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‘Loot boxes’: a new form of gambling?

Microtransactions (payments of real money within a game for items, benefits, downloadable content, etc) first gained popularity as a method of monetising so-called ‘freemium’ mobile app games. They have now become a feature of triple-A games, including Overwatch, Star Wars: Battlefront II (however temporarily), FIFA 2017 and Call of Duty: WWII and account for billions in sales worldwide. Games publisher Ubisoft recently announced that for the first time, in 2017, it made more from microtransactions than from sales of its titles.

One of the more interesting legal questions to arise from microtransactions concerns ‘loot boxes’.

Loot boxes are virtual containers with random contents. Think of digital versions of the small toys in gumball machines or Kinder Surprise eggs. There’s nothing wrong with random content – many games, such as the Diablo and Borderlands series, rely on it to encourage exploration and item collection; other games are built entirely on random content (Spelunky).

However, the combination of loot boxes and microtransactions has raised concern internationally. Paying money for a chance to win a random reward sounds a lot like a layman’s definition of gambling, an important issue given the prevalence of children and young adults playing those games. Many loot boxes also feature lights and sounds akin to pokies which only help the comparisons.

Netherlands has just banned 4 out of 10 examples of loot boxes that it examined on the grounds that they constituted ‘gambling’ under Dutch law. The Belgian Gaming Commission then followed suit and banned three out of four examples of loot boxes. Closer to home, a strategic analyst at the Victorian Commission for Gaming and Liquor Regulation, Jarrod Wolfe, has reportedly stated that loot boxes are likely to constitute gambling under Victorian legislation, but there are difficulties of jurisdiction in enforcing that legislation, but no determination has been made. Liquor & Gaming NSW is looking into the question.

On the other hand, the Queensland Office of Liquor and Gaming Regulation has said that loot boxes are not ‘gaming machines’ but could not confirm whether they constitute an ‘interactive game’ for the Interactive Gambling (Player Protection) Act 1988. The Entertainment Software Rating Board (the American self-regulatory body that assigns ratings to video games) was more firm in dismissing the issue, saying that:

While there’s an element of chance in these mechanics, the player is always guaranteed to receive in-game content (even if the player unfortunately receives something they don’t want). We think of it as a similar principle to collectible card games: Sometimes you’ll open a pack and get a brand new holographic card you’ve had your eye on for a while. But other times you’ll end up with a pack of cards you already have.

Legal definitions in Australia

Gambling in Australia is regulated under a mix of Commonwealth and State and Territory laws. This includes 14 Acts in New South Wales alone. This makes a consistent definition impossible to pin down and means that, absent a cooperative national effort, any regulation is likely to be piecemeal.

Generally, to be considered ‘gambling’, players must have to pay some form of valuable consideration to participate. There must also either be an element of chance or a mixture of chance and skill in the game or the result. So far, so good.

After those elements, the definitions diverge. Typically, but not always, the prize on offer must be of money or a prize of value. NSW’s definition of a ‘prohibited gaming device’, however, only requires ‘a game for money or a prize’ and does not specify that the prize must have a value.

Many definitions also require a chance for the player to win. That is, where a game has a guaranteed chance to win each time, that game may avoid regulation under the relevant legislation.

Previous consideration of this issue

The NSW Law Reform Commission considered the issue of gambling in electronic games in August 2011 in its report Cheating at Gambling, concluding that virtual currency which cannot be exchanged for real money is not a ‘thing of value’ and therefore does not constitute gambling. Virtual currency was instead, ‘likened to the free balls that are issued when a certain score is reached in a pinball machine’ (in 1956, the NSW Supreme Court ruled that pinball machines were not gambling because free balls were not a ‘valuable thing’).

Last year, ACMA said that:

In general, online video games, including games that involve ‘loot box’ features, have not been regarded as ‘gambling services’ under the [Commonwealth] Interactive Gambling Act 2001, because they are not ‘played for money or anything else of value.’

Value

A lot has changed since the heyday of pinball, including credit cards linked to games accounts accessible by children.

If the digital goods ‘won’ through loot boxes have no value, it may be difficult to characterise the transaction as ‘gambling’ under existing legislation. Alternatively, if there is a value, but each digital good has a roughly equivalent value, it may be difficult to show that the result depends on chance as every loot box will provide something (even if it something the player doesn’t want, can’t use, or already has).

Many of the games that offer loot boxes also prevent the trading of those items between accounts. Their terms of service also typically state that the games (and contents) are offered as a license instead of being sold to the user.  This may mean it is less likely digital goods would be considered ‘valuable’.

Despite the legal intricacies, players do value digital goods. Games that permit trading (or games in which players have developed workarounds to do so) have seen digital goods transfer hands for tens, and even hundreds, of thousands of dollars. Even in games that don’t permit trading, the fact that players are willing to spend significant amounts of money to unlock loot boxes for a chance of a new ‘skin’ indicates that that player ‘values’ the item (even if the item itself does not have a value for the purposes of legislation).

Some US decisions have indicated that digital goods have value in certain circumstances. South Korea (perhaps unsurprisingly given its gamer culture) has embraced it and trading digital goods in a game’s virtual economy can lead to real-world taxes. To date, however, we are not aware of any legal decision in Australia that addresses this question.

One indication may be the Australian Taxation Office which has said that it views cryptocurrencies such as Bitcoin as an asset (as opposed to a currency) and will be treated as such for taxation purposes. This could be a basis for arguing all tradeable digital goods are valuable assets (if not all digital goods).

Collectibles

For any regulator attempting to address loot boxes through existing legislation, there is also the need to distinguish loot boxes from other ‘collectibles’ such as trading card games which include items of varied value or else risk grouping a large category of socially acceptable behaviour into ‘gambling’ as well.

Ultimately, this may be an instance where just because it looks and sounds like gambling (flashing lights and sounds often included), it may nonetheless still not be gambling.

This article was written by Jennifer Huby, Partner and Ben Cameron, Associate from our Media & Entertainment Group.

Jennifer Huby

P: +61 2 9334 8638

E: jhuby@hwle.com.au

Important Disclaimer: The material contained in this publication is of a general nature only and is based on the law as of the date of publication. It is not, nor is intended to be legal advice. If you wish to take any action based on the content of this publication we recommend that you seek professional advice.