OpportunityLegal test
Illegal lottery
Author
Berkeley Robinson, Esq.
Managing Attorney, Robinson Law Firm PLLC
Author
Berkeley Robinson, Esq.
Managing Attorney, Robinson Law Firm PLLC
Berkeley has served as the go-to counsel for many scaling businesses in a transactional and litigation management capacity. Before becoming an attorney, Berkeley grew sales teams, ran online marketing campaigns, and did everything else an entrepreneur does—and still does today as the founder of two online businesses.
Definition
"Illegal lottery" is used in more than one setting, and its meaning depends on the context. In consumer protection, it means "a sales plan in which buyers pay for a chance at merchandise or another prize, and whether they receive the prize or nothing is decided wholly by lot or chance". Source: ftcd-vol48july-june1952pages1358-1456 The label does not always fit neatly, though. In Bear Sales the Commission agreed that an order written around lotteries might not reach devices that appeal to the public gambling instinct but are not technically lotteries because they lack one of the three elements of consideration, chance and prize. Source: Bear Sales Co. et al., Docket 8627 (Opinion of the Commission, July 8, 1965) That gap is why the duties below reach chance-based merchandising and the suppliers who furnish the devices, even when the plan is not a lottery in the strict sense.
Key legal rules
A lottery sales plan is a sales method, so the rules reach the seller who runs it and the supplier who furnishes the device. Three rules put that to work:
- Selling merchandise by a method that uses chance as a factor, or selling in interstate commerce lottery devices designed and used for distributing merchandise by gambling, is an unfair act and practice under the FTC Act; proof of further specific injury to the public is unnecessary, and labeling the scheme “casual” rather than “professional” gambling does not change the result. Source: FTC Decision, FTC Opinion by Anderson, Commissioner
- Merchandising by gambling is judged as a whole rather than divided into isolated acts that might look innocent when examined separately, and both the gamblers and those who furnish them with the instrumentalities for merchandising by gambling are engaged in practices contrary to public policy. Source: In the Matter of Esther Zitserman Trading as J. M. Howard Co. (FTC)
- Selling or trafficking in foreign lottery tickets into the United States violates federal criminal law, including 18 U.S.C. §§ 1301 and 1302; telling U.S. consumers that buying those tickets is legal, or failing to disclose that selling and buying them is a crime, is deceptive. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing)
For the sake of space, this page lists only the primary rules related to this term that most businesses should follow. More may apply to your situation, and your unique facts affect how they apply.
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Send a messageWhy these rules exist
Selling merchandise by lottery has been treated as an unfair practice because it contravenes an established public policy of the United States, and a supplier who furnishes the means of selling by chance takes part in the violation. Source: ftcd-vol48july-june1952pages1358-1456 The harm runs through the market: in Gay Games, the Commission found that the element of chance induced members of the public to trade with retailers who used push cards, and that in turn induced those retailers to deal with the manufacturers and wholesalers who supplied them. Source: ftcd-vol48july-june1952pages1358-1456 The same findings say the practice "teaches and encourages gambling among members of the public, all to the injury of the public." Source: ftcd-vol48july-june1952pages1358-1456 The duty reaches suppliers because a push card arrives with the lottery already built in. A retailer who buys one gets a ready-made way to sell by chance, and the practical place to stop that is at the source.
The syllabus of Consolidated Manufacturing reports that the Commission took judicial notice of many federal court decisions holding merchandising by gambling contrary to public policy. Source: Consolidated Manufacturing Co. et al., Docket 5557 (FTC) In Bear Sales the Commission rejected an argument that the policy had changed, because the respondents did not show that public concern with lotteries, as reflected in state and federal law, had changed significantly. Source: Bear Sales Co. et al., Docket 8627 (Opinion of the Commission, July 8, 1965) The decision was not unanimous, since Commissioner Elman dissented on the ground that no established public policy required the Commission to spend limited resources on this kind of case. Source: Bear Sales Co. et al., Docket 8627 (Opinion of the Commission, July 8, 1965) Federal criminal law also places lotteries within gambling: the definition of "gambling establishment" in 18 U.S.C. § 1081 includes one carrying on a policy game or any other lottery. Source: 18 U.S.C. § 1081 Lottery sales also appear in payment-processing orders. In the AlliedWallet stipulated order, a "Covered Client" includes any client who offers to sell, sells, promotes, or markets lottery sales or sweepstakes. Source: AlliedWallet, Inc., Stipulated Final Order (July 3, 2019)
Enforcement examples
In re Gordon and Gordon t/a Bengor Products Co. (wholesaler of merchandise, push cards and punchboards)
In the Matter of Louis Gordon and Ben Gordon Trading as Bengor Products Co., Docket 4420 (Decision, June 20, 1951)
Two partners who wholesaled miscellaneous merchandise also sold push cards and punchboards designed for retail selling by chance, under a plan in which the buyer of a push or punch who selected a concealed winning number got an article without additional cost, while others received nothing further for their money. Source: In the Matter of Louis Gordon and Ben Gordon Trading as Bengor Products Co., Docket 4420 (Decision, June 20, 1951) They sold the devices to dealers who sold other merchandise, and so supplied others with the means of conducting lotteries, gift enterprises, or games of chance contrary to established public policy. Source: In the Matter of Louis Gordon and Ben Gordon Trading as Bengor Products Co., Docket 4420 (Decision, June 20, 1951)
Outcome. The Commission held that these acts and practices were to the prejudice and injury of the public and were unfair methods of competition and unfair or deceptive acts or practices. Source: In the Matter of Louis Gordon and Ben Gordon Trading as Bengor Products Co., Docket 4420 (Decision, June 20, 1951)
In re Consolidated Manufacturing Co. (punchboard and push card manufacturer)
Consolidated Manufacturing Co. et al., Order Denying Appeal and Decision of the Commission, Docket 5557 (January 29, 1952)
The corporate respondent manufactured and sold punchboards and other lottery devices in interstate commerce, some with labels instructing use in distributing merchandise by gambling and others sold blank. Source: Consolidated Manufacturing Co. et al., Docket 5557 (Jan. 29, 1952) On appeal the respondents argued that the Commission was trying to police public morals and had exceeded its jurisdiction. Source: Consolidated Manufacturing Co. et al., Docket 5557 (Jan. 29, 1952)
Outcome. The Commission rejected the argument that it was policing public morals, holding that it has jurisdiction over unfair practices in merchandising in interstate commerce. Source: Consolidated Manufacturing Co. et al., Docket 5557 (Jan. 29, 1952) Its order told the respondents to stop selling or distributing in commerce lottery devices that were to be used or might be used to sell merchandise by chance. Source: Consolidated Manufacturing Co. et al., Docket 5557 (Jan. 29, 1952)
In re Bear Sales Co. (mail-order merchandise sold by push card)
Bear Sales Co. et al., Initial Decision, Opinion of the Commission (July 8, 1965), Docket 8627
Bear Sales mailed members of the public advertising literature, order blanks, and a push card. Source: Bear Sales Co. et al., Docket 8627 (Initial Decision, Jan. 25, 1965) The card had forty-five partially perforated discs, each hiding a number that set the price the puncher paid, and the person who punched the disc matching the name under a master seal won a broiler-toaster. Source: Bear Sales Co. et al., Docket 8627 (Initial Decision, Jan. 25, 1965) The hearing examiner found that both the amount to be paid and whether a player received the toaster or nothing were determined wholly by lot or chance. Source: Bear Sales Co. et al., Docket 8627 (Initial Decision, Jan. 25, 1965) Bear Sales did not deny that its method involved a lottery. It argued instead that its practices were consistent with contemporary business practices and public behavioral norms. Source: Bear Sales Co. et al., Docket 8627 (Initial Decision, Jan. 25, 1965)
Outcome. The Commission rejected the argument that lotteries were no longer against public policy and modified the examiner's order to reach selling merchandise by a chance or gaming device. Source: Bear Sales Co. et al., Docket 8627 (Opinion of the Commission, July 8, 1965) The examiner's order had already barred supplying others with pushcards or any other device designed or intended to be used to sell merchandise by chance. Source: Bear Sales Co. et al., Docket 8627 (Initial Decision, Jan. 25, 1965)
FTC v. Next-Gen, Inc. (prize and sweepstakes mailers)
Next-Gen, Inc.: Amended Complaint for Permanent Injunction and Other Equitable Relief (September 25, 2018)
The amended complaint alleged that the defendants sent tens of millions of personalized sweepstakes and prize mailers that falsely represented the named recipient had won or was likely to win a substantial cash prize in exchange for a mandatory fee of $9.00 to $139.99. Source: Next-Gen, Inc., Amended Complaint for Permanent Injunction and Other Equitable Relief (Sept. 25, 2018) It further alleged that consumers paid the defendants more than $110 million in response and did not receive the promised cash prizes. Source: Next-Gen, Inc., Amended Complaint for Permanent Injunction and Other Equitable Relief (Sept. 25, 2018)
Outcome. The complaint asked the court to enter a permanent injunction to prevent future violations of the FTC Act and the Missouri Merchandising Practices Act. Source: Next-Gen, Inc., Amended Complaint for Permanent Injunction and Other Equitable Relief (Sept. 25, 2018) It also asked for consumer redress, including restitution, refunds, disgorgement, and civil penalties. Source: Next-Gen, Inc., Amended Complaint for Permanent Injunction and Other Equitable Relief (Sept. 25, 2018)
In re Traffic Jam Events, LLC (auto-dealer prize mailers)
Final Order of the Commission, In re Traffic Jam Events, LLC (issued October 25, 2021)
Complaint counsel argued that Traffic Jam Events designed and sent advertisements representing that recipients had won specific prizes, such as "$2,500 INSTANT CASH." Source: Complaint Counsel's Motion for Summary Decision, In re Traffic Jam Events, LLC, Docket No. C-9395 (Aug. 14, 2021) According to complaint counsel, the mailer conveyed that the consumer's own number matched a prize, when in fact a unique number hidden in the ad had to match a different set of numbers on a prize board at the dealership. Source: Complaint Counsel's Motion for Summary Decision, In re Traffic Jam Events, LLC, Docket No. C-9395 (Aug. 14, 2021)
Outcome. The final order bars the respondents from misrepresenting, or assisting others in misrepresenting, any material fact in connection with advertising, marketing, promoting, or selling. Source: Final Order of the Commission, In re Traffic Jam Events, LLC (issued Oct. 25, 2021) Among the covered subjects is any prize, sweepstakes, lottery, or giveaway. Source: Final Order of the Commission, In re Traffic Jam Events, LLC (issued Oct. 25, 2021)
In re Gay Games, Inc. (push cards and punchboards)
Gay Games, Inc., Report, Findings as to the Facts, and Order, FTC Decisions vol. 48
Gay Games manufactured push cards and punchboards and sold them in interstate commerce to manufacturers of and dealers in other merchandise. Source: ftcd-vol48july-june1952pages1358-1456 The numbers on the devices were concealed from buyers until the push or punch was completed, and buyers who did not draw a winning number received nothing for their money beyond the push or punch. Source: ftcd-vol48july-june1952pages1358-1456
Outcome. The Commission concluded that the respondents' acts and practices were to the prejudice and injury of the public and were unfair acts and practices in commerce under the Federal Trade Commission Act. Source: ftcd-vol48july-june1952pages1358-1456
In re Seymour Sales Co. (camera and pen push-card promotion)
Seymour Sales Co. et al., Findings as to the Facts and Order
Seymour Sales mailed push cards, order blanks, and circulars to operators and members of the public to sell and distribute their merchandise. Source: Seymour Sales Co. et al. (In the Matter of Country Tweeds Incorporated and Marcus Weisman), FTC Decision Each disc on the card hid a number that was disclosed only when the customer pushed it out. Source: Seymour Sales Co. et al. (In the Matter of Country Tweeds Incorporated and Marcus Weisman), FTC Decision The Commission found that whether a purchaser received merchandise or nothing, and the amount paid, were determined wholly by lot or chance. Source: In the Matter of Country Tweeds Incorporated and Marcus Weisman (Seymour Sales Co. et al.), FTC Decision
Outcome. Although the evidence of actual use was thin, the Commission found it clear from the cards and the accompanying literature that they were designed and intended for use as a lottery, and that it could reasonably be inferred they were so used generally or in a substantial number of instances. Source: In the Matter of Country Tweeds Incorporated and Marcus Weisman (Seymour Sales Co. et al.), FTC Decision The order barred supplying push cards and other lottery devices designed or intended for selling the merchandise. Source: Seymour Sales Co. et al., FTC Decision and Order It also barred selling or otherwise disposing of any merchandise by means of a game of chance, gift enterprise, or lottery scheme. Source: Seymour Sales Co. et al., FTC Decision and Order
FTC v. Express Marketing Services and Canadian Catalog Services, et al. (Canadian lottery telemarketing)
Memorandum of Points and Authorities in Support of Plaintiff's Ex Parte Motion for Temporary Restraining Order, Preliminary Injunction and Other Equitable Relief
In its motion papers, the FTC described a telemarketing enterprise that offered U.S. consumers packages of chances in the Canadian lottery, priced from $77 to almost $1,000. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing) The FTC said the callers claimed the transactions were legal and never disclosed that selling the tickets to Americans, and buying them, was a felony. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing) It also said the odds of winning the Canadian LOTTO 6/49 jackpot were nearly 1 in 14 million. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing)
Outcome. The FTC asked the court to enjoin the conduct immediately, freeze the defendants' U.S. assets, order repatriation of assets obtained from U.S. victims, and require an immediate accounting. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing)
Exposure
The FTC's motion papers in the Canadian-lottery telemarketing case pointed to an earlier case that shows how large a redress judgment can be. In the Windermere case, the court entered summary judgment for the FTC, ordered the defendants to pay $19.8 million in redress, and entered a broad permanent injunction. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing) Before judgment, the FTC asks courts to freeze assets and order an accounting so that money remains available for consumer redress. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing) Where a lottery or prize scam runs through telemarketing, the FTC's Walmart complaint pleaded that the statute authorizes civil penalties of up to $46,517 for each Telemarketing Sales Rule violation committed with actual knowledge or knowledge fairly implied, using the 2021 inflation-adjusted figure. Source: FTC Amended Complaint against Walmart, ¶ 176
In Commission matters over lottery merchandising, the usual remedy is a cease-and-desist order. In Seymour Sales, for example, the order barred supplying push cards and other lottery devices and selling merchandise by chance. Source: Seymour Sales Co. et al., FTC Decision and Order An order can also reach beyond the conduct itself. The Traffic Jam Events final order, entered over deceptive prize advertising among other things, bars the respondents from participating in any business that involves advertising, marketing, promoting, or selling motor vehicles. Source: Final Order of the Commission, In re Traffic Jam Events, LLC (issued Oct. 25, 2021) That order runs until October 25, 2041, or 20 years from the most recent complaint alleging a violation of the order, whichever is later. Source: Final Order of the Commission, In re Traffic Jam Events, LLC (issued Oct. 25, 2021)
A lottery operation can also face enforcers other than the FTC. As early as 1989, the Postal Service brought an administrative action against several defendants in the Canadian-lottery case for using the mails to conduct an illegal lottery in violation of 39 U.S.C. § 3005. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing) The FTC's own position in that case was that selling foreign lottery tickets into the United States violates federal criminal law. Source: FTC Memorandum in Support of Ex Parte Motion for TRO (Canadian lottery telemarketing)
FAQs
- 1.Gay Games, Inc., Report, Findings as to the Facts, and Order. ftcd-vol48july-june1952pages1358-1456See also Seymour Sales Co. et al.. In the Matter of Country Tweeds Incorporated and Marcus Weisman (Seymour Sales Co. et al.), FTC Decision
- 2.Bear Sales Co. et al., Opinion of the Commission. Bear Sales Co. et al., Docket 8627 (Opinion of the Commission, July 8, 1965)
- 3.Opinion of the Commission (push-card lottery merchandising, "casual" versus "professional" gambling). FTC Decision, FTC Opinion by Anderson, CommissionerSee also Initial Decision by Edgar A. Bottler, Hearing Examiner. FTC Initial Decision (Hearing Examiner Bottler)See also Consolidated Manufacturing Co. et al., Decision. Consolidated Manufacturing Co. et al., Docket 5557 (Jan. 29, 1952)
