Nordia Law

This is a sequel to my previous article, which analysed the risk of loot boxes being considered gambling and provided an overview of the current legal environment and relevant court cases. In this article, I will provide more guidance and tips on how to avoid the risks associated with loot boxes based on recent court cases in the United States, the Netherlands, and Austria.

A Lesson from the United States

Always include an arbitration agreement and class action waiver into your terms of service to avoid expensive class actions.

In 2021, a plaintiff filed a putative class action against Electronic Arts Inc. (“EA”) alleging that the Ultimate Team Packs in EA’s video games’ (FIFA and Madden NFL) ultimate team modes, where players build their dream teams and compete against each other or AI violated California gambling law. The plaintiff argued that the Ultimate Team Packs, which contained player items, qualified as an illegal “slot machine or device” under California Penal Code §330(d).

Disclosing loot box odds has been the norm in the game industry for a few years now as the three major video game console manufacturers and every major game publisher agreed to require loot box drop rate disclosures to protect gamers’ interest in 2019. Pulling a special card of Lionel Messi or Patrick Mahomes from a pack against all odds gives you the chills when you have chased those cards for the whole time you have been playing. These cards also give you a competitive edge against players who do not have them in their line-ups and are worth millions of in-game currency, but does that make loot boxes gambling as described by the plaintiff?

Before weighing in on that, the California District Court needed to examine whether this was the right instance to resolve the case. Each of EA’s video games is governed by EA’s standard user agreement, which states, among other things, that in order to play and access the full features of EA’s games, including the ability to play Ultimate Team mode and buy Ultimate Team Packs, the user must agree to the terms of the user agreement. The User Agreement contained an arbitration agreement and a class action waiver stating that all disputes and claims arising out of or relating to EA’s games must be determined exclusively by binding arbitration. The user must also agree that any claim he or she brings against EA is in the user’s individual capacity and not as a class member, class representative, or as part of a class action.

Based on its User Agreement, EA argued that by installing and playing FIFA and Madden NFL, the plaintiff had accepted and was bound to EA’s User Agreement, including the arbitration provision and the class action waiver. EA’s argument held in court, and the court ruled that the case must be decided in arbitration (on an individual basis). This meant that the plaintiff could not bring a class action against EA and that the arbitration would have been brought against EA on an individual basis.

Note that in some countries, such as Finland, an arbitration clause in a contract concluded before a dispute arises is not binding on the consumer under consumer protection law.

A lesson from the Netherlands

Include or refer to a loot box policy in your game’s terms of service.

Another interesting development was seen last year in the Netherlands, where the Council of State (the highest Dutch Administrative court) ruled contrary to the earlier ruling by the District Court that the Ultimate Team Packs in FIFA Ultimate Team mode are not considered gambling. The District Court had ignored the basics of FIFA gameplay and stated that FIFA loot boxes could be played as their own sort of game. In its appeal, EA argued that the packs are part of the FIFA gameplay, which is a game of skill, and although the packs add an element of chance to the game, they do not constitute a separate game. EA also pointed out that most of the Ultimate Team Packs are earned and opened through gameplay by winning games, and only a small percentage of the packs are bought with FIFA points that are purchased with real money. Furthermore, EA argued that player items do not qualify as prizes or premiums as they cannot be legally converted into money and are closed off from the economy (selling or transferring coins to another player rather than getting an equally valuable FUT item for the user’s own club is explicitly forbidden in EA’s terms of service, i.e., selling coins and/or players for real money in secondary markets such as in social media, for example, in Reddit). Therefore, EA argued that FIFA was a game of skill and that there was no separate game of chance. In its ruling, the Council of State took an entirely opposite stance from the District Court and agreed with EA. The Council of State ruled that the Ultimate Team Packs did not constitute a stand-alone game of chance and therefore did not violate Dutch gambling law. According to the Council of State, the packs added only an element to the game of skill.

Even though loot boxes have been technically legal in the Netherlands after the ruling of the Council of State, there are risks that loot boxes will be banned again in the Netherlands as a motion for regulating and possibly banning loot boxes in games has already been filed by six political parties. Uncertain operating conditions have led some publishers not to publish certain games in the Netherlands and Belgium, where the Belgian Gaming Commission has ruled that selling loot boxes is illegal under Belgium gambling legislation. For example, Activision Blizzard did not release a free-to-play game Diablo Immortal in these countries.

A lesson from Austria

Forbid selling or transferring virtual items and in-game currency to another player in the terms of service and pay attention to whether players can, despite the terms of service, actually “cash out” virtual items by selling the items or in-game currency on secondary markets and transferring them to another player’s account.

The most recent case took place in a small community called Carinthia in Austria, where Sony and EA were sued for violating the state gambling monopoly. The plaintiff had “gambled” away 400 euros by buying FIFA points and then using the points to buy Ultimate Team Packs. The law firm that represented the plaintiff also filed four other similar cases against Sony and EA. In its verdict on February 26, the district court of Hermagor classified FIFA loot boxes as “illegal gambling” and ordered Sony to refund payments to the amount of 338.26 euros because Sony did not have a gambling license. It is interesting that in this case, the console manufacturer was also sued and was also the one who was ordered to refund the payments. According to the court, the result of the content of the purchased Ultimate Team Packs depends on chance and therefore represents a “financial benefit within the meaning of the Austrian Gaming Act”, and because the player items received from the packs are traded on secondary markets, it is possible to make a profit. The ruling is provisional, so Sony can still appeal.

Some player items in FIFA are untradeable, which means that it is impossible to sell these cards on secondary markets without selling the whole account. Regarding tradeable player items, EA has introduced price ranges, which makes transferring coins from one player to another more difficult because selling a low-rated card at a high price is not possible. Despite the price ranges, FIFA coins are regularly sold for real money, for example, on Reddit, where there is even a subreddit for them.

Youth Protection

Another issue and a source of motivation for regulating loot boxes is youth protection. For example, the EU Parliament’s Internal Market and Consumer Protection committee has called on the video game industry for greater player protections for minors and more actions to control loot boxes. However, the committee has not specified the actions needed. The British Government has also called on the industry to step up and improve protections for children after the Department for Digital, Culture, Media and Sport found in 2020 that players who have purchased loot boxes may be more likely to experience gambling, mental health, financial and problem gaming-related harms and that the risk may also be higher for children and young people.

PlayStation and Xbox have already introduced parental controls to manage in-game spending by choosing whether a guardian wants to share his/her PSN wallet and set a spending limit, but this does not seem to be enough for the committee and the British Government.

Conclusions

Definitions of gambling differ a bit from each other depending on the jurisdiction. However, there are three basic elements that are often looked at when determining whether a loot box mechanism is considered gambling or not. These elements are: 1) consideration, 2) prize of monetary value, and 3) chance. In general, all three elements must exist at the same time for a loot box mechanism to be considered gambling. Hence, in general, eliminating at least one element should prevent a loot box mechanism from being considered gambling, regardless of the jurisdiction. For example, eliminating the external trading of virtual items by making them untradeable could eliminate the monetary value of a virtual item. However, based on my experience as a competitive EA Sports NHL player, players in EA’s games usually prefer tradable items, so they are not stuck with the same players and can make changes to their squads. The safest way is to eliminate change by letting players know the content of loot boxes before making the decision to buy loot boxes.

Loot boxes that contain non-fungible tokens (“NFTs”) can be considered riskier than loot boxes that contain virtual items because one of the main points of NFTs is that they are always tradeable and can be sold freely on several marketplaces. If your game has loot boxes that contain NFTs, it is important to draft separate NFT terms that apply if a user purchases NFTs and to any subsequent holder of NFTs.

If your game has loot boxes, remember these lessons from the court cases above:

1. Always include an arbitration agreement and class action waiver into your terms of service, especially regarding users in the United States. Be clear on describing how the process takes place and note that some jurisdictions prohibit enforcing such provisions.
2. Draft and include or refer to a loot box policy in your terms of service. It is important to demonstrate that loot boxes are part of your game and not a stand-alone game.
3. Forbid selling or transferring virtual items and in-game currency to another player in the terms of service in all cases other than a fair trade where a user gets an equally valuable item back from the other user.
4. Pay attention to whether players can, despite the terms of service, actually cash out virtual items they have obtained from loot boxes by selling the virtual items or in-game currency on secondary markets and transferring them to another player’s account, or whether it is possible to sell the entire account on secondary markets in case the virtual items are untradeable and cannot be transferred from one player to another. Have clear rules and sanctions for players who sell or buy in-game currency on the secondary markets, if it is possible to sell and buy virtual items by using in-game currency in your game.

Finally, make sure to check these boxes to protect children:

☐  Remember to disclose the odds of pulling a certain type of item and explain and give an example of what the odds mean in practice so that minors can understand them.

☐  Have a parents’ guide that answers a guardian’s questions on how to keep their children safe while playing your games.

☐  Make managing or turning off in-app purchases and marketing messages easy.

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