On March 28, 2018 the United States Court of Appeals for the Ninth Circuit reversed a decision of the District Court for the Western District of Washington and ruled that the virtual casino chips included in Big Fish Casino are “things of value” under Washington Law and that the game therefore constitutes illegal gambling. This brings up the question whether the decision has any impact on the legal qualification of loot boxes under US gambling laws.

I.        Loot boxes in the USA

Leaving aside recent legislative efforts in some US States (mainly Hawaii, Washington State and others), loot boxes can be considered as relatively safe from a US gambling law perspective. Gambling is mainly regulated by state law in the US. However, like many other jurisdictions around the globe, gambling from a legal perspective requires (i) a game of chance, (ii) a stake and (iii) a prize. If these three conditions are met, the relevant game most likely qualifies as regulated gambling. However, so far loot box-like mechanisms and/or virtual casinos were unlikely to fall under current US gambling laws due to several US court decisions. Most notable cases are, amongst others:

  • Kater v. Churchill Downs Incorporated, United States District Court, W.D. Washington, November 19, 2015, 2015 WL 9839755;
  • Soto v. Sky Union, LLC., United States District Court, N.D. Illinois, Eastern Division, January 29, 2016, 2016 WL 362379;
  • Mason v. Machine Zone, Inc., United States District Court, D. Maryland, October 20, 2015, 2015 WL 6335771 (upheld by Mason v. Machine Zone, Inc., United States Court of Appeals, Fourth Circuit, No. 15-2469, March 17, 2017);
  • Phillips v. Double Down Interactive, LLC, United States District court, D. Illinois, March 25, 2016, No. 1:2015cv04301.

A key argument in all these decisions was that virtual items do not satisfy the prize requirement as they cannot be redeemed for money and therefore do not have a real world value. This was also decided by the District Court for the Western District of Washington in Kater v. Churchill Downs Incorporated (see next). 

II.       Kater v. Churchill Downs Incorporated: Big Fish Casino - The story so far

1.        Facts and arguments by the plaintiff

The defendant operates the game Big Fish Casino, a virtual game that allows users to play a variety of electronic casino games such as roulette and blackjack and which can be downloaded free of charge. Although users can play the games for free by using only the virtual casino chips awarded to them without charge, users have the option to purchase additional chips and a wide variety of other low-cost virtual items that enhance or extend gameplay. Users receive additional chips as a reward when they win one of Big Fish Casino’s games. The plaintiff claimed that Big Fish Casino’s virtual casino chips are prizes constituting “things of value” because they allow users to extend gameplay. Additionally the plaintiff argued that Big Fish Casino’s virtual casino chips are prizes constituting “things of value” because, although the chips cannot be exchanged for cash or merchandise directly, they can be sold to other users for actual money on a secondary market. The plaintiff also argued that the defendant would facilitate and profit from the sale on secondary markets because the game provides an in-game exchange mechanism, which allows players to transfer in-game chips to other players and the game operator receives a fee on each of these exchanges between players.

 2.        The court’s ruling: Chips cannot be redeemed for cash; extended gameplay doesn’t matter

The court dismissed the plaintiff’s arguments and ruled that Big Fish Casino’s virtual chips do not satisfy the prize element required to establish that Big Fish Casino constitutes gambling. The court unambiguously ruled that ‘Big Fish Casino is free to play and there is never a possibility of receiving real cash or merchandise, no matter how many chips a user wins’. The court also held that the fact that players can use the awarded chips to continue playing the game is not of relevance as ‘extended gameplay cannot result in any gain to the user, pecuniary or otherwise, aside from the amusement that accompanies continuing to play a game that is already available to play for free’.

3.        The court’s ruling: Secondary markets are irrelevant if the game operators T&Cs are violated

The court also rejected the plaintiff’s second argument by extensively citing the game operator’s terms of use which explicitly prohibit the trading of in-game items against cash or outside the game. According to the court, ‘any user exchanging Big Fish Casino chips for cash on a secondary market is expressly violating the game’s Terms of Use, which users are required to agree to before they can access the game’. It would ‘be contrary to basic principles of law and equity’ if the plaintiff would be allowed ‘to sue Defendant for damages based on their own breach of contract’.

III.     Kater v. Churchill Downs Incorporated - Decision reversed. Implications on loot boxes?

On March 28, 2018 the United States Court of Appeals for the Ninth Circuit reversed the decision of the District Court for the Western District of Washington and ruled that the virtual casino chips included in Big Fish Casino are “things of value” under Washington Law and that the game therefore constitutes illegal gambling. This brings up the question whether the decision has any impact on the legal qualification of loot boxes in the USA. The answer is: No - But there might be certain exemptions.

1.        Extended entertainment = "Thing of value"

The court reversed the first ruling merely on the ground that extended gameplay constitutes a thing of value: “The virtual chips, as alleged in the complaint, permit a user to play the casino games inside the virtual Big Fish Casino. They are a credit that allows a user to place another wager or re-spin a slot machine. Without virtual chips, a user is unable to play Big Fish Casino’s various games. Thus, if a user runs out of virtual chips and wants to continue playing Big Fish Casino, she must buy more chips to have “the privilege of playing the game.” […] Likewise, if a user wins chips, the user wins the privilege of playing Big Fish Casino without charge. In sum, these virtual chips extend the privilege of playing Big Fish Casino.” This argument cannot be applied to loot boxes as loot boxes typically generate virtual items such as characters, skins, weapons or other items but not the option to extend the gameplay (which would be “opening” the loot box).

2.        No change: Secondary markets are irrelevant if the game operators T&Cs are violated

The US Court of Appeals explicitly rejects the second argument of the plaintiff relating to off-platform trading on secondary markets: “Kater makes a second argument, which we reject. She argues that the chips are a “thing of value” because users can sell them for money on the “black market.” However, Big Fish Casino’s Terms of Use prohibit the transfer or sale of virtual chips. As a result, the sale of virtual chips for cash on a secondary market violates the Terms of Use. The virtual chips cannot constitute a “thing of value” based on this prohibited use. See Mason v. Mach. Zone, Inc., 851 F.3d 315, 320 n.3 (4th Cir. 2017)

IV.      Important possible exemptions: Loot boxes including virtual currency or other loot boxes

A possible exemption might apply to loot boxes which include virtual currency which the player must otherwise purchase for real money and which can subsequently be used to purchase additional loot boxes (e.g. 1000 in-game gold typically costs USD 5. A loot box costs USD 1. The loot box can include 5000 Gold). The same applies to loot boxes which might include additional loot boxes (e.g. one loot box can generate three new loot boxes). In this case an argument could be made based on Kater v. Churchill Downs Incorporatedthat the included items can be regarded as an extension of entertainment and therefore constitute things of value.

V.       Summary

For now, I consider loot boxes safe in the USA (from a gambling law perspective). However, a slightly increased risk exists in relation to loot boxes which include virtual currency which can be used to purchase new loot boxes and/or loot boxes which generate new loot boxes. Game developers relying on the US market might therefore want to consider changing their loot box mechanisms accordingly.