PURPOSE:
The purpose
of this presentation is to expand and refresh the knowledge
of promotion and direct marketing professionals about legal
issues affecting them and their clients. Although an overview
of the legal issues generally affecting promotions will be
presented, some emphasis will be given to laws and regulations
specifically aimed at the direct marketing of services and
products through various means. The objective is not to make
everyone legal experts, but to make everyone at least recognize
potential legal issues and know enough to contact legal counsel
before proceeding further with a promotion concept or marketing
assignment.
SCOPE:
Because
of time and space limitations, this presentation will cover
the general rules governing typical promotions that everyone
working in the industry should know. Whenever possible, rules
particularly aimed at the direct marketers will be identified
and "red flagged." Some attention will be given
to the FTC's Mail Order Rule, sales taxes, and other issues
affecting customer loyalty programs, catalog sales, and premium
offers. Specially regulated industries, such as alcohol, tobacco
and dairy, will be identified and only a brief sampling of
the special regulations given. At best, this presentation
will provide an introduction to legal issues and identify
the sources available, which can help make promotions comply
with applicable laws.
THE PRESENTATION:
A. LEGAL EFFECT OF CONSUMER OFFERS:
All offers
to consumers (eg. coupons, mail-in certificates, chance or
skill promotions, self-liquidating offers (“SLOs”),
rebates, etc.) can become contracts that are legally binding
on both parties. The offer to consumers must be understandable
and completeB deceptive, incomplete, or vague offers will
generate legal problems for your clients. FULL DISCLOSURE
of all material terms and conditions are required. Courts
and regulators will hold the sponsor (your client) responsible
for any consumer confusion or deception and enforce the contract
to favor the consumer. Individual suits by consumers or class
action lawsuits by groups of consumers can also be used punish
and harass sponsors of deceptive, incomplete or sloppy offers.
B. WHO POLICES CONSUMER OFFERS?
Federal
legislation is broad and the number of agencies which could
become involved include: Federal Trade Commission, Department
of Justice; U.S. Postal Service; Bureau of Alcohol, Tobacco
& Firearms; Food & Drug Administration; US Customs;
and others. All states have legislation and administrative
agencies protecting consumers and regulating businesses. State
regulators could include: attorneys general, consumer protection
departments, alcohol beverage control departments, dairy and
environmental control commissions. In certain instances the
consumers (or groups of them) could initiate lawsuits in federal
and state courts. Fines, penalties, settlements, or judgments
imposed by regulators or by the courts could cost offenders
thousands or even millions of dollars. In the case of highly
regulated industries such as beverage alcohol, penalties could
include temporary suspension or even revocation of an alcohol
manufacturer’s license to sell.
C. TYPES OF CONSUMER OFFERS or PROMOTIONS/ laws affecting
them
1. "Free" Offers and "Cents-Off" offers/coupons:
Because
they have historically been one of the most abused offers,
the federal government and most states (even New York City)
have laws and regulations governing "free" offers.
Both the FTC and FDA have separate and extensive regulations
governing "free" and "cents-off" offers.
Both sets of federal regulations require that any material
terms, limitations, or conditions affecting the offer be "in
close conjunction" with the first and most prominent
use of the word "free" or with the announcement
of the "cents-off"offer. In the case of "free"
offers, such material terms, limitations or conditions must
be in a type size not less than one third (1/3) of the size
of the largest type size used for the word "free"
in the materials making the offer. In practice, these regulations
do not permit the asterisk and "mice-type" conditions/limitations
copy at the bottom of -or hidden in- the offer materials (eg.
free standing inserts (“FSIs”), ads, store displays).
The "cents
off" regulations specifically cover "introductory,"
"buy one get one free," and similar offers which
suggest that products will be offered for discounted prices
or less than normal prices. Maximum durations and frequencies
of such offers are set forth in these "cents off"
regulations and manufacturers are required to keep pricing
records to demonstrate that the special, introductory, or
"cents off" prices are, in fact, lower than normal
prices at which the products are sold.
As with
all consumer offers, the expiration date of these offers must
be prominently set forth. Whenever possible refer to the coupon
checklist developed by our firm to insure that the required
elements are included in your clients' "free"offers
or "cents-off" offers.
In at
least two regulated industries, the dairy and alcohol industries,
rebates and coupons offering “cents off,” “free”
products, and similar discounts are subject to special restrictions
and are sometimes are prohibited. State dairy regulators often
prohibit coupons or other offers which could or do result
in sales of specified dairy products below cost. The dairy
laws and regulations of each state must be consulted to determine
affected products and local rules. State alcohol regulators
also enforce laws and regulations that severely limit the
use of free, cents off or similar coupon offers.
2. Merchandise, premium, catalog, and similar consumer offers:
Because
of abuses, the FTC adopted a "Mail Order Rule" to
strictly govern offers of any sort to consumers which contemplate
that merchandise ordered by the consumers will be mailed to
them. If the transaction is finalized by mail, the Rule applies.
Consequently, the FTC Rule applies where consumers redeem
points from "loyalty programs" (e.g., Amex Rewards),
redeem proofs of purchase (with or without accompanying cash)
for premiums/merchandise, or select items from a catalog,
direct mail offer, shopping TV channel, or site on the Internet
and have the items mailed to them. The mail order rule can
even be applied to control the amount of time in which sweepstakes
prize fulfillment must take place. Some basic provisions of
the Mail Order Rule include:
a. The consumer must be informed in written offer materials
of the date by which the mail order will be shipped ("shipping
date"). This shipping date must have been set using some
reasonable basis.
b. If no shipping date stated in the offer, the Rule requires
that the order be shipped within 30 days of the date the order
is properly completed, payment/requirements fulfilled and
sufficient shipping information provided by the consumer.
c. As soon as it is determined that a delay in shipping
will occur the Rule requires the sponsor to send a first notice
in writing which gives the customer notice of the delay, the
new shipping date, and the right to either consent to the
delay (by not responding) or cancel the order and receive
a prompt refund of money paid (by signing and returning the
cancellation election included in the notice). This "option
notice" must be sent before the announced original shipping
date or within 30 days of the completed order if no shipping
date was announced. The Rule sets forth the proper content
of the "option notice"- it requires a statement
that the customer's order will be automatically canceled if
the item is not shipped within 30 days of the original shipping
date.
d. If the item cannot be shipped on or before the delayed/revised
shipping date, the consumer must be sent a second notice (i.e.,
a "renewed option" notice) informing him that if
he does not agree in writing to a further delay in shipping,
his order will be canceled. To keep the order alive the consumer
must return in writing his consent to a further delay.
e. The FTC Mail Order is comprehensive and could cause substantial
penalties to be levied. For example, the Mail Order Rule was
applied to a pet food manufacturer’s "proof-of-purchase”
coupon offer where this pet food manufacturer was required
to pay $90,000 to settle FTC charges that it violated the
Mail Order Rule. Violation of the Mail Order Rule stemmed
from the manufacturer’s failure to ship promotional merchandise
in a timely manner, to advise consumers of the cancellation
rights and to issue prompt refunds in connection with promotional
items purchased in whole or in part with proof-of-purchase
coupons or labels.
3. Direct Mailing of Unordered Merchandise as Free Samples:
It is
NOT legal to send unordered merchandise through the mails.
The federal unordered merchandise laws, however, do permit
two kinds of unordered merchandise to be legally sent through
the US Mail without the consumer's prior consent:
a. free samples that are clearly marked as such; and
b. merchandise mailed by charities seeking contributions.
The law
provides that consumers may consider unordered merchandise
as free gifts which they are not obligated to return or pay
for.
Federal
laws include a special chapter called "Nonmailable Matter."
Among the items listed as "nonmailable" are: contraceptive
devices or information, unsealed or improperly sealed items
containing any fragrances, "household items" which
do not comply with the "child resistant packaging"
rules, perishable items, items exceeding mail size and weight
limits, or any other item whose mailing, possession or use
is restricted or prohibited by law. Consequently, caution
must be applied where regulated or dangerous or poisonous
product samples are part of a direct mailing. For example,
alcohol and tobacco product samples should not usually be
sent through the mail. Also, free samples of certain pills
or medicines must be carefully screened and checked as to
“mailability” with the US Postal Service and/or
FDA.
4. Chance Promotions:
Recent
Developments: The direct mail industry's use of chance promotions
has in recent years become strictly regulated by new federal
and state laws. The American Family Publishers case and similar
complaints filed with or by federal and state authorities
led to the introduction and adoption of very restrictive legislation
at both the federal and state levels. In 1999 the U.S. Congress
passed "The Deceptive Mail Prevention and Enforcement
Act." This federal law and similar new state laws place
special disclosure requirements upon direct mail chance promotions.
Bold print disclosures are often required- stating not only
that "no purchase is required" but also stating
that "a purchase will not in any way increase your chances
of winning." This restrictive legislation is clearly
designed to combat the blatant abuses and deception employed
by some prominent direct mail sponsors of chance promotions
(e.g., Publisher's Clearing House, Readers' Digest, et al.).
However, such legislation is broad enough to adversely affect
any chance promotions offered by direct mail to a named individual.
All federal
and state laws prohibit "lotteries." An illegal
lottery consists of 3 elements: prize, chance and consideration.
In order to be legal, a chance promotion must not require
consideration (e.g., purchase) in order for a consumer to
participate fully. What is sufficient "consideration"
to make a chance promotion turn into an illegal lottery is
often not clear and hotly debated. For example, the requirement
of multiple store visits in order to participate has been
found by some regulators to be "consideration."
To be legal, a chance promotion must offer, and give equal
dignity (status) to, the "no purchase necessary"
means of entering. Typically this means a "no purchase"
3”x 5” card mail-in entry or a toll free 800 number
means of entry. Until very recently, some state regulators
required even Internet only chance promotions to offer mail-in
or 800 number entries—but, with the expansion of computer/
online access these alternative means of entry are no longer
required for Internet only promotions.
Other
laws and Regulations: The new restrictions aimed at direct
mail sweepstakes will supplement existing federal and state
laws regulating chance promotions. Most laws already require
a prominent statement of such things as: the no purchase means
of entry, the value/description of prizes, how winners are
selected (random drawings or winning game piece), the odds
of winning, the name and address of the Sponsor, where winners'
lists can be obtained, and whether unclaimed prizes will be
awarded. Long standing FTC regulations state that, in the
case of “instant win,” game piece type chance promotions,
all game pieces must be randomly and secretly mixed, seeded,
and distributed ( with sufficient pieces held back for mail-in
entrants) so that no one knows the location of any winning
game pieces. Recent attempts to guarantee "winners in
every chain store or market" or attempts to seed grand
prize winners through "reverse shop lifting" of
the products containing game pieces are patently illegal and
contrary to FTC statements on the subject.
Game registration
and bonding: Each chance promotion where the prize pool exceeds
$5,000 is subject to advance registration and bonding in the
states of New York and Florida. Retailer involvement requires
registration also in Rhode Island. The amount of the bond
posted in New York and Florida depends on the total value
of all prizes offered (and whether the client has successfully
conducted prior promotions). In New York 30 days advance registration
is required. The registration process requires a full disclosure
of the Official Rules of the promotion. (The Official Rules
are considered the Sponsor’s contract with the participating
consumer.) Once the Rules are filed and/or offered to consumers,
they cannot be changed. Careful planning and drafting of such
Official Rules with qualified legal counsel is, therefore,
highly recommended.
Regulated
Industries: Additional and special restrictions apply to chance
promotions sponsored by alcohol or tobacco manufacturers.
For alcohol beverage sponsored chance promotions, most states
restrict the type of chance promotions which can be offered
and many require, in advance, “prior approvals”
by the state alcohol beverage control (“ABC”) regulatory
bodies. By limiting the dollar value (e.g., 25 cents for beer)
of what can be given as a gift or a prize to consumers of
alcohol products, California has, in effect, prohibited the
use of chance promotions, skill contests and other promotions
in connection with the marketing of alcohol products in that
state. Again advance planning with competent legal counsel
is crucial to avoiding the regulatory traps.
5. Skill Contests:
The advantage
of skill contests is that consideration/purchases can be required
from the consumer in order to participate, with the exception
of MD and VT residents. The skill must be recognizable and
measurable (for example: an essay, photograph, recipe, song
contests). Judging criteria and independent judges must be
provided. Contest rules must be carefully drafted and reviewed
to prevent disputes or any allegations that the promotion,
because chance plays the largest part in determining the ultimate
winner, is not a true skill contest, but an illegal lottery.
As a "rule of thumb" do not let chance determine
in any way (even for tie-breaking) the winner of a skill contest
if a purchase (eg. proof of purchase or other consideration)
is required to enter. Skill contests in connection with the
sale of alcohol products are banned in some states such as
Texas.
6. Customer Loyalty Programs:
These
"loyalty" programs have grown dramatically in popularity
since the beginning of "frequent flyer rewards"
programs. Offering loyal consumers "added value"
without additional cost by assigning redeemable points related
to their purchases is very attractive. Not unlike the trading
stamps of an earlier era, these customer loyalty programs
are used by various sponsors outside the airline industry
and offer the redemption of "loyalty points" for
desirable merchandise produced by third parties. Although
no one has yet suggested that such programs should be registered
and bonded under the old state trading stamp laws (to insure
consumers of proper redemption of their points), many operators
of such loyalty programs are running into legal and practical
problems in administering the programs and getting consumers
to redeem points. Redemption of points is desirable because
the Sponsor's exposure to future claims is diminished with
each redemption.
Here are
the potential legal issues and problems to consider when suggesting
or administering such programs:
a. Technically the "points" are things of value
and cannot be required to be surrendered in order to enter
a chance promotion-- unless a clear "no purchase necessary"
means of entry is provided. As things of value such "points"
may be found to be subject to state laws related to trading
stamps, escheat of unclaimed assets, sales taxes, and barter.
b. The terms and conditions of the entire "customer
loyalty" program must be carefully planned and fully
disclosed to the targeted consumers in advance of assigning
points; keep in mind that once established the "terms
and conditions" are difficult, if not impossible, to
change, especially if the changes diminish the rights of the
consumers or the use of the points.
c. To avoid staggering future liabilities to point holders
and long term administration costs, such programs should have
point expiration dates and "use them or lose them"
restrictions so that consumers know that they must use the
points by a certain date and that, if they don't have enough
by that date, they may lose them.
d. Assume that all state and federal laws related to merchandise
sales apply to the program, including the FTC Mail Order Rule,
sales and use taxes, consumer protection laws, etc.
e. Always reserve the right of the sponsor of the program
to change or terminate the program upon advance notice to
participating consumers.
f. As with other promotional offers to consumers, loyalty
programs are contracts with the participating consumers and
the courts / regulators will interpret any vague or incomplete
provisions against the sponsor and for the benefit of the
consumer.
CONCLUSION:
As noted
at the beginning, this presentation is only an introduction
to the vast array of legal issues that arise in the promotion
and marketing industry. Understandably there are a number
of important subjects that were not addressed. Some of these
other subjects include: 1. Contracts with clients, suppliers,
tie-in partners, free-lancers, actors and others; 2. Trademarks,
service marks, copyrights and other intellectual property
or rights, such as the rights of publicity and privacy; and,
3. Proper presentation, administration, execution and fulfillment
of consumer offers and promotions, including the drafting
of terms & conditions and “official rules,”
awarding or delivering prizes and premiums. Depending on the
promotion or marketing program involved, experienced legal
counsel can render advice on these and other subjects and
help ensure that the program will be in compliance with the
unique and varied laws affecting your industry. In short,
plan to consult knowledgeable legal counsel when promotions
and direct marketing programs are being developed.
May 2002
Copyright 2002 Jacob P. Bryniczka of Wake, See, Dimes, Bryniczka, Day & Bloom
Footnote: Mr. Bryniczka has represented clients in the promotion
and marketing industry for 30 years. Since 1984, he and his
firm have served as general legal counsel to D.L. Ryan Companies,
Ltd. (“Ryan Partnership’). Over the years Mr. Bryniczka
has prepared and given presentations to various audiences
on the laws affecting the promotion and marketing of consumer
products, including a 1995 presentation to Canadian lawyers
in Toronto sponsored by the Ontario Bar Association and a
March 2002 presentation ( with Attorney Russell Ferguson of
WSD&B) on the legal issues involved in the promotion and
marketing of alcohol products for employees of a prominent
beer manufacturer and its promotion agencies.
