By Andrew Lustigman

The settlements of the class action suits brought against popular television shows such as American Idol and Deal or No Deal further strengthen the requirement to offer equivalent value when charging for an entry to a sweepstakes.

A series of four class actions, with the lead case being Karen Herbert v. Endemol USA, Inc., were brought in federal court in California in 2007 against the networks, wireless carriers, and other related parties relating to certain TV show contests.

The cases challenged the supplemental play at home contests in connection with these game/reality shows in which participants could enter either for free via a website method or by entering through a premium SMS method of entry for a chance to win a prize.

For example, persons who wished to enter the Deal or No Deal Luck Case Game could enter by texting a code that would result in a $.99 charge to their mobile account or could enter via the Internet for free.

Both entry methods had the same chance of winning.

Plaintiffs objected, however, claiming that the promotions were in essence “pay to play” at least for premium SMS entrants who were charged a fee.

Accordingly, consumers filed a series of lawsuits as representative actions under California’s liberal Business and Professions code as well as class actions under Connecticut and Massachusetts law.

The plaintiffs alleged that because they were charged a fee to enter via premium SMS without receiving anything of substance in return, the contest sponsors were violating the law by running an illegal lottery.

A lottery has three components: prize, chance and consideration.

Plaintiffs alleged that all three elements were present: i.e., entrants paid to have a random chance of winning the contest prize, and thus the contests were illegal.

Defendants initially moved to dismiss the action, asserting that the free entry method barred application of the lottery law (i.e., there was no mandatory consideration).

Indeed, the free method of entry was utilized by the greater majority of the entrants and there was some value provided in return.

Nevertheless, to the surprise of many in the industry, the district court refused to dismiss the actions. Instead, the court found that having a “pay to play” component in SMS game promotions could potentially violate the applicable lottery laws.

Defendant’s sought to appeal the initial dismissal decision, but the appeal was ultimately denied by the Ninth Circuit as lacking jurisdiction.

Now, after four years of litigation, the parties have agreed to settle. Under the terms of the settlement, consumers will have the ability to submit a claim to receive a refund of the premium SMS fee (which were around 99 cents).

In addition, over $5.2 million in legal fees will be paid to the plaintiffs’ attorneys.

Most notably, defendants have agreed to a five year injunction from creating, sponsoring, or operating any contest or sweepstakes for which entrants are offered the possibility of winning a prize, where people who enter via premium SMS do not receive something of comparable value to the text message charge in addition to the entry.

While the settlements are not binding on companies that are not parties to the lawsuit, the settlements send a strong message to those who are running SMS or text message promotions, particularly those that assess premium charges to players.

Game promoters who utilize premium SMS must make sure that the contest is properly structured, including that a free method of entry available.

Moreover, it is critical to ensure that a paid entrant who has paid to play receives something of reasonable equivalent economic value in return.

Andrew B. Lustigman is a partner at Olshan Grundman Frome Rosenzweig & Wolosky LLP. Reach him at [email protected].