On April 19, 2018 the Dutch Gaming Authority released the outcome of its investigation on loot boxes. According to the DGA, four out of the ten investigated games constitute licensable gambling. What does this mean?

I.            Loot boxes in the Netherlands - The story so far

Loot boxes have been on the radar of the Dutch Gaming Authority (“DGA”) for quite some time now. Already in its 2016 annual report, the DGA stated that it had asked the research agency Super Data Research to conduct a study in respect of the connection between social gaming and paid online gambling.[1] According to the DGA, the results showed that the dividing line between social gaming and participation in paid gambling is becoming more and more blurred and that “At some point, half of the young people (13-24 years) in the Netherlands will make the transition from social gaming to paid gambling.” The report also addressed digital collectible card games, fantasy sports, amateur e-sports and competing for virtual items such as skin gambling. Following the Super Data Research study, the DGA announced that it would look into social games which provide certain high-risk features.

Next, in September 2017, the DGA made public that it investigates possibilities to enforce national gambling legislation against social gaming companies. Then, just shortly after, in October and November 2017, the Netherlands suddenly became the focus of global attention when first the Belgian Gaming Commission announced that it started an investigation on loot boxes[2] and later also the Belgian Minister of Justice, Koen Geens, weighed in, stating, “Mixing gambling and gaming, especially at a young age, is dangerous for the mental health of the child”.[3] Geens even added that he intends to ban loot boxes on a European level: "But that takes time, because we have to go to Europe. We will certainly try to ban it.”[4] At the same time, the events in Belgium took place, the DGA announced that it started an investigation on loot boxes as well.[5] However, at that point the DGA was non-committal and only stated that “Whether or not social games and loot boxes are games of chance for which a licence is required from the Dutch Gaming Authority is a complex question.”

II.           The decision of the DGA

On April 19, 2018, the DGA released the outcome of its investigation[6] and a corresponding press release.[7] According to the DGA it investigated ten video games that included loot boxes. The games were selected based on its popularity on a leading internet platform that streams videos of games and players. Specific games were not named. The DGA found that four out of the ten investigated games constitute gambling and are therefore prohibited to be operated without a license. The DGA states: “The reason is that the content of these loot boxes is determined by chance and that the prizes to be won can be traded outside of the game: the prizes have a market value.” The remaining six games did not enable players to sell the prizes won outside of the game. “This means that the goods have no market value and these loot boxes do not satisfy the definition of a prize in Section 1 of the Betting and Gaming Act.” However, while the DGA explicitly states that six of the ten loot boxes that were studied do not contravene the law it also points out that it found indications that “all of the loot boxes that were studied could be addictive”.

Furthermore, the DGA explicitly calls on the games sector “to modify all games before mid June […]. From 20 June 2018, the Netherlands Gaming Authority may instigate enforcement action against providers of games of chance with loot boxes that do not adhere to this norm.(Emphasis added). In terms of those games that were found not to be illegal, the DGA nevertheless asks game providers “to remove the addiction-sensitive elements (‘almost winning’ effects, visual effects, ability to keep opening loot boxes quickly one after the other and suchlike) from the games and to implement measures to exclude vulnerable groups or to demonstrate that the loot boxes on offer are harmless.

III.          Assessment / Comments

1.           In general: Legal situation of loot boxes in the Netherlands

Applicable law is the Dutch Betting and Gaming Act (“BGA”). According to Article 1(a) BGA it is prohibited to "provide an opportunity to compete for prizes or premiums if the winners are designated by means of any calculation of probability over which the participants are generally unable to exercise a dominant influence, unless a licence has been granted therefore, pursuant to this law."

The requirements for a game to constitute gambling can be summarized as (i) game of chance and (ii) prize or premium. Unlike the gambling definition of most jurisdictions, gambling in the Netherlands does not require a consideration. Thus, even free games and loot boxes can fall under applicable gambling laws if the other two requirements are met.

Like in many jurisdictions, the key question under Dutch gambling law is whether virtual items generated by loot boxes constitute a prize or premium. Little guidance exists in this regard. However, according to the Dutch Gaming Tax Act, all goods that have a certain economic value when traded constitute prizes. Thus, the decisive question is, whether loot-box-generated items have an economic value. Conclusions in this regard can be drawn from a ruling of the Dutch Supreme Court on the MMORPG Runescape.[8] While this decision concerned the stealing of a virtual objects and pre-paid accounts under criminal law, it necessarily also addressed the question whether virtual items are valuable goods as only goods can be stolen. The defense argued that virtual objects were not goods, but only virtual illusions consisting of "bits and bytes". However, the Supreme Court ruled that, for the victim as well as the offenders, the items had value, and that value could be taken away. Already the Court of Appeal Arnhem had held that over the years the concept of economic value has been recognized to include the value as understood by the possessor of the item.[9]

While it cannot be excluded that a Dutch court or the DGA would reference the Runescape decision to support an argument that loot box generated items have an economic value, the more subjective standard applied by the courts is not in line with the common understanding of value under the most gambling laws. Here, value typically does not mean personal value but economic real world monetary value. This also seems to be the understanding of the DGA when it states “that the prizes to be won can be traded outside of the game” and therefore “the prizes have a market value”. Thus, there are reasonable grounds to argue that the Runescape decision does not apply under gambling laws.

2.           What does trading “outside of the game” mean?

Focusing on the arguments provided by the DGA, the question arises when exactly prizes can be “traded outside of the game”. This can have different meanings: First, “outside of the game” can mean only those games which allow trading of the generated items on marketplaces which are not part of the game. Here, items can typically be traded against virtual currency or other virtual items which cannot be redeemed for money. However, “outside of the game” could also mean those games/platforms where off-platform trading is (additionally) enabled by third party platform providers which interface an in-game or a platform’s marketplace to set up their own trading platform. This is typically the business model of so called skin betting platforms which violate the provider’s terms of use and intellectual property through their activities. Last, “outside of the game” could mean every loot box mechanism which subsequently allows the (in-game) trading of the generated item. Technically, every loot box mechanism that allows the subsequent (in-game) trading of the generated item automatically also allows trading of the same item outside of the game environment as there is always a secondary market where players can sell virtual items and agree to hand them over within the game (e.g. eBay, skin betting platforms or even a common internet discussion board).

While not entirely clear, it seems the DGA indeed applies the latter very strict interpretation. The study released by it today explicitly states that “Loot boxes contravene the law if the in-game goods from the loot boxes are transferable.[10] Thus, according to the DGA, any game which allows the transfer of loot-box-generated items from one player to another player, even within the game, falls under Dutch gambling laws. Consequently only those loot boxes where the generated items can only and forever be used by the player who purchased the loot box himself do not contravene Dutch gambling laws. This decision seems at questionable. In many other jurisdictions, courts and various regulatory bodies also take into account whether the game or platform provider prohibits off-platform trading via its terms of use. This was, for instance, taken into account by the UK Gambling Commission in its Position Paper[11], the statement of the German Age Rating Board on loot boxes (“USK”)[12] and several US courts, most notably in Kater v. Churchill Downs Incorporated.[13] As it is common practice that video game providers prohibit off-platform trading of virtual items, this might be an argument to challenge the DGA’s decision in a Dutch court.

IV.         Consequences and Sanctions

Providing gambling services requires a license under Dutch gambling laws. However, in terms of online gambling, currently no possibility to apply for a license exists, rendering in-scope loot box games de facto illegal. Violations can be sanctioned by the DGA by imposing fines of up to EUR 810,000 or a maximum of ten percent of the company’s previous year’s turnover. Additionally it can impose administrative orders and incremental penalty payments. Violations of Dutch gambling laws also constitute a criminal offense. However, the enforcement risk in this regard is low. Penalties under criminal law are imprisonment of up to two years and/or a criminal fine of up to EUR 81,000.

V.           Summary

Even video games that only enable in-game trading of virtual items generated by loot boxes seem to fall under the DGA’s interpretation of Dutch gambling laws since the relevant items can automatically be traded via secondary markets “outside of the game” as well.  However, when exactly virtual items attain a real world value under Dutch gambling laws was not decided by case law yet. The only noteworthy court ruling seems to be the Runescape decision of the Supreme Court which, however, is a criminal court decision and provides a subjective standard to determine the real world value of virtual items whereas the applicable standard under gambling laws is typically an objective standard which requires a real world monetary value. The DGA’s decision is questionable as it does not consider the implications of a breach of the provider’s terms of use which typically prohibit off-platform trading. This might be an option to challenge a potential enforcement decision in court.