The surge of sweepstakes and freemium gaming models in the United States has ignited some heated debate. Once a staple for promotional marketing, sweepstakes have recently become a focal point in both regulatory discussions and litigation. Prominent legal voices have expressed concerns over the nuanced legal environment and the challenges operators face in the face of new regulations and growing litigation. Recently, the American Gaming Association has targeted this practice, associating it with illegal gambling.
Traditionally, sweepstakes promotions offered participants a chance to win prizes without requiring payment—a compliance strategy centred on the absence of “consideration,” one of the three elements that could otherwise categorise the promotion as gambling. This “no purchase necessary” rule continues to serve as the baseline for lawful sweepstakes. Bill Gantz, partner at the law firm Duane Morris, explained at SiGMA Europe, “In the United States, any brand, product, or service can be promoted with a sweepstakes, provided there is a bona fide alternative method of entry.” This model has kept sweepstakes on the right side of legality by preventing them from crossing into regulated gambling territory.
However, the rise of internet-based sweepstakes, often involving products like digital currency or game credits, has challenged these long-standing regulatory definitions. These platforms provide free entry but also sell products like “gold coins” for gameplay—features that align closely with gambling elements, attracting scrutiny. As Gantz points out, “There are almost no states that have restrictions on how you can reveal a sweepstakes winner,” emphasising that the regulatory framework for these games remains undeveloped and outdated.
Compliance challenges and industry tactics
The regulatory ambiguity surrounding sweepstakes and freemium gaming has attracted a surge of litigation. According to Gantz, “Regulation by litigation has become a significant force, with enterprising plaintiffs’ attorneys filing suits against premium and sweepstakes operators alike.” These cases, he notes, often target aspects like continuous play or the mechanics of credit purchases, questioning whether they constitute “consideration” and thus transform the sweepstakes into gambling.
A landmark case in Washington, known as the Cater case, brought national attention to this issue. The plaintiff argued that the purchase requirement for additional credits, after running out of free ones, constituted gambling. Gantz recalls, “The Cater decision paved the way for similar cases. The Ninth Circuit concluded that the plaintiff had a valid gambling claim under Washington law.” Although the case did not ultimately decide whether the model was legal, it highlighted the precarious position of freemium models, which must walk a fine line between offering free entry while also generating revenue through in-game purchases.
Some states, including Michigan and Connecticut, have attempted to curb the sweepstakes trend through cease-and-desist orders, prompting certain operators to exit these markets voluntarily. “Rather than contesting the state actions, many operators have chosen to withdraw from states with heightened scrutiny,” Gantz explains, pointing to instances where larger operators exited rather than face prolonged legal battles.
The challenge for regulators lies in the ways that operators exploit legal loopholes to position their products as games of skill or promotional offers. Chris Cylke, the American Gaming Association’s senior vice president for government relations, recently noted that some companies openly disregard traditional gambling laws, relying on “legal loopholes” to argue their operations are lawful. “It’s like they’re building a rocket ship to penetrate as many states as they can,” said Cylke, describing the rapid expansion efforts by operators trying to sidestep state gambling regulations.
As states increasingly pursue oversight, the legality of sweepstakes platforms is being tested, particularly where they resemble traditional casino games. Platforms frequently design their games to mimic slots, giving users the feel of a casino experience while steering clear of the “consideration” component by offering free entries. However, as Cylke notes, these distinctions are becoming less convincing to regulators and lawmakers: “It has been a challenge dealing with these issues in real-time.”
Litigation and regulatory strategies
Lawsuits targeting sweepstakes companies are not limited to state regulators. Plaintiff attorneys have taken aim at major tech platforms, like Apple, Google, and Facebook, under claims that they facilitate illegal gambling by hosting gaming apps that employ freemium or sweepstakes models. In one high-profile case, the Ninth Circuit recently ruled against Apple’s immunity defence under Section 230 of the Communications Decency Act. This case, currently back in lower courts, is one that Gantz believes could have significant implications for the industry.
In addition to state-led actions, the Federal Trade Commission (FTC) also regulates sweepstakes, aiming to prevent deceptive marketing practices. But Gantz observes that many of the challenges operators face are related not to federal scrutiny but rather to the legal actions brought by private plaintiffs. “Contrary to popular belief, these lawyers aren’t driven by an altruistic mission; they’re after financial settlements,” Gantz contends. In Washington alone, plaintiff firms reportedly amassed nearly a billion dollars in settlements.
The incentives for plaintiff attorneys, combined with weak state-level regulations on sweepstakes operations, suggest that litigation pressures will continue to shape the industry. As Gantz summarises, “Without clear statutes, this industry remains vulnerable to costly lawsuits, even in the absence of a formal ruling on legality.”
The path forward, compliance and industry adaptation
While litigation continues to exert pressure on sweepstakes operators, Gantz outlines several key strategies, emphasising the importance of transparent terms and player safeguards. “To optimise compliance and risk management, operators need to incorporate robust player safety policies, including geolocation, KYC [Know Your Customer] checks, and self-exclusion features,” he suggests, noting that these steps mirror protocols in regulated gambling. He adds, “You need a legitimate alternative entry method, and multiple ways for players to obtain free sweepstakes coins—otherwise, you risk veering into the domain of gambling.”
Gantz also advocates for a strong terms-of-use agreement and official sweepstakes rules, supported by an arbitration clause to mitigate litigation risks. According to him, “The better your platform’s policies, the fewer chargebacks and legal challenges you’ll face.” Additionally, Gantz encourages operators to join trade organisations like the Social and Promotional Gaming Association (SPGA), which he believes could help standardise best practices within the industry.
Unlock winning moments: Discover the best odds on SiGMA Play.
