American Family Enterprises was already not a winner when it filed for Chapter 11 bankruptcy protection on Oct. 29. The Jersey City, NJ, direct-mail sweepstakes house took the measure to settle more than 30 class-action lawsuits filed against it.
The suits were pooled into a single suit that claimed the company’s American Family Publishers mailers deceive consumers into believing that buying magazine subscriptions and other products increase their chances of winning cash prizes. The actions came on the heels of bitter negotiations with attorneys general in 40 states to set new guidelines for direct-mail sweepstakes. AGs came down hard on AFP for misrepresenting that consumers had won, for discouraging non-purchase entries, and for double-invoicing purchases. (Negotiations with three more AGs continues.) AFP vows to comply with sweeps practices that the AGs have approved as part of the settlements.
Bankruptcy may shield AFP from future lawsuits. Any new suit would have to be filed through bankruptcy court in a more complicated process that’s likely to net less money than suits settled before AFP filed. Still, the company “didn’t file Chapter 11 to shield itself from future suits,” says spokesman Richard Tauberman.
Chapter 11 does send a strong ripple through the promotions industry, says Stephen Durchslag, partner at Winston & Strawn, Chicago. Other marketers won’t want to face the same pressure AFP has gotten from AGs and class-action suits, so they’ll back off any “you are a winner” statements, Durchslag contends.
THE SWEEPS GOES ON
AFP says it will reorganize to diversify beyond direct-mail sweeps, although that will remain its core business. Funding under Chapter 11, which it has already received, will set up “new and different distribution channels” for magazines and merchandise. Once the class-action suits are behind the company, “we look forward to the launch of a variety of new businesses,” says ceo Susan Caughman in a statement. The company is eyeing e-commerce, other direct mail, and partnerships with other marketers.
The company will tweak its sweeps strategy, running fewer campaigns with bigger prizes. This month, AFP launches its first $1,000-a-Day giveaways and begins Live Check promos, mailing negotiable checks to random winners.
Prize money for two ongoing sweeps – one ended Nov. 24, the other ending Jan. 31 – was not halted by the bankruptcy action. “Consumers should be assured their entries are valid and all prizes . . . will be awarded,” Caughman’s statement says.
AFP is owned in part by New York City-based Time Warner’s Time Inc. publishing division.