Posted on

The Law of Unintended Consequences

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.

Posted on

When is a Proof-of-Purchase Coupon Not a Proof-of-Purchase Coupon?

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 Rimon 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.

Posted on

Gift Cards in the Legal Limelight

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?

Continue reading “Gift Cards in the Legal Limelight”

Posted on

Beware of Regulators Bearing Gift Cards

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.

Continue reading “Beware of Regulators Bearing Gift Cards”

Posted on

Disappointed in Super Bowl Bid, Giants Seek to Score on the Legal Field

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.

Posted on

Would You Like Fries With That Game Card?

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 Rimon. Nobody does it better!

Posted on

What’s in a Game? Promotions and Advertising on the ‘Net (Part 2 of 2)

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!

Posted on

What’s in a Game? Promotions and Advertising on the ‘Net (Part 1 of 2)

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 placement 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 Rimon 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.