Playing for Profits: Games of Chance vs. Games of Skill

Posted: 6/2003

Playing for Profits: Games of
Chance vs. Games of Skill
Game Promotions: Playing By the Rules — Part
2 of 3

David O. Klein and Deena B.
Burgess

So, you have decided that a
promotional tie-in would be a good marketing tool for your business. In order to
offer the promotional tie-in, you have decided to run a contest (or game
promotion) in which the winner receives the promotional tie-in as a prize. The
prize you offer can be almost anything, from free services to a cash prize or a
trip to Hawaii. The first step in planning the contest is to determine what
variety of game promotion makes the most sense to your audience in your
particular line of business. Game promotions traditionally fall into one of two
categories, "games of chance" and "games of skill."

"Games of skill," if
crafted correctly, are legal game promotions in every state. Their winner(s) are
selected based upon the skill of the contestant (for example, an essay writing
contest). In contrast, "games of chance" are illegal lotteries in the
United States unless one of the three traditional lottery elements — prize,
chance and consideration — is removed. Under existing regulation, only
government-sponsored lotteries may include all three lottery elements.

Chance. Of the three
elements, determining whether chance is present is the most subjective. There
are primarily two tests for evaluating whether the element of chance is present
in a game promotion. Please note that if the element of chance is established,
consideration, as discussed below, must not be present or the game promotion
will be deemed an illegal lottery.

The majority of states including,
but not limited to, New York, Ohio, Tennessee and South Carolina, employ the
"dominant factor" test in evaluating whether the element of chance is
present. A minority of the states, such as New Jersey, employs the
"material factor" test in this analysis. When assessing games that
utilize elements of both skill and chance, use of the dominant factor test will
result in a decision that a contest is a "game of chance" where chance
is a more significant factor than the skill of the player in determining the
winner(s) of the contest. By comparison, the material factor test will find that
a "game of chance" exists where chance was a material, but not
necessarily dominant, factor in determining the final contest result.

Some states, although in the
minority, take neither approach. Arizona, for example, evaluates game promotions
employing the state’s gambling statutes. Within this legal framework, Arizona
regulators refer to the definitions of "bet" and "wager" as
used in their bookmaking statute in making the skill chance determination.
Arizona has determined that the payment of an entrance fee is not an illegal bet
or wager in an otherwise legal competition where prizes are awarded by a
nonparticipant and where the entrance fees do not alone comprise the total prize
purse. Regardless of which approach is employed, the skill/chance exercise is a
critical one to the game promoter. Where a contest can be shown to be a
"game of skill," rather than a "game of chance," the sponsor
is free to require payment of a fee, or purchase of a product or service, as a
condition to entry.

Consideration. Caution: In
the eyes of regulators, consideration can take many forms. Although
consideration, in the pure sense of the word, is cash or some other variety of
legal tender, requiring the purchase or even use of a particular product or
service in order to enter a contest will often trigger the element of
consideration. In at least one state, a mere 37-cent stamp on an entry envelope
has been ruled sufficient value to invoke the consideration element. Where the
other two lottery elements are already present, a consideration finding will
result in an illegal lottery determination. Because game promoters want to avoid
this eventuality at all costs, your promotion must be carefully vetted and
associated rules of entry drafted by seasoned promotional counsel before the
contest commences.

Because most game promotions have a
significant element of chance to them, the safest course of action for any
contest sponsor is to remove either the consideration element or choose not to
provide a prize. Understandably, failure to provide a prize in connection with
winning your contest is not an option. Without a prize, your contest will create
absolutely no buzz and will result in an almost certain promotional washout.
Fortunately, however, removing the consideration element from the equation is a
relatively simple and popular alternative.

As discussed in the first article in
this series, an alternative means of entry — one that does not require payment
or registration for services to enter — always should be offered to consumers
to avoid triggering the consideration element. Bear in mind that entries
received in this manner must be accorded the same weight and opportunity to win
as any other entry. Game promotions that offer alternative means of entry often
use the magic phrase "no purchase necessary" in their promotional
rules and associated advertising to clearly signal that the consideration
element is not present.

Prize. The final contest
element is that a prize ultimately be awarded to the winner(s). A prize can be
anything from a month of free services to a trip to Hawaii. Applicable state
game promotion regulations require that the cash equivalent of any prize be
offered to participants in the alternative, should they so elect. In connection
with awarding the prize(s), a list of all contest winners must be maintained by
the sponsor, made available to entrants (and Rhode Island) upon request, and
filed with Florida and New York at the close of the contest period.

Please note: This is only a brief
overview of some of the more significant issues with which you will be faced
when you launch a game promotion. We recommend that you consult with experienced
promotional law counsel before embarking on such an undertaking.

David O. Klein, Esq., is a
partner and Deena Burgess, Esq., is an associate in the firm of Klein, Zelman,
Rothermel & Dichter LLP, New York, N.Y. Klein’s practice is in promotional
and telecommunications law, and Burgess’ practice is in Internet and
telecommunications law. They can be reached at +1 212 935 6020 or by e-mail at [email protected].

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