New Iowa statute targets telemarketing fraud

The use of prize and gift promotional schemes by fraudulent telemarketers is spurring a new wave of legislation intended to combat these programs.

In May, the Iowa legislature passed a new prize promotion statute which took effect on July 1, 1994. The bill, which was sponsored by the Attorney General's office, was intended to principally target telemarketing programs in which recipients of a telephonic or direct mail solicitation are induced to remit payment or the purchase of merchandise by being told that they have won a valuable prize or gift. Iowa is the third midwest state in the last several months to pass such legislation. A statute similar to that just passed by Iowa was recently passed by the state of Kansas. The State of Illinois also passed a similar statute earlier this year, but it was withdrawn for consideration at the eleventh hour in the wake of a threatened amendatory veto by the governor.

The Iowa statute requires that the sponsor of a promotion offering prizes or gifts provide written notice meeting certain detailed disclosure requirements if the sponsor either requires the consumer to make a purchase, payment or donation to receive or use the prize, or creates the reasonable impression that a purchase, payment or donation is required.

The statute goes on to say that a sponsor will be deemed to have created a reasonable impression that a purchase, payment or donation is required, unless the fact that no purchase, payment or donation is required is clearly and conspicuously disclosed in immediate proximity to and in the same type size and boldness as each reference to a purchase, payment or donation.

Typically, most sweepstakes promotions permit persons to enter or qualify for or claim a prize by either making a purchase, payment or donation or by some free alternative means such as by mail. Under the Iowa statute, as originally proposed, all such sweepstakes would be deemed to have created the reasonable impression that a purchase is required and, therefore, are subject to the written notice requirements, unless the fact that no purchase is necessary is mentioned every time a request for a purchase, payment or donation is required. The Iowa statute is the only statute in existence to create such a rigorous standard.

In terms of the written notice that is required, the statute provides that the notice must disclose the following:

* The name of the sponsor and street address of the sponsor's actual principal place of business.

* The retail value of each prize.

* The odds of receiving each prize. Any requirement that the person pay shipping or handling fees or any other charges to obtain or use the prize

* If any restrictions apply to the use of the prize, a statement to that effect.

* Any limitations on eligibility

* If the sponsor represents that the person is a winner or a finalist or has been specially selected, a statement of the maximum number of persons that are in the same position as the recipient.

Any requirement or invitation for the person to listen to a sales presentation and an estimate of the length of the presentation.

While many of these disclosures would typically appear in the official rules of a promotion, the statute goes on to require that retail value and the odds of winning must be stated in immediate proximity to each identification of the prize and must be in the same type size and boldness as the prize references. The statute also amounts to a de facto ban on broadcast advertisements, and more important to our readers, to telephone solicitations.

Although the statute was enacted to stop fraudulent telemarketers, timesharing and direct mail promotions, particularly those targeted at elderly consumers, the statute, as enacted, is quite broad and could have a restrictive impact on many legitimate telemarketing and direct mail promotions as well. Some relief from the more onerous provisions of the statute was obtained through the efforts of the Promotion Marketing Association of America (PMAA). Specifically, as a result of some meetings with the PMAA, the Attorney General's office has passed some clarifying regulations which will, to some extent, limit the impact of the statute. Specifically, promotions in which no purchase, payment or donation is required will not be deemed to have created the reasonable impression that a purchase is required and will, therefore, be exempt from the written notice provisions, if the following two conditions are met: (1) the advertisement contains at least one large and conspicuous disclosure that no purchase or payment or donation is necessary, and (2) the advertisement does not require a payment, purchase or donation as a condition of awarding the prize and does not contain more than one verbal or written request that a consumer debit a credit card or bank account or be required to mail, wire, overnight express or similarly remit money or other property by any means directly to the sponsor or to a representative of the sponsor designated to collect payments for the sponsor in order to receive any merchandise other than the prize or to make a charitable or other contribution, and the disclosure that no purchase or payment is required is in close proximity to such request.

Unfortunately for those telemarketers utilizing an offer of a prize or gift in connection with the offer of merchandise, these regulations will not provide much relief since the marketer would be limited to one request for the purchase of merchandise in the entire solicitation. As a practical matter, therefore, most telemarketers will remain subject to the rule.

In addition to the disclosure requirements, the statute also prohibits certain practices and techniques, some of which are commonly utilized in direct mail and telemarketing promotions. These prohibited practices include the following:

* Utilizing a notice or envelope that appears to originate from the government, an insurance company, debt collector or law firm.

* Represent that a person is a winner or finalist or has been specially selected. This may, in effect, be construed to prohibit the popular everybody wins form of promotion.

* Representing that a person is being notified a second or final time, unless this is true.

* Representing that a notice is urgent unless that deadline date is disclosed immediately adjacent to the urgent language.

Marketers should be aware that the statute carries criminal penalties and also creates a private right of action. This means a consumer can sue a marketer for violation of this statute and can seek the greater of $500 or twice the amount of his or her loss and costs and reasonable attorney fees. These private rights of action have been the catalyst for a number of class actions.

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

Copyright Technology Marketing Corporation Aug 1994
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