May 7, 2010 at 8:00 AM ET
Apple has quietly begun allowing developers to sell sweepstakes applications for the iPhone on its iTunes Web site, games that some legal experts say may be illegal lotteries or gambling.
One of the apps, called iFiftyFifty, is what the name suggests. Players download the app for free, then have the opportunity to buy "tickets" for $1 apiece. A button on the app encourages users to buy up to 100 tickets at a time for $100. The money is immediately deducted from a users' credit or debit card, which is on file with Apple in their iTunes account. At the end of the month, a random winner receives half the money collected. Twenty percent goes to the app developers, Chicago-based graphic design firm 2Pens Media. Apple gets even more than the software's designers - the remaining 30 percent, which is the firm's normal cut of app sales.
Other sweepstakes apps work differently. For example, users of a program called The Sweepstakes App pay to download the application, but can enter prize drawings for free after that.
The sweepstakes programs became available for download on iTunes within the past several weeks. In each case viewed by msnbc.com, consumers have the ability to enter the contests for free through a Web site.
Laws governing promotional sweepstakes, illegal lotteries, and gambling are complex. Big-prize sweepstakes -- such as McDonald's familiar Monopoly game -- are a staple of modern marketing. The same general principles apply, however: Companies can't create a game where consumers pay money only for a chance to win money, says Scott A. Schleifstein, a lawyer who advises firms on sweeepstakes promotions. In his opinion, the iTunes apps don't qualify as legal sweepstakes and are instead a form of gambling.
"They are running what we call a game for game's sake, and the regulators don't look kindly on that," he said. "...Why are you spending that $1 but for a chance to win? All you get for the $1 is the right to enter."
"I find it very surprising that Apple would do this," said Schleifstein, whose law firm, Cohen Silverman Rowan, has advised companies like Topps on giveaways and runs the Web site PromoLaw.com. "It's sort of galling."
Apple spokeswoman Trudy Miller would not comment about questions regarding the legality of the apps. She would say only, "We do allow sweepstakes apps."Dimitrios Tragas and Ryan Butz, the developers of iFiftyFifty, described a painstaking, year-long process of trying to get their app approved by Apple for sale on iTunes. After an extensive legal review – eight different iterations of the software were sent to Apple, they said -- Apple told the developers that as long as contestants had the option to enter for free, the game would be a legal sweepstakes, they said.
"Initially they told us they don't accept sweepstakes apps," Tragas said. They discarded the idea, until it became clear that Apple had reconsidered its position. "When we saw (sweepstakes apps) in their store, we called back."
The iFiftyFifty app went on sale last month for 99 cents, then was removed from iTunes by Apple and revised. Apple requested they make the app free, the developers said. It was available again for download at the iTunes site on Thursday.
The two said they received repeated guidance from Apple that their game was legal. They also consulted a lawyer and got similar advice.
"We believe in it," Butz said. "We're doing everything we possibly can to make sure it's (legal)."
So far, about 100 users have signed up and the current monthly pot is around $600, he said.
Sweepstakes are legal, but generally lotteries are not. There is a three-pronged test to determine the difference: Lotteries include a prize, an element of chance and "consideration" – payment of money or something else of value (such as an e-mail address). Providing a free alternative to entry is often enough for a company's contest to be considered a legal sweepstakes, Schleifstein said. But free entry isn't automatic insulation from accusations of illegal gambling, he said. Even if the iTunes apps don't constitute an illegal lottery, they could be considered gambling.
"They can say consideration is not present, and therefore it's not a lottery," he said. "But that has nothing to do with whether or not it is gambling."
Promotions involving prizes must comply with both federal and state gambling and lottery laws. In fact, the network of state laws is so complex that Los Angeles-based lawyer Melissa Marsh, once a leading adviser to companies that plan sweepstakes, got out of the field.
"It requires a ton of research, and most companies aren't willing to pay for it," she said. She did think a free entry method could clear the apps of legal troubles, but she said she was reticent to offer a legal opinion because she hadn't seen them.
But Texas-based lawyer Adam Hoffman disagreed. He said he believed iFiftyFifty was not in compliance with Texas law.
"In Texas it is unlawful to place a bet to win or lose something of value based even partially on chance," he said. "Nonprofits have a very limited right to hold raffles in Texas if they follow very specific rules and restrictions. The rules are established so bona fide organizations can hold occasional fund-raisers, not for fly by night operators to set up for-profit gambling rings."
He didn't think the free entries available from each app would impact their legality.
"A casino is still a casino, even if you get one free chip a month to use at the table," he said. "My belief is this places Apple squarely in the position of promotion of gambling, with them receiving a percentage of the profits."
William Evans, who developed The Sweepstakes App for his Florida-based company Weberts LLC, said he thought sweepstakes apps had a place on iTunes, and he hoped there would be a way to preserve their reputation. He does not see his game as gambling, but rather as a promotional tool for his company. Each time users submit entries for a contest, they see an ad for his software development firm. Ultimately, he hopes to sell or lease the software to consumer product companies that regularly run large-scale sweepstakes.
"The reality is people are never going to trust this kind of thing until a big company is involved," he said. "I wouldn't be surprised if Apple shut the whole thing down, which would stink because I put a lot of work and a lot of money into it."
Evans said he was comfortable that his app cleared the legal test for gambling because consumers who enter through the free Web site have equal odds of winning as those who purchase his $2.99 app to play.
"People are only paying for the convenience of being able to play with their iPhone," he said. "I want people to know that this is for real."
Evans said 830 users had signed up. He's already awarded one $1,000 prize and several $100 prizes, he said. The operation is already profitable, thanks to the app sales, he added.
Schleifstein said he had concerns about the legality of The Sweepstakes App because those who purchase the application are getting only one thing: a chance to win a prize. Customers who enter the McDonald's contest get a ticket in exchange for buying a hamburger or fries; those who enter Apple app contests aren't buying anything of value, he said.
"What gets enforcement officials' attention is a promotion without a product," he said. "It doesn't seem like (they are) selling much of anything, so it's just a pretense or exercise to run a lottery."