There is a comment from a lawyer at the end that just laughs at the whole post. There are design competitions all over the place, just not on the web. My GF regularly enters painting competitions. All the laws were set up to protect consumers from unscrupulous marketers, "Buy my cereal and maybe you will win something."
I think the key is how geographically widespread the entrants of online design contests are. Sure anyone can enter the painting competition at their local community college, but I doubt you'll have somebody across federal and state boundaries entering the same contest. This is just a really good example of the legal oversight startups often have.