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Filed under: Legal •

Looks like an auction, but smells like a lottery

A SWEEPSTAKES, A LOTTERY OR SOMETHING ELSE?

There’s a new game in town.  Instead of a sharpie lurking in the shadows inviting you to pick a card, any card is the website equivalent holding a royal flush of iPods.

In the United States, at least, gambling has long been considered not just illegal, but immoral and depraved.  The Quakers (the USA’s colonial arrivals who begot frontiersman Daniel Boone and Presidents Hoover and Nixon) forbid cards, dice, and other similar amusements.  They “thought it right, upon the same principle, to forbid the custom of laying wagers upon any occasion whatever, or of reaping advantage from any doubtful event, by a previous agreement upon a moneyed stake”  (from the Quaker View of Gambling by Thomas Clarkson (1806)).  The Quakers also discouraged the buying and selling of publicly traded stocks.

Maybe they were on to something….

Of course States have been able to run lotteries pretty much forever, and now casino gambling is available in many places.  Whether the susceptibility to gambling represents a psychological disorder or just an evolutionarily useful “risk taking” gene may be debatable, but not so the amount of money spent: billions per year on gambling, more than the total spent during the same period on movies, sporting events, concerts and amusement parks combined.

While lotteries and other types of gambling are illegal (at least unless the State or sovereign Native Americans get involved), running a sweepstakes is legal.  In general, for a game to be gambling (and illegal) it must contain all three of these elements:

• you must pay to participate (for example, buying a lottery ticket);
• winning means getting something of value (money or other prize); and
• whether you win depends on chance.

To avoid being illegal you’ve got to avoid at least one of those elements.  Lawyers play with all three, helping clients walk the line between illegal lotteries and legal sweepstakes (the sort of lawyering that led Ambrose Bierce to define “Lawyer” as “one skilled in circumvention of the law”).  (Find Bierce’s “Devil’s Dictionary” here)  For example, remove the pay to participate element (“no payment or purchase required!”) and you’ve got a potentially legal prize sweepstakes.  Remove the chance element (“judges will determine the best poem”) and you’ve got a potentially legal prize contest.  Typically people write about legal “sweepstakes” versus illegal “lotteries,” and so I do (even though that sorts of lumps in prize contests with prize sweepstakes, and over-generalizes lotteries which are just one type of gambling).

Game promoters like to collect payments, and players like to win prizes—so efforts to walk the line between lotteries and sweepstakes often focuses on what’s left: the chance element which can be eliminated by making game results depend on skill.  Recently a new type of line-walking website arrived, and it ingeniously walks the line between chance and skill by pretending to be an auction. 

YOU CAN GET SWOOPO’d… AND OH! HOW YOU CAN GET SWOOPO’d!

The pretend auction sites include:

• BIDoneTWO
• BIDDING MADNESS
• SWOOPO

In all three, unlike (say) eBay and uBid, bidding requires payment. In the case of Swoopo:

• bids cost $0.75 each;
• the auction price advances only $0.15 with each bid; and
• an auction’s end keeps getting extended by 20 seconds as long as people continue to bid (See Swoopo’s “New User” page here.)

As a result, a lot of stuff is won cheap.  The Swoopo website claims “winners save, on average, 65% when compared to the recommended retail price” and people claiming to work for Swoopo have claimed that Swoopo loses money on 70% of what it auctions.

So where’s the catch?

Lots of places, potentially.  The legal antipathy to lotteries is expressed in many laws, and which applies many depends on where and how the game is played.  On the Federal side alone the U.S. Department of Justice, Postal Service, Federal Communications Commission, and Federal Trade Commission could become involved.  State laws apply too, and vary from State to State.

HOW SWOOPO WALKS THE LINE

For everyone on Swoopo who wins with a 65% savings there can be 1,000 or more people who paid $0.75 each time they bid and got nothing. Swoopo gets their money, PLUS the money the winner spent on bids PLUS the winning auction price.  Of course the losers didn’t get nothing, exactly—they got entertainment.  “Entertainment shopping,” Swoopo calls it.

That gives Swoopo more credit for balls than the neighborhood numbers runner who, like a State lottery, pays off bigger the more people bid.    In Swoopo, in comparison, there’s practically no limit to the number of payments it can get and still pay out only a single prize.  As the auction price increases (going up in $0.15 increments with each bid) it approaches list price, and eventually bidding stops—but by then Swoopo may have received 3x or more what the auction item was worth. 

But whether Swoopo is an illegal lottery depends not on how big its profit margin, but on those three elements: pay to play, a prize, and chance.  Swoopo clearly meets at least two of the three:

• bids are $0.75 (the pay to participate part); and
• if you win, you get whatever you bid on (the prize part).

Because of the Swoopo rule that no matter how many participate, there’s still only one prize, Swoopo looks a lot like the type of lottery called a “raffle.”  In general (depending on local State law) raffles can be legally run only by charitable entities (such as Churches), not by a business for profit. (Click here for a useful resource on the law of raffles).

I’m not saying there’s no room for debate about whether Swoopo is illegal, but there’s not much room.  The question turns on the third element of lotteries: whether winning is based on chance.  In Swoopo, participants need to do more than *just* buy a ticket (the way a true raffle works).  They need also to:

• time when they make their bids; and
• choose how many bids to make (by themselves, or using an automated “bid butler”).

But does that make Swoopo a game of skill, and not an illegal game of chance?  Do some bidders consistently win more than others (which would imply that winning takes skill)?

Without doing more research, I’m skeptical.  Swoopo involves at least some chance, and in some States even buying a ticket to play a game of skill can be illegal.  And the real price of anything won on Swoopo isn’t just the cost of bidding + the cost of item won; it really also includes all the other items you bid on and lost.  Like in any other type of gambling, only the house wins.

The fact Swoopo claims to lose money on a large percentage of its “auctions” shouldn’t help it’s legal position—even genuine raffles can raise less money than the prize is worth and legally, they’re still raffles.

The illegality of website lotteries is not theoretical—State Attorney generals and Federal agencies go after them all the time.  Wikipedia says Swoopo launched in the US and Austria in September 2008 (and in a few other places during the year before that), so Swoopo is relatively new.  Eventually the law will turn its attention to Swoopo—if only when its finished with more pressing matters, like the lotteries being run by the USA’s banking system and stock markets.

- Charles

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Charles B. Kramer, Esq.
~ ATTORNEY ~ Member of the Bars of New York and Illinois
Linkedin: http://www.linkedin.com/in/charleskramer
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For discussion purposes, not legal advice.
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Hey, Antryg!  Thanks for being my first comment for this blog!

I’m not sure I agree that we need more laws to regulate online raffles.  Maybe these pay-to-bid auction sites can prove otherwise, but I doubt if winning really involves much skill, and even an element of chance could be enough to put them on the illegal side of the sweepstakes / lottery line.  If they have some kind of smart answer to that, I don’t see it.

The trickier question—and this is more social policy than law—is WHY such sites should be illegal.  IMO, a lot of the piety about the evils of gambling flew out the window when State lotteries went back in fashion.

The question comes down to how much the government should be protecting us from ourselves.  The pay-to-bid sites are an obviously terrible deal, and the fact they exploit the irrational powers of an auction (which even in the legit world sometimes inspires people to make bids that they regret) just makes what they do worse.

CBK

Posted by CharlesBKramer  on  01/19  at  08:09 AM

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Oh, Oh,!

Being a lawyer, I think of the rules like a game, and my job sometimes is to evaluate whether a particular scheme is within the rules, or outside them.  I don’t ordinarily get to ask what the rules *should* be. 

>So I’d say the statement “how much the government should be protecting
>us from ourselves” miscasts everything by pretending that the
>consequences are limited to the committer, and not also to their
>children, to their spouses

You’re on to something there—concern for the working man, blowing his week’s wages on the ponies—is a reason gambling has historically been criminalized.  But here’s a lot of the flip side:

- Government protection arguably is bad to the extent it discourages people from protecting themselves.  Swoopo could make its risks clearer, but the math is clear enough.  Lot of people must lose money on it, but I doubt if they are surprised to lose (and they *ought* not to be surprised).
- Many States now permit various types of gambling, and many run lotteries.  Doesn’t that knock them off their moral high horse?

- Even ordinary auctions mess with brain chemistry—the last seconds that tick down probably provide the same serotonin thrill that is believed to drive all compulsive repetitive behaviors.  Do you want to ban eBay too? 

- Charle

Posted by CharlesBKramer  on  01/21  at  03:50 PM

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