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Are Loot Boxes in Video Games Gambling?

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About The Author

Connor Griffith (Consulting Editor)

Connor is a law graduate from the University of Nottingham with a particular interest in intellectual property and corporate law. He is currently a trainee solicitor at a large national firm, sitting in the Real Estate department. Outside the law, he enjoys stand-up comedy and moaning about Brexit.

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Gambling: The sure way of getting nothing for something.

Wilson Mizner

The growth of the video game industry in recent decades has been phenomenal. From the humble beginnings of iconic games such as Pong and Space Invaders, technology has developed to the point of allowing gamers to fully immerse themselves in a second life through virtual reality gaming.

The impact has not just been felt technologically: an entire economy has been built around bringing entertainment to the living rooms and pockets of the masses. Formidable companies such as Electronic Arts and Activision Blizzard have locked in on an industry that brings in billions of dollars a year, constantly finding new ways to drain the wallets of enthused consumers.

However, experimentation in the monetisation of video games has not come without growing pains. Indeed, considerable controversy has surrounded the rise of in-game purchases, the newest method of profiting beyond the original purchase price of games. Many players are spending in-game currency or real money to purchase the ability to ‘open’ what are often referred to, amongst other names, as ‘loot boxes’ or ‘loot crates’. These reward the player with random in-game items, such as aesthetic designs for their virtual characters or weapons that vary in rarity and value.

While this act may appear to be harmless fun at first glance, much attention has been given to the similarities between opening a loot box and gambling. This article will consider whether loot boxes provide a vessel by which players – many of whom will inevitably be under the age of 18 – are able to gamble and will extend the argument to the consideration of views taken in other jurisdictions, some of which are starting to wake up to the dark realities of this seemingly innocent service.

Gambling Law in the UK

Section 3 of the Gambling Act 2005 (GA 2005) defines ‘gambling’ to include ‘gaming’, ‘betting’ and ‘participating in a lottery’. For present purposes, most relevant is the term ‘gaming’. Defined in Section 6 of the GA 2005, this involves ‘playing a game of chance for a prize’, regardless of whether the person playing the game is at risk of losing any money or money’s worth. This definition has two elements that must be explained further.

'A Game of Chance'

Section 6(2) of the GA 2005 provides that a game will be a ‘game of chance’ where – aside from being any athletic game or sport, which are excluded –  it:

  1. Involves both an element of chance and an element of skill,
  2. Involves an element of chance that can be eliminated by superlative skill, or
  3. Is presented as involving an element of chance.

It should be noted that the first of these options – an element of chance and skill – is not exclusive: despite the use of the word ‘both’, it includes games of pure chance (such as roulette) as well as games that involve a mixture of chance and skill (such as poker).

Indeed, it was made clear in R v Kelly [2008] that it is irrelevant whether the element of chance or skill predominates over the other: as long as there is a ‘significant or meaningful element of chance, as opposed to a mere notional element of chance’, the game will be a game of chance. As Stephen Monkcom et al. explain, the second option is designed, to ensure that a game:

[C]ontaining an element of chance will not be converted into one of pure skill merely because there may be exceptionally gifted players who can defeat the element of chance.

The third option covers games that are presented as involving an element of chance but in fact do not involve any chance at all. Stephem Monkcom et al. give the example of a rigged roulette wheel: though presented to be a game of pure chance, the player never has a chance to fairly win.

Additionally, it is important to consider Section 6(3) of the GA 2005, which provides that it is irrelevant whether the gambler plays this game of chance with other participants or if the roles of other participants are instead filled by computer generated programs. This provision brings gambling law into the 21st Century: it acknowledges the reality that many players will prefer to stay home and gamble on their computers instead of physically visiting a casino.

'For A Prize'

Section 6(5) of the GA 2005 defines a ‘prize’ as ‘money or money’s worth, and includes both a prize provided by a person organising gaming and winnings of money related’. The player will play for a prize where they, per Section 6(4) of the GA 2005, plays a game of chance and thereby acquires a chance of winning a prize, regardless of whether or not he risks losing anything at the game.

The player can therefore leave the game having not won nor spent anything in the process, but can still be considered to have gambled if there was a chance of winning a prize. This differs from the approach taken in many other jurisdictions, such as many American states, which require that a stake (consideration) be provided by the player.

Applying the Law to Loot Boxes

The argument can certainly be made that the above definition of gambling is applicable to loot boxes. The player uses in-game or real currency to purchase a box, from which they get an assortment of virtual rewards that vary in worth. Whether they get something good or something terrible is a matter of pure chance.

This process uses the same psychology as casinos to encourage purchasing more loot boxes. Psychologist B. F. Skinner’s ‘variable ratio schedule’ provides that people are more excited when rewarded at random as opposed to when they are expecting a reward and are therefore more encouraged to continue playing the game. When a player buys a loot box, or gambles at a casino, the thrill comes from not knowing whether you’re going to get something good. In this respect, loot boxes and traditional gambling are one and the same.

Indeed, an alarming statistic proves the necessity for some action to be taken. Research firm SuperData discovered the link between loot boxes and gambling when it found that:

55% of UK 25-34 year-olds switch from gambling style games or virtual item wagering… to real-money gambling.

However, there are two main arguments that can be put forward that strongly undermine the case for loot boxes constituting gambling. Firstly, many argue that the items contained within a loot box do not have value as they are virtual. Secondly, when you purchase a loot box you are guaranteed something: it may not be what you wanted, but technically there was no chance for you to get nothing out of the loot box, so it cannot really be considered a ‘gamble’.

Argument One: Do Virtual Items Have Value?

There is no definitive answer to whether virtual items within a game have value. In a game such as Overwatch, for example, there is no platform on which the items obtained through loot boxes can be traded or sold: the items stay on that player’s account and cannot leave it. This means the items have no market value and there is no way to monetise them directly. Indeed, this is the main reason the UK Gambling Commission does not consider loot boxes to be gambling. In its position paper published in March 2017, it stated:

Where prizes are successfully restricted for use solely within the game, such in-game features would not be licensable gambling, notwithstanding the elements of expenditure and chance.

In addition, several cases concerning the question of whether in-game currency has real value have reached American courts, including Mason v Machine Zone [2017] and Soto v Sky Union [2016]. In each instance, as Desirée Martinelli from the University of Mississippi School of Law writes, the courts:

[C]oncluded that the money that the players paid [for the in-game currency] was for access to the actual game and was neither a wager on games of chance. [They were therefore not] wagering or winning real world money.

These decisions create a distinction between games that lock in the items received by players and games that allow for free trading of these items. An example of the latter is Counter-Strike: Global Offensive, which generates substantial revenue through the sale of ‘skins’, another term for aesthetic designs for characters and weapons in a game. Players are able to purchase skins through the ‘Steam Community Market’ by depositing real money into their ‘Steam Wallet’. Valve, the developer of Counter-Strike, then allows ‘third parties to link up with players’ accounts, enabling skins to be traded for monetary compensation’. As Chris Groves writes, the allowance for skins to be traded causes them to:

[S]erve as a de facto currency that can power basically any type of gambling product you can imagine’.

Legal action regarding these third party skin market companies is currently ongoing: multiple class action lawsuits have been filed against the companies and Valve has been particularly careful to disassociate itself from them. However, while the conversion of skins into ‘de factor currency’ undoubtedly constitutes gambling, UK law – as written above – has yet to find the same about items that cannot be converted into real money. Additionally, arguments suggesting that it is possible to profit indirectly from loot boxes – for example, by selling an account containing multiple rare items at an above market value – are weak at best and would not stand a chance in a courtroom.

Argument Two: Guaranteed Rewards

Matters are made worse through the fact that the player, when opening a loot box, will always receive something; they may not receive what they were hoping for, but a prize is always guaranteed. Technically, therefore, it cannot be said that there is a ‘chance’ of a prize, which the definition of gambling requires: the prize is guaranteed.

Video game psychologist Jamie Madigan states this fact places loot boxes in the same category of commerce as trading cards. In popular card games such as Magic: The Gathering and Yu-Gi-Oh!, some cards can be extremely valuable. Again, an argument could be made that, when a purchaser pays money for a random pack of cards, they are gambling due to the fact that they have a chance of receiving an item that they could then sell for more than what they paid in the first place. But of course, trading cards are not considered by law to be gambling: comparing loot boxes to trading cards consequently does not help the argument that the former falls under the GA 2005.

What Solutions have been Implemented?

American lawyer Marc Whipple stated on the Robot Congress podcast that arguments of the illegality of loot boxes have fallen on deaf ears due to judges not being ‘technologically literate’ and failing to ‘understand what was going on’. Video game attorney Ryan Morrison has built on this argument on the Funhaus podcast by making the comparison between a virtual skin and a baseball card: judges can hold a baseball card and so understand it, but they cannot seem to grasp the concept of something on a screen that does not actually exist physically.

However, it seems that some jurisdictions have begun to recognise the possibility of the imposition of condemning regulations. Following publication of its position paper, the UK Gambling Commission’s director Tim Miller has made it clear that the Commission is undertaking an ongoing evaluation of the ‘risks and issues associated with [loot boxes]’. In addition, following a petition requesting that the UK ‘adapt gambling laws to include gambling in video games which targets children’, the government stated that the Video Standards Council is in discussion with Pan European Game Information (PEGI) to consider the potential need for a change in how PEGI rates games that contain gambling or activities similar to gambling.

More drastic action has been taken abroad. The Chinese Ministry of Culture requires ‘online game publishers’ to publicly release the ‘draw probability of all virtual items and services’ and has banned the selling of ‘lottery tickets’, which, by their definition, includes loot boxes. However, some companies have changed their business models in order to get around this prohibition: Blizzard, the developer and publisher of Overwatch, removed the ability for Chinese players to purchase loot boxes directly. Instead, they must now purchase in-game currency, and will receive a loot box as a ‘gift’ when doing so – a circumvention that very much removes the point of the original regulation. 

Finally, as Haydn Taylor reports, Hawaii recently became the first US state to officially propose legislation against loot boxes’ by introducing four bills on the matter. Specifically, House Bill 2686 and Senate Bill 3024 aim to:

[P]rohibit the sale of video games containing randomised rewards, or a virtual item that can be redeemed to receive a randomised reward, to consumers under the age of 21 [and] seek to establish disclosure requirements, including probability rates, for publishers of games that feature loot box mechanics.

If passed, these bills will require labels warning of in-game purchases to be displayed to the customer at the time of purchasing the game. Though it is too soon to see exactly what impact, if any, these bills will have on the industry, they demonstrate the fact that regulation on in-game purchases are becoming a matter of if, not when.

Conclusion

There are clear and real difficulties in the argument that loot boxes  unless their contents can be exchanged for real tangible money  constitute gambling. For this reason, an outright ban on all loot boxes would be excessive: though there are concerns about influencing players to gamble more in real life, loot boxes can – for the majority of players – simply be a way of having fun.

A more reasonable reaction would be to improve regulation on how they can be used. For example, placing a limit on the amount of loot boxes that players can purchase within a certain time period would be an appropriate start. The suggestion that a higher age rating should be given to games containing loot boxes, as seen in Hawaii’s first pair of bills above, is flawed for two reasons. Firstly, in reality, children are going to play the games anyway, either through lying about their age to download the game online or getting an unaware parent to buy it for them. Secondly – as shown by the SuperData study – loot boxes are having a negative impact on players of all ages, not just children.

On the other hand, adopting the Chinese method of requiring the release of information on the odds associated with loot boxes would allow the Gambling Commission to properly determine that the loot boxes are not in any way rigged through the game developers altering odds depending on the wealth or location of the player. The fact that Blizzard changed its entire business model of how it monetised its game partly to avoid releasing this information to Chinese authorities does not provide reassurance that the mechanism for determining items within loot boxes is completely legitimate. Even if this does not resolve the entire issue around the encouragement of gambling to players, it would at least provide proof that the odds are legitimate – this would certainly be a step in the right direction.

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Tagged: Consumer Rights, Courts, Criminal Law, Regulators, Technology

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