Last year marked an eventful year for loot box litigation. Loot boxes are mechanisms that contain unknown virtual items that can be redeemed or used within a game. Typically, loot boxes contain collectible items, in-game weapons or various aesthetic upgrades — often referred to as skins — for a user's character or items.
In recent years, there have been a number of lawsuits with loot boxes at the heart of the dispute, showcasing a wide range of claims and defenses.
In addition, on the enforcement front, there was a call to action in June by consumer advocacy groups Fairplay and Center for Digital Democracy to the Federal Trade Commission, asking the regulator to investigate Electronic Arts Inc. for its inclusion of loot boxes.
This article takes stock of the current landscape for loot boxes under U.S. law by looking at court decisions from recent loot box cases.
Currently, courts in various jurisdictions have interpreted loot boxes differently, and as such, these virtual items will continue to be a legal gray area unless and until such loot boxes are regulated at the state or federal level.
A common thread among nearly all loot box litigations is allegations that loot boxes qualify as illegal gambling enterprises. In general, federal and state laws define gambling as an activity that risks something of value upon an outcome subject to chance in exchange for a thing of value.
However, it is still largely undetermined if loot boxes meet this definition. Some plaintiffs have argued that loot boxes have subjective, nonmonetary value in the form of added enjoyment. However, most courts do not consider a virtual item that can be obtained from a loot box a thing of value.
In two similar class actions — Coffee v. Google LLC and Taylor v. Apple, Inc. — the plaintiffs alleged in the U.S. District Court for the Northern District of California that platforms Apple and Google were engaged in illegal gambling by permitting loot box mechanic games onto their respective stores.
Both courts found in January 2022 that neither the loot boxes nor the items obtained from them are things of value because they can only be used in-game and cannot be cashed out — i.e., no real-world value — and cannot be converted to real-world currency by any official means.
The Coffee court determined that any sales or transactions on gray markets cannot support the allegation that loot boxes and virtual items are things of value because Google's Terms of Service prohibit the sale of in-app content outside the app.
Yet, the Taylor court noted that Apple's participation within the marketing and distribution of loot boxes, if determined to be an illegal gambling device, could potentially support a theory of liability.
Unfair and Deceptive Acts and Practices
Fraud and misrepresentation — regarding loot box success and drop rates in violation of federal and state unfair and deceptive acts and practices statutes — are frequent claims made by plaintiffs against game companies.
A loot box, once interacted with by a player, triggers an algorithm that randomly generates a virtual item. Generally, the chances of a loot box containing certain items varies by the rarity or in-game value of the items and may be disclosed by a rate drop.
Many platforms require developers to disclose these odds in order to sell games containing loot boxes on their platforms. Accordingly, there is some risk of not knowing what a consumer might receive from a given loot box.
In Coy v. Lilith Games (Shanghai) Co. Ltd., the plaintiffs brought a class action in the Northern District of California against the developer of the mobile game Rise of Kingdoms in 2019.
Among the claims brought, the plaintiffs argued that defendant Lilith Games violated California's Consumers Legal Remedies Act by failing to accurately follow the apparent odds of their game.
Within Rise of Kingdoms, players spin a virtual wheel with 12 loot item slots. Based upon this visualization, the plaintiffs argued, the odds of winning any given object should have been 1-in-12. The Coy court dismissed the plaintiffs' claims in August 2022 finding that it was inconclusive that Lilith misrepresented the odds of winning specific prizes, as Lilith did not expressly disclose any odds of winning.
The mere visual representation of a 12-spoke wheel is not alone sufficient to constitute a disclosure to support the plaintiffs' claims of fraud.
Further, the Coy court noted that the plaintiffs relied on noncredible third-party information theorizing outcome calculation, which was unsupported conjecture as to how the loot boxes functioned.
In the court's opinion, it is commonplace understanding that rarer items would have an infrequent drop rate. This finding suggests that if Lilith Games had expressly disclosed the odds of winning specific prizes, and the plaintiffs' results were inconsistent with those odds, then such actions could give rise to a plausible claim.
Contract Enforcement Against Minors
Another common claim made by plaintiffs last year was that minors cannot be bound by the terms of service governing the underlying game. Some states like California, Illinois and New York, for example, have laws that give minors the ability to disaffirm or otherwise cancel a valid agreement on the basis that, as a minor, they lack meaningful capacity to be bound by any agreement.
Several plaintiffs have sought declaratory judgment to disaffirm applicable terms of service in order to obtain compensation for virtual currency spent on in-game loot boxes.
Moreover, companies have attempted to use terms of service to compel consumers to arbitrate the dispute rather than litigate. However, the issue of contract validity and enforcement may yet be reserved for the arbitrator to decide, depending upon the jurisdiction under which the contract is governed.
In Y.H. v. Blizzard Entertainment Inc., the plaintiffs brought a class action against Blizzard in May 2022 in relation to their popular digital card game, Hearthstone.
The plaintiffs alleged in the Northern District of California that, because in-game cards are essential to the gameplay mechanics, players are encouraged to purchase loot boxes for the chance to obtain rare and/or powerful cards to use in their card decks.
Blizzard moved to dismiss the case for mootness on the basis that Blizzard issue the plaintiff a refund or, alternatively, move the case to arbitration under the terms of the game's end-user license agreement. The court summarily denied the motion on Nov. 29.
California law gives minors the right to disaffirm contracts "by the minor before majority or within a reasonable time afterwards." Here, the court noted that the plaintiff had effectively disaffirmed her contract with Blizzard upon the moment the plaintiff initiated this lawsuit. In disaffirming her agreement with Blizzard, the plaintiff thereby nullified the applicable arbitration and class action waiver provisions.
However, the disaffirmance argument is not always effective.
As demonstrated by other cases involving a minor's right to disaffirm, such as the 2020 Coughenour v. Del Taco LLC case in a California state court and the 2013 I.B. v. Facebook Inc. case in the Northern District of California, plaintiffs typically attempt to void certain purchases by claiming that they did not — or legally could not, in the case of minors — agree to the terms of service at issue.
Plaintiffs may then demand a refund, which could also potentially violate the applicable terms of service. Yet, under California law, minors generally must disaffirm the entire agreement, not just the "irksome portions."
Section 230 Immunity
of the federal Communications Decency Act provides a safe harbor provision for platform providers that grants a limited immunity from civil claims arising from user-generated content.
For some game publishers and other host platforms, this federal law provides a key defense when faced with lawsuits regarding loot boxes. However, this defense is limited by the role played by the game company or maker.
In both the Taylor and Coffee decisions discussed, the courts briefly considered the applicability of each defendant's Section 230 immunity defense.
In the Taylor dismissal, the court rejected Apple's Section 230 immunity argument on the basis that Apple's participation in the marketing and distribution of loot boxes, if deemed illegal, may be sufficient to support Apple's liability with respect to related claims.
Conversely, the Coffee court granted Google's motion to dismiss in part on the basis of such immunity, noting that liability may be imposed upon Google only "if it contributes materially to the alleged illegality of the conduct."
Rather, the Coffee court reasoned, Google was merely providing a neutral tool for third-party developers to distribute their content, and subsequently, their in-game loot boxes.
As compared to the Coy case discussed above, the Coy court rejected defendant Lilith Games' Section 230 immunity argument on the ground that, unlike Google and Apple, Lilith Games had created the game at issue rather than acting solely as a platform for the game.
In short, Section 230 immunity poses an interesting defense to liability stemming from loot boxes: For publishers, this defense may remain intact so long as marketing and distribution of loot boxes does not implicate such publishers as participants.
For game developers who craft these loot boxes, this defense is likely not viable, as evidenced by the holding in Coy.
We likely haven't seen the end of lawsuits aimed at loot boxes. This next year may bring more lawsuits as consumers continue to take aim at the chance-based mechanics of loot boxes.
As discussed, loot boxes are currently a legal gray zone and continue to be a point of great pause for game developers, publishers and even their distributors.
Further, loot boxes span a wide array of legal issues, from sweepstakes laws to false advertising laws, making them a gamble not just for the consumer but for the game industry alike.
In recent years, U.S. law made little headway toward regulation of loot boxes, despite being discussed at length by the FTC in a perspective paper in 2020. Global online microtransactions have been projected to grow from $59 billion in 2021 to $67 billion in 2022, and reports also suggest that the microtransaction market could grow to $106 billion by 2026.
However, regulation has stepped up abroad, with countries such as Belgium, Spain and the Netherlands taking steps to either outright ban or regulate loot box mechanics and similar surprise-based microtransactions.
For game developers and publishers who wish to include loot boxes in their games, be aware of the complicated risks loot boxes pose and the potential liability that comes with them.
This article first appeared in Law360 on January 18, 2023.
Loot boxes span a wide array of legal issues, from sweepstakes laws to false advertising laws, making them a gamble not just for the consumer but for the game industry alike.