Legal Essay

November 12, 2008

Please find the legal essay on this contest as sent to me from Ms. Jan Margosian.

RAFFLE-STYLE WRITTEN CONTESTS

The Financial Fraud/Consumer Protection section of the Oregon Department of Justice periodically receives inquiries from law enforcement officials, the news media and members of the public regarding the legality of raffle-style contests requiring the submission of a written entry by participants. Typically, a person or entity offers an item of significant value (e.g., a house) to be awarded to a winning contestant. Contestants are charged a fee to enter the contest. The rules of the contest require a contestant to submit a written essay on a particular subject and the winning contestant is selected on the basis of the “best” submission.

This article is not intended as a legal opinion, but, rather, it is intended to identify some legal and practical issues associated with the operation of such contests, which create legal problems. As a general rule, we would warn promoters that such contests, if not properly structured, would violate Oregon law. Moreover, we would advise potential participants to be wary of essay contests that offer large prizes for small entry fees.

In general, it is illegal to operate lotteries in the State of Oregon. The operation of a prohibited lottery constitutes illegal gambling and is punishable as a criminal act. See ORS 167.117 et seq. The most notable exceptions to this prohibition are lotteries conducted by the Oregon State Lottery and bingo and raffles conducted by a non-profit tax-exempt organization. See. Oregon constitution, Article XV, Section 4.

Lotteries involve chance, consideration and prize. Whether these elements are present is determined on a case-by-case basis. In the above-described contest, the elements of a prize and consideration are present. Therefore, the contest is an illegal lottery if the element of chance also is present.

The scenario described above raises the question of whether the essay contest is one of skill or chance. If the contest is predominately skill, it is not a lottery. Conversely, if it is predominately chance, it will be viewed as illegal. There are no Oregon cases directly on point; however, there are two cases that discuss when a game is skill or chance. In Johnson v. McDonald, 132 Or 622 (1933), the court held that a type of contest based on a checkers game was predominately skill, while in State v. Coats, 158 Or 122 (1938), the court ruled that operation of a pinball machine was predominately chance.

In the case of an essay contest, we will look closely at the judging criteria to determine whether the outcome rests predominantly on skill or chance. If the proposed criteria result in the winner being chosen simply through the luck of the draw, the contest will be considered an illegal lottery. Similarly, if there are no objective criteria for judging the winner, we will presume the contest is based primarily on chance and thus be an illegal lottery. The most important factor is that the winner is determined not through chance but on skill.

Another factor in determining whether the contest is based predominantly on skill or chance is the qualifications of the judge or judges. If a judge is independent with some skill in judging an essay contest, and there is an articulated objective criterion for judging the contest, the promoter has a much better chance of showing the contest is based on skill rather than chance.

Another problem with essay contests involves the entry fees. All moneys received should be placed in a separate account until the winner has been declared. Some contests tell participants that the awarding of the prize is conditioned on participants returning an adequate number of applications. In such cases, the money is not the promoter’s, but should be held in trust for the participants until the winner is awarded the prize. If the promoters use the money before awarding the prize, they may have committed a crime or an unlawful trade practice.

Even if a contest is not viewed as an illegal lottery, there are other problems. The Oregon Unlawful Trade Practices Act (UTPA) requires that contests be promoted honestly and free from deception. See ORS 646.608(1)(p). To comply with these provisions, a contest promoter must tell participants the minimum and/or maximum number of entrants. The contest must be conducted fairly and objectively. If a friend or relative of the promoter won, it would appear the selection process was “rigged” or, at least, arbitrary and therefore, an illegal lottery.

Some examples of problems found in California illustrate the types of violations we would anticipate. In one, the promoter created a nonprofit to “own” the property and, therefore, the nonprofit was supposedly benefiting from the sale. It turned out the beneficiary of the nonprofit was a relative of the seller. In other words, the participants were led to believe their participation benefited a nonprofit when it was merely benefiting the seller.

The value placed on the property also is an issue. For example, one property in California was listed with a value of $800,000. However, this was $125,000 more than the price at which the seller had unsuccessfully marketed the property. In addition, a “winner” could have serious tax consequences depending upon how the property is valued.

Moreover, Oregon’s contest, sweepstakes and prize notification rule covers essay contests played through the mail or telephonically. In this rule, the promoter must make certain disclosures when the contest is offered including the name of the judges, the method used in judging and the date the final winner will be determined. The rule does not legalize what would be illegal lotteries.

If a person is able to design a contest which avoids all the problems stated above, the proposal should be reviewed with the Real Estate Agency if real estate is offered as a prize. The person may need a real estate license if the contest is promoted on behalf of some third party.

Because of the many, serious legal issues raised by such contests, we have encouraged individuals to discuss the contest with legal counsel prior to offering the contest in Oregon.

# # # #

UPDATED 11/08

========

Our Response:

1) This contest relies strictly on the contestant’s ability (SKILL) to move people to vote for their story.  Their story is available to the public to vote.  A contestant should have sufficient skill to motivate people by writing a story that is touching that others would want to vote for them.

2) The contestant needs to garner support from friends and family to gain the maximum number of votes (a SKILL).

3) The judging process is done by the Internet at large.  Neither Freehouse LLC nor George Tran is involved in the judging process.  We select the winner based purely on the number of votes garnered by the contestants.

Exciting News

November 11, 2008

Well, I wrote a letter to Ms Jan Margosian after seeing the story about this giveaway on KEZI.

Ms. Jan Margosian
Consumer Information Coordinator
Financial Fraud. Department of Justice
100 Justice Building
Salem, Oregon 97310
Phone: (503) 378-4732
Fax: (503) 378-5017
e-mail: jan.margosian@doj.state.or.us

In my letter, I explained clearly that we have cleared this with my attorney before moving forward.  We intend to comply with any requests made by Ms Margosian.  I am an honest guy doing something innovative and different, while helping non-profit organizations at the same time.  Through out this project, I have been complete transparent as I know there is a high degree of skeptism for this sort of thing.  Again, my reputation is worth a lot to me, and I will continue to be transparent and honest to you.
Second exciting piece of news is that we were featured in a radio interview in Georgia today.  They called me at 5.30am this morning.  Woke me out of bed. 🙂  I hope I did not sound too groggy.

Finally, we got an invitation with the Register Guard for them to come out and write a story about our giveaway tomorrow at 1pm.  That’s exciting news.  I will keep you posted.

Sincerely
George

Featured on KEZI

November 10, 2008

I put out the press release on Friday and got a phone call from KEZI for a TV interview.  The lovely Paris Jackson came out on Saturday and interviewed me.  I was aired on Sat evening at 11pm, and shortly after, got a huge amount of response.

Today, I received a phone call from the Register Guard (Eugene’s largest newspaper) saying they would like to set up an interview.  Very exciting.

Check out our very touching stories and entries at:

http://digg.com/arts_culture/Can_t_Sell_house_I_m_giving_it_away_on_Digg

If the story move you or touch you, please vote for them.

Ray Sinclair’s Guide to house giveaways

November 10, 2008

September 24, 2008
From: win-this-home.com

So you want to run a contest for your house?

My name is Ray Sinclair of Yachats, Oregon. I attempted to run an essay contest for our house, across the street from the beautiful Pacific in this bucolic little village on the Central Oregon Coast. My wife and I have owned this 2000 sqft, home for over 12 years. We purchased it in 1996 and spent the next year on renovations. It was our dream home where we had retired to spend the rest of our lives.

I will not go in to the details of why that balloon came back to earth with a resounding thud in 2005.

We had to down size our living quarters in early 2006 and as a result the Yachats house went on the market in May of that year. I had a professional appraisal done to get an idea of the price to set on the house. At that time there were NO, ZERO houses on the market on the west (ocean side of Hwy 101) available in Yachats, a very desirable address.

We tried the conventional approach, listing with the most successful realtor in the area.

In the following six (6) months the house was only shown three (3) times. WOW!!!

We decided to pursue FSBO. First we used the Internet, then doing the whole thing ourselves. We dropped the price the equivalent of the realtor’s fee, 6%, to make the price more affordable.

We held open house EVERY WEEK, Wednesday through Sunday, 10AM-4PM. WE did all the signs (right on Hwy 101) with balloons, made flyers and all the other things to draw attention to the house.

We had several thousand people through our open house during the following TEN (10) months. We would spend our “off days” cleaning and doing yard work plus maintaining our other living quarters.

We had taken out a bridge loan to buy the other house. We are retired folks living on a fixed income. The payments on the loan eroded our savings and I spent many sleepless nights pondering a solution. We had continued to reduce the price on the Yachats house during this period to the point of diminishing returns.

The central theme we heard during all the open house events was “ we love the house but can’t afford it”. One of my sleepless nights I had the idea of perhaps we could have some kind of contest, wherein the house is the prize and we at least cover the cost of the loan.

I knew that in this state there are no other lotteries or raffles allowed other than those by charities and other 501C groups. I started making phone calls to the local government offices as to what other avenues might exist. Every one deferred to the State Lottery Board, who controls every thing related to any thing vaguely related to gaming.

I found out that there was a niche referred to as “skill contests” that might fit what I was looking for.

I knew that my individual inquiries would not get much response so I hired a law firm to dig into this possibility. After several weeks it was determined that indeed there was an area to work with.

Prior to proceeding I was advised to have a conditional sale agreement prepared.

I had an agreement drawn up under which my wife and I would sell the house in Yachats to the corporation for a predetermined amount at the successful conclusion of the contest. The corporation would then be the owner and award the prize(s). We would get our price for the house and all would be right in the world.

In the mean time I worked on a process and structure for a contest, stressing openness,

checks and balances, separation of managing the contest and the judging. What followed was a lot of flow charts with a process to direct the flow of entries. There would be a lot of revisions during the initial weeks of the contest.

I made sure to consult with the “legal eagles” on my process. A lot of attention was paid to the separation of judging and processing entries. The qualification of the judges was rather simple (so I thought). I wanted at least three (3) people with many years (read retired) of formal experience in education, preferably English and/or Journalism.

The hiring of suitable judges proved to be a formidable task. I ran ads and put out the “word” in the local community for candidates. I did not hire my last judge until 12/31/07.

All my judges were retired educators, all English teachers in Oregon. Each had 30 years of experience, in the classroom and some administrative.

The qualifications for the judges must include the disclaimed that there can be affiliation

or relationship with the contest/corporation organizers or their families.

In parallel I started the process of forming a corporation and all the related support required for a business, getting a PO Box, opening a bank account and hiring an accountant.

I had done a preliminary budget for the contest. I was required to capitalize the corporation (who owned the contest) and fund all the startup costs.

All the myriad details that popped up in doing these things related to law changes due to the Homeland Security caused many delays. Getting a Federal Employment # must be in hand to open business bank accounts (there must be a separate savings type account established for the “escrowing” of entry fees) with several photo IDs. To get a business PO box requires forms and IDs. NO funds shall be used from the “escrowed” account other than for prizes or refunds.

I had paid major attention to the plan for publicity for the contest. I did NOT do enough in this area. I had this grandiose idea that the contest, with only 3000 entries at a “bite size” fee of $200 would be a breeze for this house in Yachats. I thought that certainly the contest would be concluded within the State very quickly. What an opportunity!!!! A house across the street from the ocean for only $200!!

One of the early items was the development of a really good web site. I found a very talented site designer right in Yachats who walked me through the variances of this task.

I had looked for a good “domain” name for the contest/web site and found “win-this-home” was available. This drove the entity of the corporation and all related items of the contest. This should be moved up to a high priority in the large list of “things to do”.

In constructing the web site have a “contact us” page that links to your email. DO NOT list your email address/phone #/address. Construct an informational page about your specific local area, listing all the highlights/medical facilities/churches/schools/infrastructure of the community, etc. If possible include a map or, as I did, an aerial photo showing the geographical location of the house to the ocean and village. There are usually several web sites on your local area with some of these features that may be linked to your web site.

Media:

There was a growing buzz in our little village about the contest and word got all the way to a Network TV station in Portland. I got a call to see if I would like to get coverage on major network news. WOW!!! I was ecstatic!!!

The filming event was to come the first week of the contest, January 2. That was the good news.

The bad news was we were hit with the worst winter in Oregon in 57 years. The storms rolled in one after the other. High winds and heavy rain are the norm here on the coast but then we had snow in the local area, heavy enough to curtail traffic and affect safe travel over to the coast through the coastal hills/mountains.

The weather became the big news and we were called to say that our coverage was cancelled.

I started scrambling for media coverage. I was lucky enough to have several local folks with contacts and previous experience in the media business. We began a concentrated

Push for media coverage.

All this work paid off in mid January with terrific articles in the Register-Guard in Eugene, the second largest circulation paper in Oregon and the NewportNews on the coast. These articles were picked up in all the regional papers throughout the State and some bordering regions. Voilia!!! The entries began to flow in. I was getting a very warm feeling.

We kept the push on media with hundreds of press releases citing the articles. There are several web sites that facilitate contacts at all newspapers. They are subscription only but a very good investment.

I took out a radio ad in the largest chain of stations on the Coast with an interview on their talk show at peak time. It was my largest single expense for media coverage and was a major flop.

We got a call for AOL asking if we were interested in an article for their Internet Emagazine, CyberSpace and USNews Interent news.

Good things were happening!!! I was getting 50+ emails from my web site twice a day!! The web site administrator was reporting over a 1000 hits a day on the website for the contest!!! At the highest part of the contest in April we recorded over 4000 hits in a day!

At the conclusion of the contest we had over 67,000 hits on the site.

The weather continued to pound us on the coast. Our open house events were held every Saturday/Sunday from 10AM-4PM. We had over 300 people come through for tours some weekends. When the weather was bad we still got over 100. All the feedback was very positive. I began to get static from the City regarding my signs and had to change placement and styles several times. It makes no difference if you think you are right, comply. We were widely supported throughout the local area, excepting the usual small town very small minority. Roll with the flow.

I was besieged with requests for more photos of the house for the folks that could not get “over the hill” to the coast to see the house.

FINALLY the light bulb went off!! A video “virtual tour” of the house for the web site!!!

Better late than never. We had a local aspiring video cameraman do the filming based on a script I put together. Our web site administrator had a friend do the editing and a week or so later we had an entry level home tour on the web site to augment the photos.

The next week we got a call from ABC news from Portland and the Oregonian, the largest paper in Oregon for articles. We were on a cloud!!

The article for the Oregonian was mixed in on the business page with other alternative ways homes were being put on the market.

The coverage from CH2 was terrific. The day was beautiful, warm and sunny. The fishing boats were right offshore and the gulls were all about. The resultant video was aired on the 6PM Sunday news and again on Monday!! Wow!!. The footage was picked up by FOX (CH 12) News in Portland.

In June we got another article in the Register-Guard (Eugene) and the Newport NewsTimes. Both were very favorable.

The next day we got a call from a call from the ABC station in Eugene requesting coverage. The feature was shown on that station and all regional stations throughout Oregon. I heard from people as far away as IN, FLA and TX that it was carried there on local TV.

At this time we only need about 1000 additional entries (I don’t remember the exact #) and I truly believed we would rocket across the finish line.

For what ever reason it failed to happen. The entries got to about 2200 around the end of the month and I extended the contest another month (a option in the rules). I just knew we were going for the gold.

In the first 7 days of July I received only six (6) entries. I pulled the plug on the 8th and shut the contest down. The rest is old news.

Rules/Instructions:

The detailed instructions for contest entry and the rules evolved to resolve issues from emails asking for more details. No matter how well to vet these there will be small details that are caught by the thousands of people (hopefully) that read them over. It is best NOT to change anything in the rules unless absolutely required. Should you do so, ensure that you post the revisions on the web site with much ado. Explain changes on the FAQ page. Document all revisions and dates.

Try to make the rules as simple as possible. Some areas should be somewhat general and offer guides on the “FAQ Page” of the web site. The entry instructions should be simple, but I found that ever with that there are many folks that will not get it right, ever.

Make sure to require a SASE or an email address, specify it is for their return confirmation for the contest with their entry #. The importance of retaining the entry # should be stressed as the identifier for any contact(s) with the contest. Without the inclusion of an entry # there is no validation of the entrant.

Of all the things I did, I did NOT plan for failure in the contest and when it did fail I had to do a whole separate process for the return of entry fees. Some folks felt very put upon to send “another SASE” for their refund. Many people did not/could not find or know their entry # and this caused undue emails and work on my part, plus some people could not grasp the idea that I did not know who they were, sometime even though they entered under different name(s)/addresses/email address/could not tell me when their check was written.

The rules should cover procedure of fee returns in the event of the contest being closed due to an inadequate # of entries being received. There should be a statement in the rules and in the entry form regarding conditions under which, the contest may be closed by the corporation, followed by advisement to see the FAQ page for details/instructions.

The rules must have a statement regarding any potential refund. That refunds will be made by corporation check only, payable to the entrant of record, once proper ID has been established.

Back to the contest:

Develop a flow chart for the contest to allow for checks/balances, such as audits for entry errors and # assignments.

At any task on the flow chart ensure that there is a process to cover any physical action involved. If a form is required design one. Always date any transaction(s). If more than one person is involved, use initials also.

When the entry is received and logged in, it should be assigned an entry #. That # should be placed on the entry form and the entry # with the date, initials if required. The entry forms should be filed by entry #. The entry should be filed by entry #. If any extraneous data/paperwork accompanies the entry attach it to the entry form (use judgment as some very strange things may come in). Do not discard any envelope or mailing packing until the logging and deposit of fee is completed.

Always log the entry prior to any fee deposit.

Be sure to remove/blackout all entrant identifiers from the entry. If they are within the entry, contrary to the rules, black them out.

There can be no identifying names on the entries that go to the judges, just a #.

The entry log should record type of payment, check/money order.

Design a form letter to be returned to those that enclose a SASE. Include a statement advising any winner to consult professional tax assistance prior to accepting any prize.

Also note that this is not a charitable contest.

A separate form should be used for any email confirmations that are opted for at entry, requiring only the entry # to be inserted.

Prepare a Master Entry Log. This will be used to record all entries by entry #. Include columns for date in/method of pay/deposited date/name of entrant/address of entrant/email address (if provided)/confirmation sent (SASE or email and date)/refund sent/check #/date.

This log is the BIBLE for the contest and should be secure. If at all possible restrict the persons maintaining it very closely and perform periodic audits for obvious errors.

Deposits: Record all deposits by Date/Entry#. That saves extra work and stresses the importance of the entry #.

When compiling entries/confirmations/deposits perform this operation every several days to allow for having more entries processed at a time. “Batching” the work reduces start/stops of doing this daily, UNLESS your are incredibly successful and are inundated with entries (as I was at times). You will have to make periodic infusions of capital to the corporation. This will be noted as “loans” to the corporation. A separate agreement is required to document any loans to the corporation and how payment is to be handled.

In that you are essentially the corporation there must be documentation for the separation of entities for tax and legal reasons.

Make sure that you open a Monthly Journal to record ALL expenses and transactions, at least weekly. Perform a monthly balance of the books.

Salaries: The IRS specifies that the person hiring/paying the employees of the corporation must be paid equal to or greater than the employees. What a waste. I paid myself a salary same as the judges and put it right back into the corporation via loans.

You will have to carry some type of working mans comp on your employees unless you find a better way to pay the judges. This must be done all very legally as you WILL have people challenge the legality of your contest and turn you in to all kinds of State and Local groups, plus the threats of law suits. Just do the right thing and turn the “nut mail”, including emails, over to your law firm. After all, you paid them to ensure that your contest is all legal and sanctioned by your state.

Judging: Remember the flow charts?

After the entries have an entry # assigned batch the entries for judging.

Provide the judges a form for ranking the entries. I used a 1/2/3 scale, meaning the highest ranking could be a cumulative of either a 3 or a 9, as you choose.

The judges did not compare their scores to one another and turned in their sheets to me at the end of each judging session with their names/dates on the sheets.

I collected the sheets and compiled the scores on my Master Ranking log. I logged in all scores in separate columns, totaled the scores, initialed the Master Log, initialed/dated the judges ranking sheets and returned them to the judges.

As each judge ranked an entry they use an initial to signify they judged it. I only logged completed entries.

The judges I hired were just great. They were very professional and gave each entry their full attention. When the contest began to falter they suggested that we wait until a greater volume of entries are available then we could proceed. They fore went their pay until we could resume the contest. Alas, the volume failed to materialize and the contest folded.

Entries: All judged entries are filed by entry #. All judged files should have some indictor of having been judged, by each judge. Method is not important as long as it is consistent. I batched the entries, as they can get rather bulky.

And the winner is!!! I had developed my process to take the top ranked entries (the 3s or 9s) and pass them by the judges once again to end up with just the top 10. The judges would be allowed to confer with each other on this phase. When the final 10 were selected the judges could repeat this process again until the winner and three runner-ups were determined. I would have allowed them to bring in one additional outsider at this point if they chose.

The winner would have been widely acclaimed, as I had the media calling weekly to find out the results. Winners would be notified and the media contacted for the awards.

Alas, it was not to be.

As you can see there was/is a lot of work and attentiveness required. I essentially did all of this, excepting the judging which was not under the direction of me other than the original charter, “this is NOT and English exam”. The content or message of the entry was what counted. Originality and creativity were weight factors also.

It is important that the inner working of the contest be closely held and not for publication, except in general.

It is of utmost importance that the identities judge be very guarded. None of my judges were from Yachats and none had ever met one another prior to a meeting on 12/3107.

Good luck to all.

Ray

Improving the offer

November 5, 2008

Well, I spoke to a few people about the offer and here are some of the feedbacks I’ve received. Please contribute your opinion if you please.

1) The price is too high.
They said they were not willing to risk $49.95 for a chance to win a house free and clear.

2) They don’t want the house.
They don’t live close by or it’s not where they want to live….or they don’t want to relocate their family.

3) The call to action to Digg the story was unclear and has no “what’s in it for me?”

So, as a result of this feedback, I’m going to improve the offer:

1) The price is reduced from $49.95 to $19.95

2) We’re giving away the house or $100,000 cash – you choose.

3) We’re just going to ask you to register.

We’ve also made the submission process a lot simpler. All you have to do is to tell your story in the comments of the Digg story. The person with the highest number of votes, wins.

Launched

November 3, 2008

Well, the site is now launched.  Spent yesterday doing last minute corrections and filming the house tour.  It’s now uploaded and linked.

Sent an email blast to my friends.

Sadly, with the election going on…I’m holding back the press release till next week.

Got 9 diggs thus far….we only need a few more.  If you are reading this, please help out.  Just click on this link and Digg our story. Digg This Now.

Completed Press Release

October 31, 2008

Just put up the press release.  Spoke to my friend Dwain J  (a big internet marketing genius) about it and he loves the idea!  This is a big deal coming from Dwain.

Going to work on the instructions after the registration (ie. what happens after people registers).  Going to make training videos and film a short video clip so I can post this on youtube.

Updates

October 31, 2008

Creating an LLC

October 31, 2008

My attorney also advised me to create a new LLC for this.

We’re going to stick the funds received for this under the LLC, and the house will be deeded to the LLC.

The Terms of Service will be with the LLC.

Should anyone decides they want to sue us, it will be under the LLC.  Once this event is over, we will close the LLC.

Creating a Paypal account today so the money will go strictly under the LLC.

We went to the bank and created a bank account. We will link this to Paypal later tonight.

Attorney gave OK

October 30, 2008

My attorney called back and said that we are not violating any laws.  There’s an Oregon Raffle law, in which you have to register your raffle…this is to prevent people giving away the prize to their friends and family.  Since we’re letting the Internet vote…who the winner is, is pretty clear.  We are not responsible if someone is manipulating Digg.com….the good thing is…Digg.com has been around for years and is very good at catching fraud manipulations.

He also mentioned that the winner will have to pay tax on their winning.  Just like going to a casino or winning the lottery.

So, we’re good to go legally.