GUIDANCE NOTE

FREE DRAWS AND PRIZE COMPETITIONS

You may be forgiven for thinking that operating a simple prize draw to generate interest in your business would be relatively straightforward. After all, you can see examples in nearly every form of business from gossip

magazines to insurance companies, through all forms of media from TV to online.

Unfortunately this is not the case and seemingly innocent prize draws may fall foul of the law in a variety of ways - by constituting gaming, betting or a lottery. Additionally, as the law changed with the full introduction of the

Gambling Act 2005 ("the Act") on 1 September 2007, you are no longer able to follow the example of previous prize draws as precedents for compliance with the rules.

Why should you care about this? The newly established Gambling Commission has been given teeth to enforce

the new rules and won't be afraid to use them!

This post will outline the position of prize draws which may constitute unlawful lotteries. A lottery is defined in

s.14 of the Act. In brief, a lottery is an arrangement where participants pay in order to enter a competition and to be in with the chance of winning a prize, the allocation of which "relies wholly on chance." There are also certain limited exceptions where a lottery is run by a non-profit organisation, in which case it must be registered

with the Gambling Commission but I will not explore that further here.

The following options are available to operators of a prize draw which requires payment to enter (if your prize draw doesn't require payment to participate, the following does not apply - but be aware that inflated prices of

goods/services can constitute payment to enter if they reflect the opportunity to win a prize):

1. Satisfy the requirements of the "skill test"

2. Provide a free entry route.

The "Skill Test"

If the exercise of skill is required in order to win a prize, the prize draw will not rely wholly on chance and as such will be lawful. There is a catch - the level of skill must either prevent a significant proportion of entrants

from winning a prize or prevent a significant proportion of potential entrants from entering.

This test, which is outlined in s.14(5) of the Act, raises the level of skill required from a nominal level (as before) to a substantial level. The Gambling Commission has published Explanatory Notes to help prize draw promoters

determine whether their competitions satisfy the skill test.

The Free Entry Route

By providing a free entry route you can avoid a prize draw from being classed as an unlawful lottery. If relying on this, please note the following points:

Each potential entrant must have the choice to enter by paying or by sending a communication.

Such communication must be "neither more expensive nor less convenient" than choosing to pay to enter.

This would include sending a letter by ordinary post, but not free web entry.

The free entry route must be brought to the attention of each potential entrant.

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The system for allocating prizes must not differentiate between paying entrants and free entry route

entrants.

N.B If entrants are required to buy a product or service at its normal price (i.e. not a price which is inflated to reflect the opportunity to enter the prize draw), this does not constitute a payment to enter and as such the prize

draw would not be deemed an unlawful lottery.

This note is not, of course, a comprehensive examination of the Act and its implications for prize draws, but hopefully it's given you a flavour of the changes afoot in this area.

Yasmin Joomraty

Laurence Kaye Solicitors

© Laurence Kaye 2007 T: 01923 352 117 E: laurie@laurencekaye.com

www.laurencekaye.com http://laurencekaye.typepad.com/

This guidance note is not intended to be exhaustive and it does not constitute or substitute legal advice, which should be sought on a case by case basis.

Please feel free to copy or make available this guidance note without modification in print or electronic form for

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publication, please contact the author at laurie@laurencekaye.com.