The Hague’s district court has ruled that loot boxes qualify as a game of chance under the Dutch Betting and Gaming Act (BGA). The decisive factor in its assessment is the definition of a ‘prize’. For the BGA to apply, not only an element of chance is required, but the prize must represent ‘economic value’. Economic value is considered present if players can transfer the virtual goods involved between individual accounts. In addition, if such virtual goods, or the amounts of in-game credits paid for such goods, can be converted to real-world money, this is an additional indication that the results of the game qualify as a ‘prize’ under the BGA.
Introduction
In what has been an ongoing battle between game publishers and national regulators, the Netherlands have moved to a level where national courts were asked to decide on the legal status of loot boxes. On 29 October 2020 the The Hague’s district court ruled on whether loot boxes qualify as a game of chance. The ruling sheds light not only on the court’s qualification of loot boxes, but even more so on the arguments brought forward by both the regulator and the game publisher and the preliminary procedure that led to the court’s ruling.
In the case at hand the court has ordered the publisher of well-known sports games to cease the availability of loot boxes as part of its game, and upheld the regulator’s decision to impose significant penalties (€ 500,000.- per week, with a maximum of € 10,000,000.-) for non-compliance with the order.
Background
The publisher operates a well-known sports video game. An aspect of the game includes the creation of a team of in-game characters. These characters can be acquired by players in two manners: either by purchasing loot boxes containing unknown characters, or by purchasing known characters from other players through an online marketplace. The sports game uses in-game credits as a currency. These credits can be acquired by players either by winning matches or by purchasing such credits with ‘real-world’ money from the publisher’s platform.
In April 2018, several publishers of video games were informed by the Dutch regulator (Kansspelautoriteit, or “Ksa“) that it considered certain loot boxes a violation of the BGA. Subsequently, publishers were given eight weeks to make their games compliant. This was due to a study (on the Ksa’s initiative) including ten popular games, which found that four games employed loot boxes that were in direct breach of the Betting and Gaming Act.
The publication of the current ruling reveals that on 15 October 2019 a penalty subject to an order was imposed by the Ksa on the publisher for non-compliance with the BGA, but the publisher contested both the fine and the Ksa’s anticipated publication of the decision and initiated proceedings before the district court of The Hague.
Dutch Betting and Gaming rules
Under the BGA, providing or facilitating a game of chance is only allowed under a permit. The BGA defines a game of chance as ‘providing the opportunity to play for a prize, if the designation of the winners is made by an element of chance over which the participants generally have no control’.
For the BGA to apply, separate requirements must be met. Most notably, the relevant game must include (i) an element of chance and (ii) a ‘prize’. Both have been defined in the Ksa’s guidance documents. Unlike in most other jurisdictions, the definition of gambling in the Dutch BGA does not require a consideration.
– Element of chance
If players do not have a ‘predominant influence’ on the selection of winners, games qualify as a game of chance in scope of the BGA.
– Prize
Prizes can be intangible game outcomes that represent an economic value. According to the Ksa, intangible game outcomes include ‘economic value’ if the prize can be transferred between individuals.
Ruling of the The Hague district court and comments:
The district court assessed three aspects of loot boxes to conclude whether the BGA applies. These are whether:
- the game qualifies as a separate game of chance;
- the game includes an element of chance; and
- the results of a loot box qualify as a prize.
(1) Separate game of chance
The publisher argued before the court that the inclusion of loot boxes in a sports game is inseparable from offering the game mode which allows for the use of the results of the loot boxes. As this game mode is a game of skill, the loot boxes cannot be considered as a separate game of chance, and adding an element of chance to the virtual sports matches does not make it a game of chance, as the outcome is predominantly determined by the skill of the player.
However, the court agreed with the Ksa’s argument that loot boxes are indeed a separate game. It argued that loot boxes can be purchased and opened separately from playing the virtual matches and that the virtual goods of the loot boxes can be won separately from the matches, i.e. that a player may choose to open loot boxes solely in order to obtain the desired characters, who may or may not then be traded. The fact that many players do not play the game in this manner does not affect the possibility to do so.
This aspect was seen differently in particular by some courts in the USA which ruled that elements of a game of chance within a skill-based game do not constitute a game of chance (Mason v. Machine Zone, Inc., United States District Court, D. Maryland, October 20, 2015, 2015 WL 6335771).
The court’s argumentation still leaves room for other publishers to raise the same argument with regard to games where loot box mechanisms are integrated deeper and inseparable from the core gameplay.
(2) Element of chance
The publisher also argued that a loot box always contains content and with regard to each loot box a player knows in advance how many and which quality items are included at minimum. The publisher argued that, as players are guaranteed to win, and can choose what kind of loot box they want to open, thus influencing the result of the loot box, there is no element of chance involved.
The court decided in accordance with the arguments brought by the Ksa, that while opening a loot box there is no influence or skill involved to determine the contents, this is predominantly affected by chance. This means that the requirement of an element of chance is fulfilled. Further, the court considered it irrelevant that the virtual goods can be used in the virtual matches as well as that a certain amount of transparency is provided with respect to the minimum contents of the loot box and the related chances.
In particular the court’s arguments on transparency do not exclude a loot box solution which makes all items available in a loot box transparent, with the items of the next loot box being randomly generated once the transparent loot box is purchased. It can be argued that such a setup disconnects the element of chance from the purchase and therefore does not fall under NL gambling regulation.
(3) Prize
Lastly the publisher argued that the virtual goods have a relevant game value exclusively within the specific game mode. As the internal tradability is within a closed circuit (the game’s platform) and there is no payout or cash conversion, there is no economic value according to the publisher. Further, the publisher argued that the fact that there is a black market through which the virtual goods can be obtained in exchange for real-world money does not change the legal status of the items.
The court disagreed on these points. Firstly, it considered that the concept of ‘prize’ must be interpreted in an extensive manner. It determined that in the present case the value of the virtual goods to be won is based on ‘supply and demand’ on the internal market, where players may transfer the goods in exchange for in-game credits between each other. The economic value is reflected in the fact that in-game credits represent a value in euros. With these loot boxes, the economic value on the internal market of the virtual goods in question is decisive for whether these qualify as a ‘prize’.
In addition, the fact that a black market exists for the virtual goods and on in-game credits can actually be converted into real money, is an additional indication that a real economic value exists. The court also considered that the goods have a significant market value: 5000 in-game credits are roughly equivalent to €1, and subsequently a special version of a character was worth (at least) 9,970,000 in-game credits (€1,994).
In particular the question on whether external (often illegal) grey markets must be considered with regard to the prize requirement is one of the most debated questions in the still ongoing loot box debate. Several other countries have decided differently on the matter, such as Sweden. The Swedish Gambling Inspectorate and the Swedish Consumer Agency agreed that the sale of items on third party sites without the gaming company’s permission or participation is not enough for these loot boxes to be considered as gambling.
With regard to the Netherlands it should, however, be reiterated that an internal game economy or marketplace or the existence of third party platforms is not necessary to meet the prize requirements. These circumstances are merely specifics of the current case discussed in this article. According to the Ksa, the mere possibility to transfer loot box-generated items from one player to another is already sufficient to meet the prize requirement of ‘economic value’.
In addition, the publisher brought forward that various facts and circumstances of the case would bring the loot boxes out of scope of the BGA. Such circumstances include: (i) the intention of the publisher, (ii) the goal of the game, (iii) the intentions of the players, (iv) a certain amount of transparency about prizes and chances, (v) the ‘always-win’ concept, (vi) the frequency of the game being played, (vii) the lack of deposit, benefit or exchangeability in cash, (viii) the designation of a winner, (ix) mutual competition and (x) the existence of an internal closed circuit. The court disregarded these circumstances as these are not elements that are considered in the BGA.As a result of the above assessment of the circumstances of the case and the qualification of these specific loot boxes as a game of chance, the district court ruled against the publisher and upheld the Ksa’s decisions imposing a penalty enforced order to comply and to publish its decision.
International aspects
The scrutiny of loot boxes by the Dutch regulator is by no means unique to the Netherlands; regulatory bodies around the world are addressing the cross-overs of gambling and gaming for a few years already. The circumstance that multiple[1] regulatory bodies have initiated investigations into the use of loot boxes (although with different outcomes), and that even in the EU Parliament questions were raised on the topic of loot boxes, may well be viewed as a coordinated approach of regulatory institutions and a tightening of the screws on loot boxes. However, the fact that Gambling laws differ significantly per country, as well as that they are not harmonized throughout the EU, requires a country-specific approach, for both regulators and game publishers.
Conclusion
The key element in this decision is the possibility for players to transfer virtual goods obtained from opening loot boxes to other players. If the virtual goods are transferable, or tradeable, this makes it a prize, as the item has economic value. This is in line with the guidance documentation published by the Ksa and has now been confirmed by a national court for the first time.
Although it remains to be seen whether this decision will uphold in appeal and whether other countries will follow or deviate, this ruling is a significant set-back for games publishers operating a business model that employs loot boxes for a (significant) part of its revenue. For the first time, a national court in the Netherlands has ruled that in-game loot boxes can be considered (regulated) gaming activities.
[1] See for example the investigative report of Belgium’s ‘Kansspelcommissie’ here and questions raised to the European parliament here.
