Sweepstakes Firm Agrees to Refunds, Disclosure

Publishers Clearing House, the giant magazine marketer, has agreed to reform its business practices and refund $16 million to customers in California and 22 other states under a sweeping settlement expected to fundamentally change how the sweepstakes industry does business.

The accord with attorneys general in 23 states and the District of Columbia settles allegations that the company, known for its “You are a Winner” campaigns, used deceptive sweepstakes promotions to get customers to buy magazines. The company will be required to change what it tells customers about their chances of winning.

PCH becomes the latest among several sweepstakes marketers that have agreed to settlements in the last year paying millions of dollars in restitution to consumers who complained about deceptive practices.

But the latest accord marks the first time that a company has agreed to make fundamental changes in how it does business, a move that is likely to be followed by other large direct marketers.

“This is a model agreement that makes substantial changes in sweepstakes promotion requirements and sets new standards for the entire industry,” said Christopher L. Irving, a PCH spokesman.

Indeed, California Atty. Gen. Bill Lockyer said Tuesday that he and the other attorneys general were close to a settlement with another major sweepstakes firm that would have similar provisions.

“This is the first among a series of them that is designed to clean up the industry,” Lockyer said.

The Port Washington, N.Y.-based company is well-known for the slogan in which millions of people are offered a chance to win sweepstakes prizes, including $10 million on Super Bowl Sunday.

But state officials said consumers, particularly the elderly, are misled into believing they have already won or have a greater chance of winning if they purchase magazines.

State officials said 5,000 consumers in California paid more than $2,500 a year purchasing magazines with the false belief they were increasing their odds. About $5 million of the settlement fund will be earmarked for refunds to those consumers, Lockyer said.

In Washington state about 1,000 consumers spent more than $2,500 a year, said Sally Guftahson, senior assistant attorney general. Some spent “significantly more” and some were left penniless, she said.

“It’s a significant consumer victory,” Lockyer said. The company “sends over 100 million mailings per year and they have perfected the art of identifying what some in the industry call the ‘sucker list.’ These are the people who we were aggressive about trying to help.”

In addition to the refunds, PCH will be prohibited from using the “You are a Winner” statement unless it provides in equal prominence qualifying language that the consumer has not yet been determined to be a winner.

PCH executives hailed the settlement but defended the company’s past practices. A company spokesman said 98% of consumers who purchase magazines through PCH spend less than $300 a year.

“We believe our mailings have always been clear to our many customers,” said Bill Low, senior vice president and general counsel for PCH. “Nevertheless, prolonged litigation is very expensive and no company can withstand separate proceedings with so many states.”

In April, California and three other states filed a lawsuit against PCH accusing the company of using deceptive sweepstakes promotions to get consumers to buy magazines. They were eventually joined by 19 other states as well as the District of Columbia.

In the last two years, more than 40 states have been investigating sweepstakes firms. In February, a federal judge approved a $30-million settlement of a class-action lawsuit filed on behalf of people who received PCH solicitations. That class-action suit did not include provisions to change misleading marketing promotions.

Both state officials and PCH executives lauded terms of the latest accord and hoped it would be copied by other direct-marketing firms under pressure to change their business practices. State officials threatened to sue the companies if they don’t adopt new business practices.

Under final terms of the settlement filed in San Diego Superior Court, PCH will be prohibited from using “winner” proclamations, sending simulated checks or requesting information from consumers such as when they’ll be home that would lead them to believe they had won a prize.

The mailings must also contain a “clear and conspicuous” sweepstakes fact box--similar to nutrition labels required on food products--with a statement on the odds of winning and a statement that buying magazines won’t help consumers win the sweepstakes, that the consumer has not yet won, that the consumer doesn’t have to buy anything to enter the sweepstakes and that the consumer can enter as often as she wishes.

PCH also is prohibited from using documents that look like checks without a clear disclaimer that they are not checks. Under recent California legislation, sweepstakes mailers such as PCH will be prohibited next year from using simulated checks in the state.

Technically, the settlement amounts to $18.4 million, of which about $2 million will be used for administration of the refunds. The refunds will go to consumers who purchased more than $2,500 of magazines from 1997 through 1999.

Some elderly consumers were skeptical the settlement would protect others.

“Don’t hold your breath,” said John Dewhurst, 79, a resident at Leisure World in Seal Beach who last year wrote to PCH to remove his name from the mailing list. “They’re trying to sell magazines and they’ll find another way.”

Dewhurst recalled how a friend never left home on days when PCH letters claimed a representative might visit, hoping they would deliver a winning check.

“It’s enticing, because you need the money.”

Other states involved in the settlement are: Alabama, Alaska, Georgia, Hawaii, Idaho, Illinois, Louisiana, Mississippi, Montana, Nebraska, New Hampshire, New Mexico, Nevada, New York, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Utah, Virginia and Wyoming.