June 23, 2016

  • Marc Dunbar, Partner, Dean, Mead & Dunbar

Gambling in virtual worlds

as the lines betweenAs the lines between gambling and gaming continue continue to blur court decisions help clarify the murky boundaries between the legal and the suspect

Electronic gaming has never been more popular than it is today. As more people have integrated Internet-connected mobile devices into their daily lives, and as those devices have grown more advanced and accessible, so too have the number and type of online games that can be played on them. ‘Free-to-play‘ games are online games that a user may download to a mobile device and play without charge. Often these games are free only for those users who choose to keep them that way.”

This article is about a trio of recent federal trial court judgments involving players who chose not to “keep them that way” and how social gaming and virtual currencies have the potential of reshaping the world of online gaming. While at least one of these cases is still working its way through the federal appellate system, gaming lawyers with clients in the social gaming or online gambling marketplaces should take notice. This article will provide an overview of these cases and present discussion as to how the law in the United States may be reshaping somewhat around gaming and gambling involving proprietary virtual currencies created by game designers.

Virtual currencies and their use within social networks, proprietary virtual worlds and social gaming environments have existed for more than a decade. In fact, these virtual environments have created a myriad of ways that their virtual currencies can be purchased, mined, earned, stolen, insured, refined and even won. Creators of online virtual worlds such as SecondLife have progressed to the point where they have monetized their virtual currencies via vibrant secondary exchanges that allow proprietary virtual currencies to be converted into fungible “real life” money.In each of the recent three cases, it is the “gambling” of these virtual currencies within these online environments which became the subject of potential class actions seeking recovery under various state statutes.

In Mason v. Machine Zone, the plaintiff sought recovery under Maryland and California loss recovery and consumer protection statutes for losses of “virtual gold” that she purchased and then gambled in the popular multi-player online game titled Game of War: Fire Age. The virtual world in which the plaintiff played allowed “gold” to be earned for free or purchased with real currency. The “gold” had numerous uses inside the game, but it could also be wagered at the “casino” inside the virtual world. The pleadings alleged that the “gold” could also be bought and sold via a secondary market which would convert the same into “real world” currency; however, these secondary markets and exchanges were expressly prohibited via the game’s terms and conditions to which all players agreed prior to the their participation in the game.

The federal judge rejected attempts by the plaintiff to analogize the gaming environment to a slot machine or other games of chance instead finding that the overall virtual world was essentially a game of skill and that the casino activity was “more akin to purchasing cinema or amusement park tickets” where “consumers of such services pay for the pleasure of entertainment per se, not for the prospect of economic gain.” Of particular note was that while the Plaintiff could “spend her ‘gold’ as she pleased” subject to the game’s terms and conditions, the judge found that she could not “cash out of the game” and dismissed the action stating that: “Even in the Internet age, there is a crucial distinction between that which is pretend and that which is real and true. … The laws of California and Maryland do not trifle with play money…”. The Terms of Service seemed to be a critical aspect leading to dismissal of the claims against the game designer.

Similarly in Kater v. Churchill Downs, Inc., the Terms of Use were an important reason that the Big Fish virtual casino was able to evade claims under the Washington Recovery of Money Lost at Gambling Act. In that case decided in November, the Plaintiff alleged that the virtual casino games constituted gambling under Washington State law. Unlike the Mason case, there was no virtual world with alternative currency that had alternative uses within that realm. Instead, the virtual casino offered players the ability to receive free daily deposits of chips which could be used to play a sundry of casino games. These game chips could also be purchased with real-world money in the event a player does not want to wait until the next day’s deposit of free credits and could be transferred to another player for a fee charged by the game operator. Like the Mason plaintiff, the existence of a secondary market for these casino credits was raised as evidence of a “real world” payout evidencing the alleged illegal gambling. In addition, the fact that the chips awarded from successful games of chance extended game play or time inside of the gaming environment was evidence of a “thing of value” being awarded via the game.

In dismissing these claims, the court found that the extension of game play is only valuable if the game is not free to play. In addition, the court determined that “any user exchanging Big Fish Casino chips for cash on a secondary market is expressly violating the game’s Terms of Use, which users are required to agree to before they can access the game. Allowing Plaintiff and those similarly situated to sue Defendant for damages based on their own breach of contract would be contrary to basic principles of law and equity.”

The final and most recent case in the trilogy involves a social game known as Castle Clash which is more of a hybrid between the two prior cases. In Soto v. Sky Union, the court considered a virtual gaming environment in which success inside the gaming world had a lot to do with the skills and talents attributed to the virtual characters obtained by a player. These characters as well as their skills and talents could be earned over time spent in the virtual world or could be won via a host of chance-based algorithms inherent to the game. The plaintiffs sought recovery of gaming losses under Michigan, Illinois and California consumer protection and loss recovery laws as a result of the inherent chance within the game in its determination of which players received the more powerful Heroes and Talents for their virtual characters which increased their game success and ultimately their time in the gaming environment. The lack of a secondary market on which Heroes, Talents and Gems could be exchanged was noted by the court while it also found that unlike a casino there is no “house” to “cash out” the players. The court used similar logic as the prior decisions finding that “Heroes and Talents cannot be monetized. They merely improve, to greater and lesser extents depending on their strengths and skills, the gameplay experience for Castle Clash players. And under Illinois law, ‘the possibility of winning a greater or lesser amount of amusement‘ is not gambling.”

Each of these cases provides some clarity and guidance for game designers on how “free play” and “pay-to-play” can coexist without running afoul of some state laws prohibiting gambling. These lines however are still somewhat blurred when they involve regulated gaming companies, particularly those that are licensed in Nevada. The Nevada Attorney General took a more conservative view when asked to opine as to the legality of an online gaming environment designed by WagerWorks for casino conglomerate, MGM. The gaming environment which provided players with daily allotments of free game credits which had no value within or outside of the game but instead awarded players casino marketing points based on the amount of time the player spent within the online gaming environment was found to be outside of regulation by the Nevada statutes. The opinion did clarify that other proposed game options similar to those in the above trilogy could be subject to regulation by the State’s gaming control board if the virtual credits could be lost by the player or were convertible to some type of other reward or prize within the gaming environment regardless of “whether or not the instrumentality may be redeemed for cash.”

This area of the law no doubt will continue to unfold presenting challenges to regulated gambling companies and unregulated social gaming concerns. These cases make a strong point that game designers should be very clear in the Terms of Use for their games as the Terms of Use relates to player’s rights to the virtual currencies and assets. In addition, they should also be diligent in monitoring of the use of their virtual currencies and be mindful of other cases which have extended property rights in these assets to their players. Finally, consideration should be given to proactive protection of intellectual property rights associated with the game by unauthorized secondary markets dealing in virtual assets and currencies. Diligence in the prosecution of such unauthorized uses will prevent arguments that the game designer has tacitly accepted the monetization of the virtual currency making it more akin to convertible “scrip money” which could lead to gambling law prosecutions and consumer redress. These steps will no doubt help insulate the games from future challenges, but as the lines between gambling and gaming continue to blur via their convergence on the Internet one should expect additional court decisions to help clarify the murky boundaries between the legal and the suspect.