Prize and gift schemes remain high on the regulatory agenda

Telemarketers are quite familiar with the marketing appeal and sizzle the offer of a prize or gift can create in inducing consumers to respond to a telemarketing campaign. Unfortunately, the abuse by some, of these otherwise legitimate marketing techniques, has caused regulators at both the federal and state level to focus their attention on these practices with a vengeance.

The Federal Trade Commission, for example, recently reported that prize offers were the number-one source of complaints in the telemarketing arena, and, it is clear that increased regulation of these types of offers is on the horizon.

In August 1994, Congress enacted the Telemarketing and Consumer Fraud and Abuse Prevention Act. The sole purpose of the act is to strengthen the authority of the FTC to protect consumers in connection with sales made with a telephone. The act specifically authorizes the FTC to prescribe rules prohibiting deceptive and abusive telemarketing practices and to define deceptive telemarketing acts and practices. Although the act itself does not contain any specific provisions relating to prize and gift schemes, staff members at the FTC have indicated that prize promotions will be a major focus of the bill and that the rules will seek to specifically address and eradicate some of the abusive practices in this area. The proposed rules will be published in early 1995. The FTC has indicated that it will follow the same process in this rulemaking proceeding that it followed in promulgating rules pursuant to the Telephone Disclosure and Dispute Resolution Act regulating pay-per-call services. Specifically, in addition to soliciting written comments on the proposed rules, the FTC will conduct a workshop session to which interested industry members will be invited to participate.

The government's concern with prize promotion schemes was also evident in the federal Crime bill passed by Congress late last summer. The bill includes a section relating specifically to the telemarketing industry which promulgates the Senior Citizens Against Telemarketing Fraud. Specifically, the act includes within the definition of telemarketing, a plan, program, promotion or campaign that is conducted to induce purchases of goods or services or participation in a contest or sweepstakes by use of one or more interstate telephone calls initiated either by a person who is conducting the plan, program, promotion or campaign or by a prospective purchaser or contest or sweepstakes participant. By including within the definition of telemarketing activity both inbound and outbound calls and mere participation in a sweepstakes or contest without the purchase or sale of additional products or services, Congress has added another powerful weapon that can be used to combat fraudulent prize promotion schemes. Indeed, when one considers some of the drastic remedies contained in the amended Crime one would suspect that bill will have a strong deterrent effect. For ample, the act increases the on term for certain telemarketing offenses additional five years, and provides further that if the victim is over the age of 55, an additional 10 years will be added to the term of imprisonment. Another section of the act provides that in addition to all other penalties, the court must order and the U.S. Attorney must enforce restitution to the victims. The act also authorizes appropriations over the next six years for the Department of Justice and the FBI to carry out their duties and to set up public awareness and prevention initiatives relating to telemarketing. This past year has already brought a marked increase in coordinated efforts between the various branches the government to prosecute telemarketing fraud. With these added funds in tow, this coordinated effort is sure to increase.

At the state level, prize and gift schemes continue to be the subject of new legislation as well. In just the last few months, two more states, Hampshire and South Carolina, have joined the ranks of states with detailed statutes governing prize promotion schemes, and a third state, Oregon, has proposed new legislation for public comment.

The South Carolina and New Hampshire bills are similar to statutes already in existence in states such as Louisiana, Nevada, Virginia and West Virginia. Specifically, the statutes severely regulate the so-called "everybody wins" promotions by prohibiting any representation that a person has won anything of value unless the recipient of the prize is given the prize without obligation and the prize is delivered to the recipient at no expense within 10 days of the representation. The statutes also set forth specific and somewhat-onerous disclosure requirements for any solicitation in which the person is notified at he or she is eligible to win or receive a prize or gift and requested to do anything more than simply mail in or deposit the entry at a local retail establishment or call in the entry. Accordingly, the statutes appear to be uniquely targeted to promotions requiring submission to a sales presentation. Specifically, the statutes require disclosure of the sponsor of promotion, all material terms and conditions, the retail value of each item or prize, the number of each item or prize, and the odds of receiving each item or prize. The disclosure of the number and value of prizes and odds must be immediately adjacent to the first identification of the prize or in a separate section entitled "Consumer Disclosure" printed in 10-point type.

The Oregon statute specifically regulates both sweepstakes and contests and contains a number of privacy-related provisions that should be of extreme concern to the telemarketing community. Specifically, the Oregon bill would require for contests disclosure of things like the number of anticipated rounds, the relative degree of difficulty of each round, the total cost to participate, and the name, address and phone number of the sponsor. In a sweepstakes, the statute would require disclosure of the odds, the name, address and phone number of the sponsor, and the full rules for free entry. One of the more objectionable provisions of the bill to the industry is a provision that would require disclosure of the fact that no purchase or donation is necessary in 23-point type in a boxed format.

In an obvious attempt to address growing privacy concerns, the bill would require the sponsor of the promotion to disclose in solicitations the sponsor's intent to sell or rent personal or demographic data obtained from the person. The bill would also flatly prohibit requesting any person to disclose the person's phone number, age, date of birth, social security number or financial data, including credit card ownership.

The Oregon Attorney General's Office has circulated the proposed bill to the industry for comment, and hopefully some of the industry's concerns will be reflected in the final bill.

As 1995 is ushered in, the message clear. Prize promotion schemes can and should remain a popular marketing vehicle. Sponsors of such promotions, however, must exercise increased caution to insure that such promotions are fairly and lawfully conducted as the stakes for making mistakes in this area continue to rise.

Linda Goldstein is a partner in the New York office of Hall, Dikler, Kent, Friedman & Wood, a law firm specializing in advertising and marketing law, with particular expertise in direct marketing and telemarketing.

Copyright Technology Marketing Corporation Jan 1995
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