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New Federal Court Decision Counsels “Clear and Conspicuous” Advertisement of Alternative Means of Sweepstakes Entry – Coinbase Suit Proceeds
January 12, 2022

New Federal Court Decision Counsels “Clear and Conspicuous” Advertisement of Alternative Means of Sweepstakes Entry – Coinbase Suit Proceeds

By: Jacob Grubman

 

Most states require that companies offering sweepstakes allow entry without requiring purchase or other consideration. This alternate means of entry, or “AMOE,” avoids liability under gambling and lottery statutes by removing the “consideration” element in state gambling and lottery laws. A recent decision in California federal court has shed new light on how sweepstakes operators must publicize these alternative means of entry (“AMOE”), underscoring the need to make AMOE instructions clear and accessible to the reasonable consumer.

Last June, three users of the cryptocurrency exchange site Coinbase filed suit against the company on behalf of a purported class of users that had entered into a sweepstakes Coinbase ran for its new offering of the cryptocurrency Dogecoin. The plaintiffs in that case, Suski v. Marden-Kane, Inc., et. al, argued before the U.S. District Court for the Northern District of California that Coinbase had led them to believe that to be eligible for prizes, they needed to buy or sell a certain quantity of Dogecoin within the sweepstakes period. The plaintiffs acknowledged that Coinbase had, in fact, disclosed an alternative means of entry, but they contended that Coinbase formatted the AMOE instructions in a way that made it unlikely that a reasonable consumer would read and understand them.

On January 11, 2022, the court ruled on Coinbase’s motions to dismiss and to compel arbitration. As a threshold matter, the court denied Coinbase’s motion to compel arbitration. The court then granted in part and denied in part the motion to dismiss, determining that although Coinbase’s AMOE disclosure was sufficient to defeat certain claims under the penal code (i.e., allegations of an illegal lottery), the plaintiffs pleaded sufficient facts for a factfinder to determine that Coinbase’s instructions were misleading to a reasonable consumer.

In addressing the motion to dismiss, the court described the pages on Coinbase’s website in which Coinbase promoted or described the Dogecoin sweepstakes. First, the court described the site’s main advertisement for the sweepstakes, which stated in large text, “Trade DOGE. Win DOGE.” Below that, the ad stated, “Starting today, you can trade, send, and receive Dogecoin on Coinbase.com and with the Coinbase Android and iOS apps. To celebrate, we’re giving away $1.2 million in Dogecoin. Opt in and then buy or sell $100 in DOGE on Coinbase by 6/10/2021 for your chance to win. Terms and conditions apply.” Following that was a blue link to “See all rules and details” in a smaller font. The advertisement then continued in larger font with information on “What you can win,” followed by a blue button to “See how to enter.”

Information concerning alternative means of entry appeared only in a paragraph in the page footer, below the Coinbase logo and social media links. In smaller, light gray text, the site stated, in part:

Not investment advice or a recommendation to trade Dogecoin. NO PURCHASE NECESSARY TO ENTER OR WIN. PURCHASES WILL NOT INCREASE YOUR CHANCES OF WINNING. Opt-in required. Alternative means of entry available.

The court went on to describe several more pages related to the sweepstakes, including the “opt-in” page that set forth the rules of the sweepstakes and a page describing the benefits of Coinbase’s service. On the latter page, Coinbase again disclosed the existence of an alternative means of entry—but only in the same small, light gray font as used on the earlier page.

The court first granted dismissal with respect to certain of the plaintiffs’ claims that alleged violations of California Penal Code § 320, which prohibits unlawful lotteries. To constitute a lottery under California law, a sweepstakes must include (1) consideration, (2) prize, and (3) chance. As the latter two elements were present, the court considered whether Coinbase’s Dogecoin sweepstakes required consideration on the part of the entrants. Although entrants had the option of buying Dogecoin as a means of entry—which, if it were the sole means of entry, would constitute consideration—the court observed that Coinbase did offer an alternative means of entry. Accordingly, noting that the facts presented a “close case,” the court dismissed the plaintiffs’ claims characterizing the sweepstakes as an unlawful lottery.

Next, the court turned to the plaintiffs’ allegations that the sweepstakes violated various California consumer protection laws because it misled users into believing that the only means of entry was through the sale or purchase of Dogecoin. As to those claims, the court denied Coinbase’s motion to dismiss, concluding that Coinbase’s “advertising methods heavily directed people to make a trade in order to participate in [the] sweepstakes” and that Coinbase’s use of the term “no purchase necessary” was ambiguous: “Persons could have reasonably believed they were required to buy or sell Dogecoin to participate, which would have been consistent with not making a purchase but still requiring them to make a trade.” In addition, the court cited California law requiring sweepstakes sponsors to include a “clear and conspicuous statement of the no-purchase-or-payment-necessary message” in solicitation materials, determining that the plaintiffs had pleaded sufficient facts to show that Coinbase’s advertisements of the AMOE were not “clear and conspicuous.”

In the same decision, the court also denied Coinbase’s motion to compel arbitration. Although Coinbase’s user agreement included a valid arbitration agreement, Coinbase required Dogecoin sweepstakes entrants to agree to the official rules of the sweepstakes, which specified that California courts had exclusive jurisdiction over any controversies arising from the sweepstakes. Because the arbitration provision and the forum selection clause conflicted, the court determined that the later contract superseded the earlier agreement, and the arbitration provision therefore did not bind the plaintiffs.

Recent cases have repeatedly underscored the need for parties offering sweepstakes to clearly publicize alternative means of entry to avoid violating gaming and lottery laws and consumer protection provisions. In this case, Coinbase has avoided certain potential liability because it included an alternative means of entry and made information about it available on its website. Still, the case offers an instructive instance of AMOE disclosures being potentially insufficient to meet the state consumer protection standards. Coinbase now faces a potential class action under the consumer protection statutes.

This latest development in the Coinbase cases provides new indications of what can influence a court’s analysis of AMOE disclosures. First, the size, color, and placement of text identifying alternative means of entry can be relevant: The larger, clearer, and more prominent the disclosure, the less likely that a sweepstakes operator will run afoul of consumer protection laws. In addition, companies must be cognizant of how a consumer might understand the term “no purchase necessary” as a term of entry, as that term, by itself, is not necessarily effective in communicating the existence of an alternative means of entry. Finally, companies seeking to impose arbitration provisions for sweepstakes and contests should ensure those provisions are in the promotion rules, rather than rely on underlying terms and conditions of a website or app.