the subject of recent class action litigation in California and Georgia. Generally, the plaintiffs have argued that the imposition of a 99 cent premium charge for sweepstakes entry via text message transformed the promotion into illegal gambling, in that text message participants risked something of value -- the premium charge -- on an event outside their control (i.e., the determination of winners in the promotion). The inclusion of an alternate, non-purchase method of participation (the “AMOE”) did not “save” the promotion.

The plaintiffs’ argument represents a radical departure from promotion marketing law as it is currently and generally interpreted and enforced. Under the plaintiffs’ reasoning, the AMOE no longer neutralizes the element of consideration (i.e., the premium charge). Rather, the fact that some persons furnished consideration is determinative.

This line of reasoning can be traced back to the “Bank Night” cases of the early to mid 20th century, as well as more recent regulatory actions concerning scratch-and-win games offered with the sale of milk caps (or “pogs”), emergency phone cards and so-called “collector cards.” The scratch-and-win games are particularly relevant here, as attorneys general and courts largely concluded that the underlying product (i.e., the pog, phone card or collector card) was incidental to the game -- the exact opposite of the promotion marketing paradigm where the promotion serves to advertise a bona fide product. Within this context, the AMOE was largely dismissed as a rather flimsy pretext designed to conceal conduct that amounted to a private lottery.

As the class actions continue to percolate through the court system, it is important to emphasize that no state regulatory body has adopted the plaintiffs’ arguments and no enforcement official has challenged the validity of premium text message promotions. It may therefore be premature to void premium text message promotions in any states. However, with respect to the class action suit in California mentioned above, on November 30, 2007 the US District Court in California denied the defendants’ motions to dismiss the case. In making this ruling, the Court interpreted California state case law as distinguishing between business promotions (which are designed to market the sale of legitimate products) on the one hand and “those where the game itself is the product being merchandized” on the other. The former are lawful; the latter are illegal lotteries. Based on the fact that the text message participants paid only for the ability to participate, the Court placed the promotions at issue in the “game as the product” category. As an aside, we note that the Court did not address why a reality-television program was not a legitimate product. In any event, a natural reading of the Court’s order suggests that had the text message participant received something of value beyond the ability to participate in the promotion (say, for example, a ring tone), the Court may well have reached a different conclusion.

Thus, care must be taken in developing a premium text message promotion. Here are some ideas to ameliorate the risk of proceeding, at least to a certain extent. First, be sure that the advertising clearly reflects that the promotion is designed to market a given product and is not an end in and of itself. A “game for game’s sake” is more likely to attract unwanted attentions of regulators, where a promotion for a legitimate product will not. Secondly, don’t forget the AMOE. To be effective, it must be clearly disclosed as well as fully functional. Lastly, give the text message participant something of value for her payment. The premium charge can then be characterized as purchasing something beyond participation in the promotion, thereby rebutting the contention that the text message entry method is nothing more than a “pay to play” vehicle.

Guaranteed Winner Promotions

Can a sponsor state in its promotional materials that a person is a "guaranteed winner" when all sweepstakes entrants will win and receive a prize? Several states have directly addressed this issue by statute.

The following language from Connecticut Admin. Code Section 42-110b-23(a)(c) is fairly representative regarding the types of activities that are precluded in those states that address the issue:

(c) It shall be an unfair or deceptive act or practice to represent that a person is a "winner," or has been "selected," or is otherwise being involved in a select group for receipt of a prize or an opportunity, or that a person is entering a "contest," "sweepstakes," "drawing," or other competitive enterprise from which a winner or select group of winners will receive a prize or opportunity, when, in fact, the enterprise is simply a promotional scheme designed to make contact with prospective customers, or all or a substantial number of those "entering" receive the same "prize" or "opportunity."

While statutory language in the other states varies, each state's laws are generally designed to prevent sponsors from deceiving people into thinking they are, in some manner, specially selected to win, when in fact, everyone who enters is a winner. Accordingly, a program (a) using the restricted language "winner" or "guaranteed winner;" (b) in a promotional scheme designed to make contact with prospective customers; and (c) where all or a substantial number of those entering the promotion will receive the same prize, arguably conflicts with the statutory or regulatory prohibitions in those states with similar laws. 

Tax Issues – Valuation of Sweepstakes and Contest Prizes

The Internal Revenue Code mandates that the value of a sweepstakes or contest prize be included in the winner's gross income. If the value of the prize is $600 or more, the payor of the prize must file with the Internal Revenue Service a Form 1099 (with a copy to the winner) reporting the value of the prize.

Where the prize is cash or its equivalent, the value to be reported is, obviously, the face value. If the prize is not paid in money, then the "fair market value" of the prize must be reported. Unfortunately, there is no IRS regulation defining "fair market value" and revenue rulings and Tax Court decisions set no uniform method for determining fair market value. Objective factors are the primary ones looked at, but subjective factors also can play a part in determining the fair market value of a prize.

Two common sweepstakes prizes which often lead to disputes or dissatisfaction with the winner regarding reported fair market value are automobiles and trips. As to automobiles, the immediate tendency is to report the manufacturer's suggested retail price (MSRP) as the value, since that usually is the "approximate retail value" assigned to the prize in the sweepstakes' Official Rules. However, automobiles are rarely sold for the MSRP. Accordingly, the lower price at which the sweepstakes sponsor purchased the vehicle may be a more acceptable fair market value.

Regarding trips, there are many different ways to ascertain their value, such as the advertised cost of air fare or standard hotel rates or cruise rates. Often, these are the values used in the Official Rules and in advertising materials. As with automobiles, however, trips are often purchased at a discount, especially if they are being purchased in bulk. Thus, sponsors may also need to consider their direct costs for the different components of the trip in determining the fair market value of the trip for purposes of the Form 1099.

Finally, many sweepstakes sponsors wish to assist the winner in paying any taxes due on the receipt of the prize, by offering the winner additional cash. Please keep in mind that any monies used by a sponsor to defray a winner's taxes on his/her prize is in itself a taxable income to the winner.

Direct Mail Issues

FEDERAL

Under the federal statute, if a direct mail piece contains entry materials or any opportunity to enter the sweepstakes, then the direct mail piece must contain the full official rules, various disclosures, including the full no purchase statement, and the notification/opt out provisions which apply to ANY direct mail piece that references a sweepstakes or contest.

Disclosure must appear in the rules, on the entry/order form and in the solicitation materials. The disclosure must read as follows: NO PURCHASE NECESSARY. PURCHASE WILL NOT INCREASE YOUR CHANCES OF WINNING.

A sample opt out statement, which must be clearly and conspicuously disclosed, may read as follows: If you do not wish to receive and would like to be removed from subsequent mailings regarding sweepstakes or contests sponsored by Sponsor, contact us at [TOLL-FREE number] OR [name and mailing address of sponsor].

The sponsor must, of course, have a system set up to ensure that no subsequent mailings regarding a sweepstakes are sent to the customers who opt out, or fines may be imposed. In addition, customers who opt out have to affirmatively notify the sponsor of their desire to opt back in. (There are also prohibitions against selling/using/providing their names to third parties.)

If there are no entry materials, in order to satisfy the federal statutory obligations, include abbreviated rules and the notification/opt out provisions.

The federal disclosure requirements do not apply to promotions sent via direct mail in magazines, newspapers, or other periodicals if: (i) the materials are not sent to a named individual, or (ii) they do not include an opportunity to make a payment or order a product or service.

STATE

Even if there are no entry materials, COLORADO state law mandates full official rules in direct mail pieces which advertise a sweepstakes or contest in which there is an opportunity to make a payment or order a product or service. In addition, the federal notification/opt out provision will still be required.

Colorado also requires a Consumer Disclosure statement in the full official rules. A sample such statement, may read:

Consumer Disclosure. No Purchase of any kind is necessary to enter or win this sweepstakes. You have not yet won. Grand Prize: [brief description]; (ARV)$XXXX. There is 1 prize out of # prize notices distributed. Odds of winning depend on the number of entries received. Entries must be received by [deadline]. Sponsor is: [list Sponsor's name, address of its actual principal place of business, and address where sponsor may be contacted, if different].

Note: The first sentence (Consumer Disclosure) must appear in at least 12 point, bold-faced type. The second sentence must appear in at least 10 point, bold-face type. The rest of the paragraph must be in at least 10 point type.

California Gift Certificates

In Cortney Reynolds v. Philip Morris USA Inc., U.S. District Court for the Southern District of California adopted an extremely broad interpretation of California’s gift certificate law, Cal. Civil Code § 1749.5. In a class action, a consumer challenged Philip Morris’ notification of the termination of the “Marlboro Miles” incentive program (where proofs of purchase from Marlboro cigarette packages could be redeemed for award items), arguing that the Marlboro Miles were gift certificates under § 1749.5. If characterized as a gift certificate distributed by the issuer pursuant to an awards, loyalty or promotional program without any money (or other thing of value) being exchanged for them, the Marlboro Miles could only expire if they bore an expiration date in capital letters in at least 10-point font on the front. See § 1749.5(d). The Court denied Philip Morris’ motion to dismiss (as well as its subsequent motion for summary judgment), agreeing with the consumer’s argument. 

The Court seemed to misapply § 1749.5(d), as one must purchase Marlboro cigarettes to obtain Marlboro Miles. How then could the Court conclude that the Marlboro Miles were given to consumers without money or other thing of value being given in exchange for them? The Court’s rationale here appears to be that persons purchased Marlboro cigarettes, not Marlboro cigarettes and Marlboro Miles; i.e., the Marlboro Miles were an “extra” or “bonus” throw in with the purchase of the cigarettes. 

If the case were to stand, it would have far-reaching consequences for promotion marketers and businesses generally. To offer any frequency or loyalty program in California where points may be obtained via product purchase, legal compliance would entail inclusion of an expiration date in capital letters in at least 10-point font on the front; the only alternative being to void the program in California. Every awards program sponsored by a credit card company, airline carrier or other good/service manufacturer would, by definition, be affected. Worse yet, other states with similarly worded gift certificate laws could follow California’s example, making the Reynolds Court’s interpretation the standard rather than an exception.

A Victory for Philip Morris

Fortunately, Philip Morris appealed the lower court’s decision.  In a Memorandum Opinion issued 6/2/09, the U.S. Court of Appeals for the 9th Circuit reversed the District Court’s ruling in Cortney Reynolds v. Philip Morris USA Inc. The 9th Circuit held that the District Court erred in concluding that Marlboro Miles is a “gift certificate” under California law. Rather, it is a proof-of-purchase akin to a cereal box top. Accordingly, California Civil Code 1749.5 – in particular, the disclosure of the expiration date in 10 point font -- is inapplicable. Those offering frequency and loyalty programs in California can now breath a sigh of relief.