Truth in Advertising is Winning Strategy

Posted: 5/2003

Truth in Advertising is Winning
— PART 1 OF 3

By David O. Klein

Editor’s Note: This is the
first of a three-part series addressing the legal issues surrounding game-based
promotions. The second and third parts will be published in the June and July
issues of PHONE+.

always has been An exciting field. This excitement, however, comes with a price,
namely extremely heavy competition and often complex industry regulation. In
order to withstand the rigors of the business during this industry downturn,
telecom executives must not only have business savvy, but also must continually
devise innovative ways to enlarge their customer bases and maintain those
customers once they have signed up for services.

One popular method employed by many
businesses, including providers of both telephone and Internet services, is the
use of promotional tie-ins, offering consumers a chance to win free services or
products as an inducement to become and remain a customer. The marketing of
promotional tie-ins, often referred to as "game promotions," is an
innovative way of not only making would-be customers aware of your services, but
also of persuading new customers to utilize your products and/or services.

Customers like the idea that they
might "win" something. Even if it is only a nominal prize, game
promotions will draw customers to your business like flies to honey.
State-sponsored lotteries are a perfect example. The odds against winning are
enormous, but consumers are willing to spend their hard-earned money on the
outside chance they might be the next jackpot winner. In fact, most of those
consumers are willing to spend their money week after week, year after year
to enter these lotteries. Granted, most telecom companies cannot afford payouts
as large as those offered by typical state-run lotteries, but if a consumer is
faced with two identical services, and one of those services is offering a prize
to its customers, it is a safe bet the consumer will choose to buy from the
service provider that offers an opportunity to "get something for

Game promotions are an effective
marketing tool but, like telephony, are subject to comprehensive regulation by
federal and state governmental entities. Not surprisingly, in addition to the
ordinary regulations that apply to myriad businesses, there are many that apply
solely to game promotions. Among these are rules on the advertisement,
registration and bonding of game promotions.

Although laws vary from state to
state, we can attempt to clarify some of the more widely accepted and more
onerous regulations that must be complied with. The information contained in
this article certainly cannot replace the case-specific advice of legal counsel.
Any business that is considering the sponsorship of a game promotion should
retain a qualified attorney to write the official rules of their particular
promotion and to explain the laws of each individual state where the promotion
will be offered. The penalties for failure to comply with applicable game
promotion regulations are significant and range from fines to seizure of
business assets and even criminal charges, on both state and federal levels.

The first advertising pitfall
overlooked by many businesses is misuse of the word "free." It does
not sound confusing, but if the consumer has to incur any cost whatsoever,
either to enter the game promotion or to register for a service in order to
qualify to enter the promotion, the game promotion is not, in fact,
"free." If entry in the game promotion is not possible without
incurring an "expense," use of the word "free" often will
result in regulatory proceedings against the promotion sponsor. An alternative
means of entry, one that does not require payment or registration for services,
always must be offered to consumers. Usually, game promotions that offer
alternative means of entry use the phrase "no purchase necessary" in
their promotional rules and associated advertising.

Other common stumbling blocks are
the use of direct mail or e-mail pieces that advise the recipient consumer that
he/she is a "winner" or a "guaranteed winner" of the
applicable game promotion. It is often quite costly to make such a claim if it
is not based in fact. A well-known marketing company recently paid nearly $53
million dollars to settle lawsuits filed by nearly all states for making such
false representations.

An often overlooked, but obviously
crucial, advertising guideline is that the business actually has, and intends to
provide to the winner, the prize it is offering in the promotion. This may sound
self-evident, but failing to award the prize, in a drawing where at least one
winner is required, will result in serious consequences.

In this three-part series, we will
address several of the legal issues that any business planning to run a game
promotion should consider. In this article, we covered some of the rules
governing advertisement of game promotions. Next month’s article will address
the differences between games of skill and games of chance, as
well as the associated regulations that apply to each. The final article in the
series will discuss the different state registration and bonding requirements
and the tax issues that must be addressed prior to launching a promotion.

Please note this offers only a brief
overview of some of the most common advertising pitfalls surrounding game
promotions. Remember, it is always advisable to seek the guidance of a licensed
legal professional prior to embarking on such a promotion.

David O. Klein, a partner at the
firm of Klein, Zelman, Rothermel & Dichter LLP, specializes in promotional
law and telecommunications law. He can be reached at +1 212 935 6020 or by
e-mail at

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