Innovative and creative multi-billion euro industry but what are the legal risks and are they gambling?

The article aims to provide a brief overview of the regulation and recent court cases regarding loot boxes. The following regions are covered in the article: Belgium, the Netherlands and the rest of Europe, the UK, the USA, Japan and China.

Microtransactions and loot boxes have become more and more popular as a business model in the game industry. The growth has been staggering. While a decade ago, only 4% of desktop games on Steam had a loot box mechanism, nowadays a majority of the mobile games and a significant portion of the desktop games have such mechanism. According to research conducted at the University of York last year, a total of 58.0% of the top games on the Google Play store contained loot boxes, 59.0% of the top iPhone games included loot boxes, and 36.0% of the top games on the Steam store contained loot boxes. Loot box mechanisms are estimated to produce $50 billion in revenue worldwide by 2022.

Loot boxes from a legal point of view

Loot boxes are currently still broadly unregulated, apart from a few countries. In Belgium and the Netherlands loot boxes have been deemed gambling products, in China loot boxes are regulated under national lottery law and in Japan multi-level loot box mechanisms (“complete gacha” or “kompu gacha”) are prohibited.

The debate over loot boxes and are they considered gambling, and thus basically illegal, has been divisive and intense, especially in recent years as legislators and regulators have started to speak up and take a stand on the matter. Although there is no clear legal consensus in many countries, recent court cases and statements of different gambling authorities have provided valuable information on what types of loot boxes are safe for game developers and publishers and which ones involve legal risks.

Loot box mechanisms and gambling

Loot boxes are usually obtained by virtual in-game currencies, which can be purchased with real money or earned by playing the game. There are usually two types of virtual in-game currency, which both can be used to buy loot boxes: a currency that can be earned by playing the game (often referred to as coins or gold) and a currency that can be bought with real money (often referred to as points or gems). Loot box mechanisms are typically designed to be random but drop certain virtual items more frequently than other items. Some loot box mechanisms allow players to trade loot box generated items with other players within the game, which makes trading possible also in secondary markets outside the game environment. Some loot box mechanisms generate untradeable items which a player can only use by himself or herself. The only way to convert untradeable items into real money is to sell the entire account to another player.

Gambling is generally very heavily regulated. 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.

Breaking down the elements of gambling

Consideration

The first element of gambling, consideration, is met when opening loot boxes costs directly or indirectly real money. Therefore, although loot boxes are often obtained using virtual currency, the element is considered to be met if the virtual currency is purchased with real money.

Prize of monetary value

The second element, the monetary value of virtual items, has been at the centre of the loot box debate in various countries. The element is generally considered to be met if loot boxes contain items that have monetary value. The value of virtual items is often defined as the degree of usability. This means that players are willing to pay money for virtual items that give them an advantage over a player who does not purchase loot boxes or which they desire for other reasons. Other desired items are often purely cosmetic such as a player’s favourite characters or skins which may not only look cool but also influence how other players in the game value the player. However, the monetary value of virtual items is ultimately dependent on whether players can cash out the items they have obtained from loot boxes, i.e., whether items can be traded within the game and thus sold in secondary marketplaces or not. For example, in Counter-Strike: Global Offensive (“CS:GO”) skins can be traded or gifted to other accounts, which makes it also possible to sell and buy skins with real money in several secondary marketplaces. It is generally considered that tradeable virtual items have monetary value. In my opinion, also untradeable virtual items have at least indirect monetary value if the entire account can be sold in secondary marketplaces.

Chance

The third element, chance, is met if the winnings from loot boxes are at least partly determined by chance. Many countries have adopted a broad interpretation of chance in their gambling acts and abandoned the idea that a game is a game of skill if chance impacts less than 50 % on the outcome. Therefore, it is generally enough that chance is a secondary element in the determination of the winner and the size of the winnings. In other words, winning is considered to be based on chance when its influence on the determination of the winnings cannot be ruled out by the most knowledgeable and skilled player.

Legal environment

Many countries have investigated loot boxes, but only a few countries have taken a clear stance on whether loot boxes are gambling within the meaning of the country’s gambling laws and whether they violate the gambling laws.

Belgium and the Netherlands

Belgium was the first country that banned loot boxes that can be bought with real money by declaring them illegal gambling in August 2018. Pursuant to the Belgian gambling legislation, a game is a game of chance if a bet can lead to a win or loss, and the win or loss is at least partly based on chance. The Belgian Gaming Commission, which monitors illegal gambling in Belgium, investigated four popular video games with loot boxes (Overwatch, FIFA 18, CS:GO, and Star Wars Battlefront II) and found that three of them contained loot boxes that were essentially games of chance and thus contravened the country’s gambling regulations. During the investigation, Electronic Arts (EA) first removed loot boxes that can be bought with real money from Star Wars Battlefront II and eventually removed them completely. However, at the time, it was mostly due to the furious feedback from the players as the use of loot boxes was overly aggressive.

The Netherlands Gaming Authority published a similar study in April 2018, which eventually led to banning loot boxes that can be bought with real money. The Gaming Authority examined ten games and their loot box mechanisms and found that four of the ten loot box mechanisms contravened the Betting and Gambling Act. These games were Rocket League, PUBG, FIFA 18, and Dota 2. The reason was that loot boxes’ content in these games was determined by chance and the loot box generated items were tradeable and had a market value.

The gaming authorities’ interpretations of the definition of a prize differed slightly, which is why Belgian gambling legislation and the Gaming Commission’s interpretation of it is stricter towards loot boxes than in the Netherlands. According to the Belgian Gaming Commission’s assessment, the prize obtained from a gambling activity does not necessarily have to have monetary value to meet the national definition of gambling, and the impossibility for a player to convert virtual items or in-game currency back into real money does not rule out the application of the Gaming and Betting Act. Therefore, even loot boxes that generate untradeable items can meet the definition of gambling in Belgium when a prize has value for a player. The value of an untradeable item for a player can, for example, result from the rarity of a virtual item. Instead, in the Netherlands, the fact that the prize has individual value to the player is not sufficient for a loot box to meet the national definition of gambling. The prize must have a market value that requires that loot box generated items can be traded to other players.

Possibly due to these differences, in the Netherlands, EA tried to argue that FIFA loot boxes do not count as gambling under the Dutch Betting and Gambling Act because 1) the loot boxes do not offer items that have monetary value, 2) they cannot be directly converted into real money, and 3) FIFA is inherently a game of skill rather than a game of chance. The court dismissed these arguments and noted that there are ways for players to profit from the virtual items (FIFA Ultimate Team player cards) that can be worth thousands of euros. The court ignored the basic FIFA gameplay and stated that FIFA loot boxes can be played as their own sort of game. EA’s argument of the closed environment where participants are not allowed to buy or sell FUT coins with real money (prohibited in the game’s terms of service) received little attention in the judgement. According to judgement, the argument was not decisive for the assessment as the circumstance is not a component of gambling in the Betting and Gaming Act. EA has already announced that it will appeal against the ruling, so it is possible that the situation changes.

Rest of Europe and the United Kingdom

Elsewhere in Europe and the UK, the situation remains mostly unclear while many countries’ authorities are currently investigating the matter. However, at least for now, Poland can be considered as a safe harbour of loot boxes as Polish Ministry of Finance has stated that loot boxes are not considered gambling in the light of Polish law. In September 2020, the UK’s Department for Digital, Culture, Media and Sport announced that it will launch a call for evidence on loot box mechanisms due to an increasing concern that loot box mechanisms encourage gambling-style behaviour among children. The call for evidence can be seen as a result of the department’s previous report on 12 September 2019 which suggested that loot boxes that contain the element of chance should not be sold to children playing games, and instead in-game credits should be earned through rewards won through playing the games. The report also suggested that the government should regulate loot boxes under the Gambling Act and that the gaming industry should protect players from potential harms.

A similar report was published in Sweden on 1 October 2019 by Swedish Consumer Authority. The report highlighted the similarities between loot boxes and gambling and emphasized consumer protection. According to the report, loot boxes may be covered by the Swedish Gambling Act when loot box generated items have monetary value, i.e., the items can be traded and sold for money. While it is currently unclear whether the loot boxes fall under the Swedish gambling act, the report has led the Swedish government to consider whether loot boxes should be regulated under the Swedish Gambling Act.

The United States

In recent years, the courts in the United States have issued a few rulings regarding loot box mechanisms that provide clarity and guidance for game developers on how loot box mechanisms should be designed. Despite some case law, there is currently no clear legal consensus in the United States whether loot boxes constitute gambling. Also, the fact that each state is free to regulate or prohibit gambling at the local level complicates the matter. Therefore, the legality of loot box mechanisms needs to be examined on a case-by-case basis.

In the United States the courts have had a slightly different interpretation of whether a game’s monetisation mechanism can meet the elements of gambling than, for example, the district court of the Hague in the Netherlands. Of course, it must be noted that there are also differences in the countries’ gambling laws. In the Netherlands, the court ignored the basic gameplay and ruled that loot boxes can be played as a game of their own in FIFA. In the United States, the district court of Maryland had a different interpretation and ruled differently in Mason v. Machine Zone, inc. three years earlier in 2015 regarding a game where the basic gameplay could have been separated from the in-game casino. The case concerned the free-to-play mobile game Game of War: Fire Age (“GoW”), where the player’s object is to conquer the world by forming strategic alliances with other players. In GoW, players can buy in-game currency, gold, with real money and use the gold to buy in-game items or virtual chips to try one’s luck by spinning a wheel in an in-game casino to win virtual items. In this case, the court ruled that the in-game casino, while being a game of chance, did not make a game of skill such as GoW a game of chance. According to the court, the in-game casino was comparable to purchasing cinema or amusement park tickets where consumers of such services pay for the entertainment, not for the possible economic gain.

In the FIFA case in the Netherlands, the court noted that there are ways for people to profit from virtual items that can be worth thousands of euros. Like in FIFA, there are secondary markets in GoW through which virtual gold or entire accounts can be purchased or sold. However, in the United States, the court did not give much weight to the existent of secondary markets and the real-world value of virtual items, because secondary markets and exchanges were expressly prohibited in the game’s terms of service. As the player could not cash out in the game within the game’s terms of service, the court ruled that the player did not receive any economic gain because there was no money at stake when the player spun the in-game casino wheel. The decision was upheld in the United States Court of Appeals.

The district court for the Northern District of Illinois gave a similar ruling in Soto v. Sky Union, LCC, in 2016. The plaintiff argued that loot box generated virtual items, heroes, had value due to the amount of money that a player must spend on virtual currency to be sure to win a hero. For example, if a loot box costs $1.29 and the odds of winning a certain hero are five hundred to one, the “expected cost” of the hero is roughly $645.00. The court rejected the plaintiff’s argument and stated the valuation method was fallacious and circular, and by the same logic, a game’s reward would be a “thing of value” any time a player pays to play a game of chance. The plaintiff also argued that heroes are worth the amount by which they increase the value of the entire account if the account is sold in secondary markets. The court rejected the argument and stated that the amount a player can get for selling his/her account to another player says little about the value of the individual items contained within that account.

Casino games

Casino games have gained more popularity, first in the United States and then in Europe. There seems to be a higher risk than in other games that a casino game is considered gambling even if it is based on a free-to-play concept. In the case Kater v. Churchill Downs Inc. in 2018, the game Big Fish Casino was deemed to fall within the definition of illegal gambling in Washington by the United States Court of Appeals. The game consists of various casino games that can be played for free with virtual casino chips that are awarded for free on a periodic basis. If a player runs out of chips, he/she could either wait until more chips are awarded free of charge or buy virtual chips with real money and continue playing immediately. The district court for the Western District of Washington ruled that although the virtual chips won extended the gameplay, playing the game could not result in any other gain to a user than amusement since the game was already available to play for free., i.e. the virtual chips did not have value. The court of appeals reversed the decision and concluded that the game’s virtual chips have value (although not monetary value on their own) because the chips bought extend the privilege of playing Big Fish Casino without charge. The decision led to substantial settlements and changes in gameplay. Recently, several settlements have been reached in similar class-action lawsuits regarding casino games in the State of Washington.

Recent cases

One of the most interesting pending cases is the class-action lawsuit against EA in California concerning loot boxes in its sports games’ Ultimate Team modes. It is interesting to see whether the district court arrives at a similar conclusion as the District Court of The Hague that loot boxes can be played as their own sort of game or, for example, does the court give weight to the fact that the sale of in-game currency is prohibited in terms of service of EA’s sports games as the US courts have previously done. EA is also facing a similar class-action lawsuit in Canada.

China

Loot boxes are heavily regulated in China by the Ministry of Culture and the State Administration of Publication, Press, Radio, Film and Television. There are several requirements and limitations for loot boxes. In short, Chinese laws generally allow elements of chance and prize but forms of consideration are limited as loot boxes are not allowed to be purchased by using real money or virtual currency. The strict Chinese laws have led developers to make changes to their games. For example, Blizzard solved the aforementioned requirement in Overwatch by removing the ability to buy loot boxes with real money and starting to offer loot boxes for free when players purchase in-game currency with real money.

Japan

Japan is the birthplace of loot boxes and is considered relatively safe market for games that include loot boxes although there is no clear consensus on whether loot boxes fall under the definition of gambling. There are also a few special characteristics that game developers need to take into account. First, multi-level loot box mechanisms (“complete gacha” or “kompu gacha”) that fall under a specific consumer protection law are prohibited. Multi-level loot box mechanism includes more than one level that a player needs to complete in order to proceed to the next level. For example, the player needs to obtain items A, B, and C one by one through regular loot boxes to compete the set and obtain the grand price item D. Therefore, game developers need to be cautious when designing loot box mechanisms that require players to draw several items and complete multiple levels to collect another rarer item. There are also various self-regulatory requirements such as disclosing the odds of receiving each type of virtual item and implementing measures to prevent real money trading on secondary markets, which companies entering to Japanese market should be aware of.

Conclusions

It is vital that the intended loot box mechanism of a new game is carefully analysed before the game release so that it does not contravene gambling laws. In particular, the following factors are relevant:

1. Do the loot boxes cost directly or indirectly real money?
2. Are loot box generated virtual items tradeable and can thus be sold in secondary marketplaces?
3. Are the loot box generated items at least partly determined by chance?

It is important to keep in mind that in general, all three elements of gambling (1) consideration, 2) prize of monetary value, and 3) chance) must exist at the same time for a loot box mechanism to be considered gambling. It is also important to keep an eye on possible amendments or broader overhauls of gambling legislation as regulatory pressure increases.

Eliminating the chance. The safest way to prevent a loot box mechanism from being considered gambling regardless of jurisdiction is to eliminate the possibility of chance by letting the player know in advance what each loot box contains, i.e., selling virtual items for a fixed price.

Eliminating the monetary value of the prize. It is vital that the external trading of virtual items is prohibited in the game’s terms of service, especially if loot boxes generated items can be traded. Also, for example EA has actively been banning players that sell in-game virtual currency (coins) in its Ultimate Team modes. The courts have not yet given weight to these actions, but they may be relevant in pending or future cases.

Transparency. It is also important to develop and implement policies concerning transparency of loot box mechanisms as the major console manufactures Sony, Microsoft and Nintendo have already started requiring publishers to disclose the odds of getting loot box items before players purchase the boxes. Some game developers have also introduced new tools that enables players to track and control their spending in the game.

The article is also published in the Game Developer Blog.

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