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When does a free prize draw become a lottery? – The new Gambling Act 2005

28 March 2008

Prize competitions and free draws are free of statutory regulatory control under the Gambling Act 2005 (the Act). Public lotteries, however, must operate under a licence.

The Gambling Commission has drafted guidance on the distinction between the various competitions but as you would expect it is not always easy to see where the dividing line between the two lies!

Lotteries (Licence required)

There are 2 types of lottery; a simple lottery and a complex lottery. Both types of lottery must be organised lawfully andoperate within the statutory provisions of the Act.
A simple lottery is one where:

The most obvious example of a simple lottery is the National Lottery and the Irish Lottery.
A complex lottery is one where:

The key requirement for the above lotteries is they are placed on public sale. Incidental ‘non commercial’ lotteries which are not for private gain, such as a lottery at a school fete or dinner/dance are exempt from regulation.

Prize Competitions
Prize competitions are different to lotteries in that success depends on the exercise of skill, judgement or knowledge by the participants and does not, as it does in a lottery, rely wholly on chance.

A genuine prize competition is one which contains a requirement to exercise skill or judgment or to display knowledge and where it can reasonably be expected that that
requirement will either:

(a) prevent a significant proportion of people who wish to participate from doing so; or
(b) prevent a significant proportion of people who participate from receiving a prize.

An example of a prize competition is where the participant has to solve a crossword to be able to enter the competition. It is still classed as a prize competition even if those who successfully complete the puzzle are subsequently entered into a random draw to pick the winner as it is only the first stage of the competition that contains the requirement to exercise skill or judgement or display knowledge.

The difficulty arises for competitions where entry depends on answering a simple question of which the answer is commonly or widely known or is blatantly obvious from the accompanying documentation. Such competitions would not meet the test and would be classified as a lottery if there is a requirement to pay to enter.

As the Act is so new it is difficult to examine what type of competitions would fall into the prize competition category or fall foul and be classified as a lottery. But the more
questions that have to be answered make it more likely that the competition will not be a lottery. The test in the Act is whether the skill, judgment or knowledge could ‘reasonably be expected’ to have eliminated a significant proportion of people who wish to participate.

The onus lies on the competition organiser to satisfy themselves that they are compliant with the law. If the Gambling Commission form the view that the competition is actually a lottery then organisers will be given an opportunity to explain why they think they are compliant.

Free draws

If participants are required to pay to enter a draw then it is classified as a lottery. What amounts to ‘payment to enter’ can be envisaged in two circumstances.

  1. A draw will be ‘free’ if there is only one entry route and the method of communication is at a ‘normal rate’. ‘Normal rate’ is defined as ‘a rate which does not reflect the opportunity to enter a lottery’. It includes first and second class post and telephone but cannot involve a payment over what it would normally cost to use the particular method of communication e.g. special delivery, premium rate telephone.
  2. Where there is a choice of entry the draw will not be classed as a lottery if:
    a. Each eligible participant has a choice whether to do so by paying or sending a communication.
    b. That communication is either a letter sent by ordinary post (first or second class) or some other method which is neither more expensive nor less convenient than entering by the paid route.

The choice must be publicised and the allocation of prizes must not distinguish between those using either route. Further, for a prize draw to be ‘free’, organisers must not
require the participant to pay to discover whether a prize has been won or pay to take possession of the prize.

Product Promotions

Some organisers may wish to offer the chance of winning a prize to an individual who buys their product. This is permitted where the price of the product does not include
any element which reflects the opportunity to participate in the promotion i.e. the entry must not involve a cost beyond the actual cost of a product. For example, a participant
may be offered the chance of winning a printer when a computer is purchased – for the promotion to be exempt the computer must be sold at its normal price and must not be an inflated price.

Organisers who run a product promotion will no longer have to provide a free entry route. This means the familiar phrase ‘no purchase necessary’ will no longer be necessary for product promotions. This development will inevitably please organisers who want to only offer the promotion to individuals who actually buy their product.

The overriding principle of all draws, promotions and competitions is that organisers must not mislead the public. Identifying how far the boundaries can be pushed in relation
to free prize draws and competitions will rely somewhat on trial and error and is sure to be a much debated topic!

Are any of the issues in this article giving you a headache? If so, we want to know

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Ron Reid

Partner
T: 08700 86 3317
I: +44 (0)1604 54 3317
E: ron.reid@shoosmiths.co.uk