Since the loot box debate peaked again in April 2018 with regulatory enforcement action being announced or taken in South Korea, Belgium and the Netherlands, things have calmed down significantly. Nevertheless, several proceedings, investigations and legislative actions which were initiated during the first loot box peak in October/November 2017 are still ongoing, one of them being the investigation commenced by the French gambling regulator, the Autorité de regulation des jeux en ligne (“ARJEL”). For different reasons, the decision of the ARJEL has been expected with tension for some time now. First, because France is a key market, an adverse decision on loot boxes would have a much greater impact than the decisions taken by the Belgian and Dutch gambling regulators had. Furthermore, the Belgian and Dutch gambling authorities indicated that their actions have been coordinated with other authorities and that they are in ongoing discussion with these regulators. This gave rise to concern that the ARJEL’s decision would be similarly strict.
On June 28, 2018, the ARJEL released its activity report for the year 2017-2018 (Rapport D’activité 2017-2018) and used the chance to officially and extensively comment on its position on loot boxes. This short article first summarizes the developments in France so far (I.) and afterwards summarizes and assesses the ARJEL’s position on loot boxes as set out in its activity report 2017-2018. The article reflects local counsel input from various loot box due deligences on which we have worked in the past.
I. Loot boxes in France – the story so far
Along with other jurisdictions, loot boxes became subject to increased scrutiny in France when the global loot box debate peaked in October/November 2017.
1. Letter by Senator Jérôme Durain
On November 16, 2017, French Senator Jérôme Durain wrote a public letter to the president of the French gambling regulator, the Autorité de regulation des jeux en ligne(“ARJEL”). The matter caused widespread public attention. According to the Senator “loot boxes seem […] to require special attention from the public authorities” as many players and specialized observes would question the deleterious effects of the spread of microtransactions in the world of video games.
However, the senator also made clear that he does not think that specific legislation need to be put in place at the moment. Furthermore, he expressed that loot boxes containing cosmetic items seem to be well-accepted. On the other hand, the Senator identified pay-to-win practices as “contentious” and pointed out that some observers see “a convergence of the video game world and practices specific to gambling”. The senator criticized the lack of transparency with regard to loot boxes with only few good practice examples existing. As such he named China which obliged video game developers to disclose loot box drop rates already in May 2017. The senator also pointed out that the Dutch and Belgian gambling authorities would be investigating the matter from a gambling law perspective. Furthermore, the senator asked the ARJEL whether it would have the infrastructure to address the issue of unclear winning probabilities in relation to microtransactions. The senator concluded its letter with mentioning that he had written in similar terms to Mr. Mahjoubi, Secretary of State for digital affairs, the SELL [French videogame consumer body], the SNJV [French games industry association] and the France e-sport association.
2. Response letter by the ARJEL
Charles Coppolani, the President of the ARJEL, responded to Senator Durain’s letter on November 20, 2017 stating that he is also concerned about the phenomenon of loot boxes: “It tends to introduce into this fun activity open to all, a financial dimension that, as we had anticipated in 2016, presents risks for our fellow citizens and especially for the youngest. These risks are very similar to those that characterize gambling addiction; it is necessary to be very vigilant.” According to the President loot boxes take different forms, with some being more and more excessive. The President pointed out three different issues that would need to be addressed:
- Quasi-mandatory transactions in the course of a game which would be added to the original purchase price, without the player being clearly informed. However, the president added that this issue lies within the field of consumer protection.
- “A totally random product that amounts to introducing a paid lottery game in a video game”. According to the President, such microtransactions must be differentiated from regular pay-to-win microtransactions where the player precisely knows what he buys and therefore has better control over his expenses.
- In some games, the player would have the opportunity to resell the won virtual items for real world money, either on the game site itself or via other sites. According to the president, this category would fall under the prize requirement.
The President continued with summarizing the measures which the ARJEL intends to take in reaction to the aforementioned practices. These measures included, aside from a “realization of a typology of ‘different risky practices’ in the development of video games”, the following actions:
- Working together with the General Directorate for Competition Policy, Consumer Affairs and Fraud Control (“DGCCRF”) for all matters relating to consumer protection.
- Mutual sharing and collaboration with several European regulators concerned in the same way as the ARJEL by the development of games "on the border of gambling", in particular Belgium, UK and NL.
- Reflection on the French definition of gambling by taking under consideration monitoring reports which are currently prepared by different stakeholders.
II. Summary and assessment of the ARJEL’s position on loot boxes and announced actions
The comments made by the ARJEL in its activity report 2017/2018 are by far less committing than the decisions taken by the Belgian and Dutch gambling authorities.
1. General remarks / Introduction
The ARJEL first shortly addresses the global loot boxes debate and implies that full prize video games which require additional spendings on loot boxes in order to make adequate gameplay process were the main reason for the global uproar and complaints by gamers. However, it also points out that the business model of microtransactions and loot boxes emerged long before the global debate of 2017 and that it had already expressed its concerns about this phenomenon on earlier occasions.
The ARJEL then provides some general explanations on the French gambling law. It first summarizes two basic principles which are (i) that gambling is generally prohibited in France unless it was expressively permitted by the regulator and (ii) that only three different types of online gambling are currently allowed (poker, horse betting and sports betting). Furthermore, any online gambling activity is subject to a state monopoly. Thus, online casino games and other online gambling activities are prohibited. Illegal gambling offers can be blocked by the ARJEL.
Afterwards, the ARJEL quickly summarizes the requirements for a game to constitute gambling (Public offer and a financial sacrifice made in the expectation of a gain). The law does not explicitly name a chance requirement. However, this condition is implied . Thus, the requirements for Gambling in France are essentially the same as in the most other jurisdictions (stake, chance, and prize).
Lastly, the ARJEL summarizes the purposes of the French gambling legislation (protection of minors, prevention of addiction etc.).
2. Microtransactions undermine the objectives of the public policy on gambling
The ARJEL continues with stating that loot boxes, whether they fall under the national gambling definition or not, undermine the objectives of the public policy on gambling because (i) minors can play games which include loot boxes without any age verification taking place, (ii) loot boxes give rise to habits and reflexes which introduce minors to real gambling as the spending of money in the hope of obtaining a certain item in order to make gameplay progress is an "apprenticeship" for betting and slot machines and (iii) the random number generator which is responsible for determining which loot box item is generated is non-transparent and could even be based on the players behavior and the exploitation of his personal data.
Altogether, this is a confusing and inconsistent statement which in addition is based on mere assumptions rather than facts. However, the statement is in line with the comments of many regulators we have seen in the past months in relation to loot boxes. Even where regulators declared themselves incompetent or unable to regulate loot boxes, they nevertheless used the chance to condemn loot boxes in general in front of a (probably) broader audience. These statements often relate to a subject matter which does not even fall under the responsibilities of the relevant authority. The Dutch authority concluded that four out of ten investigated games and loot box mechanisms meet the Dutch gambling definition. However, this did not hold the authority back from also criticizing the other six games and the business model of microtransactions in general. Statements by the German and Belgian authorities were similar in tone. In fact, the assumption that the random number generator might illegally be based on the player behavior and personal data was explicitly pointed out by the Belgian Gambling Commission first.
3. The argument that loot boxes always contain one item is “questionable”
The ARJEL also addresses the commonly expressed argument that loot boxes are not gambling because they always contain at least one item. According to the ARJEL, however, this fact does not exclude loot boxes from being gambling. According to the ARJEL, what matters is that loot boxes rely on a technique of giving the player the feeling that he “barely missed” the item he wanted. Such mechanisms would be similar to slot machines which also rely on giving the player the feeling that he almost won in order to incite him to continue playing. The argument that loot boxes always contain at least one item was already torn apart by the Dutch gambling authority and - frankly - was never really solid in the first place. Other arguments are much more robust when it comes to challenging potential gambling allegations.
4. Combined and coordinated action on loot boxes is required
The ARJEL votes for a combined and coordinated action in relation to loot boxes. According to the ARJEL, European financial regulators would be able to provide a coherent analysis of microtransactions embedded in video games. Furthermore, the national gambling policies would share the common goal of preventing the dangers which arise from practices such as loot boxes. Several additional arguments would speak in favor of a concentrated action:
- Many video game operators are located outside the EU but offer the same products all over the world;
- Specific skills (e.g. source code analysis) are required to identify in-scope games and to record infringements;
- While the ARJEL is able to block websites via DNS protocol, this technique might not work with video games and video gaming platforms, leaving [not really promising] criminal prosecution as the only option;
- Loot boxes fall under the competence of several regulators and institutions, in particular, gambling authorities, consumer protection authorities, financial and banking regulators and data protection authorities.
The ARJEL continues with pointing out that - in accordance with the action plan announced by its President in his response to Senator Jérôme Durain (see above) - a collective effort has already been initiated by the The Gaming Regulators European Forum ("GREF") of which some members have already “spoken” (probably a reference to the Dutch and Belgian gambling authorities and their announcement to take regulatory action on loot boxes). Furthermore, an upcoming joined position paper of the GREF is supposed to demonstrate the determination its members to:
- clarify common rules and raise awareness among game publishers;
- make consumers aware of the dangers of microtransactions, both in terms of the integrity of the gambling offer and in terms of addiction;
- alert parents of the risks to which minors are exposed and call them to particular vigilance.
These comments can easily be filed under non-committal regulatory statements which will have little or no consequences in future; especially not if the loot box controversy continues to calm down (and with it the public interest). In fact, the joined position paper only shows that a combined (effective) action is rather unlikely as none of the included statements relates to any concrete plans of enforcement action. This is probably due to the fact that the different European gambling authorities take different views on whether loot boxes constitute gambling or not.
5. Are loot boxes gambling? – Most likely not
Last, and most importantly, the ARJEL addresses the question whether it considers loot boxes as gambling or not. In line with other gambling regulators the ARJEL emphasizes the importance of the prize requirement. According to the ARJEL, loot boxes could qualify as gambling if the generated item has a real world monetary value. This would in particular be the case where the item is likely to be sold outside the gaming platform and the publisher allows using the obtained prize outside the environment of its platform. This part is crucial. At first it looks like the ARJEL follows the strict approach taken by the Dutch gambling authority by stating that the mere possibility to sell/transfer an item is already sufficient to meet the prize requirement. However, the ARJEL then restricts this rather brought approach again by requiring that the game operator must somehow authorize such off-platform trading. This brings the ARJEL’s position much closer to the position of the UK Gambling Commission. Since the question whether the ARJEL would tend more towards the liberal UK position or the strict Belgian/Dutch position was one of the most anticipated questions, this development should be a relief for many game developers and publishers as currently almost no video game or video game distribution platform allows off-platform trading. In fact, the most games even explicitly prohibit such practices via their terms of service.
However, despite the fact that almost no video game currently allows off-platform trading, the ARJEL also announces that “a certain number of investigations are in progress” in relation to the authorized selling of loot-box-generated items. This brings up the question how exactly the ARJEL interprets the requirement that the game developer must “allow” the use of the generated item outside the video game. Technically, “allowing” could also mean that the game only allows item trading within the game. In-game trading always and automatically means that items can also be traded outside the game (e.g. on eBay or skin betting platforms). However, it seems unlikely that the ARJEL has taken this position: In a specific legal section of its activity report the ARJEL further elaborates on the prize requirement. Here, it first points out that virtual items can generally have a real world value if they can be monetized. The ARJEL repeats that this would in particular be the case where the item can be sold. However, the ARJEL adds that “It would still be necessary […] that [the game operator] participates in this monetization”. If the ARJEL sticks to this explanation, this would rule out almost all video game developers and distribution platforms. Even if a game developer tolerates off-platform trading, it typically does not participate in the relevant activities, i.e. in the monetization. Only if the ARJEL would take the position that an indirect participation in the monetization is also sufficient (e.g. because loot box sales are boosted through off-platform trading) another outcome seems possible. However, this is unlikely as this would stretch the argument beyond what seems reasonable. It is therefore rather unlikely - although of course not excluded - that the ongoing investigations pointed out by the ARJEL will lead to any enforcement action.
6. Summary and final comments
While the comments by the ARJEL are very critical and certainly no good press, they are also non-committal and unspecific. Altogether it is unlikely that any concrete actions will follow. Most importantly, loot boxes in practice do not seem to meet the prize requirement as interpreted by the ARJEL. Any enforcement action under French gambling law is therefore unlikely and it looks like the strict Belgian and Dutch decisions will remain an exemption of two very small markets. With its explanations the ARJEL might have even taken a stance in terms of the still unsolved legal question on whether off-platform trading can be held against the game developer even if the latter does not allow such practices. This question is currently subject to a legal debate. On the one hand, it seems unreasonable that video game operators become subject to gambling regulations due to the unauthorized and illegal activities of third parties and consumers. For this reason some regulators and legal experts (e.g. in the USA, UK and Germany) have taken the view that unauthorized off-platform trading is irrelevant when it comes to the determination of the monetary value of the prize (i.e. the loot-box-generated item). However, on the other hand it can be argued that the question of real world monetary value is independent from any authorization by the video game developer as it is merely a simple reflex of supply and demand. For this reason, other regulators and legal experts (e.g. in the Netherlands) argue that it is already sufficient if items are only transferable, regardless of any authorization of the game developer. With the ARJEL, the list of the stakeholders following the first opinion was now extended by an important regulatory body of one of the key markets.