A lucrative prize incentive can be the engine for an exciting and socially beneficial innovation competition. Despite the good intentions of the organizer, a lot can go wrong even when the sponsor is a nonprofit. An innovation contest generally promotes the generation of ideas or prototypes for new advancements in an industry. We have worked with many entities that seek to encourage innovation through prize incentives. Such promotions can involve very large prizes, and they can engender a lot of press coverage. Regardless of whether the purpose of the contest is for commercial, educational, or social purposes, a company or organization can still end up in federal court if the contest is not properly structured and conducted.
In Personavera, LLC v. College of Healthcare Information Management Executives, C.A. No. 18-633, 2021 U.S. Dist. LEXIS 68250 (E.D. Pa. Apr. 8, 2021), the College of Healthcare Information Management Executives (CHIME) was an Illinois nonprofit corporation that represented chief information officers and information technology professionals involved in managing information technology in the health care industry. According to its website, CHIME “provides a highly interactive, trusted environment enabling senior professionals and industry leaders to collaborate, exchange best practices, address professional development needs and advocate the effective use of information management to improve the health and healthcare in the communities they serve.” One of its missions was to encourage development of a national patient identification (NPI) system that would help health care providers quickly identify and exchange information about patients. CHIME created an Innovation Trust as a vehicle for it to design, promote, and run a contest to devise a usable NPI system.
In the first level of the challenge, participants were required to submit a proposal for an NPI system. The two top-scoring proposals, based on judging criteria published on the website, would each win $30,000. The second level of the challenge comprised two rounds. In the first round, participants were asked to submit proposals regarding improvements on their designs from the first level. In the second round, the same participants had to build prototypes according to that improved design. After both rounds, one winner would be awarded $1 million.
In order to enter the challenge, participants had to accept certain terms and conditions, including a provision that CHIME could cancel the challenge at any time for any reason. Those terms and conditions were sent through HeroX, a website used to conduct contests.
Michael Braithwaite was the majority owner of a company called Personavera, LLC (we refer to both Braithwaite and his company collectively as Braithwaite, although he entered on behalf of his company). Around January of 2016, Braithwaite entered the challenge and designed a biometric system that used the unique pattern of a person’s iris and the shape of their face to identify them. On June 1, 2016, Braithwaite was announced as one of the top two winners of the first level and was awarded $30,000. Nearly a year later, on May 15, 2017, after several deadline extensions, CHIME identified Braithwaite as one of four finalists. CHIME mentioned that each finalists “exhibited an extraordinary level of innovation, adoptability and implementation in creating a viable solution to solve this critical patient safety issue.”
But, on November 15, 2017, CHIME announced that it was suspending the challenge and informed all of the finalists, including Braithwaite, that it would not be awarding the $1 million prize. CHIME stated the reason for the cancellation was Innovation Trust’s failure to achieve the results they sought. Although CHIME initially communicated that the cancellation was not related to the quality of the submissions, it later stated that the poor quality of the submissions did contribute to the cancellation decision.
After the challenge was cancelled, Braithwaite demanded return of his prototype, but CHIME refused. Braithwaite filed a complaint alleging breach of contract, promissory estoppel, conversion, fraud, negligent misrepresentation, and violations of the Illinois Consumer Fraud and Deceptive Practices Act, 815 Ill. Comp. Stat. 505, and the Illinois Prizes and Gifts Act, 815 Ill. Comp. Stat. 525. The case was heard by the court on CHIME’s motion to dismiss.
Breach of contract
First, Braithwaite argued that CHIME breached a contract because the challenge and the rules that formed the contest constituted a unilateral offer that Braithwaite accepted through performance of the contest requirements. CHIME argued that the challenge was not a unilateral, promotional offer, but rather a part of a larger, general mission to develop initiatives not subject to contract law.
According to the court, the facts alleged established the existence of a unilateral contract between the parties. CHIME published an offer in the form of the conditions and rules of the contest, which promised participants that they would have the opportunity to win a prize if they submitted proposals and prototypes in accordance with its directions, including the judging criteria. As with most promotional structures, the contest and its official rules constituted a unilateral contract, and Braithwaite’s full performance constituted acceptance, binding CHIME to the contract’s terms.
Braithwaite argued that CHIME’s cancellation of the challenge was a breach of the contract. CHIME’s official rules included a provision allowing CHIME to cancel the challenge at any time for any reason. However, the court ruled that even if the terms expressly gave CHIME the right to cancel the challenge, notwithstanding Braithwaite’s full performance, Braithwaite could make out a claim for breach of contract based on the implied covenant of good faith and fair dealing. Good faith is always an inherent quality of any contract, and Braithwaite, according to the court, sufficiently alleged that CHIME may have breached its contract by exercising the cancellation provision contrary to the implied covenant of good faith and fair dealing, notwithstanding the cancellation clause.
The court ruled that Braithwaite successfully alleged that CHIME made express and implied promises to him designed to induce his participation in the challenge. In addition, Braithwaite further alleged that he expended significant time, energy, and money, in reliance on CHIME’s promises, successfully making out a cause of action for promissory estoppel.
Braithwaite argued that he was the rightful owner of the prototype he had submitted pursuant to the contest. He had repeatedly demanded return of it, and CHIME refused to return it. Because Braithwaite met all of the elements of common law conversion under Pennsylvania law, the court maintained his cause of action.
Common law fraud
Braithwaite also alleged that CHIME knowingly made several untrue statements about the challenge that were material to Braithwaite’s decision to enter the challenge. The court ruled that Braithwaite demonstrated an actual misrepresentation by alleging that CHIME acted with a particular state of mind with regard to the truth or falsity of its statement. The court found that the statements CHIME made were all stated with particularity and supported Braithwaite’s argument that CHIME knew or recklessly disregarded that the statements were false at the time they were made.
Braithwaite alleged that CHIME made several untrue statements related to the second level of the challenge that were material to Braithwaite’s decision to enter the challenge. Since Braithwaite sufficiently pled misrepresentations under the heightened pleading standard for fraud, the court concluded that Braithwaite sufficiently alleged misrepresentations for purposes of their negligent misrepresentation claim.
Illinois Consumer Fraud and Deceptive Practices Act
Although the case was brought in Pennsylvania federal court, Braithwaite argued that CHIME had violated the Illinois Consumer Fraud and Deceptive Practices Act, 815 Ill. Comp. Stat. 505 (Consumer Fraud Act or the Act). Section 2 of the Consumer Fraud Act prohibits “deceptive acts or practices…or the concealment, suppression or omission of any material fact, with intent that others rely upon the concealment, suppression or omission of such material fact…in the conduct of any trade or commerce.” 815 Ill. Comp. Stat. 505/2.
Although the language of the Act is broad, the court looked to the Illinois Supreme Court’s holding that the Act only applies to a particular fraudulent transaction if the alleged transaction took place within Illinois. To determine whether a transaction occurred “primarily and substantially” within the state, courts in Illinois had examined several factors including where the Official Rules were drafted; the residence of the plaintiff; the place of incorporation or place of business of the defendant; where the deceptive statements were made; and where complaints were directed to, among others.
Although the facts were insufficiently developed to compel a conclusion that Illinois law applies, they were sufficiently developed such that the court could conclude that they could not defeat the application of Illinois law. Although Braithwaite resided in Pennsylvania and was injured in Pennsylvania, CHIME was an Illinois nonprofit corporation, and the website and fraudulent communications were created in and publicly available to residents of Illinois.
Illinois Prizes and Gifts Act
Lastly, Braithwaite argued that CHIME had violated the Illinois Prizes and Gifts Act, 815 Ill. Comp. Stat. 525 (Prizes Act). The Prizes Act requires a sponsor of a “written promotional offer” to disclose in the offer’s materials a variety of items, including the name of the sponsor, the sponsor’s principal place of business, and the retail value of each prize that participants could receive, among other material terms. The court held that Braithwaite had sufficiently pled facts demonstrating that the challenge induced participants to contact a person in Illinois. Accordingly, CHIME’s failure to make the required disclosures could constitute a violation of the Prizes Act.
CHIME argued that Braithwaite was not a “consumer” for purposes of the Prizes Act because he did not purchase any goods or services from CHIME. The court acknowledge that the Prizes Act only allows “consumers” to bring a private action, but the Prizes Act does not define the term “consumer.” The court held that it would be contrary to the plain language of the Prizes Act to confine the term to the narrow definition of one who has purchased a good or service. It was sufficient for Braithwaite to have participated in the challenge to be considered a “consumer” for purposes of application of the Prizes Act.
The terms and conditions – the Official Rules – of a competition usually constitute the terms for an enforceable contract between the sponsor or organizer of a competition and the participants. Because the contract will be construed against the drafter, it is critical that the organizer of a competition draft the Official Rules carefully. This general principle is triply important when the prize is very great in value and the involvement level by participants is intense. Participants will read the contest rules. Do not make the mistake of believing that the terms and conditions of the contest are just a bunch of boilerplate language. Participants will pore over them, especially if they become semifinalists or finalists.
One of the danger signs of a contest about to go sour is the continual use of extensions. Pushing out the deadline for entries often means that the organizer has not received entries impressive enough to justify the large cash prize. There are ways to mitigate against the risk of low turnout or poor performance against the judging criteria. But simply extending the contest’s deadline is rarely a no-risk option. When one changes the end date, an organizer likely affects the pool of eligible contestants, potentially prejudicing those who entered on time. There were many extensions of the deadline for the contest in this case, but the real problem that led to litigation was the eventual cancellation of the contest entirely. There is no easier way to attract negative attention to one’s competition than to fail to award the prize.
The court’s attention to the principle of good faith and fair dealing was interesting. CHIME had placed a clause in the Official Rules that gave CHIME the unilateral right to cancel the competition at any time for any reason. Depending on the circumstances, a court might be more likely to enforce that term. Generally, if an organizer needs to cancel a promotion, it should contemplate the circumstances under which it would do so and what relief it would give to those entrants who had participated in the contest and had partially or fully performed. The facile use of a boilerplate cancellation provision seems to have bothered the court, leading it to invoke an equitable approach – at least at the motion to dismiss stage.
One of the head-scratchers of this case is why CHIME did not simply return the prototype when Braithwaite requested it. It seems as though Braithwaite might have taken his $30,000 preliminary award and called it a day but for CHIME’s refusal to return the manifestation of Braithwaite’s innovation. Quick, quiet, and courteous accommodation of participants who complain can often quell a rancorous pool of contestants.
Turning to the statutory causes of action, it is notable that Braithwaite chose to invoke the statutes of the state from which the offer emanated rather than the state in which Braithwaite resided. Not all unfair and deceptive acts and practices (UDAP) statutes are the same; in fact, UDAP statutes can vary greatly in terms of their scope and the penalties available to private plaintiffs. Very often a breach of a promotional contract can constitute a UDAP violation, and there can be civil penalties associated therewith as well as attorney’s fees, costs, and sometimes even punitive damages. Thus, invocation of a UDAP statute is common in situations where a contest has gone sour and large prizes remain unawarded.
Finally, a word about the Illinois Prizes Act. It is sometimes easy to forget that a skill-based contest can be subject to state prize and gift law just like a sweepstakes. This means that state law that governs the disclosure of certain material terms can apply with equal force to a skill contest. Thus, a comprehensive, well-drafted set of Official Rules not only protects the organizer practically by laying out the process for determining winners and awarding prizes but also helps the organizer comply with applicable gift and prize statutes, which can authorize consumers to bring private actions to enforce their requirements.