Loot boxes and player refund claims
Dr. Matthias Spitz and Dr, Andreas Woerlein ask whether games publishers and console manufacturers are facing legal peril when offering loot boxes in Germany
In Austria and Germany, the online gambling industry is struggling with hundreds of claims for the refund of losses filed by players in civil courts due to allegedly unlawful operations over the past decade. Lawyers specialising in representing players in these cases argue that gambling contracts concluded between player and operator when placing a wager or playing a slots game are void and that, accordingly, any player losses should be refunded. This is a position which a number of civil courts follow referring to statutory restrictions of online gambling, albeit the applicability of those restrictions with European Union law, specifically, the freedom of services, has been in question for many years.
In parallel, the issue of gamers spending excessively on loot boxes and digital card packs in video games, and whether such in-game purchases could constitute gambling, has been on the agenda at a number of legal forums, including IMGL. Revenue figures for in-game purchases in Germany are substantial –in 2021 alone, they amounted to 4.24 billion EUR. In a precedent case, an Austrian civil court has recently confirmed a claim for the refund of payments to a video game company.The court held that the digital card packs offered by SonyInteractive Entertainment (‘Sony’) as console manufacturer in the popular football (soccer) game ‘FIFA’ constituted unlawful gambling. As a consequence, the underlying contracts were considered to be void and the company ordered to refund the gamer. The process funding company that had been pushing the case – who seemingly hopes to attract many disgruntled players – already hails the judgment as a “bombshell” for video games industry. Although the court’s conclusions on defining card packs in video games as gambling may seem legally questionable, the judgment may arguably lead to more legal peril for video games publishers.
A very brief history of German gambling regulation
The regulation of gambling in Germany is a long story with many twists. Under the first iteration of Germany’s overarching regulatory framework, the Interstate Treaty on Gambling (the ‘IST’), a total ban on online gambling on the internet was enacted in 2008. Although a legislative amendment of 2012 provided for a limited licensing process for sports betting as an exception from the state monopoly on betting, courts concluded in 2015 that regulators had conducted the licensing process in a non-transparent and discriminatory way towards applicants from other EU Member States. Also, the Court of Justice of the EU (the ‘CJEU’) had consistently confirmed that the sports betting monopoly and the lack of transparency in the 2012 licensing process were infringing the freedom of services of operators under Art. 56 TFEU in a series of judgments, including Carmen Media, Markus Stoss, Winner Wetten and Ince. As a consequence, no licences were awarded during that time and operators remained in a legal limbo, relying on their freedom of services when continuing to operate in Germany. It took the German state legislatures until July 2021 to fully implement the licensing of sports betting, so-called ‘virtual slots’ games and online poker under a revised Interstate Treaty on Gambling (the ‘IST 2021’). Accordingly, these verticals may currently be offered legally online in Germany by licensed operators.
How the situation in player claims unfolded
A steady increase of claims for refund of losses filed by players in civil courts due to allegedly unlawful operations (in industry speak simply referred to as ‘player claims’) during the unregulated era became noticeably roughly 2½ years ago, coinciding with ever-more-prominent advertising of specialised legal services providers representing players, such as Dr. Redell, Glücksspielhelden (‘gambling heroes’) or CLLB. Since then, a number of civil courts have sided with the players. As an early example, the District Court of Giessen, in a judgment of 21 January, 21, ordered a gambling operator to refund EUR12,000 in losses from online gambling. The court reasoned that the operator did not own a licence in Germany during the period in question and concluded that the gaming contract was void under sec. 134 German Civil Code in conjunction with sec. 4(4) IST 2012 i.e., the total internet ban. Other courts had already come to similar conclusions in individual previous cases. However, the Giessen judgment had a signalling effect with substantial consequences for private operators of gambling in Germany. Some two years later, operators active on the German market before the IST 2021 came into force are now confronted by a wave of player claims with more than 180 court decisions having been issued in Germany on the subject and more to follow. Player claims have emerged as a continuing financial strain on the now largely licensed and therefore legal operators of online gambling, and will continue to occupy the civil courts for years to come.
By comparison, Austria has been at the forefront of litigation when it comes to player claims in terms of being a step ‘ahead’ of Germany in the development of case law and, arguably, displaying an even more extreme bias in favor of the player than German courts. As an example, the Supreme Court of Justice in Vienna ruled in November 2022 that an unregulated gambling operator must refund losses incurred by a player even if the player already had the “intention” to sue for losses at the time of participating in the game.
What is the relevance of loot boxes in the context of player claims?
Another topic that is becoming increasingly important in the regulatory discussion is whether so-called ‘loot boxes’ offered in video games by publishers may fall under the ambit of gambling regulations. ‘Loot boxes’ are understood to be specific forms of in-game purchases or micro-transactions in a video game where “virtual boxes […] can be purchased for a fee and contain a random selection of variously rare virtual items for a computer game”. While there has long been general consensus in the German legal literature that loot boxes do not fall under the definition of gambling as defined in the IST, there are now a growing number of opinions to the contrary, defining loot boxes as illegal gambling within the mean-ing of the IST under certain conditions.
A legal assessment of loot boxes by a German court is yet to made. But here, too, Austria is a pioneer. The Hermagor District Court decided in a judgment of 26 February 2023 (as yet unpublished) that offering loot boxes in a video game may amount to illegal gambling. The subject of the proceedings were not just any loot boxes, but the digital card packs of well-known publisher Electronic Arts (EA) which can be purchased in EA’s critically successful FIFA football (soccer) game. The question arises whether games publishers and console manufacturers in Germany could now also face similar liability for operating loot boxes as gambling operators for previously unregulated operations. To answer this, it may be helpful to determine whether the legal understanding of gambling in Germany and Austria is the same or at least similar. ‘Gambling’ is legally defined in both countries as follows:
Sec. 3(1) sentence 1 IST2021 (Germany) “A game of chance exists if, in the context of a game, a consideration is demanded for acquiring a chance to win and the determination of winnings is entirely or predominantly a matter of chance.”
Sec. 1(1) Gambling Act (Austria) “A game of chance within the meaning of this federal law is a game in which the decision on the outcome of the game depends entirely or predominantly on chance.”
At first impression, the German legal definition of gambling appears to be much more complex. However, the legal supplement regarding so-called ‘play-outs’ (‘Ausspielungen’) in Austrian law cannot be ignored in this context:
Sec. 2(1) nos. 1-3 Gambling Act (Austria) “Play-outs are games of chance (no. 1) that are organized, offered or made available by a company and (no. 2) in which players or others make a financial contribution in connection with participation in the game of chance (stake) and (no. 3) in which a financial contribution is promised by the company, players or others (winnings).”
Based exclusively on the wording of the regulations and the associated characteristics of ‘chance’, ‘stake’ and ‘winnings’, there is a quite similar understanding of the legal classification of games of chance. There is no question that loot boxes – regardless of the country in which they are ultimately purchased – can be assumed to involve an element of chance, for example, by way of the random allocation of cards in card packs. However, at least in Germany, there are further aspects that need to be considered in connection with the character-istics of ‘fee’ and the ‘chance of winning’ pursuant to sec. 3(1) sentence 1 IST 2021.
The first-instance ruling from Hermagor did not have to take these aspects into account for territorial reasons. However, the court took a pragmatic approach in its decision. In addition to a chance dependency, according to the court’s opinion, the sale of loot boxes “also constitutes a pecuniary benefit within the meaning of the Austrian Gambling Act, because the digital football players are traded on a secondary market and thus a profit can be made”.
Whether the court’s rationale can be transferred directly to the German understanding of ‘gambling’ is doubtful at present. For example, the requirement of a ‘total loss’ in the German understanding of the term should be remembered, and is not generally the case with loot boxes. The question as to what a publisher or console manufacturer must do to prevent prohibited secondary markets and under what circumstances exculpation is possible is also likely to occupy the courts in the future.
In addition to the legal ramifications of a court decision, it is always possible for the proverbial ‘regulatory pendulum’ to swing back against the industry as soon as the issue attracts more attention from policymakers, regulators and the media. Games publishers may be aware that political resistance is shaping up in various countries, with bans on certain types or aspects of loot boxes being considered, as is already the case in Japan, Belgium and the Netherlands. Since German civil courts have a tendency to side with players in player claim cases, it is not far-fetched to assume that they could follow a similar approach in a loot box refund case, in particular, if the issue continues to attract more attention in public and politics.
In light of these recent developments, it may be prudent for games publishers to review their approach to loot boxes and other micro transactions in video games, and to adjust their design so as to mitigate the risk of falling within the scope of gambling regulations. As mentioned above, the revenue figures of in-game purchases in Germany are massive – EUR4.24 billion in 2021. If the trend set in Hermagor continues and reaches Germany, we may well see a new wave of lawsuits from gamers against publishers and console manufacturers in the coming years. Taking a more risk-averse approach when it comes to the risk of player claims – or rather ‘gamer claims’ – at this early stage may be worthwhile.