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In a rare example of a sweepstakes leading to litigation, Coinbase and its promotion agency, Marden-Kane, were sued over a sweepstakes run by Coinbase and administered by Marden-Kane titled “Trade Doge. Win Doge.” As part of that sweepstakes, Coinbase offered prizes totaling $1.2 million of Dogecoin to individuals who purchased or sold $100 worth of the DOGE cryptocurrency on the Coinbase exchange. Of course, in order to comply with federal and state lottery laws, the sweepstakes rules also included an alternate method of entry (AMOE), which allowed consumers to enter for free without making a purchase. Specifically, under federal and state laws, a promotion that contains all three elements of prize, chance and consideration is considered a lottery and is generally unlawful outside specific contexts, such as licensed casinos and state lotteries. Since sweepstakes by definition include the elements of chance and prize, the element of consideration must be eliminated in order for the promotion to be lawfully conducted. While many sweepstakes, including the Coinbase promotion, award sweepstakes entries in exchange for a purchase or payment, they rely on an AMOE to eliminate the element of consideration. In short, as long as there is also a free way to enter the sweepstakes, entries can be given to those who make a purchase. In this case, although Coinbase and Marden-Kane did include an AMOE, the plaintiffs challenged the promotion on multiple grounds. First, the plaintiffs claimed that the sweepstakes was a lottery notwithstanding the existence of an AMOE. Second, they alleged that even if there was an AMOE, it was not adequately disclosed and the promotion therefore violated various sweepstakes disclosure requirements, was misleading and deceptive, and violated the California Consumer Legal Remedies Act (CLRA).

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The court’s initial rulings on the defendants’ motion to dismiss contain some important lessons for both brands and agencies to consider.

First, in an important win for the defendants, the court dismissed the plaintiffs’ lottery claims in their entirety. The court noted that no California court has ever found that a promotion became a lottery when a free entry was offered, even if the plaintiffs were not aware of that option. This is significant because if the court suggested that a failure to adequately disclose the AMOE turned the promotion into a lottery, it could open the floodgates to future litigation and regulatory action. Second, the court found that these sweepstakes services fall outside the CLRA. Ultimately, what’s left in the case are the defendants’ claims that the promotion did not include necessary sweepstakes disclosures and violated various state truth-in-advertising laws.

What is perhaps most interesting at this point about the court’s decision is its ruling on the defendants’ attempts to move the dispute to arbitration. While the court granted Coinbase’s motion, it denied Marden-Kane’s, leaving the agency in the awkward position of having to defend the case in court while its client is in arbitration. In reaching its decision, the court relied on the fact that all entrants agreed to the Coinbase user agreement and its arbitration provision when they created an account, which was required to enter the sweepstakes. While Marden-Kane argued that it should also be able to enforce that arbitration provision, the court rejected that argument because Marden-Kane was not a party to the Coinbase user agreement. Thus, Marden-Kane was left to rely on the sweepstakes’ Official Rules, which it was party to, but unfortunately the Official Rules did not include an arbitration provision. While the Official Rules did prohibit class action claims, the court found that the waiver was unconscionable. The CLRA claims, which were dismissed, were the only ones that permitted punitive damages, and the $100 purchase to enter the sweepstakes was low enough that the claims predictably involve small amounts of damages, making the class action waiver unconscionable.

This case is a good reminder that when drafting Official Rules for sweepstakes, careful attention should be paid to every provision in the Official Rules and none should be viewed as “boilerplate.” In this case, Coinbase was able to rely on an arbitration provision contained in its user agreement, but most sweepstakes today do not require accessing a website or creating an account. And while many sweepstakes’ Official Rules include a class action waiver, they do not always include an arbitration provision. This case suggests that if a company wants to avoid class action litigation, both an arbitration provision and a class action waiver should be included in the Official Rules, and they should be included with sufficient prominence as to be enforceable. Further, promotion agencies may want to ensure that such provisions expressly cover the agency as well as the sponsor in order to avoid being left out in the cold.

Coinbase Decision Highlights Importance of Official Rules’ Dispute Provisions