In a recent landmark decision, Netherlands Administrative Jurisdiction Division of the Council of State strengthened the rights of skill games providers in the use of in-game loot boxes. The ruling is – rightfully - attracting a lot of attention in the gaming world.
What are loot boxes?
Loot boxes can be described as a kind of surprise box that computer game providers offer users to buy within their games. They are widely popular amongst the gaming industry: Many of the big games titles include the possibilities to acquire loot boxes. These include, in particular, the big market leaders like: Fortnite, Overwatch, League of Legends, CSGO, FIFA, Call of Duty, Rocket League, etc. Anyone who purchases such a box is allocated a virtual item at random, which they can then use within the game. Thus, a characteristic feature of loot boxes is that they are typically an integral part of an overarching game environment. Although a market worth billions has already developed around loot boxes, the phenomenon is still gaining in popularity. As a consequence, more and more European authorities are dealing with loot boxes. In particular, the question of whether loot boxes constitute (prohibited) games of chance is disputed.
What are the legal intricacies?
From a legal perspective, loot boxes definitely “tick certain boxes” that would make them eligible as games of chance. All loot box products have a significant random element to them. Users pay a predefined amount to get a chance of receiving their desired item in return. On the other side, loot boxes typically have specifications that speak against a game of chance. For one, the user always receives an item in return. They never suffer a risk of total loss of their “wager”. Furthermore, as loot boxes do generally not exist as a standalone, they typically only form part of another game, in particular a skill game. Lastly, it is questionably if the items to be gained contain any economic value at all. This strongly depends on whether a market for such items exists and can therefore only be assessed in the individual case.
EA Case against the Dutch Gambling Authority KSA
The case at hands revolves around a fine of up to EUR 5 million that was imposed on Electronic Arts Inc. and others in the Netherlands by the Dutch Gambling Authority KSA in 2019. According to the authority, by offering “player packages” within FIFA Ultimate Team, the most popular feature of the FIFA computer game series, EA offered illicit gambling services to its customers and thereby infringed the Dutch Betting and Gaming Act. The KSA penalized EA because its popular FIFA football game included illegal loot boxes, which contained players determined by chance (i.e. the contents cannot be influenced). The fact that football players often have a high value and can occasionally be traded represented a violation of the Dutch Betting and Gaming Act, according to the KSA.
FIFA Ultimate Team (FUT) is an online playing mode where users compose teams of virtual players to compete against other teams. Naturally, teams with higher rated (/”better”) players are more successful. However, users do not dispose of unlimited resources of players. Among free in play coins, users can use real money in order to purchase packages of virtual football players. The user, however, generally does not know the exact content of such packages.
Admin court confirming KSA fine
In 2019, the District Court of The Hague ruled in favour of the KSA, stating that the regulator correctly identified loot boxes as "games of chance". To that end, the Court found that the KSA did not err in concluding that the Games should be considered as stand-alone games and regarded as such because the random allocation in the boxes are different games that can be played separately from FIFA, and the items included in the Games are separate from the other Games.
Decision by Administrative Jurisdiction Division of the Council of State
In an important judgement for the European Gaming market, the Netherland's Administrative Jurisdiction Division of the Council of State concluded that – contrary to the legal opinion of both KSA and The Hague District Court – the loot boxes offered within the FUT feature are not to be considered as a game of chance. The court found that even though not playable during other features of FUT, the random allocation of “player packages” only contributed an element of chance to the game.
Due to apparent gambling elements, the court indicated the possibility that loot boxes are suitable to “infect” skill-games, rendering the overall product a game of chance. If the price is determined by chance and the prize won represents a certain economic value, it cannot be excluded that by the introduction of loot boxes a game of chance within the meaning of the Act is created. However, this is to be determined on a case to case basis.
The Division follows EA in arguing that it is common for players to open the packs only to play virtual soccer games. The division also took into account that packs are purchased and opened in the FUT feature.
An important factor in this assessment was the fact that, as EA claimed in this case, the vast majority of packs were acquired through game participation, instead of real money purchases. As EA convincingly pointed out, players can earn FUT coins through their skill, which they get by playing matches and completing in-game tasks. They can use the FUT tokens earned in this way to purchase and open packs. Players then use the contents of the packs to form teams, play matches, and complete in-game missions. Packs are not opened in an environment separate from FUT mode. Although opening packs is not possible while playing matches and completing in-game missions, it takes place in the same FUT mode. The fact that packs are opened separately from the game or the task in the game does not make it a separate game, the court decided.
Court bases assessment on empirical study of the actual use of loot boxes in practice
The fact that it is not completely impossible to obtain the packs in any other way does not change the above facts. After all, the vast majority of packs are acquired and used for participation in the game. The tradability of packs on the black market is relative. The black market focuses on trading complete accounts rather than individual packs or their contents. According to the court, the KSA cannot isolate one component - the fact that packs can be purchased and opened separately from the game - to conclude that it is a stand-alone game, unless the KSA can demonstrate in detail that this occurs on a large scale:
“the assessment of whether the purchase of the packs can be regarded as an separate game must also be based on how the game is played by the majority of players.”
Consequently, the court found that FUT still is to be assessed as a skill-game, although containing elements of games of chance.
Findings for German legislation
The decision by the Netherland's Administrative Jurisdiction Division of the Council of State arguably is a milestone in European Gambling and Gaming case law and may serve as a pointer for other jurisdictions. The decision is persuasive in its pragmatic and lifelike assessment of facts, putting a hold to the authority’s rather ungainly attempt to widen the scope of restrictive gambling regulation.
Germany has not yet succeeded in tackling the matter of loot boxes on a larger scale. The phenomenon has neither been addressed in Germany’s new Interstate Treaty on Gambling, nor in recent case law. Prior to the new legislation, only few state parliaments had picked up loot boxes and had identified the necessity to regulate them. Indicatively, the legislators examined aspects of youth protection, media and addiction prevention, identifying a need for regulation in the aforementioned areas, but not in the area of gambling regulation.
Until then, there will remain a dispute about the sovereignty of interpretation, which not only revolves around the question of what role loot boxes play within video games and how their element of chance can affect the overall game, but also about whether loot boxes in themselves fall under the concept of gambling at all. This is still heavily disputed in Germany.
According to the prevailing view, the concept of gambling is characterized by three features: Stake, chance, winnings.
The participants in the game must wager a not inconsiderable amount of money, simultaneously such a substantial amount must be offered as a prize. Finally, the outcome of the game must depend predominantly on chance.
Element of chance: Whether or not the outcome of the game depends predominantly on chance also depends on which features fall into the scope of the game: For most of classical loot box features in widely popular games like FIFA, Fortnite, Overwatch and CS:GO, to name just a few, the element of chance is hardly disputable for the loot box feature itself. However, it cannot be disregarded that such loot box features generally do not exist as a standalone but only within a wider gaming environment, often very much determined by skill elements. Just as the recent decision by the Dutch court emphasizes, gambling authorities have to take a bird’s perspective. Furthermore, games providers have already found creative solutions to soften up the boundaries. Recently, FIFA has added the option to view the contents of a card pack before opening it and making a purchase decision. If the pack is not purchased, the player has to wait 24 hours before being offered a new loot box. If, on the other hand, the player purchases the pack, he will directly be given the opportunity to purchase further packs, the contents of which he will be able to see. As a result, if the player wants to see as many packs as quickly as possible in order to build up a good team as quickly as possible, they will have to purchase multiple card packs. For some time now, Fortnite has introduced a similar concept. Here, the boxes are only available in the form of so called X-Ray-Lamas, where the content is already apparent in advance. If the player buys the loot box, they can see the contents of another box. If they decide against a purchase, they have to wait 24 hours before the content of another Lama is displayed.
Such solutions as the ones mentioned above are capable of eliminating the element of chance all together. Whether this is actually the case, very much depends on the specific solution – details can be decisive here.
Element of winning: In order to establish a “winning/prize element” it is necessary for the winning to have a monetary value. Such value can only be assumed if a market exists for the disputed goods on which they could be sold for real money. The design options here are many and varied. In some cases, the providers of loot boxes can prevent the exchange or transfer of their content and thus prevent an exchange platform/market. In addition, however, in accordance with the above decision of the Dutch Administrative Jurisdiction Division of the Council of State, the assessment of such a market must take into account whether and how the content of the boxes is actually traded. In the example of FUT, there is no relevant market for individual players, at most for entire teams, whose value is determined not only by the value of the individual players, but also by a skill-based composition of the squad from a tactical point of view.
Stake/loss risk: This also becomes relevant for the evaluation of a risk of loss. In its Supermanager-judgement, the German Federal Administrative Court decided that the term “stake/wager” includes any performance made in the hope of obtaining an equal or higher value performance in the event of winning, and in the fear that it will fall to the opponent or the organizer (“risk of loss”) in the event of losing. According to some voices in literature, games that cannot pose a risk of total loss to the player do not constitute gambling according to its legal definition. This interpretation is arguably too broad and has no backing from German case law. Additionally, it would enable simplest circumvention of licensing requirements for gambling operators. It is more convincing to assume a risk of a loss if the player loses a significant part of his wager in case of an unsuccessful game participation. Based on this definition, most of the current loot box features like the FUT “player packs” do not fall within the definition of a game of chance. Assuming that virtual players drawn from such packs are hardly even traded individually but as a whole team, it is difficult to assign an individual price or worth to them, let alone define if the value of such draw would mean a significant loss in relation to the wager.
With the new uniform licensing procedures for various types of games of chance still in progress and the upcoming transition to the newly established Joint Gambling Authority of the federal states in 2023, it has to be questioned whether the regulator takes a stand on loot boxes in the near future. Against this background, action by legislative bodies is all the more important to bring some legal clarity on the issue. Until then, it is vital to provide educational work for all decision-makers involved and promote prudential regulation taking into account the fast moving nature and flexibility of the gaming world.
The recognized certification body “TÜV Rheinland” is pioneering in this field, setting up a certification project for “E-Sports & Online Gaming” in order to advance the co-regulation in this area. Our founding partner Dr. Wulf Hambach is available to answer any questions about this project.