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. 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 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”. 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.” At the same time, the events in Belgium took place, the DGA announced that it started an investigation on loot boxes as well. 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 and a corresponding press release. 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. 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.
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?
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.