By Anthony J. Dreyer and David Lamb, of Skadden, Arps, Slate, Meagher & Flom LLP
The Year 2019 saw an appreciable increase in scrutiny directed toward the use of “loot boxes”—in-game rewards (often randomized) that players can purchase while playing a video game. Both domestically and internationally, legislatures, regulatory agencies, and private groups took up the issue of what, if any, legal concerns loot boxes present. However, while discussions concerning loot boxes were certainly more prominent in 2019, they are just the latest in a long line of legislative and administrative reactions to this growing trend in video games. Although, to date, most attempts to ban or regulate loot boxes have been unsuccessful, the increasing government (and private) scrutiny of this practice deserves the attention of anyone with a connection to the video game industry.
The Rise of the Loot Box
The term “loot box” generally refers to any mechanism allowing players to obtain a set of unknown, virtual items for use in a game. A loot box could be a booster pack in a collectible card game, a weapons crate in a first-person shooter, or a llama-shaped piñata in a battle royale game. In most, though not all, instances of loot boxes, the available items have varying degrees of rarity, with more desirable items appearing less frequently.
Loot boxes and other micro-transaction mechanics have grown increasingly popular in the last several years, paralleling both the growth of the free-to-play segment of the video game market, as well as rising development costs across the industry.
Are Loot Boxes Legal?
Today, with some few exceptions, most forms of loot boxes remain legal and unregulated worldwide. However, proponents of loot box regulation argue that the chance and rarity mechanics make loot boxes akin to gambling, and constitute predatory practices focused toward minors.
While this comparison may seem overblown to some (particularly those with small children who are familiar with the rampant use of “surprise mechanics” in toys), a careful examination of the relevant statutes and analogous cases demonstrates the potential risk posed by loot box systems. For example, the federal statutes governing online gambling, as well as each state’s individual gambling laws, generally require three elements for a particular activity to constitute an illegal “wager”: (1) risking something of value, (2) on the occurrence of a chance event, (3) for a potential valuable prize. Arguably, each of these elements may be satisfied by certain loot box systems.
In fact, courts have already held that in the context of mobile games, virtual currency may constitute something of value, and thus may satisfy the first element. Further, because many loot box systems involve some aspect of chance, the second element is likely satisfied as well.
With respect to the final element, the Ninth Circuit recently held that in the context of a casino games mobile app, the chips that a player could win constituted an item of value under California’s anti-gambling statute, because the chips allowed the player to continue playing the game. Thus, while most courts that have considered the issue in the context of mobile games have found that “prizes” awarded in video games do not constitute a thing of value, there is at least some support for the claim that a virtual good, even if useable only in the game itself, may satisfy the “valuable prize” prong of the gambling analysis.
Given this potential, video game developers and distributors should be aware of the various avenues by which the legality of particular loot box systems may be challenged. For example, state Attorneys General may bring criminal or civil actions, or aggrieved consumers may bring challenges directly under most state’s anti-gambling laws.
Additionally, even if loot boxes are presumptively legal and do not constitute gambling, consumers may bring lawsuits based on consumer protection or false advertising laws if they believe that the loot boxes are marketed in an arguably misleading way. In this connection, consumer groups have recently begun questioning whether the odds of receiving certain desirable prizes are manipulated to incentivized continued play. These sensitives are particularly heightened where the loot boxes at issue may be targeted toward minors.
Recent Attempts at Regulation
In light of these concerns, many government officials, both in the U.S. and abroad, have taken steps directed at regulating loot boxes. For example, state legislatures in at least four states have introduced bills aimed at regulating loot box sales, and the Protecting Children from Abusive Games Act, which seeks to prohibit loot boxes in any game played by minors, was introduced in the U.S. Senate this year.
Additionally, this summer the U.S. Federal Trade Commission held a public workshop to examine consumer protection issues related to loot boxes. The primary focus was on the information asymmetry present in loot box mechanics, and whether such mechanics are unfair practices requiring FTC regulation.
Internationally, at least a dozen countries have considered the legality of loot boxes, and three—Belgium, the Netherlands, and China—have outlawed loot boxes to some extent. In fact, the gambling commissions of Belgium and the Netherlands found that most forms of loot boxes constituted gambling under the same wager, chance, and valuable prize structure discussed above.
Most recently, both the United Kingdom and Sweden have taken steps suggesting that loot boxes soon may be regulated or banned in those countries as well. For example, the Digital, Culture, Media and Sport Committee of the U.K. House of Commons released a statement that loot boxes purchased with real-world money that do not reveal their contents in advance constitute games of chance, and should accordingly be regulated under the United Kingdom’s Gambling Act. The Committee also recommended that loot boxes containing an element of chance should not be sold to children.
Similarly, the Swedish Consumer Agency submitted a report to Sweden’s Gaming Market Commission highlighting the similarities between loot boxes and real-money gambling, and suggesting loot box regulation.
Best Practices
Given the uncertainties present in the current landscape, video game companies should examine their loot box practices closely, and keep in mind the following strategies to minimize legal risk:
Take steps to avoid creating a wager, chance, or win/loss structure required for a finding of gambling. For example: Make the currency used to purchase loot boxes also acquirable from in-game actions, not simply available for direct purchase;
Remove chance by showing players in advance what they will get in a loot box (a strategy Fortnite has recently employed);
Allow players to use duplicate items to progress in the game in some other way, so loot boxes always provide players with some value; and
Prevent players from exchanging items received in loot boxes, and enforce pre-existing prohibitions on sales of items and/or accounts, to minimize perception that in-game items can be converted to real-world currency.
Consider substantial parental controls on loot box purchases made by minors;
Ensure that loot boxes are promoted transparently, with minimal “fine print” terms or fees that consumers plausibly could contend are “hidden” or obscured; and
Continue working with law makers and regulators through self-regulatory bodies like the ESRB to foster an environment of self-regulation. For example, in the first panel of the FTC loot box workshop, it was announced that Nintendo, Sony, and Microsoft will mandate loot box odds disclosures for new games available on their respective platforms, and update existing games with loot box functionality by the end of 2020.
