Oregon

12/17/01

"The Financial Fraud section of the Oregon Department of Justice periodically receives inquiries from law enforcement officials and members of the public regarding the legality of raffle style contests requiring the submission of a written entry by participants. Typically a person or entity offers an item of significant value (e.g., a house) to be awarded to a winning contestant. Contestants are charged a fee to enter the contest. The rules of the contest require a contestant to submit a written essay on a particular subject and the winning contestant is selected on the basis of the "best" submission.

This article is not intended as a legal opinion, but, rather, it is intended to identify some legal and practical issues associated with the operation of such contests which create legal problems. As a general rule we would warn promoters that such contest, if not properly structured, would violate Oregon law. Moreover, we would advise potential participants to be wary of essay contests that offer large prizes for small entry fees.

In general, it is illegal to operate lotteries in the State of Oregon. The operation of a prohibited lottery constitutes illegal gambling and is punishable as a criminal act. See, ORS 167.177 et seq. The most notable exceptions to this prohibition are lotteries conducted by the Oregon State Lottery, and bingo and raffles conducted by a nonprofit tax exempt organization. See., Oregon Constitution, Article XV, Section 4.

Lotteries involve chance, consideration and prize. Whether these elements are present is determined on a case-by-case basis. In the above described contest, the elements of a prize and consideration are present. Therefore, the contest is an illegal lottery if the element of chance is also present.

The scenario described above raises the question of whether the essay contest is one of skill or chance. If the contest is predominantly skill, it is not a lottery. Conversely, if it is predominantly chance, it will be viewed as illegal. There are no Oregon cases directly on point, however, there are two cases discussing when a game is skill or chance. In Johnson v. McDonald, 132 Or 622 (1930), the court held that a type of contest based on a checkers game was predominantly skill, while in State v. Coats, 158 Or 122 (1938), the court ruled that operation of a pin-ball machine was predominantly chance.

In the case of an essay contest, we will look closely at the judging criteria to determine whether the outcome rests predominantly on skill or chance. If the proposed criteria results in the winner being chosen simply through the luck of the draw, the contest will be considered an illegal lottery. Similarly, if there is no objective criteria for judging the winner, we will presume the contest is based primarily on chance and thus be any illegal lottery. The most important factor is that the winner is determined not through chance but on skill.

Another factor in determining whether the contest is based predominantly on skill or chance is the qualifications of the judge or judges {sic}. If a judge is independent with some skill in judging an essay contest, and there is an articulated objective criteria for judging the contest, the promoter has a much better chance of showing the contest is based on skill rather than chance.

Another problem with essay contests involves the entry fees. All moneys {sic} received should be placed in a separate account until the winner has been declared. Some contests tell participants that the awarding of the prize is conditioned on participants returning an adequate number of applications. In such cases, the money is not the promoter's, but should be held in trust for the participants until the winner is awarded the prize. If the promoters use the money before awarding the prize they may have committed a crime or an unlawful trade practice, since they have used money which they should be holding in trust.

Even if a contest is not viewed as an illegal lottery, there are other problems. The Oregon Unlawful Trade Practices Act [UTPA] requires contests be promoted honestly and free from deception. See, ORS 646.608(l)(p). To comply with these provisions a contest promoter must tell participants the minimum and/or maximum number of entrants. The contest must be conducted fairly and objectively. If a friend or relative of the promoter won it would appear the selection process was "rigged" or, at least, arbitrary and therefore an illegal lottery.

Some examples of problems found in California illustrate the types of violations we would anticipate. In one the promoter created a nonprofit to "own" the property and, therefore, the nonprofit was supposedly benefiting from the sale. It turned out the beneficiary of the nonprofit was a relative of the seller. In other words, the participants were led to believe their participation benefitted a nonprofit when it was merely benefitting the seller.

The value placed of the property is also an issue. For example, one property in California was listed with a value of $800,000. However, this was $125,000 more than the price at which the seller had unsuccessfully marketed the property. In addition, a "winner" could have serious tax consequences depending upon how the property is valued.

Moreover, Oregon's contest, sweepstakes and prize notification rule covers essay contests played through the mail or telephonically. In this rule, the promoter must make certain disclosures when the contest is offered including the name of the judges, the method used in judging and the date the final winner will be determined. The rule does not legalize what would be illegal lotteries.

If a person is able to design a contest which avoids all the problems stated above, the proposal should be reviewed with the Real Estate Agency if real estate is offered as a prize. The person may need a real estate license if the contest is promoted on behalf of some third party.

Because of the many, serious legal issues raised by such contests, we have encouraged individuals to discuss the contest with legal counsel prior to offering the contest in Oregon.

Updated 9/97."