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Is A Prize-Linked Savings Account A Lottery?

In 2014, the United States Congress enacted the American Savings Promotion Act, P.L. 113–251 (DEC. 18, 2014) permitting financial institutions to offer savings accounts, with the added feature of offering chances to win prizes.  According to this blog post by John P. Feldman and Kimberly Chow, some 26 states now allow for prize-linked savings accounts.

Earlier this week, California Senator Josh Newman introduced legislation, SB 1055, that would allow banks and credit unions to offer this type of incentive to save.  The California Constitution, however, may prove to be a problem. Article IV, Section 19(a) states:

The Legislature has no power to authorize lotteries, and shall prohibit the sale of lottery tickets in the State.

Senator Newman tackles this issue head on by including in the bill declarations that  these promotions "shall not be considered a lottery within the meaning of Section 319 or 319.3 of the Penal Code, or a raffle within the meaning of Section 320.5 of the Penal Code".

Eppur si muove?

But does declaring something to not to be a lottery make it so?  A lottery has three essential elements: (1) a prize, (2) distributed by chance and (3) the payment of valuable consideration.  2002 Cal. AG LEXIS 46.  SB 1055 would permit a bank or credit union to offer prizes if, among other things depositors are not required to pay any fee or otherwise provide any consideration in order to enter the savings promotion.  This would seem to be an attempt to negate the third element.  Thus, SB 1055 provides that "a depositor’s deposit of at least a specified amount of money in a qualifying account, which is required in order to enter the savings promotion, is not consideration if the interest rate associated with the qualifying account is not reduced, as compared to comparable nonqualifying accounts offered by the bank, to account for the possibility of winning a prize".  

If SB 1055 is enacted, the courts may be required to determine whether prize-linked savings accounts are lotteries.  In this regard, I am reminded of the following:

"[N]o sooner is the term 'lottery' defined by a court, than ingenuity evolves some scheme within the mischief discussed, although not quite within the letter of the definition given; but an examination of the many cases on the subject will show that it is very difficult, if not impossible, for the most ingenious and subtle mind to devise any scheme or plan, short of a gratuitous distribution of property, which has not been held by the courts of this country to be in violation of the lottery laws . . . The court will inquire, not into the name, but into the game, however skilfully disguised, in order to ascertain if it is prohibited. . . ."

Holmes v. Saunders, 114 Cal. App. 2d 389, 390-391, 250 P.2d 269, 270 (1952).

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30172DBAB0084D3A8F39D7AF0A8E79BC.ashx Keith Paul Bishop
Partner at Allen Matkins
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