A New York lawsuit asserting that video game “loot boxes” are a form of gambling should concern businesses across online industries, especially those selling products involving elements of chance.
In February, the New York attorney general (“NYAG”) brought the suit against video game developer Valve alleging criminal liability under the state’s gambling statutes, likening the company’s use of virtual in-game mystery boxes to illegal betting. Valve recently moved to dismiss, claiming the practice is similar to other tangible collectibles like sports cards or branded promotional toys. The NYAG opposed the motion, arguing that sports cards and similar products offer purchasers something of value. The loot boxes, according to the NYAG, are different—because Valve’s skins are mostly worth pennies on the dollar, the true value of the loot boxes allegedly lies in the chance to win big.
Many businesses should consider how this lawsuit may impact them, particularly because it implicates criminal liability.
New York’s Lawsuit
The suit challenges Valve’s in-game practice under the New York Constitution Article I, Section 9 and under Sections 220.05 and 220.10 of New York’s Penal Law. The specific challenge is to “loot boxes,” which contain virtual items (called “skins”) that do not impact gameplay and are purchased with actual money.
The NYAG’s complaint claims these virtual items are “extremely valuable, with the rarest items worth thousands of dollars” on the resale market. The suit points out that Valve has enabled an independent market for these virtual items through its resale ecosystem, sponsorships and control over the frequency of items found in the loot boxes. Valve collects revenue from gamers’ purchases of the loot boxes, plus a 15% commission when virtual items are resold.
The complaint characterizes Valve’s loot boxes as a lottery or slot-machine model. A key element of the analogy is that most loot box purchases contain items that do not resell at a high value. The complaint points out a “spinning wheel” feature that “conveys the illusion of a ‘near miss’ when it appears to stop close to, but not on, a valuable item.” This model is “quintessential gambling,” according to the complaint.
Valve Disputes That Its Entertainment Is Gambling
Valve argues the legal challenges are an untenable expansion of New York’s statutory and constitutional prohibitions against gambling. Valve argues that a loot box buyer is not risking “money” nor “something of value” under the specific definition in the law, and that a loot box purchase is not a monetary bet against Valve, where both parties have money to gain or lose. Rather, according to the developer, players are engaging in a retail transaction—buying a loot box with exactly one skin from a known set of options pursuant to publicly disclosed odds. Valve argues that this is analogous to the purchase of trading cards, which is not gambling.
Further, Valve argues that the loot box is purchased with virtual currency instead of actual dollars. This virtual currency can be used for various in-game purchases, including but not limited to the loot boxes. In this way, Valve likens the purchases to other entertainment purchases like movie theater tickets and amusement park passes.
The fact that the NYAG is challenging Valve’s practices under constitutional and criminal law raises several potential consequences. Valve argues that the NYAG’s interpretation of state law would significantly expand the state’s definition of gambling and this kind of enforcement of criminal laws would violate due process through the lack of fair notice, the First Amendment and separation of powers between the legislative and judicial branches. Rather than incorporate Valve’s e-gaming purchases into the definition of gambling, all three of these considerations instead require the court to limit its interpretation of New York’s gambling laws strictly to the text of the statute, according to Valve.
In the opposition to Valve’s motion to dismiss, the NYAG reiterated a position of broad authority under Article I, Section 9 to bring an action for any “repeated or persistent” illegality, including gambling activities within Sections 220.05 and 220.10. It also pushed back on Valve’s due process arguments, stating that the NYAG does not need to wait for the legislature to pass a law against loot box models in order to enforce the gambling statutes as written. But Valve replied that the court has an obligation to take a more definitive stance on the implications of NYAG’s legal theory, given the constitutional and statutory questions at stake.
End Game: Key Takeaways
The implications of a lawsuit where consumer gaming products create criminal liability could be widespread. As Valve points out, purchases that include an unknown element have existed in many forms, including trading cards, grab bags and subscription boxes. A new focus on these transactions, particularly under a criminal statute, raises legal risk for companies and their C-suite.
Companies that sell products with a “surprise” element to their contents should take note of this lawsuit and other emerging case law in this space. Reach out to one of the authors for further questions.
