We’ve all seen the COVID-19 fall-out in the past few weeks—indeed, we’ve all lived the fall-out. But the promotions, events, and hospitality industry has been particularly hard-hit by the recent restrictions on public gatherings and travel. From Coachella to SXSW to the Olympics, events around the globe have been cancelled, rescheduled, or postponed —sometimes indefinitely—due to the pandemic. These postponements and cancellations have put companies sponsoring promotions such as sweepstakes and contests, events, and ad campaigns linked to these postponed events in a difficult position. How do companies protect themselves from potential liability associated with the postponement or cancellation of a sponsored event? Can one change the terms and conditions of sweepstakes associated with an event to when the event is postponed or cancelled? Those of us familiar with contract law understand how important a well-drafted Force Majeure clause can be in this situation. But one doesn’t always have a well-drafted Force Majeure clause when dealing with a new pandemic. And, as is often the case, sweepstakes and prize promotions rules (and related documents) are a form of contract, but they are a type of agreement that is regulated a bit differently from a standard commercial contract between sophisticated business entities that have negotiated in good faith. Let’s unpack that.
How does my Force Majeure Clause apply to Corona-cancellations?
The Force Majeure (French for “Superior Force”) clause is a common contracts clause that, if properly drafted, frees both parties from liability when an unanticipated supervening event or circumstance beyond the control of the parties (e.g., war, riots, blackouts) or an “act of God” (e.g., tornados, hurricanes, floods, etc.) prevents one or both parties from fulfilling their obligations under the contract. A party seeking to invoke this clause would generally need to show that the act was unforeseen and that it caused performance to become impossible or impracticable. As we are still in the early stages of dealing with the Coronavirus pandemic, it is not certain if a Force Majeure clause will provide an adequate defense in every situation or even if Coronavirus is certain to be considered Force Majeure, and the impossibility and impracticability of performance would still be assessed on a case-by-case basis. With that in mind, the best practice in drafting any promotion and sponsorship agreements and associated documents, such as prize supplier agreements, sweepstakes rules, and winner/guest releases would be to include specific language concerning a pandemic or epidemic, or at least a health event, in a Force Majeure clause excusing failure to perform such as cancellation, delay, or interruptions. This specific language would be in addition to more traditional Force Majeure language excusing performance for acts of God, war, terrorism, civil unrest, strikes, supply shortages, natural disasters, weather, order of governmental authority, or other “catch-all” reasons. For now, there is some uncertainty over whether preexisting Force Majeure clauses that did not specifically reference disease or epidemic will cover cancellations or postponements due to COVID-19.
Of course, we are presupposing here that the sweepstakes rules in question include a Force Majeure clause. While it’s tempting to use short, standardized rules for all one’s prize promotions, if one is running a sweepstakes or contest that is linked to or contingent on the occurrence of an event, a Force Majeure clause is a good idea (indeed, that may be true for any sweepstakes that involves a travel prize).
What If Prize Promotion Rules or Related Agreements Do Not Have a Force Majeure Clause?
A promotion sponsor may find that its contest or sweepstakes rules do not contain a Force Majeure clause or do not otherwise directly (or adequately) address nonperformance of contract obligations. If that is the case, the promoter should consider whether it may avail itself of common law bases for excusing its nonperformance in the absence of contractual protections.
The common law doctrines of impossibility, impracticability, and frustration of purpose are the most frequently applied here. Under an impossibility or impracticability theory, an unforeseeable supervening event renders performance either impossible or infeasibly difficult or expensive. The doctrine of frustration of purpose is generally distinguished in American courts from impossibility or impracticability, although the doctrines are closely related. Frustration is not caused by impossibility or even difficulty in performing one’s obligations; a party may be perfectly capable of performing, but its reason for doing so no longer exists. For example, consider a rock band that was supposed to end a sweepstakes and announce the winner on-stage at the last concert of its tour (set for this weekend) that now finds that this concert has been postponed for six months and wants to extend the entry period by six months as well. Announcing the sweepstakes winner now is not impossible — the rock band is quite capable of doing so. But the purpose of announcing a winner immediately has arguably been attenuated. Frustration of purpose requires a supervening event that substantially frustrates the party’s primary purpose in forming the contract. The purpose of the contract must have been known and acknowledged by both parties at the time of contract.
Parties seeking to excuse or delay their performance must conduct a comprehensive assessment of the terms of the rules, governing law, and common industry practices to determine their best argument. Clearly-drafted rules and contractual provisions are often the first line of defense. In some cases, courts have applied the impossibility doctrine even where a Force Majeure clause was in place. The frustration of purpose doctrine has been recognized by U.S. courts, but is not as well-developed as its brethren. The analysis for companies sponsoring promotions will be rule, contract, and situation-specific. For our example, there may be a difference between a sweepstakes where the plan is to announce the winner on stage and one where the prize is a trip to the final concert.
Sweepstakes/Consumer Protection/UDAP Laws Place Key Restrictions on What Promotion Sponsors May Do
Whether or not Force Majeure and/or the doctrines of impossibility, impracticability, and frustration of purpose apply, it is important to keep in mind that for prize promotion terms and conditions, the sweepstakes and consumer protection laws will apply. Most sweepstakes rules include a modification/cancellation clause, and additionally provide substantial latitude for sponsors to make decisions “in [their] sole discretion.” These modification clauses, however, are often drafted narrowly, for example, to provide for modification only in circumstances where there are technical issues, fraud, or corruption, with a limited remedy (e.g., cancel and choose a winner). A well-drafted modification and cancellation clause should leave some room to craft a remedy if there is a delay, postponement or some other circumstance that does not require termination, permitting modification of the promotion such that, to the extent possible, it may continue in the spirit in which it was initially contemplated, with a winner selected according to the winner selection procedure provided in the rules.
That said, under sweepstakes and UDAP laws, modification is viewed as a remedy of last resort, to be used only in situations, for example, where there has been Force Majeure, fraud or there is impossibility. Many state laws (Florida and California are examples) require that all advertised prizes in a sweepstakes must be awarded (without exception), and failure to do so is an unfair and deceptive act. Moreover, changing the rules may trigger fairness issues. For example, in the rock & roll tour example above, if the entry period is extended by six months, many more people will be able to enter, thus lowering the odds of winning in a way that is unfair to consumers who entered the sweepstakes before the extension. Additionally, state laws require disclosure of specific start and end dates for a sweepstakes, and these dates may be on record with the states that require filing of sweepstakes rules (i.e., New York, Florida, and Rhode Island), so any material changes – or the failure to make the required filing of winner’s lists in a timely manner—may trigger a regulatory inquiry. And there is considerable private litigation challenging changes to the rules and similar conduct on breach of contract and related grounds. The risk of such changes, then, is clear, and they should be undertaken only in extreme circumstances.
The takeaway here is this: (1) in running (or contemplating changes to) sweepstakes, promotions and events in the COVID-19 era, it’s important to first review your Force Majeure and modification clauses to make sure they give you the protection and flexibility you need; then, (2) before making any changes to your rules and other agreements/documentation, make sure you won’t create new problems for yourself under the sweepstakes and consumer protection laws!