Court trims claims against for-profit "charity" sweepstakes site that keeps 85% of "donations"

Knuttel v. Omaze, Inc., No. 2:21-cv-09034-SB-PVC, 2022 WL 1843138 (C.D. Cal. Feb. 22, 2022)

Plaintiffs used Omaze’s website to “donate” money to various charities and be entered for chances to win prizes. “After learning that Omaze retained up to 85% of the donated funds, Plaintiffs filed this suit alleging that Omaze’s marketing is deceptive and violates California law.” The court granted the motion to dismiss in part.

Omaze now buys its own swag for contests. It contracts with Charities Aid Foundation of America, which in turn delivers donated funds to designated charities. For certain “celebrity experiences,” 60% of the money donated goes to CAFA to be paid to the designated charity, but for Omaze-owned campaigns, Omaze keeps 85%. This is disclosed in the fine print at the bottom of Omaze campaign pages.  

Shifting to this business model “dramatically increased its profits while reducing the share of the money raised that is passed on to charities.” In 2017, the last year before the switch, Omaze reported approximately $750,000 in revenue, with the substantial majority—approximately $450,000—passed through to CAFA. “In 2020, Omaze reported $104 million in revenue, with only $20 million—less than one fifth—passed through to charity.” The newly profitable site attracted $115 million in investor funding.

Plaintiffs understandably also alleged that this was just an illegal lottery, and it sure has a lottery stench. “Although members of the public are able to enter for chances to win prizes without paying money, Omaze advertises increased opportunities to win in exchange for larger donations.” Plaintiffs also alleged that, “even though Omaze allows free entries, if it does not receive enough paid entries to cover the costs of the prize, Omaze extends the campaign and postpones the drawing date until it has generated enough money to cover its costs.” In addition, though Omaze ultimately allowed online free entries, “it made it difficult for people to find and use that option.”

Multiple state AGs have, again understandably, investigated and settled with Omaze. A January 2020 settlement agreement with the California Attorney General required Omaze to modify its website to more prominently advertise the opportunity to enter sweepstakes for free, though plaintiffs alleged that Omaze has violated the agreement. “Omaze’s founder and CEO, Matt Pohlson, acknowledged in an April 2020 interview that numerous legal experts had advised Omaze that its model was improper.”

Plaintiffs brought the usual California statutory claims, as well as claims for common-law fraud and unjust enrichment.

Omaze argued that consumer-plaintiffs weren’t harmed by its conduct, only the charities, so plaintiffs lacked standing.

Omaze suggests that Plaintiffs’ theory indicates they would have given the same sum of money to the charities if they had not donated through Omaze, but even if that were true, it would not defeat standing. Omaze cites no legal authority to suggest that the standing of a fraud victim depends on how the victim would have used the money in the absence of the fraud. Plaintiffs plainly have standing.

The alleged misrepresentations constituted, in essence: (1) suggesting that most or all of the donated money would go to charity and (2) suggesting that Plaintiffs would be more likely to win prizes if they made donations than if they entered for free.

For example, one plaintiff viewed a video soliciting donations to Omaze for a chance to win a Tesla 3 automobile. The video stated that the organization had raised over $100 million in donations to charity since 2012 and that the money donated in connection with the Tesla 3 would be given to a specific charity. But this didn’t disclose the substantial portion of the money received that Omaze had deducted and would deduct for the cost of prizes and for its fees.

Omaze argued that (1) a reasonable consumer would have understood that a portion of the donations would be used for expenses and fees, especially in light of Omaze’s disclosure that it was retaining a portion of the proceeds, and (2) the First Amendment precludes the imposition of liability or the injunctive relief Plaintiffs seek.

Starting with the First Amendment, Riley v. National Federation of the Blind of N.C., Inc., 487 U.S. 781 (1988), is the foundational case. Riley struck down portions of a North Carolina statute that prohibited professional fundraisers from retaining excessive fees (with a presumption of unreasonableness for fees above 35% of gross receipts) and required them to disclose to potential donors their average percentage of gross receipts actually turned over to charities based on past solicitations. Soliciting charitable contributions was protected speech, and a percentage threshold wasn’t narrowly tailored to an antifraud interest. The Court also struck down the compelled disclosure requirement as an imprecise and burdensome prophylactic rule, but emphasized the availability of antifraud laws as a “more benign and narrowly tailored option[ ].”

Then, in Illinois, ex rel. Madigan v. Telemarketing Assocs., Inc., 538 U.S. 600 (2003), the Illinois Attorney General sued for-profit fundraising corporations that solicited charitable contributions for veterans but retained 85% of the proceeds while representing that “a significant amount of each dollar donated” would be paid to the veterans organizations. The Supreme Court allowed a fraud claim:

Our prior decisions do not rule out, as supportive of a fraud claim against fundraisers, any and all reliance on the percentage of charitable donations fundraisers retain for themselves. While bare failure to disclose that information directly to potential donors does not suffice to establish fraud, when nondisclosure is accompanied by intentionally misleading statements designed to deceive the listener, the First Amendment leaves room for a fraud claim.

By itself, then, a mere reference to “donation” could not be an affirmative misrepresentation [this is again a normative judgment, not an empirical one: it simply does not matter what reasonable audiences think]. Thus, plaintiffs who relied solely on the word “donate” or “donation” lacked plausible misrepresentation-based claims relating to Omaze’s use of the donated funds. However, one plaintiff did allege relying on a video ad stating that the money donated to the campaign “will be given to [a specific charity].” This was plausibly an affirmative misrepresentation that could mislead reasonable consumers into believing that all or substantially all of the donated money in fact would go the designated charity, “notwithstanding the disclosure of the truth in the fine print of Omaze’s website.”

Misrepresentations about chances to win: “Omaze has consistently given donors different numbers of entries to win prizes based on the size of their donation.” Currently a $10 donation allegedly results in 20 entries ($0.50 per entry); a $20 donation results in 125 entries ($0.16 per entry); and donations of $50, $100, and $200 result in 500, 1,000, or 2,000 entries, respectively ($0.10 per entry). Omaze used to assign 200 entries (at the time equal to a $20 donation) to someone who used the free entry method, but now gives 2,000.

Plaintiffs alleged that, based on Omaze’s representations that making larger donations would result in a greater number of entries, they each believed that free entries would result in a lower chance of winning than paid entries, and they therefore paid for entries they would not have purchased if they had known they could submit multiple free entries at one time. “But Plaintiffs do not identify any misrepresentations by Omaze regarding its treatment of free and paid entries, and indeed allege that Omaze identifies on its donation pages how many entries will be awarded for paid entries.” Thus there was no misrepresentation-based claim.

UCL “unlawful”/violation of CLRA for advertising an illegal product: California defines a lottery as

any scheme for the disposal or distribution of property by chance, among persons who have paid or promised to pay any valuable consideration for the chance of obtaining such property or a portion of it, or for any share or any interest in such property, upon any agreement, understanding, or expectation that it is to be distributed or disposed of by lot or chance, whether called a lottery, raffle, or gift enterprise, or by whatever name the same may be known.

There are three elements: (1) prize; (2) chance; and (3) consideration. The first two elements were undisputed. There is no required consideration “if anyone can participate without paying for a chance to win.”

Plaintiffs argued that, given Omaze’s business model, if Omaze does not initially receive enough paid entries, it postpones the drawing to avoid losing money. “Thus, Plaintiffs contend, even though no individual person must pay to enter, some people are required to pay in order for the prize to be awarded, making the campaign an illegal lottery rather than a sweepstakes or raffle.” Plaintiffs relied on an earlier case, in which the court held that a game called “RINGO,” which combined elements of chance and skill, was a lottery because the vast majority of players were unable to successfully toss small rings over pegs and therefore had to pay to continue playing the game.

But a deficiency in skill is not the same thing as a statistical inability to “play” without paying; free entries were available to everyone no matter their skill. [I would think it would be much worse! RINGO ringers were always a possibility, but the allegations here suggest that Omaze deliberately controls—and in the process falsely advertises—the ending dates in order to make sure it covers its costs. No amount of skill could save entrants from that, or make their free entries as valuable as paid entries in bringing the contest closer to its conclusion.]

But California cases have focused on whether those receiving prize tickets “could have received them for free” by asking, which was the case here. [I think this goes to the manipulation part: the entries that one receives for free are different than the ones one pays for, because the latter bring the contest closer to ending and thus don’t dilute the chance of winning as much as the free entries. So the “entries” aren’t actually for the same thing—payment also gets you at least some exclusion of others, raising your own chances to win.]

This manipulation did go to other California regulations of sweepstakes. Most of the sweepstakes-specific provisions of California law that plaintiffs invoked were inapposite, such as prohibitions on misrepresenting odds, which isn’t the same thing as falsely advertising drawing dates and then changing them.

Likewise, the prohibition on “[m]isrepresenting in any manner, the rules, terms, or conditions of participation in a contest” applied only to “contests,” which by statutory definition require at least some skill, and Omaze’s sweepstakes didn’t. So too with the provision stating that “[s]weepstakes entries not accompanied by an order for products or services shall not be subjected to any disability or disadvantage in the winner selection process to which an entry accompanied by an order for products or services would not be subject,” because Omaze didn’t take orders for products or services.

Also, California law provides that “[t]he official rules for a sweepstakes shall disclose information about the date or dates the final winner or winners will be determined.” Here plaintiffs did better: “Plaintiffs plausibly allege that ‘participants would be less likely to spend money on “entries” if they knew that Omaze retained the right to postpone the drawing’ until it receives enough donations to ensure a profit,” as to the two plaintiffs who alleged they were subject to postponed drawings.

UCL unfairness: “A business practice is unfair within the meaning of the UCL if it violates established public policy or if it is immoral, unethical, oppressive or unscrupulous and causes injury to consumers which outweighs its benefits.” But, “where the practice alleged to be unfair overlaps entirely with the practices addressed under the fraudulent and unlawful prongs of the UCL, the former may be dismissed when the latter prongs do not survive.” So a bit of unfairness survived, but not anything based on the stuff dismissed above.

Unjust enrichment: dismissed because not a separate California claim.