By Nigel Miller, Commerce and Technology Partner, Fox Williams LLP

Competitions can be a great form of below-the-line advertising. But if they are not run properly, or in accordance with the law, then they can badly backfire causing reputational damage and regulatory action as well as financial loss. One only has to think of names such as Hoover, Blue Peter, Richard and Judy etc etc.

The first issue to consider is whether your competition is legal. The difference between a lottery and a competition is crucial because (apart from the National Lottery and certain other exceptions for non-commercial purposes) lotteries are illegal. On the other hand, genuine prize competitions and free draws are lawful.

The law was found in the Lotteries and Amusements Act of 1976. However, the law suffered from a lack of clarity on the distinction between unlawful lotteries and legal competitions. All this has changed from 1st September 2007 when the Gambling Act 2005 came into force. The new Act seeks to clarify the distinction. The newly formed Gambling Commission (which has taken over the role previously played by the Gaming Board in regulating casinos, bingo, gaming machines and lotteries) will monitor the boundary between lotteries and competitions and take action where a scheme is promoted which, in its view, amounts to an unlicensed and, therefore, illegal lottery.

Lottery v prize competition?

A lottery may be either a simple lottery or a complex lottery. A simple lottery is one with the following three ingredients:

o you have to pay to take part,

o prizes are awarded, and

o prizes are allocated wholly by chance.

A complex lottery is one where again, participants must pay to take part, but prizes are allocated by a series of processes, the first of which relies wholly on chance.

If a scheme falls within the definition of a lottery, then it will not be lawful unless it has been licensed by the Gambling Commission. This will also include a requirement that at least 20% of the proceeds are contributed to a good cause.

On the other hand, prize competitions (where prizes are allocated in a test of skill and not wholly by chance) and free draws (where there is no payment to take part) remain free of statutory control and can be run by businesses for their own commercial purposes. They may however come under the control of either Ofcom (where they use broadcast media) or ICSTIS where they use premium rate telecommunications services.

Free prize draws

Many schemes which currently operate as competitions are, in fact, lotteries because you have to pay to take part. An example is a quiz show where you call in via a premium rate telephone number. Such games will either have to stop operating altogether or operate under the provisions relating to lotteries. Alternatively, they could change their format so that they fall within the provisions relating to either prize competitions or free draws.

Free draws that do not involve payment always have been and will remain exempt from statutory control. The Gambling Act seeks to clarify the distinction by defining what will amount to a payment. If the cost of entry is simply the normal cost of a letter by ordinary first-class or second-class post or a normal rate telephone call, then this will not amount to a “payment”. On the other hand, having to make a premium rate call or paying for goods or services at an inflated price which reflects the opportunity to participate, will be regarded as payment.

The definition of “payment” includes cases where there is a requirement to pay to collect the prize. That does not mean that prize winners cannot be required to pay normal delivery costs needed to obtain the prize so long as there is no additional payment over what it would normally cost to pay for delivery or use.

It is irrelevant who benefits from any payment. So, if a competition organiser makes no charge for entry but the telecommunications company does, that still involves payment as defined in the Act.

Where there is a choice of how to enter (e.g. by phone, by post or by internet), it will not be treated as a “payment” where there is a choice to participate either by paying or by sending a letter by ordinary post or by using another method of communication which is neither more expensive nor less convenient than entering by paying. Given that not many people do not have ready access to the web at home, a competition which offers an alternative ‘free’ entry route via the web may not necessarily offer a genuine choice or the alternative may not be as convenient as the paid route.

If the condition for entry into a competition is simply the provision of reasonable personal information (for example, the completion of a survey form) it is not thought that this will amount to “payment”. The position might be different where large quantities of data are requested before entry to the draw takes place, particularly where data is obtained in circumstances where it is intended to be sold to third parties.

Product promotions are permitted, so long as entry involves no cost beyond the normal cost of the product. However, a product linked to a promotion which is charged at a price which bears little relation either to its cost of production or to comparable products may mean the promotion will be challenged as an illegal lottery. An increase in price just before or at the same time as the promotion may not be a problem if it can be shown that the price rise is unrelated to the promotion, for instance because of higher costs of such things as raw materials or transport. The test is whether an identifiable element within the price of the product during the promotion can be said to be a participation fee.

Skill element

A key element to the distinction between a lottery and a competition, as set out in the new Act, is that, in competitions, success depends, at least in part, on the exercise of skill, judgement or knowledge by the participants.

Many competitions have exploited the current lack of clarity in the law to run what are in effect unlawful lotteries. For instance, many competitions involve questions which are so simple to answer that in reality they do not require any genuine skill or knowledge. An example might be one used by “Richard and Judy”“Bags carried on board an aeroplane are commonly known as (a) foot luggage, (b) hand luggage or (c) head luggage”.

Under the new Gambling Act the element of skill required must be such as may reasonably be expected to deter a significant proportion of people from entering the competition or eliminate a significant proportion of those who do. A competition which asks just one simple question, the answer to which is widely and commonly known, will fail to meet the test and will fall to be classed as an illegal lottery because the simple question will not eliminate a significant proportion of actual or potential entrants. On the other hand, word and number puzzles, where entrants have to solve a number of clues, would be lawful, even if those who successfully complete the puzzle are subsequently entered into a draw or tie breaker to pick the winner. Also, the fact that the answer to a question could be discovered by basic research, on the internet or elsewhere, will not mean that it lacks the necessary element of skill.

The Commission thinks that organisers should be in a position to produce evidence of estimates of these likely proportions and know their target audience. For instance, if a TV programme carries a competition and the organisers wish to argue that the skill question will eliminate a significant proportion of those who wish to enter, the organisers will need to be able to provide some evidence of the propensity of its audience to enter such competitions. This may require market or other research to be conducted by the competition organiser. Ultimately, however, only the courts can authoritatively interpret the law and it may be that it will take some time before case law develops a clear view of exactly where the border between skill and chance falls.

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

Nigel Miller is a Commerce and Technology partner at City law firm Fox Williams LLP. Nigel can be contacted at nmiller@foxwilliams.com or on 020-7614 2504.