Big Stakes for Charities?

Pending legislation to curb shady for-profit sweepstakes raises concerns among non-profit groups that offer mail-in contests

Charities that solicit money through sweepstakes might get stung by a government crackdown on deceptive offers sent by businesses.

State and federal government leaders say

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that while their efforts are aimed at for-profit operators of sweepstakes — where problems with illegal or unethical contests have been uncovered — charity-run sweepstakes would have to comply with any new or tighter rules.

“The emphasis is to eliminate deceptive sweepstakes,” says Jeffrey A. Modisett, Indiana’s Attorney General, who is heading a national effort by attorneys general to improve the regulation of sweepstakes. “If the shoe fits, so be it, but we haven’t been targeting, or really been concerned about, charities.”

Charity officials say that they understand the need to prevent misleading or deceptive mailings, but they fear that the application of present laws or new, more restrictive laws could unfairly limit their free-speech rights. Strict rules about the content of sweepstakes offers, they say, could hinder their ability to raise money and to educate people about their organizations or issues of interest to them.

Charity officials are also concerned that regulations could vary so widely from state to state that keeping up with the requirements would become too burdensome.

In addition, they worry that the negative publicity generated by the crackdown will discourage people from participating in sweepstakes even if the contests do not run afoul of any rules and are meant to benefit charities.

“Charities may be an unintended victim of the increased scrutiny,” says Errol Copilevitz, a lawyer in Kansas City, Mo., who specializes in state regulation of fund-raising activities.

Lawsuits against sweepstakes companies are pending in nine states, and lawmakers in at least a handful of states are pressing for tougher rules for sweepstakes operators. Four bills that would tighten restrictions on sweepstakes mailings were introduced in Congress this session, and two public hearings have been held so far this year — one by a Senate committee and the other by the National Association of Attorneys General. At both hearings, consumers testified about how they or their family members were duped by what they said were misleading prize promotions mailed by companies.

Sweepstakes critics say that mailings often trick people into believing that they have already won a prize, or imply that purchasing a product from the sweepstakes company will improve the chances of winning.

Commercial sweepstakes operators typically send promotions to millions of consumers hoping that the contests will entice people to buy a variety of products, from magazine subscriptions to jewelry. Some charities — including the National Easter Seal Society and Disabled American Veterans — operate sweepstakes, too. But instead of asking participants to buy a product along with their contest entries, charities solicit donations. Because the donations are not required for participation, the gifts are fully tax deductible.

Lawmakers and regulators concerned about deceptive sweepstakes practices say that the charity-run games have not raised the same problems as the games operated by businesses. They say that the charity promotions are more likely to make clear that donations or purchases are not required for participation. They also acknowledge that since charity sweepstakes typically offer smaller prizes and are mailed to fewer people than are the for-profit games, the authorities have had few complaints about them.

The last time that a charity-run sweepstakes raised any notable controversy was a decade ago, when Watson and Hughey Company, a Virginia fund-raising consultant, and a group of its client charities were charged by a number of states with deception in a series of direct-mail campaigns. One accusation: that consumers were led to believe that they had won $5,000, when most “winners” received checks ranging from 10 to 40 cents. The company, now called Direct Response Consulting Services, and the charities agreed to out-of-court settlements with the states but did not acknowledge wrongdoing.

In most states, sweepstakes are regulated under consumer-protection and trade-practices laws. But as more states look to add or tighten rules about the games, charity advocates want the distinction between for-profit and non-profit sweepstakes to be made clearer.

“Everyone is trying to let the legislators know that intertwined with a charity’s sweepstakes promotion is information about the organization, its ideas, the problems in society it is trying to deal with — information we consider to be core expression,” says Seth Perlman, a lawyer in New York. “There’s a difference between core expression — the free speech that gets the highest protection from the First Amendment — and commercial speech.”

Mr. Perlman represents a group of charities that last year sued the state of Connecticut, arguing that its statute regulating sweepstakes is so broad that it discourages charities from using the games to solicit and otherwise communicate with the public. Among other provisions, the law requires sweepstakes letters to contain certain disclosures about the odds of winning that must be made in the same size and typeface as the description of the prizes.

The case is pending in federal court.

Michael A. Walsh, vice-president of Newport Creative Communications, a fund-raising company in Duxbury, Mass., that runs sweepstakes for charity clients, is watching the Connecticut case.

“I bristle at the thought of lawmakers legislating copywriting and art direction in a charity mailing,” Mr. Walsh says.

For that reason, Mr. Walsh and charity officials around the country are watching legislation pending in Congress, too. Bills that were introduced in the House and Senate in January would change federal postal laws to ban sweepstakes letters unless they carried specified disclaimer notices printed in specified type sizes.

The following month, Sen. Susan M. Collins, a Republican from Maine, introduced a bill also intended to regulate sweepstakes offers and other mailings. Her bill, however, does not prescribe the language, size, or style of disclosure statements. Instead, it more generally requires that certain disclaimers be “clearly and conspicuously displayed.” The Collins bill, according to observers, is the deceptive-mailing bill most likely to be passed by Congress this year.

An additional piece of legislation regarding sweepstakes was introduced this month. It would provide for a national, toll-free telephone number consumers could call and elect not to receive any mailings related to sweepstakes.

For the most part, charity officials say that they support Congressional efforts to crack down on deceptive mailings. Still, they are concerned that none of the bills makes any distinction between solicitations made by charities and those by businesses.

“It is good for everyone if we can weed out the fringe operators — for-profits and non-profits — that are misleading people,” says Barry Giaquinto, chief financial officer at the North Shore Animal League, in Port Washington, N.Y. “We just have to make sure not to throw the baby out with the bath water. Legitimate non-profits running legitimate games that raise money and get their message out to people through sweepstakes should not be overburdened with legislation.”

North Shore runs sweepstakes year round, giving away small prizes each month and a grand prize of a car or $25,000 in cash every 12 to 18 months. About 80 per cent of the more than $25-million that the organization raises each year comes from gifts that accompany sweepstakes entries.

Such gifts may be in jeopardy, though, if charity-run sweepstakes start feeling the heat of Congressional inquiry and public scrutiny. Participation in for-profit sweepstakes has been dropping over the last year, industry experts say, and declined more dramatically following the Senate hearings in March.

“It’s a challenge for us as non-profits because we have been swept into the same negative perceptions people have of all sweepstakes,” says Christopher Cleghorn, senior vice-president for direct marketing at the National Easter Seal Society, in Chicago.

The society raises about $5-million a year — or about 5 per cent of all its gifts — through sweepstakes, Mr. Cleghorn says. But, he says, if the image of sweepstakes continues to be damaged by unscrupulous operators, the charity would consider dropping the contests.

“We don’t want anything that would jeopardize the brand that is Easter Seal,” Mr. Cleghorn says. “Our sweepstakes generate revenue that provides services directly to people who need them and it would be hard to walk away from that money, but we are weighing if we’ll continue to do them.”