U.S. FTC Negotiates $15.5 Million Settlement in Alleged Deceptive Prize Promotion Scheme

On April 26, 2012, the U.S. Federal Trade Commission (FTC) announced that it negotiated a settlement of about $15.5 million with operators of an allegedly deceptive prize promotion scheme.  In making the announcement, the FTC said:

“The Federal Trade Commission put a stop to an operation that allegedly conned hundreds of thousands of consumers into paying $20 apiece by posing as government agencies and luring them with fake sweepstakes prizes. Under settlements reached as part of the FTC’s ongoing crackdown on schemes that prey on financially strapped consumers, the defendants are banned from the prize promotion business.

According to the FTC’s amended complaint, operators of the scheme sent consumers personalized mailers, some with fictitious government agency names and official-looking seals, with misleading statements such as, “Your identification as recipient for reported cash award entitlements totaling over $2,500,000.00 has been confirmed!” What the mailers did not tell consumers is that they had not actually won any prize. The defendants operated through a network of companies, used multiple business names, and sent dozens of versions of their mailers, according to the FTC’s complaint.”

As in the U.S., contests in Canada are fairly highly regulated.  Contests must comply with the federal Competition Act (which sets out certain mandatory disclosure requirements), the Criminal Code (which contains illegal lottery offences), privacy legislation and the common law of contract (see: promotional contest law in Canada).

In addition, the “general misleading advertising” and deceptive prize notice provisions of the Competition Act also apply to contests.

The general misleading advertising provisions prohibit materially false or misleading representations to the public for the purpose of promoting products (or business interests more generally).  The potential penalties can be severe and include civil fines of up to $750,000 (for individuals) and $10 million (for corporations) and court orders to cease the conduct, publish corrective notices or compensate consumers (restitution).

The deceptive prize notice provisions of the Competition Act prohibit prize notices sent by electronic or regular mail that give the general impression that a recipient has won (or will win) a prize and requires a payment (or incurring another cost) unless the recipient actually wins a prize and certain required disclosure is made (including the number and approximate value of prizes, regional allocation of prizes and odds of winning).

Based on these various requirements, it is important for contest organizers to review their rules and advertising materials for compliance with the Competition Act and Criminal Code and take steps to draft enforceable rules that anticipate potential issues and contingencies.

In some cases, it is also prudent to consider intellectual property or other issues – for example, where third party logos or trade-marks are to be used for prize illustrations (which may require consent) or entrants’ materials are to be used or reproduced (e.g., in skill contests).

For the FTC’s news release see:

FTC Settlement Bans Swindlers from Prize Promotion Business

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This entry was posted in Advertising Law, Competition Law, Compliance, Consumer Protection, Contests, Electronic Marketing, International Developments, Lotteries, Sectors - Internet & New Media, Sectors - Media, Sweepstakes. Bookmark the permalink.

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