Legal Bytes : Advertising & Media Lawyer & Attorney : Reed Smith Law Firm : Marketing & Intellectual Property : Legal Bytes Law Blog

Just more than a year ago, a Legal Bytes post entitled "Gift Cards: The Chart is Free. It's Our Experience You Pay For." gave our readers and visitors a handy chart that listed and briefly summarized the key legal requirements applicable to Gift Cards - those payment instruments that are increasingly blurred with prepaid debit cards, stored value cards, smart or chip-cards, reward cards, discount certificates, and traditional credit, charge and debit cards. Now those of you with gift card programs - or who are thinking about gift card programs - already know there are various state laws and regulations that require certain disclosures, and impose certain restrictions on expiration dates and on the imposition of inactivity fees, not to mention the applicability of escheat and abandoned property laws that may apply on a state-by-state basis.

If you have been coming back to Legal Bytes to keep up with this and other developments in the law of Advertising Technology & Media ("ATM"), you also know that Keri Bruce in Reed Smith's ATM practice group posted a report entitled Gift Cards Tag Along with Credit Card Legislation, noting that federal legislative and regulatory requirements will soon apply to gift cards.

Well, with one legislative delay granted by Congress with respect to certain requirements that apply to gift cards issued before April 1, 2010, the law and corresponding regulations have just now gone into effect.  Time to update the chart for you loyal readers and to entice new visitors to subscribe via email or RSS Feed to keep up-to-date. As before, the US Gift Card Statutory Chart (Updated) is provided at no cost or obligation. As we have said previously, it's our experience and skill you pay for, not our ongoing research services in areas where we already remain current for a wide variety of clients.

First, the obligatory disclaimers. No chart can be comprehensive or substitute for actually knowing the statutes and regulations. It is a guide, not an authority, and you should not rely on it for anything other than as a roadmap to proper and thorough legal counsel based on the source material itself. That said, I do not wish to trivialize or minimize its value - it represents the distillation of years and hours of work and effort - a special thanks to Keri Bruce for helping to update it.  

We point out, as we did previously, that the chart (with one new and notable exception - keep reading) doesn't cover state escheat, abandoned or unclaimed property laws that may apply to the "breakage" remaining on unused gift cards. It also does not cover the various requirements and obligations applicable to money transmitters under state law. But it does cover disclosure requirements and expiration date restrictions, as well as various exclusions and exemptions; and, of course, it provides citations to the relevant laws in each jurisdiction. Now about that new and notable exception: the chart does make reference to a recent law enacted in New Jersey and applicable to abandoned property (escheat), which effectively alters the tenor and scope of the New Jersey gift card law. Because of the complexity, Legal Bytes has created a separate post that describes that law in greater detail (see, Gift Cards in New Jersey: It's Complicated). 

The chart provides a handy citation and reference tool for the various gift card and gift certificate laws in the 50 states in the United States and the District of Columbia, and now includes a description of the new federal U.S. requirements that have just gone into effect as a result of the Credit Card Act of 2009. In addition, if you have an interest in this area, you really should go back and read (or re-read) the prior Legal Bytes' posting since it provides valuable context as online loyalty and promotional programs have proliferated, and as gift and payment instruments are increasingly being scrutinized by regulators and legislators and dealt with by the courts. As this update evidences, the law is dynamically changing, evolving and being re-configured to reflect our inter-connected, digital information age. Whether online or offline, this is a sophisticated regulated category of financial payment services and products; in a complex retail, promotional, loyalty-reward consumer environment; with a large number of possible variations; offered and used across multiple jurisdictions; governed by an even larger number of evolving state (and now federal) laws and regulations - and we haven't even scratched the surface internationally.

So if you are wondering why we give the chart away for free - don't wonder too long. If you are in this business and you need help from lawyers who know this area and can provide experienced, practical counsel, contact Joseph I. ("Joe") Rosenbaum or Keri Bruce, or your favorite Reed Smith lawyer, all of whom will be happy to help.

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As we mention in our post entitled Gift Cards: The Updated Chart is Still Free, a  New Jersey Bill (A3002), effective July 1, 2010, has now amended and expanded New Jersey's Unclaimed Property Act (the "Act") to apply to stored value cards.  But don't be lulled into a false sense of security. The Act, as amended, defines "stored value card" as any "record that evidences a promise, made for monetary or other consideration, by the issuer or seller of the record that the owner of the record will be provided, solely or a combination of, merchandise, services, or cash in the value shown in the record, which is pre-funded and the value of which is reduced upon each redemption.  The term 'stored value card' includes, but is not limited to the following items: paper gift certificates, records that contain a microprocessor chip, magnetic stripe or other means for the storage of information, gift cards, electronic gift cards, rebate cards, stored-value cards or certificates, store cards, and similar records or cards."

As it relates to unclaimed property and as amended, the Act includes a presumption of abandonment after two years of inactivity and a presumption that if the issuer does not have the address of the purchaser, the address is deemed to be New Jersey, if the card was purchased in New Jersey.  We leave to your assessment and future court battles whether this violates the Supreme Court's decision in Texas v. New Jersey, 379 U.S. 674 (1965), which rejected a transactional priority rule for reporting unclaimed property.

What is curious about the amended Act is that, although it is an "unclaimed property" statute, it now contains significant stored value card (e.g., gift card) provisions.  The Act prohibits imposition of dormancy fees and, presented here in simplified summary form, exempts stored value cards issued: (i) under a promotional, loyalty or charitable program for which no monetary or other consideration has been tendered; (ii) by an issuer (or "family" of issuers) that sold stored value cards with an aggregate face value in the previous year of $250,000 or less; and (iii) any business or class of businesses that the State Treasurer decides to exempt (see section 5(f) of AB 3002).

But what is most perplexing about the amended Act is that it cross-references New Jersey's current Gift Card Law (see New Jersey Attorney General - Gift Cards & Gift Certificates), and provides that only a stored value card that is exempt from the Unclaimed Property Act shall be considered a gift card or gift certificate for purposes of the Gift Card Law.  Now if you want the analysis of what the original Gift Card Act covers and how the "exemption" essentially neuters much of that definition, replacing it with the new "stored value" reference - well you are going to have to call Keri Bruce or me.  Bottom line, the amended Act effectively and significantly alters the definition of a gift card and gift certificate under New Jersey law.

More significantly, this inter-relationship between New Jersey's amended Unclaimed Property Act and its Gift Card Law demonstrates the complexity of developing a legally compliant gift card and gift certificate program.  Now, in the United States at least, an issuer (and sometimes the seller) must comply with the U.S. Federal Credit Card Act of 2009; the gift card and gift certificate laws on the state level; the applicable escheat, abandoned or unclaimed property laws; and an increasingly complex and often perplexing overlap between one or more of these statutes, sometimes, as is the case in New Jersey, including complexities within the same state.

Need help?  Feel free to contact Keri Bruce or Joseph I. ("Joe") Rosenbaum, or the Reed Smith lawyer with whom you regularly work.  We are all happy to help.

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Chapter Authors

United States

Douglas J. Wood, Partner – dwood@reedsmith.com
Stacy K. Marcus, Associate – smarcus@reedsmith.com
Anthony S. Traymore, Associate – atraymore@reedsmith.com

United Kingdom

Marina Palomba, Partner – mpalomba@reedsmith.com

Germany

Stephan K. Rippert, Partner – srippert@reedsmith.com
Katharina Weimer, Associate – kweimer@reedsmith.com

Introduction

This chapter looks at the relationship between social media and advertising and marketing practices, and how to protect brands.

As an emerging technology with nearly limitless boundaries and possibilities, social media gives consumers unprecedented engagement with a brand. Consumers are empowered. However, this brings with it risks as well as gains. Consumers aren’t just buying a product or service online, they are discussing, reviewing, endorsing, lampooning, comparing and parodying companies and their brands. They aren’t simply being targeted for advertising; in many cases, they are participants in the creation and distribution of advertising. Companies can better enable, influence, monitor, react to and, hopefully, monetise the consumer conversations taking place in social media, and can better engage and interact with the consumer directly with their brands—but it’s critical to understand and navigate the legal minefields that are both dynamic and evolving as the media evolves.

Why are advertisers and marketing professionals drawn to social media? Because more than 1.8 billion people use the Internet every day[1], and, according to Nielsen, consumer activity on social networking and blogging sites accounted for 17 percent of all time on the Internet in August 2009, up from 6 percent the previous year.[2] The Internet audience is larger than any media audience in history, and it is growing every day. It’s those eyeballs that marketers want.

In the UK alone, spending on online advertising grew by almost 5 percent in the first six months of 2009, while television spending fell by 16 percent (see IAB UK News, “Internet advertising spend grows by 4.6 per cent”). It was also reported that UK online advertising spend overtook TV advertising spend for the first time.[3] Almost two-thirds of businesses say they intend to spend more on onsite social media, while 64 percent are looking to boost search engine optimisation efforts and 56 percent want to invest more in mobile marketing. Looking forward, new global research by Econsultancy and ExactTarget has revealed that 66 percent of company marketers in the UK intend to spend more on Internet advertising this year compared with 2009. Total Internet advertising spending will surpass £3.5 billion in the UK this year, according to a forecast from eMarketer.

Morgan Stewart, director of research and strategy at ExactTarget, comments: “The shift from offline to online is in full swing as marketers look to measure direct increases in top line sales, site traffic and improve overall marketing return on investment.”

In the United States, Nielsen estimates that ad spending on social networking and blogging sites grew 119 percent, from an estimated $49 million in August 2008 to $108 million in August 2009.[4] Expressed as a percentage of total U.S. online ad spend, ad expenditures on social networking sites climbed from 7 percent in August 2008 to 15 percent in September 2009.[5] In February 2010, the COO of Kellogg’s confirmed that since 2007, the company had tripled its social media spending.[6] Where are companies spending these dollars? The possibilities are numerous.

National authors begin by examining the use of social media and the risks and gains involved. Branded channels, gadgets, widgets, promotions such as sweepstakes and contests within and even across social media platforms, are a few of the ways companies are using social media to increase brand awareness. Even companies that are not actively using social media platforms to engage consumers must monitor social media outlets for comments made about the company or its brands. Social media cannot be ignored, and this section explores the legal implications of marketing in this manner.

Next, we look at the use of social media to foster brand engagement and interaction. Many companies are moving beyond simply having a page on Facebook, MySpace or YouTube, and are encouraging consumers to interact with their brand. Companies are using social media to provide customer service and get product reviews. Marketers seek to engage the consumer in developing user-generated content (“UGC”) around their brands for advertising, and actively solicit their social networks to create buzz, viral and word-of-mouth advertising campaigns. Some even employ “street teams” of teenagers who plug and promote a brand, movie or music artist in return for relatively small rewards. Who controls and retains liability for the statements made and content provided in the social media universe? Who owns the content? Will brand owners lose control of their brands?

Finally, we explore the impact of social media on talent rights and compensation. As discussed above, increasingly, ad spend is moving online. Along with this shift, the line between “content” and “advertising” has become blurred. Celluloid is being replaced by digital files and projectors by flat screens and monitors. What once aired only on television is now being moved over to the Internet by content owners and advertisers, or is going viral thanks almost entirely to consumers with a little encouragement from advertisers. We will examine how this shift impacts talent compensation and will discuss its application to the Screen Actors Guild (“SAG”) and American Federation of Television and Radio Artists (“AFTRA”) commercials contracts.

In our review, we have covered advertising regulation in the United States, the UK and Germany. Note that the UK has a largely self-regulatory environment. This self-regulation comes in the form of codes of practice that are designed to protect consumers and create a level playing field for advertisers. The codes are the responsibility of two industry committees—the Committee of Advertising Practice (CAP) and the Broadcast Committee of Advertising Practice (BCAP), and are independently administered by the Advertising Standards Authority (ASA). Online advertising, including via social networking and the techniques referred to in this chapter, fall under the remit of the CAP Code (which is explained in more detail in Chapter 2).

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Wishing you health, happiness, prosperity and peace in 2010

In a tradition that started almost 4,000 years ago by the ancient Babylonians – although they celebrated the new year upon seeing the first new moon after the vernal equinox – please enjoy a very happy, safe and joyous new year celebration.  Those of you who look forward to Useless But Compelling Facts can read more about the history of new year celebrations, or how the new year’s festivities, now televised around the world, began in New York’s Times Square.

 
This is the first year we have published in a blog format, and with your feedback – mostly positive and always constructive – and more than 17,000 visitors in slightly less than 11 months, I am grateful and appreciative for your support.  Thank you for reading Legal Bytes.

-  Joe Rosenbaum

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This post was contributed by John Feldman, edited by Joseph I. Rosenbaum.

Puerto Rico Sweepstakes Regulation Revised

Earlier this week, Luis G. Rivera Marín, Secretary of the Department of Consumer Affairs (DACO) of the Commonwealth of Puerto Rico, announced the enactment of the country’s revised Sweepstakes and Games of Chance Regulation, effective Nov. 27, 2009. The new rules remove legal barriers that previously forced advertisers and other promoters to void sales promotions in Puerto Rico and to limit participation in many product and service sweepstakes to only residents of the 50 United States and the District of Columbia. When it becomes effective, the regulation will provide the 3.9 million residents of Puerto Rico with an array of opportunities to participate in the “chance to win” promotional marketplace more generally available within the U.S. market.

“I am pleased to announce that the many practical complications U.S. advertisers previously experienced conducting sweepstakes in Puerto Rico, which routinely led to excluding our residents from participation in their promotions, are now behind us,” Mr. Rivera said. “For many years our laws made it impossible for companies to conduct national sweepstakes here, and consequently we have been excluded from the opportunity to take part in these potentially valuable promotions. We enter a new chapter now whereby our law adequately protects consumers without locking ourselves out of perfectly legitimate sweepstakes.”

Changes in Puerto Rico’s Sweepstakes and Games of Chance Regulation align the Commonwealth’s rules and definitions with regulations in the United States promulgated by the U.S. Postal Service, the U.S. Federal Trade Commission and individual states. Highlights of the new regulation include:

• The definition of "consideration" contains some of the best language for SMS and other technology-based sweepstakes in the United States
• The requirement that the rules be certified by a notary is GONE
• The vague prior reference to having to deliver prizes within three months is GONE
• An express provision defining "abbreviated rules" has been added and the regulation provides for the use of abbreviated rules in advertising, so long as they point to where the full rules are published
• Although rules still need to be "published," you can now satisfy that requirement by putting them on a website
• The requirement that rules be published, disseminated and spread in Spanish is GONE. The new regulations allow you to publish them in the language of the advertisement.
• Complicated “odds of winning” statements have been simplified
• Complicated publication dates for different types of promotions are GONE
• The requirement that the drawing procedures be certified by a notary is GONE
• Notarized certification of game piece security codes is GONE
• Tax liability, which was previously placed on the promoter, is now on the entrant 
• A requirement that full rules appear in print ad covering more than two-thirds of the page is GONE
• Regulations concerning unavailability of prizes based on "foreseeability" of circumstances is GONE
• Penalty for not awarding prizes if the circumstances were foreseeable is GONE
• Although changes to rules still need to be approved by the Secretary, if no action is taken after 10 business days, the default is approval
• The complex prize awarding regulations (e.g., within three months; quality advertised) has been simplified—now requiring that prizes be awarded as advertised
• The requirement that alternate winners be chosen is tempered by the caveat that some prizes, because of their nature, cannot be awarded to an alternate winner
• Any distinction between games originating inside or outside of Puerto Rico is GONE

“DACO is grateful for the assistance of John Feldman, a partner in the Washington, D.C. office of Reed Smith LLP, an international law firm, and Gabe Karp, Executive Vice President and General Counsel of ePrize LLC, the worldwide leader in interactive promotions, who both provided the Department with a great deal of information and significant input and suggestions in redrafting the sweepstakes regulations,” Mr. Rivera said. “Without Mr. Feldman’s and Mr. Karp’s able consultation and guidance over the past several months, the opening of a vibrant Puerto Rican sweepstakes market for U.S. advertisers and our people would not have been possible.

“Both Reed Smith and ePrize are cutting edge in the area of promotions, particularly in the cross border aspects of this advertising specialty,” Mr. Rivera continued. “They provide aggressive and creative thinking, as John and Gabe did in helping us solve our longstanding issue with sweepstakes barriers.”

Legal Bytes congratulates John Feldman in our D.C. office, who is not only an authority in sweepstakes, contests and a wide variety of promotions, but is also well-regarded by peers and by regulators who, as in this case, call upon John for his insight and who respect his reasoned and experienced views. Nice work. You can download the text of the revised Sweepstakes and Games of Chance Regulation right here.

If you are a client, you can get the benefit of his experience by contacting John Feldman directly; or me or Douglas J. Wood any of our Advertising Technology & Media law team; or the Reed Smith attorney with whom you regularly work. If you aren’t a client and you advertise, engage in promotions or marketing – why aren’t you?

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Did you ever have the experience of someone walking up to you and telling you that you look just like someone . . ? Most of us at one point or another have had that experience. Well, Russell Christoff was in a store in 2002, when someone came up to him and said he thought he looked just like an image he had seen on a jar of coffee. Perhaps he laughed at that moment, but about a month later, when Mr. Christoff actually saw the jar of Taster’s Choice instant coffee on a shelf – with his recognizable image on the label – he bought the jar of coffee, stopped laughing, and called his agent.

It seems Mr. Christoff, a former model, had posed for a photo shoot for Nestlé (owner of the Taster’s Choice brand) back in 1986 and was paid $250, with the understanding that if the company used his likeness in marketing, he would receive $2,000 in compensation. Thus begins the tale and trail of a legal battle that continues to this day. Mr. Christoff filed suit in 2003 alleging violation by Nestlé of his right of publicity. (California Civil Code § 3344 bars, among other things, unauthorized use of a person's image for commercial purposes.) The statute allows for damages, punitive damages, the award of attorneys’ fees AND (unlike many other state statutes protecting rights of publicity), profits attributable to the unauthorized use.

As the action unfolded, Mr. Christoff discovered Nestlé’s had begun using his image in 1986. Not only had he never been paid the $2,000, but there was more as well. Much more. It appears that from 1997 to 2003, Nestlé had also used his image on eight different varieties of Taster’s Choice brand labels in 18 different countries, including in Israel, Japan, Kuwait, Mexico, South Korea and the United States. At the trial, a jury concluded that Mr. Christoff should have been paid $330,000 for the use of his likeness and was entitled to damages of more than $15 million! California’s right of publicity statute, as it relates to proof of a defendant’s profits, states that the plaintiff needs to “present proof only of the gross revenue attributable to such use,” (emphasis supplied) while the defendant must prove “deductible expenses.”

In this case, even though the jury determined that only 5 percent of the sales of Taster's Choice over the period of 1997 – 2006 were attributable to the use of the image, a profitable product and extended use made the jury award substantial, to say the least. Now you would think that the jury verdict in 2005 might have put an end to it, but predictably, Nestlé appealed and the saga continues.

Based on Nestlé’s appeal, the appellate court reversed the jury’s verdict based on the fact that Mr. Christoff had not brought his lawsuit before the statute of limitations had expired; but just this past Monday (Aug. 17), the California Supreme Court ordered the case back down to the trial court to take another look. Why, you may ask? Because the Supreme Court wants the trial court to answer the following question: What’s the correct way to calculate the statute of limitations – start date/end date – in lawsuits involving rights of publicity and product labeling?

Since Mr. Christoff brought his lawsuit six years after Nestlé USA, Inc. began using his image (but less than a year after he discovered it), the original trial court instructed the jury to use a two-year statute of limitation, but to use the point at which Mr. Christoff knew, should have known, or could have reasonably suspected his image was being used on the label, as the starting point for calculating when the statute of limitation would bar his lawsuit. It seems the trial court determined that unlike offensive or defamatory remarks that would not be considered “published” over and over again, simply because they were repeated in 100,000 copies of the same book, the “Single Publication Rule” (Uniform Single Publication Act as codified in Civil Code section 3425.3) did not apply to cases involving the use of someone’s likeness or image. So here’s how the wrinkle unfolds . . .

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Last month, Legal Bytes posted Online Gaming Laws Survey – Free (Yes, You Read Correctly), which also included a link that would allow readers to download a copy of a chart summarizing the U.S. laws that apply to online gaming (Survey of U.S. Federal and State Gaming Laws & Regulations). In that posting, I asked "Why would a law firm be giving away such valuable research for free online, on the web, for everyone to see?" The answer, my friend, is . . . (you were expecting a Bob Dylan line, weren’t you) . . .

The answer is simple. We know that many lawyers and firms can do research! While it may come as a shock to some, it comes as no surprise to us that Reed Smith may not be the only, or even the first, law firm that has done 50-state surveys of various laws and regulations. However—and it’s a big HOWEVER—Legal Bytes may be among the few lawyer-driven blogs that actually gives research away to any visitor to our blog—for nothing. You don’t even have to be a client, but you may want to be. It’s free. Yours for the taking.

It’s free because in this age of information and social media, we believe it’s not the research that distinguishes lawyers or law firms. Oh, of course we must do research and, of course, we need to be good at it. We are. But clients want lawyers who can wisely and effectively apply and use the research; lawyers who know how to use years of hands-on experience gained from working with clients, and apply it to real-world, real-life and real-time situations. We give research away because our sustainable competitive advantage is based on relationships, and the depth and wealth of experience that enables us to bring value to clients when they call.

So, just as with online gaming, we turn today to gift cards and gift certificates, online and offline, and the wealth of experience our Advertising Technology & Media law group has developed and applies regularly for clients. The experience that lets us give valuable research away for free. So enough philosophy, show us the money.

In connection with the work we do for many clients, we have found it useful to develop and maintain a database, which we update periodically, relating to Gift Cards, payment instruments that are increasingly blurred with prepaid debit cards, stored value cards, smart or chip-cards, reward cards, discount certificates, and traditional credit, charge and debit cards. If you are in this market, you already know there are regulations that require certain disclosures, certain restrictions on expiration dates and on the imposition of inactivity fees, as well as escheat and abandoned property laws that may apply on a state-by-state basis. You also know that for the first time, the Credit Card Act of 2009 will impose federal legislative and regulatory requirements on gift cards.

So with pleasure to all of our current (and future) Legal Bytes readers and subscribers, here is a link to our publicly available chart covering Federal and State Gift Card Laws. The chart provides a handy citation and reference tool for the various gift card and gift certificate laws in the 50 United States and the District of Columbia, and includes a description of the newly enacted Credit Card Act of 2009, which provides certain consumer protections applicable to gift cards under U.S. federal law.

Now the disclaimers. First, no chart can be as comprehensive or as up-to-date or clear as actually reading and knowing the statutes and regulations themselves. It is a guide, not an authority, and you should not rely on it for anything other than as a roadmap to proper and thorough legal counsel based on the source material itself. That said, let’s not minimize its value either: it represents the distillation of years, and of hours of work and effort. A special thanks to Keri Bruce and Stacy Marcus for helping to consolidate and refine it so that it is ready for prime time.

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When Merck was busy battling lawsuits emanating from the pain medication Vioxx, the Wall Street Journal, among other news organizations that were reporting on the proceedings, also reported on the practice of "ghostwriting," alleging that five out of the six authors of a study published in the Journal of the American Medical Association were paid consultants to Vioxx lawyers! An editorial accompanying the studies in JAMA opined that manipulation of publications in the promotion of drugs by paid ghostwriters might not be such an uncommon occurrence. The Washington Post even went so far as to report that the JAMA studies essentially “accuse” the drug manufacturer of “scientific fraud.” 

Merck responded to the Wall Street Journal article expressing disappointment at reports that trial lawyers might have made payments to authors whose work found their way into medical journals. While a majority, if not all, of the Vioxx cases have been settled, inquiries into the practice of ghostwriting—payments by pharmaceutical manufacturers for articles frequently extolling the virtues of one drug or another and appearing in medical journals—seems to be a continuing, and problematic, means of promoting pharmaceuticals.

As they say, timing is often everything. A few weeks ago, I had prepared a presentation for an international gathering of lawyers at Limerick University in Ireland, describing the use of testimonials and endorsements in advertising. You can read my previous post and obtain a .PDF copy of the presentation. In briefing the assembled professionals—mainly from the United States and Europe—my presentation and their interest focused heavily on the Federal Trade Commission’s proposed updates and revisions to its Guides that were last revised in 1980.

One of the items clearly on the FTC’s agenda is DISCLOSURE—specifically, disclosure of material connections between those who promote and endorse products and services, and the advertisers and companies that create, manufacture, distribute and sell these products and services. Indeed, the FTC is considering extending liability to endorsers themselves who promote goods and services, if the claims being made are found to be false, deceptive, or misleading, or if they represent unfair competition. While much of the discussion surrounding these revisions has focused heavily on new social media and digital distribution—buzz, viral and word-of-mouth marketing, social networks, bloggers, vloggers, sploggers and virtual worlds—and both traditional and revised Guides (as well as specific advertising guidelines for regulated pharmaceuticals), all focus on the potential for misleading consumers as to the credibility of the speaker or writer, where a material connection to the sponsor is not clearly disclosed. Whether a physician who reads an article that is authored by a paid ghostwriter and that appears in a medical journal, would be considered a "consumer" under these circumstances; or whether an independently peer-reviewed article would be considered advertising or promotional activity, are separate questions. But clearly these are topics that have created "buzz."

Well, here we go again. Just recently, the ABAjournal.com reported that Wyeth paid ghostwriters for articles published in medical journals—in this case promoting certain replacement hormone therapy in menopausal women. You can read the full article here. While proponents (or should we say "defenders") of payments made to authors assert that if the medical professional is qualified; if the content is subject to rigorous peer-review by independent experts; and if the authors retain complete editorial control over the content and the views that are expressed; it should not be a problem and should be considered perfectly fine.

Assuming, as both the pharmaceutical companies and the individual authors assert, that the content of these articles is scientifically accurate, many questions arise. For example, is disclosure even necessary under these circumstances? Could failure to disclose these payments be construed as deceptive or misleading—always, or only under specific circumstances, and if so, what circumstances? What criteria will be used to determine if a payment is "material," and if disclosing (or not disclosing) that fact that would affect the reader’s perception of the credibility or impartiality of the authors? Is this even a "consumer" regulatory issue or does this belong to the FDA or another regulatory body relevant to the medical profession, since this isn’t really "consumer" advertising? These are questions perhaps that that FTC and David C. Vladeck, its new Director of the Bureau of Consumer Protection, may well decide to focus upon.

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“Advertising Law in the United States and Europe: The Challenges Ahead” is the subject of a CLE Conference organized and sponsored by the University of Limerick Law School and the Franklin Pierce Law School that is being held July 24 and 25 in Limerick, Ireland (Limerick is 20 minutes from Shannon). Douglas J. Wood and Joseph I. Rosenbaum, Co-Chairs of Reed Smith’s global Advertising Technology & Media Law Group, are among the distinguished faculty, which includes some of our clients, as well as scholars and government leaders from both sides of the Atlantic.

What’s more, these institutions have graciously agreed to allow us to invite our clients to attend at no charge. Yes, you read correctly. Free! Now you must be a client to take advantage of this promotional offer, and although you will have to pay your own way to join us and stay for the two-day course, what better time and excuse to visit Ireland? Yes, it’s short notice, but airfares are favorable, and if you are in Europe you literally have no excuse not to get away and take advantage of this great opportunity. Just click to learn more about the Agenda, the Faculty, the University of Limerick Law School, where the conference will be held; or nearby accommodations. Being a client does have its privileges, so if you are interested, email either Doug Wood or Joe Rosenbaum as soon as possible to take advantage of this opportunity. And start making your travel arrangements now!

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Although consumer credit regulation is hardly new – Regulation E, the Fair Credit Reporting Act, Regulation Z and laws regulating disclosures, debt collection practices, billing statements and the like have been around for decades – for the first time in U.S. history, Federal legislation is tackling pricing, rate modifications, advertising disclosures and fees, and adding a gift card angle as well. 

While the House has not yet passed this or any other version of the legislation, those in the know believe a similar, if not identical, bill will be approved by the House of Representatives and that the President is likely to sign it. 

Are you a bank, payment card association, credit union or financial institution that issues credit cards or gift cards? Here are highlights of the bill that passed the Senate:

• When marketing, a card issuer would not be permitted to increase any advertised ‘teaser’ rates for at least a year after a new account was opened for the consumer, and promotional rates advertised to consumers must remain in effect for at least six month;
• Unless the credit-issuing institution can get proof that anyone under 21 can actually repay their credit card debt, credit cards can only be issued to individuals under the age of 21 if a parent, legal guardian or guarantor agrees in writing to be responsible for the debts;
• If a consumer pays more than the minimum balance due, the excess must be applied to the balance with the highest interest rate;
• Card issuers will not be allowed to change rates retroactively on existing balances (there is an exception where the consumer is past due by 60 days – which, I guess, presumes that when a consumer can’t afford to pay their balance within 60 days, it’s ok to raise their rates since they probably won’t be able to afford to pay a higher rate either);
• Bills for balances due must be sent at least three weeks (21 days) before their due date;
• Card issuers will no longer be able to charge additional fees to consumers for alternate payment mechanisms (e.g., by mail, telephone, online, electronic, wire transfers), unless the consumer requests and the issuer offers some type of ‘expedited’ service;
• Consumers must be asked if they want to allow ‘over-limit’ credit transactions and if they do not affirmatively consent, the card issuer will not be permitted to charge a fee if the issuer still authorizes the transaction (e.g., your credit limit is $1,000 and you charge something for $1,001 and the authorization system approves the transaction anyway);
• Changes in the terms and conditions that apply to consumer cardholders will require at least 45 days’ notice; and
• The minimum amount of time a gift card must remain valid for use will be 5 years. First, it is likely this will apply to gift cards that are consumer-oriented and where full value is paid, and not to discounted, bulk sales, non-consumer, incentive, employer or promotional gift cards – but then the legislation isn’t final yet, is it? Furthermore, the Federal legislation is not likely to preempt more consumer-friendly State law (e.g., California prohibits any expiration date on such gift cards), but it will place a minimum level of consumer protection against earlier expiration, even in States that have no applicable regulation.

There is also consideration being given to removing any current legal and contractual restrictions on merchants that would allow them to differentially price their products and services based on the incremental costs (or savings) of accepting different forms of payment. When credit and debit cards were scarce and cash was king (cash, as in ‘currency’), regulation and industry groups frowned upon differential pricing, arguing that allowing a merchant to charge more for the use of a credit card was discriminatory to the consumer – even though the cost of accepting such payment instruments was higher (the merchant pays a fee (discount rate) to the card-issuing enterprise for the privilege of accepting the particular brand of card). Furthermore, the growth of corporate and purchasing cards and the use of payment instruments in B2B transactions has resulted in situations where a manufacturer accepts a purchasing card (procurement-based credit card) in payment of sales to distributors, wholesalers and retailers – a fee is charged to the manufacturer for the card transaction. This chain continues until a consumer makes a retail purchase, and if any or all of these transactions involve branded payment instruments and not cash, travelers’ checks, bearer bonds or two goats and a chicken, today, a fee would most likely accrue on each payment-card transaction at each step of the way . . . significantly raising the cost to everyone and ultimately the consumer. Stay tuned.

So: Consumer Credit? Co-branded promotions? Loyalty Rewards Programs? Gift Cards? Premiums and Incentives? Retail Promotions? Payment Card Industry (PCI) Data Security Standards? Privacy & Data Protection? Identity Theft? Data Breach? Pre-Screening? Online Digital Payment Systems? Corporate Cards? Purchasing Cards? E-Commerce? Regulation E? Regulation Z? Statement Insert Advertising; Credit/Demographic Market Segmentation? Free? APR? Limited Time Offer?

Any of these sound familiar? It’s what we do? Our Advertising Technology & Media Law Group; our Financial Institutions Group; our Data Security and Identity Theft Group . . . need we say more . . . If you need help (or you are just over stimulated by the flurry of legislation, regulation and excitement), call us or email me at jrosenbaum@reedsmith.com. We can help.

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Attention holiday shoppers. Not sure what to buy Aunt Matilda or cousin George? A gift card allows them to buy whatever they like? Maybe. Large retailers such as Sharper Image, Bombay Company and Linens ‘N Things have filed for bankruptcy or gone out of business, leaving behind millions of dollars in unused gift cards. In bankruptcy, money left on a gift card is treated as a debt, which the bankruptcy court can decide if it is to be repaid, and how. If the retailer stays in business, the court may allow it to continue to honor its cards, but even then consumers may not get the full value. Sharper Image, for example, was allowed to continue accepting gift cards, but only if the cardholder spent twice the value of the card in a single transaction. Bombay Company was allowed to pay its gift-card holders 25 cents on the dollar. If the retailer closes its doors, it is possible the consumer’s only recourse would be to file a claim and stand in line with the other unsecured creditors.

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A new provision of the Italian data protection law (Loyalty Cards, issued Feb. 24, 2005), is getting a workout. The Data Protection Authority fined a well-known supermarket chain €54,000 for not giving customers adequate ino theformation regarding use of personal data. The retailer issued loyalty cards—for shoppers to obtain discounts and rewards—and gathered customer names, email and cell phone numbers (personally identifiable information) and behavioral marketing information (spending habits and locations). Customer profiles were then evaluated and used to create targeted ad campaigns. The retailer didn’t ask customers for consent for all of these uses—a violation of the data protection law.

In Italy, if customer information is not used solely for operating the loyalty program, but for customer profiling and advertising, the consumer must be told and must give consent. While consent is not needed to carry out contract obligations needed to fulfill the loyalty reward program itself, collecting more information than needed for that purpose or using information for other purposes requires specific consent. Is this true elsewhere? In Europe? The United States? Canada? Latin America? Asia? New Zealand? Call me and find out, or read my bio.

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In June, H&R Block settled charges brought by the New York Attorney General arising from two sweepstakes programs involving instant-win scratch-off cards. The cards were available at retail when purchasing tax-return preparation services, or online via free registration. The advertisements online, in print, and on radio and television mentioned “no purchase necessary,” but the mentions were fleeting or not conspicuous, according to the NY AG. Further, in-store advertising did not include these words, nor were Official Rules posted in the retail stores. The NY AG noted that under these circumstances, customers who found about the promotions in retail stores had no way to know they could enter online at no charge. The NY AG alleged the lack of disclosure in stores about free entry, coupled with unclear or minor disclosures in the other ads, was false and deceptive. To settle, H&R Block agreed not only to clearly post the Official Rules at participating retail offices, but also to pay $245,000 in penalties and costs. The settlement also requires H&R Block to train employees to direct consumers to information about nopurchase means of entry and clearly disclose that alternate means of entry are available whenever advertising mentions entry is available by purchasing an H&R Block service.

There are complex state laws that cover how promotions, chance, skill or combinations, are to be advertised and operated. When marketing globally, rules are more complicated with language, currency, prize notification and disclosure regulations, as well as age and consent requirements on national, provincial or trading-block scale. What is a “skill” or when is “no purchase” required? When does the chance of winning have equal “dignity” when entering without a purchase? These are often subject to varying interpretation—online and offline. Compliance (registration and bonding in some jurisdictions) can seem an endless legal quagmire. Fortunately, Reed Smith’s Advertising Technology & Media lawyers around the world can help.

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When Coors asked, football fans chose to receive text-message alerts about the NFL football draft, each one containing a blurb about Coors Light; and mobile devices can also send messages, not just receive them. They can be interactive! While messaging technology allows only 40 characters for an ad (the other 120 are for content), simple tag lines are the current vogue.

Coors is not alone. Marriott has sponsored a campaign combining print and cellphone ads with free sports alerts from USA Today’s website. Verizon Wireless is sponsoring an ad campaign in which Screenvision, a company that boasts an ad network of thousands of screens in thousands of motion picture theaters, will ask theater audiences to vote by text messaging, with results calculated and displayed on-screen. The advertising campaign will feature branded popcorn containers and a short film directed by Spike Lee entitled “VCast Street.”

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When NBC Universal broadcasts “Deal or No Deal,” viewers are invited to play a “Lucky Case Game.” The game allows viewers to pick one of six cases and submit their entry via premium text message ($.99) or online. If you pick the right case, you are entered in a random drawing for a prize of up to $100,000. Well, wouldn’t you know. Someone lost and sued NBC under Georgia’s gambling laws, which make gambling contracts void and states that any “money paid…upon a gambling consideration may be recovered from the winner by the loser” (Hardin v. NBC Universal). There are also actions pending before the California courts. Just a few weeks ago, the Georgia Supreme Court held that the $.99 was not a bet or wager, and there was no “gambling contract” between the plaintiffs and NBC. For now, and at least in Georgia, a premium text message game is permissible.

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According to a report in Media Week, advertising spending for advertising in videogames will reach about $1 billion by 2012. Advertising in video games can take a number of forms: in-game advertising, which is preformatted ads that appear within the game itself; advergames, which are games constructed around a particular brand or product in order to highlight and promote that product or brand; context-sensitive or dynamic advertising, which is similar to in-game advertising, but rather than static advertisements, can be contextually modified in a number of ways depending on when, where and how the in-game scene is viewed. Most of that growth is projected in the casual, online, web game world catering to a broader audience than hard core console gamers. The logic is that people are more willing to accept advertising in return for free game playing on the web; and absent a dynamic Internet connection with more user acceptance than is evidenced to date, console gaming provides fewer opportunities for placing context sensitive or behavioral advertising.

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I know of no suit by the FTC against a media company for running an allegedly deceptive advertisement for someone else’s product or service. In a July 9 letter, the FTC states the “active participation in advertising preparation” by a radio broadcaster is subject to challenge for possible violations of §5 of the Federal Trade Commission Act, which gives the Commission broad authority to prohibit “unfair or deceptive acts or practices.” The FTC characterized the broadcaster as a “hybrid entity,” both producing programming and participating in preparing advertising. In the past, ad agencies have been held liable for a deceptive advertisement if the agency was actively involved in developing and producing the advertising. Now the FTC is stating that media companies can be subject to the same analysis. Increasing use of product placement, sponsorships, context-sensitive advertising, branded entertainment and the host of ways advertising and programming increasingly intersect and blur, make it inevitable that media companies will more actively be challenged in connection with what products and services show up on the screen as part of programming. Now the FTC has also indicated the media may have responsibility for what shows up in advertising if a media company participates in its creation or development. It should also come as no surprise that certain advertising (targeted at children; diets)—those that have been special targets for FTC enforcement action—should receive the most attention. Do you have a policy regarding participation in the creation or development of advertising (if you are an advertiser or advertising agency you probably do) and does it need updating? If you are a media company, you may not (other than for your own ads)—but then, maybe you should. Where can you go for help? The answer is not a useless fact, but it is compelling.

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China: A 30-year-old man in the southern Chinese city of Guangzhou appears to have died of Internet gaming exhaustion. He had been playing online for three days and was declared dead at the Internet café where he had been playing. Clinics have sprung up to treat “Internet addiction,” noting that children and teenagers often play online games or surf the Web for days at a time. China has more than 140 million Internet users, and a huge market for online games.

Poland: A bus driver in Slupsk, a city in northwestern Poland, was fired for sending 38,000 text messages on his employer’s cell phone. The driver, Leszek Wojcik, told reporters he wanted to buy a car if he won the 100,000 zloty prize ($36,000) in an SMS (text messaging) contest. According to the Slupsk city transport service, Mr. Wojcik ran up a bill of about 94,000 zloty ($34,000) in his losing bid to win, sending an average of 1,200 text messages per day at a cost of 2.40 zlotys per message. Among the lessons learned: promotions and advertising using SMS, streaming and mobile technology are extremely powerful.

USA: A U.S. federal judge didn’t recall how he spent $3,000 at a strip club. He apparently also forgot a few other things, such as using a credit card for either an Internet dating service or to pay for pornography—all reportedly while married; the marriage has since ended. At the trial, when the Judge was asked about the $150 credit card charges, he reportedly replied, “I’m embarrassed to be even talking about this. I think you pay extra to get certain features, such as if you upload a picture or—I don’t even recall.” Under the Constitution, federal judges are appointed for life, and while they are supposed to follow an official code of conduct, they can be removed from the bench for high crimes, misdemeanors, treason or bribery.

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Well according to a June 5, 2007, decision by a Federal District Court in California, when it falls within “the plain language of the statute…”—that is, California’s Gift Certificate statute—(Section 1749.5 of the California Civil Code). Scared yet? You might be.

Philip Morris used proof-of-purchase promotions enabling consumers to collect “Marlboro Miles” from packages of cigarettes and send them in for catalog items. A few years ago, Philip Morris changed the promotion and announced that the “Old Miles” (ones collected prior to 2003) were only valid through 2003 and that in 2004, it would only accept the “New Miles.” In 2006, Philip Morris decided to end the promotion altogether and removed “Marlboro Miles” proofs-of-purchase material on cigarette packages sometime in 2006, indicating that folks had until the end of September to put in their catalog order requests with any “New Miles” they had accumulated.

As if the tobacco industry didn’t have enough trouble, now comes the class action! Since these were distributed to consumers under “an awards, loyalty or promotion program” the plaintiffs argue they should be considered gift certificates and covered under the California Gift Certificate statute. If that is correct, Old Miles, New Miles or any miles simply can’t expire!

But wait a minute. These aren’t really “gift certificates,” are they? Look at dictionary definitions, case law, the text of the California statute itself. Listen, if proof-of-purchase coupons on boxes are gift certificates when you run a promotion, then anything and everything that is part of any sort of rewards, loyalty or promotional campaign—think bottle caps, box tops, candy wrappers—rises to the status of potential gift certificate. What’s worse, if the decision holds (Courtney Reynolds v. Philip Morris USA), once the coupons or other items are categorized as a gift certificate, in California (among other states), they can’t expire—ever! In fact, read the decision and you’ll walk away with the notion that unless a 10-point ALL CAPITAL type font is used for an expiration date on the face of the proof-of-purchase icon or label, you may never be able to terminate at all.

Think the law and regulation of promotions—gift certificates, loyalty rewards programs, sweepstakes, contests and coupons, interactive gaming, online gambling—is complicated? That’s why Reed Smith created the Advertising Technology & Media law group. Between our leading practice in the U.S., our network of offices around the world, and the worldwide GALA network, we are at the top of our game. Put us to work for you…and while you are at it, pay attention to the special rules applicable to marketing and advertising which is (or could arguably be) targeted at children.

If you think the tobacco industry is the only target, just pick up a newspaper. Obesity in children is caused by advertising—didn’t everyone know that? The regulators seem increasingly inclined to think so. Violent behavior? Clearly there’s too much violence in movies and television programming. At least that is what’s on the minds of some legislators. That’s why we have Adlaw By Request. The Internet has not simply expanded the reach of advertising and marketing, but has transformed (an unabashed plug for Transformers) advertising and marketing into new worlds—both real and virtual. It’s a complex and highly regulated world out there—let us help guide you through it.

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In a decision of potentially far-reaching consequences, on Aug. 1, 2006, a U.S. District Court in New Hampshire ruled the sale of Simon Giftcards—prepaid electronic stored value cards—sold by the company that owns and operates shopping malls, are not subject to certain provisions of the New Hampshire consumer protection laws and are preempted by federal law. Simon cards look like ordinary plastic credit cards and operate on the Visa network. Simon became subject to action by the Attorney General in New Hampshire because each card had an expiration date and fees were imposed that reduced their value, violating provisions in New Hampshire’s Consumer Protection Act.

Simon cards are issued by U.S. Bank (formed under the National Bank Act) and MetaBank (a federal savings association under the Home Owners’ Loan Act). Simon had agreements under which each bank owns and issues the cards, manages the “account” relationship with the consumer, and sets the fees and terms that apply. Simon is responsible for advertising, marketing, promoting and selling the cards. Simon has no right to define or change the terms of the contract between the bank and consumer. Simon sells a Giftcard to a consumer and collects payment. The amount of purchase, minus an initial fee, is loaded onto the card, and Simon gives the consumer a copy of the card agreement along with the card. Simon deposits the funds into the bank’s account and the bank pays Simon a sales commission. When the consumer uses the Giftcard, the bank sends the money to the merchant through the Visa network, and all further deductions or fees charged are bank charges.

New Hampshire sought to stop the sale of these cards—asserting that Simon sells these Giftcards as an agent for the banks; and since Simon is not a bank, New Hampshire laws can be applied against Simon. Because the Giftcard is sold by Simon—a non-bank—the state claimed federal laws don’t preempt any limitations New Hampshire law impose to protect its citizens.

In deciding the case, the court notes that state regulations are preempted whenever they conflict with federal regulations, or when state law impedes the accomplishment of federal law objectives. Clearly, state regulation cannot limit fees charged or impose restrictions on the contract between these banks and the purchaser—thus state regulation is preempted. But what about Simon?

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Although many people think the Trojan Horse story comes from Homer, the Iliad ends before Odysseus comes up with the famous deception and the Odyssey occurs after Troy has fallen. It is Virgil, the most famous poet of Ancient Rome, who wrote the Aeneid that actually fills the gap. In Book II, the priest Laocoon warns the Trojans not to accept a giant wooden horse placed outside the walls and gates of Troy: “Quidquid id est, timeo Danaos et dona ferentes”—which translates into “Whatever it is, I fear Dardanians [Greeks] even when they bring gifts.” While we have come to think of a “Trojan” Horse as a form of malicious code—a computer virus wrapped in a friendly cocoon—the “Trojan” Horse wasn’t really Trojan at all: it was a Greek horse figure filled with Greek fighters who deceived and overpowered the drunken Trojans who thought it was a gift. The English expression “beware of Greeks bearing gifts” is derived from Virgil’s Aeneid.

Deception is also at the heart of legislation regulating gift cards, gift certificates, e-cards, gift codes and similar instruments—we’ll call them all gift cards in this article. Essentially plastic or electronic prepaid or stored value cards, they can be purchased or obtained by one person, freely transferred or gifted to another, used in promotions, or used by the original purchaser. Years ago, prepaid phone cards adorned the walls of gas stations and retail outlets. Today, newsstands, retail stores, the Internet are filled with them—adorning walls, displays, check-out counters, e-greeting card websites and online digital music services.

Gift cards owe their origins to pieces of paper issued by merchants allowing one person to pre-purchase value that can be given to someone else as a gift and which they can then use at an establishment to purchase goods or services available from that merchant. When you engage in a transaction with a merchant at the point of sale, you are presumed to know (or you should be able to know) the terms and conditions that apply. While there are legal exceptions, a posted sign that says “no refunds, no exchanges—store credit only” is part of the bargain you make when buying from that retailer. But what about a gift? If I hand you a gift card, how will you know what restrictions or limitations apply…the Trojan Horse!

Not limited by geography, gift cards can be used virtually (pardon the pun) anywhere. Chain store near you? Buy a gift card for your nephew across the street or across the country. Know a teenager who loves rock and roll, but prefer not sending a check for $100 and hope they head for the CD rack? Send a gift card that enables downloads, CD or subscription purchases online.

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This past November, the New York Giants and the NFL filed suit against Clear Channel Communications alleging breach of contract, trademark infringement, unfair competition and fraud. Apparently, a number of Clear Channel websites advertised a promotion that would enable listeners to win tickets to Giants’ football games. Both the Giants and the NFL allege that the stations were not authorized to use tickets as prizes in connection with any such promotion, and since the printed text on the back of the tickets specifically indicates tickets may not be used for advertising, promotion or other commercial purposes without the written consent of the NFL and the Giants, they sued. The complaint alleges that these promotions were unauthorized and (because apparently this was not the first time promotions like this were attempted) were a “willful and bad-faith” attempt to trade on the Giants’ and NFL’s famous trademarks and their goodwill. That, the complaint says, is likely to confuse consumers into believing that these promotions were sponsored or endorsed—authorized. The NFL and the Giants are seeking to enjoin the websites (and presumably any other medium) from using these tickets for promotional purposes or using their trademarks at all.

We will let you know as the two-minute warning approaches.

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A woman buying french fries at a McDonald’s drive-through window received a game card which she thought was worth a million dollars. However, when she submitted the card to the McDonald’s redemption center, security codes revealed the card only entitled her to a relatively low dollar amount as a prize winner. Didn’t win. No problem—file a lawsuit: simply allege McDonald’s induced her to purchase the food item knowing that crooks were afoot trying to steal prize-winning game cards. That, she alleged, gave her worse odds to win the million dollars than those advertised. Therefore, she should be declared a winner of $1 million…are you actually following this logic?

But there is a happy (and, fortunately, rational) ending to this story. McDonald’s actually had “official rules” for its promotion. Those rules, among other things, had an arbitration clause which, if enforceable, would preclude her from bringing the lawsuit into court. So McDonald’s moved to dismiss the lawsuit. In addition to upholding the enforceability of the arbitration clause, this past August the U.S. Court of Appeals (7th Circuit) dismissed the woman’s argument that she could not be bound by a contract (the “official rules”) that she had never read, having gone through the drive-through window. The rules were posted near the food counter, the rules were on the reverse side of tray liners inside the restaurant, and were also posted near the drive-through window. Even the french fry containers which had the game cards attached to them mentioned that Official Rules governed participation in the game.

She was alerted that there were Official Rules, she had ample opportunity to read the Official Rules, the Official Rules were openly and conspicuously available for inspection, and it would be “unreasonable and unworkable” to require that each customer be afforded a personal reading of a lengthy set of game rules, and require each one read and then sign an agreement to be bound by their terms. Put that in your sesame seed bun for starters. A valid contract existed (and the customer is bound by the Official Rules—including the arbitration clause) because a contract does not have to be actually read to be enforceable. Here, the consumer knew and had every reason to know there were detailed rules that governed the promotion. The presence of Official Rules was clearly part of the game card promotion. The Official Rules were available and easily obtainable for inspection and review. To create a valid contract, it is enough that the Official Rules were identified to her as part of the contest and that she had an opportunity to read them.

Promotions such as sweepstakes and contests are regulated. States often have detailed regulations—some general and some targeted at categories of promotion (e.g., retail, online), others at particular industries, some relating to the target audience (e.g., children, senior citizens, cause-related charitable promotions), and yet others related to prizes (e.g., travel prizes, motor vehicles). There are regulations requiring registration and bonding in a few states (New York, Rhode Island and Florida in some circumstances), prize notification and disclosure statutes, and a variety of laws, regulations and judicial pronouncements on differentiating promotions involving chance versus those that involve skill and those that combine both—in stores, at county fairs and online. But by making sure you stay within the boundaries of the law and by ensuring your “Official Rules” are crafted and drafted properly, you can run successful promotions and withstand challenges like the one brought by our french fry purchaser in this case. Need help, call Reed Smith. Nobody does it better!

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As we mentioned in last month’s issue, sweepstakes, contests and promotions are primarily regulated by state law, although federal statutes and regulations must be considered. Jurisdiction and eligibility across borders, language, currency restrictions, licensing and export of technology, liability, billing and payment, whether a deposit to play might be construed an account for banking purposes, or whether gathering non-public, personally identifiable information about contestants may have privacy implications, are just a few of the issues that transcend the “gaming” aspects of any legal analysis.

On the U.S. federal level, although the FTC can take regulatory action and sue advertisers for deceptive or unfair acts and practices, it relies heavily on the states to regulate the industry. The FTC has, however, promulgated rules that do have significant impact on promotions. For example, the Children’s Online Privacy Protection Act (“COPPA”) was enacted to protect children from marketers who collect or use personal information obtained online from under-age children without parental permission, and authorized the FTC to develop a rule that requires “verifiable parental consent.” Because contests are extremely popular for Internet marketing, online advertisers must be cognizant of COPPA if a portion of their online traffic is, or is likely to be, children under the age of 13.

To illustrate the maze of legal and regulatory issues, let’s use an example: Joe’s Airline, Widget and Screen Door Company wants to conduct a contest on the Internet in which participants are charged $2 to play successive rounds of chess, with prizes at various levels and a grand prize of a million dollars. Our promotion is really a unilateral offer to enter into a contract, subject to terms and conditions (e.g., rules) agreed upon through some manifestation of acceptance. Participants accept the offer by performing a required act—registering, paying, selecting an “I ACCEPT” link—and a binding contract is formed. Point number 1: if Joe fails to adequately disclose the rules upon which the offer is made, the promotion could be construed as an illegal lottery, rather than a contest. Point number 2: Joe better get the rules right and disclose them properly because there are cases which indicate once a participant enters (“accepts”), Joe cannot change the rules (i.e., unilaterally amend the contract). Something to think about: Could each chess game be viewed as a new contest, permitting amendments prospectively?

In general, to qualify as a contest, skill, and not chance, must determine the outcome, and chance may not determine the winner or prize amount. Most, but not all, state laws distinguish games of skill from games of chance, although states do not use a uniform standard to differentiate between the two. While some states prohibit requiring consideration to engage in a promotion where a prize is awarded, most states do not prohibit the payment of money if the promotion is a bona fide contest of skill. What constitutes skill? Good question. The decision is often a question of fact, and when the Internet is involved, evidence can be complex and technology-based, straining judges and juries. Two criminal courts in New York judging the legality of a shell game and a card game reached opposite conclusions.

A number of states have disclosure statutes which apply. Some (e.g., California) arguably apply to skill-based contests, while others do not. Many prize notification statutes were not intended to apply to skill contests, but are worded broadly to include any promotion requiring an entry fee or a purchase. Joe should also be aware that some state gambling laws do not limit their application to games of chance, but focus on whether players are asked to risk or wager something of value. In those states, a skill-based contest that involves betting or offers prizes dependent on the number of entries or the amount of entry fees should be reviewed carefully against state gambling laws. Remember the three elements that constitute an illegal lottery? A prize, consideration and chance. By including an equal and alternate means of entry in which there is “no purchase necessary” to enter or win, and by avoiding a payment (i.e., consideration), Joe can introduce the element of chance in the determination of the winner and not be in violation of federal or state law.
Maybe!

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Marketing and promotional experts already know that with rare exceptions (e.g., the government), lotteries are illegal. An illegal lottery is a game or contest in which the outcome is determined by chance, the entry requires some form of consideration, and the winner is awarded a prize. Over the years, these three elements have been the subject of scrutiny, regulatory opinion and judicial decision. Although interpretive rules are not cast in concrete, a prize can be nominal in value; consideration can take the form of visiting a store or filling out a lengthy customer survey; and, if chance plays a material factor in determining the outcome, no amount of skill in any of the other elements of the promotion will save the day.

Marketing and promotional experts use “no purchase necessary” or “free alternate means of entry” as tools to avoid consideration—in general, promotions with a freely available alternate means to enter may be based on chance and may have a prize. Some promotions involve skill—eliminating chance. Shooting a hole in one at golf or solving a mathematical puzzle are examples of skill-based contests. Of course, the skill must be bona fide—guessing the number of beans in a jar is not a real skill, no matter how good one becomes at guessing.

Against this backdrop, advertisers, eager to get their message in front of consumers, are finding life increasingly difficult. Have you noticed increased advertising in movie theatres, outdoor signage or on uniforms of your favorite sports figures? Distribution technology and storage and recording media have given us the ability to fast-forward or avoid viewing messages that previously required you to physically leave the room or change the channel! Hmmm…so people are spending more time on the Internet—browsing, surfing—how about advertising there?

Well things seemed to be looking up for advertisers—cookies, pop-up ads, banners, above and below the fold advertising, mass commercial e-mail. Seemed like technology was coming to the rescue. But, enter their legal and technical counterparts—cookie disablers, pop-up blockers, spy-ware and ad-ware detection programs, SPAM and other filters, coupled with legislation and regulation over intrusive technologies or programs that invade privacy or transmit information without consent. Getting the message across is still getting tougher.

One approach is the increased use of “product placement”—insertion of branded products into actual programming “content.” Branded products become part of the action—someone is drinking a beverage, driving a car, using a computer—all branded. One of the most interesting developments in the world of product place ment is taking place in interactive gaming. Interactive games require players to sit, often for hours, staring at a screen, paying close attention to the game. Background, backdrop, even music, contribute to making games realistic and become music to the ears of advertisers targeting a captive audience.

Can interactive, Internet-based games require a participant to pay to enter and participate—online “pay-to-play” games—and provide the winner cash or prizes? Here’s how such a game is typically structured: the participant downloads licensed programming for installation on his or her computer—the platform from which instructions and controls are transmitted. When combined with instructions and controls from team members or opposing players, the programming allows the game to be played. To enhance the gaming experience (and also to bolster the argument these are predominantly skill-based, not based on chance) many gaming platforms have sophisticated mechanisms to rate players and provide “matches” of comparable skill. Assuming games are skill-based, many (but not all) jurisdictions permit the payment of cash to play and the award of a prize. In some jurisdictions (but not all), the prize can even be derived from the number of players and the amounts paid by the participants. Check with Reed Smith before making any assumptions.

Regulation of Internet contests in the United States falls into four broad legal categories: (a) regulation of sweepstakes, contests and prizes; (b) regulation of unfair and deceptive trade practices; (c) regulation of gambling; and (d) consumer protection. We will turn to a more comprehensive legal review in next month’s issue, but we will tell you that if your game attracts children, you had better ensure there are mechanisms enabling you to comply with special regulations that apply. These are not limited to issues involving the age of majority and the ability of participants to legally enter into binding contracts (e.g., Alabama and Nebraska = 19; Mississippi and Puerto Rico = 21). Compliance with the Children’s Online Privacy Protection Act (“COPPA,” not to be confused with COPA or Copacabana—anyone still reading?), considerations of parental consent, propriety of content and a host of other regulations and legal considerations, come to mind.

Stay tuned for next month’s issue to find out more about these legal issues.

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