Federal Court Dismisses Illegal Lottery Claims Against Omaze, Emphasizing Adequacy of Fundraiser’s Alternative Means of Sweepstakes Entry

By: Jacob Grubman

 As covered in this blog, in most states, companies that offer sweepstakes entries with certain purchases must also allow free entry (often called “alternative means of entry” or “AMOE”). This requirement stems from the three elements that generally make up regulated gambling: (1) consideration, (2) prize, and (3) chance. Random-chance giveaways inherently meet the latter two factors. To avoid running afoul of the gambling laws, sweepstakes operators must therefore ensure that participation is possible on a free basis, without consideration (i.e., payment or purchase).

On February 22, 2022, a judge in the Central District of California offered a succinct case study of the AMOE requirement in Knuttel v. Omaze, Inc., No. 2:21-cv-09034 (C.D. Cal. 2022). In dismissing most of the consumer plaintiffs’ claims in that case, the court explained that although Omaze requires at least some sweepstakes participants to make charitable donations through its platform—or else the giveaways are canceled—the existence of an AMOE for each prospective entrant is sufficient for the sweepstakes to comply with California lottery laws.

Background

Omaze, Inc. is a for-profit corporation operating a fundraising platform for charities. Omaze organizes fundraising campaigns for specific charities by conducting sweepstakes for various largescale prizes—like cars, houses, trips, and celebrity experiences—which people can enter predominantly by making donations. In general, the more a person donates, the more entries he or she receives for a given sweepstakes, up to a certain maximum. Omaze discloses that the donated funds are divided between the target charity and costs stemming from the prize and Omaze’s administration. Importantly, Omaze also offers an AMOE: Individuals can submit entries to receive the maximum number of entries without making a contribution.

In April 2021, a purported class of consumer plaintiffs sued Omaze, asserting that Omaze had violated various California statutes—including the state’s lottery laws—by soliciting donations to charities but “tak[ing] the lion’s share of the revenue for itself.” Among the host of claims raised in Knuttel v. Omaze was the plaintiffs’ assertions that Omaze inaccurately communicated that entrants would benefit from giving larger donations and that Omaze offered an illegal lottery in violation of Cal. Penal Code § 319 (via the state’s Unfair Competition Law and Consumers Legal Remedies Act) because Omaze would not complete its campaigns if everyone opted for the AMOE.

From Omaze’s perspective, the AMOE should have resolved any illegal-lottery concerns: As Omaze asserted, because participants can enter without making a donation, consideration is not present, and the giveaways are not lotteries. Furthermore—as the court noted—in 2020, Omaze agreed with the California Attorney General that it would modify its website to more prominently advertise the AMOE. But the plaintiffs raised two arguments regarding Omaze’s AMOE. First, they asserted that Omaze gave entrants the impression that their odds would improve if they donated more money to each campaign, obscuring the fact that free entrants can receive the maximum entries allowed. Second,  as to the adequacy of the AMOE, the plaintiffs argued that although Omaze offers an AMOE, it does not close entries to a given sweepstakes unless enough people opt for the paid method of entry for the company to cover its costs. In that event, the company extends the date of the giveaway’s closing and the announcement of a winner, and if every entrant used the AMOE, the sweepstakes would never conclude.

Federal Court Dismisses AMOE-Related Claims

This week, Judge Stanley Blumenfeld, Jr. of the Central District of California issued an order mostly granting the motion to dismiss filed by Omaze, allowing only a small portion of the plaintiffs’ claims to proceed. Included in the claims dismissed by the court was the plaintiffs’ claims that Omaze held illegal lotteries and that Omaze misrepresented the need to make larger donations for better chances to win.

On the former matter, the court noted plaintiffs’ argument that although “free entries in Omaze’s campaigns are available to anyone who wants to claim them,” at least some participants must pay to enter in order for Omaze to award a prize. Two California Supreme Court cases factored heavily into the Knuttel court’s decision. First, in Cal. Gas. Retailers v. Regal Pet. Corp., 50 Cal. 2d 844, 858 (1958), the state’s high court held that a promotional scheme involving tickets that were made available with or without purchase was not a lottery because “any person could have received a ticket, or tickets, free for the asking, or even without a request and without any necessity of making any kind of purchase.” Then, in People v. Shira, 62 Cal. App. 3d 442, 459 (1976), the court considered a game in which participants could complete the second of two stages only by either successfully performing a ring-toss challenge (with exceedingly low odds) or paying a fee. The Shira court distinguished Regal, concluding that “if some of [entrants] had to pay in order to have a chance at the prize or conversely if some of the players could not have played the entire game without paying some monetary consideration[,] the element of consideration is established” under California’s lottery law. Shira, 62 Cal. App. 3d at 460-61.

The plaintiffs in Knuttel emphasized the first part of that line, asserting that in Omaze’s contests, at least some entrants must pay for any entrant to have a chance to win a prize. But drawing on both the other reasoning in Shira and the main import of Regal, the court ruled in Knuttel, “Because any person who wishes to participate in Omaze’s campaigns may receive free entries upon request, the dispositive circumstance in Shira—that the ‘[t]he chance to win the prize is not open to Any person without the payment of consideration’—is not present here.” Accordingly, it concluded that Omaze’s sweepstakes do not require consideration and are therefore not lotteries under California law.

Next, the court dismissed the plaintiffs’ assertion that Omaze gave entrants the false impression that they needed to pay more for better chances to win, and “they therefore paid for entries they would not have purchased had they known they could submit multiple free entries at one time.” In a brief analysis, the court concluded that the plaintiffs had failed to identify any misrepresentations by Omaze concerning either the entries available at each level of giving or the entries available using the AMOE.

Notably, the claims concerning Omaze’s practice of making drawing dates dependent on fundraising levels survived the company’s motion to dismiss, at least in part. Cal. Bus. & Prof. Code § 17539.15(j) states, “The official rules for a sweepstakes shall disclose information about the date or dates the final winner or winners will be determined.” The court therefore concluded that “[g]iven the plausible allegations that Omaze may have provided incorrect information regarding the drawing dates for [two plaintiffs’] campaigns,” Omaze was not entitled to dismissal of claims arising under § 17539.15 and the Unfair Competition Law.[1] The court also denied dismissal as to one plaintiff’s claim that Omaze misrepresented the portion of funds that the target charity would receive, as that plaintiff had cited statements by a celebrity spokesman that the charity “would receive” the amounts being donated.

Takeaways

This newest decision on AMOE provides further insight into how methods of free entry can factor into broader sweepstakes operations. Here, it appears undisputed that Omaze does not complete its fundraising campaigns unless a sufficient number of participants have entered via a monetary contribution, such that no prize would be offered if every entrant used the AMOE. Nevertheless, the court examined Omaze’s model from the perspective of each individual sweepstakes entrant: Because the AMOE is available to everyone, the campaigns do not involve consideration and are therefore not lotteries under California law.

[1] The court also denied dismissal as to one claim of misrepresentation regarding Omaze’s practice of keeping a portion of donated funds but dismissed two others, and it denied Omaze’s motion to strike any nationwide class allegations, reasoning that the plaintiffs might not seek class certification in light of the latest ruling.