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Federal Court Dismisses Claims Against Coinbase of Illegal Lottery

Sweepstakes entrants’ lack of knowledge of free method of entry insufficient to constitute violation of California Penal Code.

A Northern District of California case styled Suski v. Marden-Kane, Inc. (decided August 31, 2022) has resulted in a significant ruling in the field of sweepstakes law. A sweepstakes sponsored by Coinbase, a popular cryptocurrency exchange, and administered by Marden-Kane offered the chance to win valuable prizes to Coinbase users who bought or sold Dogecoin, a well-known “meme” token, on Coinbase for a total of $100 or more. The sweepstakes offered an alternative method of entry that did not require the trading of Dogecoin or incurrence by the entrants of any other expense. However, this free alternative method of entry was not well-publicized.

The Plaintiffs, who are Coinbase users, filed a class action lawsuit against Marden-Kane and Coinbase alleging (in part) that the failure to conspicuously disclose the alternative method of entry effectively turned the sweepstakes into an illegal lottery. Under the law of most states, including California, private parties may not run a sweepstakes that includes the elements of prize, chance and consideration.  In order for a sweepstakes to avoid being considered an illegal lottery, it must typically offer entrants an equal opportunity to enter and win without purchasing a product or service or otherwise expending consideration. This is why most sweepstakes rules include a prominent statement to the effect of “No purchase necessary to enter.  A purchase will not increase your chances of winning.”  

Over the years, regulators and plaintiffs’ attorneys have challenged sweepstakes promotions that either fail to provide sufficient disclosure that no purchase is necessary or otherwise obfuscate the no-purchase alternative method of entry.

In this case, the challenge failed. The Plaintiffs alleged that besides their own subjective lack of knowledge about the free method of entry, “the ordinary, reasonable consumer could not be expected to have known the truth” that users could enter the sweepstakes without buying or selling Dogecoin on Coinbase and that the “truth was reasonably and objectively knowable only to the Defendants themselves.” The Plaintiffs further alleged that the Defendants “objectively conceal[ed] from those consumers and from the public at large” that the prospective sweepstakes entrants could obtain free chances to win.

Despite the Plaintiffs alleged misrepresentations, incomplete disclosures and lack of disclosures relating to the free method of entry and their subjective lack of knowledge of this method, the Court reaffirmed its prior ruling that the Plaintiffs had failed to allege that the sweepstakes constituted an illegal lottery under California Penal Code § 320.  As the Court previously stated, because the California penal statutes are construed strictly and “no California court has held that being unaware of the free method of entry is sufficient to demonstrate the required consideration,” the Plaintiffs could not allege a violation of the penal code. 

The Court granted the Defendants’ motions to dismiss the Plaintiffs’ claims with prejudice to the extent they were premised on allegations of an illegal lottery.  Other alleged false advertising aspects of the case will move forward.

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