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updated 12/3/2012 1:52:31 PM ET 2012-12-03T18:52:31

Many businesses use sweepstakes and contests to excite consumers about their products or services. These promotions can be exciting, but when problems arise, it can lead to a messy (and expensive) legal battle.

Take for example, when a consumer tried to buy a Harrier Jet with Pepsi points in 1996. The promotion encouraged consumers to collect Pepsi points in exchange for merchandise such as t-shirts and sunglasses. A Pepsi commercial featured various items and their point values: a leather jacket for 1450 points, and a Harrier Jet for 7 million Pepsi points. Pepsi contended the jet was a joke, but plaintiff purchased 7 million Pepsi points and tried to redeem them for a fighter plane. Pepsi ultimately won, but had several years' worth of legal fees battling the case in court.

To make sure you don’t end up in a similar situation, here are a few tips to keep in mind for running a successful promotion.

1. Is it a sweepstakes or a contest?
A sweepstakes is a promotion of chance (enter your e-mail for a chance to win), while a contest involves skill (write a jingle). It’s important to distinguish between the two because sweepstakes and contests may have different restrictions in various states.

Related: 3 Steps to Generating Buzz with a YouTube Contest

2. Create official rules before the promotion -- and stick to them. According to Linda Goldstein, a leading advertising law expert and partner at Manatt, Phelps & Phillips, LLP, business owners should "make sure all material terms and conditions of the sweepstakes and contests are disclosed in the Official Rules." 

Goldstein also cautions businesses to never copy rules from another promotion. "Rules should be specifically tailored to your promotion," says Goldstein, to avoid ambiguity and inconsistencies.

3. Know the requirements for your jurisdiction. First, decide who you want to open your promotion to (residents of one state, the entire U.S., or internationally), then follow the requirements for that jurisdiction. International laws may apply if the promotion is open to residents outside the United States.

For example, states like Florida, New York and Rhode Island require registration with the state and/or bonding (a surety bond to protect participants and ensure compensation if the promotion operator fails to award prizes) for contests.

If you plan to advertise you contest or sweepstakes on social media, Goldstein recommends reviewing the site’s guidelines for promotions. For example, Facebook requires operators to provide certain disclosures and prohibits promotions that require Facebook users to comment or vote using the "Like" button to enter. Businesses using Twitter for promotions still must provide key information to participants such as how to enter and material terms and conditions. 

Related: The Top 3 Legal Mistakes Entrepreneurs Make and How to Avoid Them

4. Be mindful of laws governing online communications. Contests that are conducted online are subject to additional laws. Likewise, information gathered during the promotion such as e-mail addresses, regardless of whether the promotion was online or in-store, is subject to additional laws.

Online promotions are also subject to restrictions such as COPPA (Children’s Online Privacy Protection Act)  and the CAN SPAM Act (governing commercial e-mail messages to consumers), both of which provide steep penalties for violators. 

5. Hire an attorney with experience in advertising law to review your rules and marketing plans to ensure compliance with the law. Careful drafting is critical to a successful promotion. Printing errors can cause promotions to go haywire. Just ask Kraft Foods when, in 1989, a printing glitch rendered every game piece a winner of a new Dodge Caravan, when only one grand prize was intended. Kraft ultimately canceled the promotion, leaving many customers upset. As a result, many promotions today include "Kraft" clauses to guard against printing or typographical errors.

Contests can also turn tragic. In 2007, Jennifer Strange, a participant in the California radio station contest "Hold Your Wee for a Wii," died of water intoxication. Her family sued the radio station alleging wrongful death and received $16.5 million from a jury.

Promotions, when done right, can be a great way to build excitement and promote your brand among consumers. When they go wrong, however, they can lead to a host of problems, ranging from bad publicity to millions of dollars in liability. Consulting with an attorney will minimize your risk and maximize your promotion’s impact. 

Related: How to Choose the Best Legal Structure for Your Startup

Copyright © 2013 Entrepreneur.com, Inc.

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