Loot Box Update

Written on 16 Aug 2018

Loot box mechanics have become a popular and commercial important gameplay and monetization feature that is by no means limited to F2P games. There are myriads of variations how a loot box mechanic can be implemented, and while some of these may be clear cases of gambling, others are not. This diversity, along with a divergence between jurisdictions as to how gambling is legally defined, make the discussion complicated and sometimes messy. We provide an update on recent developments in various EU jurisdictions.

Netherlands

On 19 June, the Dutch Gaming Authority (Kansspelautoriteit) published a statement  cautioning games publishers that starting on the following day, it would start checking whether game companies have made any adjustments to their “illegal loot boxes”’, and whether these adjustments are sufficient.

In case of non-compliance, Kansspelautoriteit can levy administrative sanctions (fines), and if those prove ineffective, involve criminal prosecutors

Furthermore, in the Q&A’s accompanying the statement, the regulator indicates that it will be cooperating with its European and other counterparts: “Regulators worldwide are busy with the fading boundaries between gaming and gambling. The Gaming Authority is, among other things, a member of the Gaming Regulators European Forum. GREF has 29 members; During the last annual meeting in June 2018 in Prague, the fading boundaries between gaming and gambling were extensively discussed. Supervisors are working on this worldwide. Loot boxes are an exponent of this. A complicating factor is that gambling legislation is strongly determined nationally. Depending on the culture, each country has formulated its own laws and regulations. Wherever possible, joint efforts will be made”.

Belgium

On 9 May 2018, the Belgian Gambling Commission (“BGC”) issued a research report in which it considers that “loot boxes” in video games qualify as gambling and fall within the scope of the Belgian Act of 7 May 1999 on gambling, betting, gambling establishments and gambler protection (the “Act”).

Context

In the words of the BGC, loot-boxes are “one or more game elements that are integrated into a video game whereby the player acquires game items either for payment of for free in an apparently random manner”, and received specific attention from the public on the release of the video game “Star Wars Battlefront II” in November 2017, which was using such elements. This created a growing controversy in the video game sector regarding in-game payments made by players to evolve in such games, which eventually led the developers of “Star Wars Battlefront II” to remove the loot-boxes system right before its public release.

After stating that self-regulatory bodies (such as the PEGI system developed by ISFE) are powerless to rule on such an issue but are not opposed to regulation, the BGC assessed whether loot-boxes constitute a form of gambling in the sense of the Act and the potential dangers surrounding them.

The assessment was based on the BGC’s analysis of four video games (“Overwatch”, “Star Wars Battlefront II”, “FIFA 18” and “Counter-Strike: Global Offensive”) and can be found on the gaming commission website [PDF].

Findings of the BG

1. Self-regulatory bodies do not provide adequate protection against techniques such as loot-boxes

In comparison with the strict rules on age restriction contained in the Act, the BGC considers that self-regulated video games entities do not provide sufficient protective measures for minors regarding gambling and the risks attached to it. For example, PEGI standards do not include the obligation to check whether a game allows betting, winning or losing money, or whether such games would be banned if they took place in the real world. Moreover, the age classification established by PEGI appears to be more lenient and does not take into account the age restrictions contained in the Act.

2.  Several techniques are being used by the gaming industry in order to encourage players to purchase loot-boxes

The BGC noticed that the following techniques are used to “lure” players (especially younger gamers) to purchase loot-boxes:

  • The use of specific techniques to monitor the player’s behaviour and determine which game item he will seek the most while playing the game ;
  • Video games are presented as a game of skills whereas most of the players’ actions are automatically corrected by the game. This leads the player to believe that his progress is solely due to his actions and encourages him to buy loot boxes as he thinks that winning items out of these boxes will be due to their skills rather than an element of chance;
  • Confusion between fiction and reality: for example, virtual avatars of famous people are used as advertising for the most expensive loot boxes in the analysed games;
  • Popular game characters or items can only be found in the loot boxes, which in turn are only available during specific events;
  • Some boxes are offered during a limited time or discounts are given for the purchase of multiple boxes;
  • Loot boxes are acquired with virtual money that is purchased in the game by the player, without limitation, while presenting the value of the virtual money as high compared to its actual value;
  • The nature and scope of the player data transferred to the video game producers when starting the game is unclear and data policies are not often in line with European standards. The player must only consent once to the processing of his/her data (at the beginning of the game) without any subsequent acknowledgment of the information he/she is communicating; and
  • The use of random number generators (“RNG”) to determine the players’ chances of winning, while no odds of winning are ever communicated to the player.

3. Loot-boxes constitute an illegal “game of chance” under the Act

In principle, gambling is prohibited under Belgian law and is subject to criminal sanctions unless it takes place in accordance with the conditions set out by the Act.

The BGC found that loot-boxes qualify as an illegal “game of chance” for the following reasons:

  • They constitute a game

Loot-boxes qualify as a game even if in the cases analysed, the player will mostly be playing against a machine (i.e. the game manufacturer). The player must actively participate by purchasing the box from the game marketplace, and then opening it (e.g. by spinning a wheel).

  • For which the player places a bet of any kind

The bet does not need to consist of money. Usually, the player will use virtual money to obtain a loot box, which still qualifies as the placement of a bet under the Act. The BGC states that the bet is what is paid for the in-app (or in-game) purchase to obtain the box and not the costs related to the purchase of the game itself, or to an online subscription.

Furthermore, the BGC considers that a difference must be made between “game-play currency” (i.e. virtual currencies obtained by the player throughout the game without having to purchase them) and “in-game currency” that the player purchases with actual money. “In-game currencies” will usually give the player an advantage in the game (e.g. better skills or objects, or new levels) that he/she wouldn’t have if he/she didn’t use them.

While the “game-play currency” is not considered a wager under the Act, this is not the case for the use of “in-game currency”, or the direct purchase of a loot box with real money.

  • Leading to the loss of this bet or a win of any kind

The BGC assessed whether the player receives a higher value (win) or a lower value (loss) compared to the purchase price of the loot box.

As the Act states that the loss or win can be of any value, it is irrelevant whether the item obtained with a loot box has an actual value or use in the game (e.g. the player will obtain new skins for an in-game character but this doesn’t bear a specific value). In any case, should the item be deemed to have no value, the BGC considers that the amount of the player’s wager will constitute an integral loss for the player and an integral win for the game developers and distributors.

This condition is also fulfilled by the mere fact that when obtaining an item, the player obtains a form of “advantage”, even if it is merely psychological, that the players who didn’t purchase a loot box containing specific items do not have.

  • Whereby determination of the winner of the size of the winning are determined (even secondarily) by chance

There’s undoubtedly an element of chance when the player is opening the loot box as its content is uncertain.

The BGC also took into account the fact that some games use so-called subjective RGNs that can modify the percentage of win or loss of a player based on monitored and recorded player data (e.g. nationality or region, playing schedule, results obtained, or use of the cursor). Therefore, the element of chance is only in favour of the game manufacturers and the chance for the player to win or lose is “staged” as he has the impression that he will have an equal chance to obtain each item in a loot box. Moreover, the player is never informed of his actual chances of winning or losing and cannot usefully adopt a methodology to increase his chances of winning.

4. The video games that came under the BGC’s scrutiny are therefore breaching the Act

Under the Act, anyone willing to operate such a “game of chance” must obtain a licence from the BGC. These licences are limited in number by gambling category (e.g. online gaming, casinos, and betting establishments) and granted subject to the applicant satisfying a series of conditions set out by royal decree depending on the type of licence mentioned in the application.

Non-compliance with this requirement can lead to a criminal fine up to €800,000.00, which is doubled if the game of chance involved a minor/child. The individuals potentially subject to these fines are game operators, facilitators, advertisers, recruiters and players who knowingly play these game of chances.

Therefore, the BGC found that none of the above-mentioned game operators held such a license in Belgium. They are therefore in breach of the Act and could be prosecuted if the loot boxes implemented in their games remain accessible to Belgian players. Based upon the information currently available, the position expressed by the BGC is based on the broad definition of a “game of chance” under the Act. Given such a broad definition, it may come as no surprise that the regulator takes a rather restrictive approach. The situation of each game publisher should be assessed on a case by case basis, however, as the BGC did for the four games that came under its scrutiny.

Recommendations of the BGC

Based on its findings, the BGC issued the following recommendations and encouraged further dialogue between all stakeholders of the gaming sector:

  • For the regulator
    • Provide better information in relation to gambling addiction to parents and children;
    • Obtain the authority to inspect video games for gambling elements;
    • Develop and grant specific licenses for games of chance contained in video games;
    • Place a ban on minors purchasing games with paid loot boxes;
    • Introduce age verification prior to the purchase of such games in supermarkets;
  • For the granter of licences: take into consideration quality standards when granting a licence to a game developer (e.g. no illegal gambling contained in the games);
  • For the payment platforms: align the age requirements of the platform and those of the video games; i.e. minors shouldn’t be able to make a payment in a game that is forbidden to minors;
  • For game developers and distributors:
    • Publish a clear mention on the game cover that it involves gambling (by using a specific symbol);
    • Indicate the chances of win or loss in the game;
    • Allow the BGC to control the random number generators used for the loot boxes;
    • Provide player data and payments to the gamers;
    • Set a financial ceiling for the amount paid for loot boxes;
    • Avoid that loot boxes impede or disadvantage the normal course of the game.

UK

Loot boxes have come under intense scrutiny in the UK over the past year, from politicians, campaigners and the general public.

A petition launched in the second half of 2017 entitled “Adapt gambling laws to include gambling in video games which targets children” quickly garnered almost 17,000 signatures and prompted a response  from the UK government in late October 2017. There have also been recent calls from a number of opposition MPs in the Labour Party, gambling awareness groups and charities, to extend gambling rules to cover the use of loot boxes within games.

Media attention on the issue has consequently ramped up, precipitated further by the clampdown in the Netherlands and Belgium. So far, though, as noted in the government’s response to last year’s petition, there has been no change in the position adopted by the UK Gambling Commission in its paper from March 2017 (here), i.e. loot boxes do not constitute gambling.

However, the Commission also makes clear that the status of loot boxes will depend on the nature of the rewards and whether they function as a ‘closed-loop’, or can be converted to real monetary value.  Where there are “readily available opportunities” for a player to exchange in-game “loot” for real money outside the game, the acquisition of those items can be considered licensable gambling activities.  (It is important to bear in mind at this juncture that in the UK, unlike a number of other European countries, gaming is simply defined as ”playing a game of chance for a prize” with no requirement to put up a stake.

Whether or not loot boxes are purchased using virtual currency (often acquired with real money), or earned via game-play, does not matter.) Unless the Gambling Commission expands its understanding of value to include virtual items, the key factor in the future regulatory treatment of loot boxes in the UK is consequently going to be the availability of secondary markets and the ease with which players can trade in-game rewards.

Germany

While German consumers, legal scholars, authorities and legislators have been following the debate with great interest, no specific games have been found in violation of existing law and no new regulatory initiatives have been brought forward, even if one public statement by the Youth Protection Commission caused confusion earlier this year.

The regulator had indeed announced it could take an interest in online games using loot box mechanics. Several international news outlets (mis)understood this as the announcement of a “ban” on loot boxes, or at least a suggestion that loot boxes as such might run afoul of gambling legislation – but that is not what the Youth Protection Commission actually said, nor would they have jurisdiction to enforce such legislation.

The Youth Protection Commission (formally the Kommission für Jugendmedienschutz) only enforces certain media content regulation in broadcast and online media. In particular, it can take action if content providers fail to take appropriate measures to keep minors away from content that is unsuitable for them, or if advertisements improperly address minors.

It is this last point that the commission was trying to leverage: The way loot boxes are advertised to players who are under 18 can of course violate provisions that prohibit direct purchase exhortations to minors and mandate particular clarity and transparency in commercial communication targeted at them.

This has nothing to do with the question whether loot boxes as such constitute gambling for the purpose of any applicable regulation, nor even with the question whether loot boxes should be allowed in general. As long as they are not specifically advertised to minors at all, the Youth Protection Commission cannot take issue with the advertisement (even if it can be tricky under German law to determine whether or not an advertisement is targeted at children ).

Ultimately, the commission could try to take the view that any game with a loot box mechanic should be rated “18+”. But that would hardly be consistent with applicable content rating legislation – and it still would not amount to a “ban” on loot boxes, because even 18+ content is perfectly legal online if some reasonable safeguards are in place.

 Italy

Despite the European-wide (and beyond) debate around the regulatory status of loot boxes, the Italian courts and regulatory authorities have not yet addressed it. This, together with the lack of specific regulation in this area leaves open the question of what kind of Italian rules may apply to loot boxes.

In fact, considering the Italian regulatory framework on gaming / gambling activities there are two main questions which should be addressed:

  1. Do loot boxes qualify as an unlawful gambling activity sanctioned, as a criminal offence, under the Italian Criminal Code?
  2. Do loot boxes qualify as lawful and yet regulated activity falling into the Italian’s State Monopoly on games and gaming activities?

In relation to question A – The Italian criminal code provides that gambling is forbidden, and defines as “gambling” those games which (i) requires a stake to participate, (ii) are played by the player with the goal of making a profit or gain something of value, and (ii) where winning or losing depends completely or almost completely on chance.

Arguably, loot box wins depend completely or almost completely on chance and if they are purchased in exchange for real money the key questions then are: (i) can a gamer playing a game be regarded as purchasing a loot box with the goal of making a profit? And (ii) can a gamer playing a game where, as part of the gaming experience, the game purchases a loot box for real money can be regarded as being exposed to lose something?

Per the Italian Supreme Court’s jurisprudence as developed in respect of gambling, the magnitude of the possible winning, the length of the game, the possibility that the same game can be repeatedly played could all be relevant factors playing a role in determining whether or not the player’s goal in connection with playing the game is that of making a profit.

In relation to question B – The Italian DPR no. 496/1948, provides that all games of skill and all games of chance that provide (i) a reward of any kind, and (ii) the payment of a monetary stake / entry fee fall within the scope of the State monopoly and, as such, are regulated activities requiring a license from the State.

In respect of the actual scope of the State monopoly, what should be noted is that definition of what constitute a “reward” is very broad, and in fact so broad that, arguably, loot boxes may meet the “reward” legal requirement. However, what remains to be seen, in connection with the gamer’s purchase of loot boxes in exchange for virtual currency, is whether virtual currency could qualify as a “stake”. There are tangible signs that Italian Courts and Regulatory Authorities are starting to taking an interest in gaming, as a general phenomenon , and this is likely to mean that we can reasonably expect Italian Courts and Regulatory Authorities will get the chance to address and clarify this question and, in more general terms, the regulatory status of loot boxes from an Italian law perspective.