Is Your Contest Really Skill-Based? The Legal Risks Businesses Overlook

Many companies see skill-based contests as an attractive way to engage customers, reward loyalty, generate leads, and create new revenue streams. Whether it is a mobile game, a sales competition, a fantasy-style challenge, or an online tournament, executives often assume that labeling an activity a "skill contest" removes gambling or lottery concerns.

That assumption can be dangerous.

Regulators do not evaluate contests based on what a company calls them. Instead, they examine how the contest actually operates. A competition marketed as skill-based can quickly cross the line into an illegal lottery if it contains the wrong combination of elements.

The Three Elements of an Illegal Lottery

Most states analyze lotteries using three components:

Prize
Chance
Consideration (something of value given to participate)

Importantly, if any of these three elements are missing, then the activity is generally, but not always, permitted under both state and federal law.

For businesses developing contests, the challenge is usually not the "prize" or "consideration" element. The real question becomes: Is the outcome determined predominantly by skill, or does chance play too significant a role?

The Most Common Mistake: Overestimating Skill

A company might develop a game that appears skill-based on the surface but contains mechanics that introduce meaningful randomness.

For example:

Randomized player matchups
Variable scoring algorithms
Randomly generated game boards
Luck-driven bonus opportunities
Unequal starting conditions
Hidden modifiers affecting outcomes

That is, a company may spend months building a "competitive skill platform" only to discover that certain game mechanics undermine the argument that the outcome is truly skill-based.

The Hidden Risk: Matching and Tournament Design

Many operators focus exclusively on game design while overlooking tournament architecture. However, even if the underlying game requires skill, undisclosed systems that influence outcomes can create significant legal and reputational risks.

Consider a hypothetical mobile competition where players pay an entry fee and compete against others for cash prizes. If participants are told they are competing head-to-head, but the platform instead relies on undisclosed bots, simulated opponents, or manipulated match assignments, the operator may face allegations that the contest is not operating as advertised. Recent litigation in the skill-gaming industry has highlighted how fairness, transparency, and disclosure can become central legal issues.

This risk was underscored by a recent $420 million federal jury verdict against a skill-based mobile gaming operator. The largest award ever under the Lanham Act, centered on a single failure: telling users they faced human opponents while secretly using bots to influence outcomes. The case is a clear warning that undisclosed bot use exposes operators to false advertising and consumer protection liability, and in some cases risks recharacterizing a skill game as illegal gambling.

Why Promotional Teams Should Care

This issue extends well beyond gaming companies.]

Businesses increasingly use contests to:

Generate leads
Drive app downloads
Promote products
Reward loyalty members
Increase social media engagement
Create influencer campaigns

Imagine a retailer running a "skill challenge" where customers must make purchases to participate and winners are selected based on a scoring mechanism that contains substantial randomness. While the retailer may see it as a creative marketing campaign, a state regulator may see something entirely different.

Technology Creates New Compliance Challenges

Artificial intelligence and advanced personalization tools open the door to even more potential challenges. Many modern platforms can now:

Dynamically adjust difficulty
Customize player experiences
Modify matchmaking

These tools may improve engagement, but they also raise difficult questions for regulators and litigants as to what their actual impact is:

Are all participants competing under equivalent conditions?
Are outcomes being influenced by undisclosed algorithms?
Can the company demonstrate that skill remains the primary determinant of success?

As new technology and tools gain more prevalence in the continuous search for more user engagement, so do the potential pitfalls.

Five Questions Every Company Should Ask

Before launching any skill-based contest, management should be able to answer:

Can we clearly explain why skill—not chance—determines the winner?
Would an independent expert reach the same conclusion?
Do all participants compete under substantially similar conditions?
Are our marketing claims completely aligned with how the contest actually works?
Have we analyzed the laws of every state where participants may reside?

If the answer to any of these questions is uncertain, legal review should occur before launch—not after a regulator, competitor, or plaintiff's attorney starts asking questions.

The Bottom Line

The line separating a lawful skill competition from an illegal lottery can be thinner than many businesses realize. What begins as an innovative customer engagement strategy can become a regulatory problem when chance, consideration, and prizes intersect in unexpected ways.

For growing businesses, the lesson is simple: calling something a skill contest does not make it one. The legal analysis depends on the actual mechanics, disclosures, and player experience. Companies that vet these issues early can reduce risk, protect their brands, and create sustainable promotional and gaming programs that stand up to regulatory scrutiny.

Should you have any questions regarding offering skill contests, please do not hesitate to contact the authors: Don Lee at [email protected], Glenn Light at [email protected], or Karl Rutledge at [email protected].

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This article is for informational purposes only and does not constitute legal advice. Because lottery and gaming laws vary significantly by jurisdiction, companies should consult qualified counsel before launching skill-based contests, real-money competitions, or promotional prize programs.