We’ve established what lock-boxes are and how they are used in games. Next, I want to tackle fiercely debated topic in lock-boxes: Are lock-boxes gambling? After several hours of research through lots of court opinions, the answer is a resounding not yet. I spent an afternoon reading to understand the leg whats and whys of lock-boxes and gambling in virtual worlds.
There are four frequently cited cases involving gambling and virtual worlds, and in all four cases the courts (and appeals courts) have sided on the side of the publisher, but probably not for the reasons you think.
What is Gambling?
It makes sense to start with something simple – what is gambling? The answer is not nearly as clear as we might expect. Gambling isn’t statutorily defined at the federal level, and state definitions of gambling vary pretty wildly. So that being said, I decided to go with a Common Law definition. Most state level definitions of gambling include the Common Law definition, but add in some other bits for additional flavor.
The Common Law definition is that gambling has 3 characteristics: consideration, chance, and prize. Consideration means that there must be some sort of risk involved, and that you must risk something of value, which we’ll see is pretty important below. Chance is just that — there must be some element of chance, in most cases, chance has to be the Dominant Factor in the game. This test is interpreted differently depending on the court, but its actually pretty hard to prove that any game didn’t have a chance dominant factor. The final element is that of a prize, which must be something of value, but they never clearly define this and this concept of value is pivotal to understanding whether lock-boxes are gambling.
The Crux of the Cases
I looked at four different cases and read the court opinions on all of them. If you are curious: Kater vs. ChurchHill Downs, Soto vs. Sky Union, Mason vs. Machine Zone Inc, Phillips vs. Double Down Interactive.
Part of the challenge with internet gambling cases is that the federal statue established in the Illegal Gambling Business Acts and the Unlawful Internet Gambling Enforcement Act of 2006 is jurisdiction. Most courts refer to one or both of these acts in their opinions. In the both laws have key components that apply only if the act is in violation of the gambling laws of the specific state it occurs in. As you can imagine, this creates a bit of a conundrum in our connected, cyber-citizen life and makes consistent enforcement a bit tricky.
Interestingly, none of the courts ruled against these cases on grounds of the mechanics not being gambling-like. In fact, taken inside the scope of the game, lock-boxes fit gambling to a T — they require consideration, there’s definitely chance involved, and there’s a prize. Based on the opinions, there’s little doubt that the courts consider these mechanics to be gambling-like, but they just don’t think they fit the legal definition of gambling.
What’s it worth to you?
The point of contention in these 4 cases was always around the understanding of ‘value.’ For example, in Mason vs. Machine Zone Inc., the court sided with Machine Zone because they said the in-game currency didn’t qualify as currency, per the letter-of-the-law definition which required that currency be federally recognized. Coupled with the fact that winnings or in-game currency couldn’t not be ‘cashed out’ to federally-recognized currency means that it didn’t fit the strictest definition of gambling. It failed the ‘consideration’ requirement of gambling, because according to the court there was no risk since the in-game currency (what you were betting) had no value and the prize you were winning had no value because it couldn’t be exchanged for legal currency.
Alternatively in Soto vs. Sky Union, they did consider the in-game currency as having value, based on the wording a state law that allowed betting using money, tokens, or anything else representing the token. So the Soto vs. Sky Union passes the consideration check because the in-game currency was considered a token, not unlike a poker chip. Where it failed, according to the court, is that the prizes had no value because they couldn’t they couldn’t be ‘cashed out’. Meaning it was closed loop, once money was put into the game by purchasing the in-game currency, you couldn’t get it back out. Anything won with that currency had no value because it couldn’t be translated back into real legal currency. Kater vs. Churchill Downs fails the same prize requirement, because they make the statement the virtual good has no value.
It bears mentioning that both of the games mentioned here had thriving secondary markets where virtual items could be turned back into legal tender. However, in both cases the secondary markets required a willful violation of the Terms of Use, and thus not a consideration in the court opinion.
The final court opinion I read was the Phillips vs. Double Down — which in addition to affirming the lack of legally defined value of the prize, but also leaned on another state law requiring a winner and loser. The argument was that Double Down never actually ‘won’ anything, and therefore it wasn’t gambling. That one seemed a little odd to me, but state laws and all that.
The Final Assessment
So are lock-boxes gambling? The safest answer here is no…yet. Courts aren’t really arguing whether practices by these game developers are gambling-esque, only that they don’t meet the legal requirement of gambling because of their interpretations value of the consideration or value of the prize. What I expect will happen is that another court will find virtual items to have value regardless of direct monetary value, and that case will be used as precedent to establish that virtual items (and in-game currency) have legal value, which will then put all of these practices well into the realms of gambling and federal regulation.
Once a precedent establishes that in-game items can have legal defined value, all of these are mechanics instantly hit all 3 points of definition of gambling.
lvl-42.com 
I don’t think declaring virtual goods to have value makes it an automatic jump to gambling. (Nor do I think that is likely anytime soon because, as you point out, without the ability to cash out how does one assess value, nor it is it a desirable turn of events in my opinion.) If a lockbox always delivers some virtual item, is a court then going to rule on whether one possible prize has value and another does not. Because to get to the “risk” aspect of the gambling test, you have to be able to lose. If you always get something of value, that it was not the item of value you wanted does not seem like enough to make it gambling.
If some lockboxes were empty, easy call. If all lockboxes give you a prize, not so easy.
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My understanding of the requirement is that to satisfy the risk, you just have to have the opportunity for the prize value to exceed the amount invested in the consideration. The actual prize doesn’t have to be a value of zero to qualify as losing. As I understood the legal argument anyway. The burden was that the value of the prize had the potential (but not the guarantee) to exceed the value of the risk. As Schmidt.Capela mentioned on Massively, the expected value of a lockbox is always going to be greater than the risk – that’s why we buy them. But the actual value has to be less on average than expected, because that’s how the money is made. If the actual value equals or exceeds expected, revenue would start to dip.
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Are loot boxes alone in the consideration of chance and prize value? If, as you say, that another precedent has to be set in order to establish that virtual goods have value, why are loot box items looked at differently in that regard? If I can buy a cloak in one game for .99 cents, but another game sells me a loot box for $2.99 with a chance that I might get the cloak I want, does that make the value of the cloak $2.99 if I get it on the first try? Or, did I pay $2.99 for a chance at winning a .99 cent cloak?
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From what it seems like – no loot boxes are not alone in the consideration. The courts said that virtual items didn’t have value because you couldn’t turn that item back into legal currency (thereby making its value effectively zero). So the same could be said of just about any virtual item or currency that doesn’t provide a wide to turn that item or currency back into real money – to ‘cash out’ as it were. The reason I think that a precedent will be set someplace outside of the lock-box debate is that one of convenience. Publishers are pretty well prepared for the lock-box legal debates. What I think we are likely to see is some loss of virtual property where the player brings suit to say they encountered an actual monetary loss based on the loss of the virtual property, which would then establish a precedent on virtual goods having value without the ‘cash-out’ requirement (assuming the courts don’t explicitly exclude that scenario, but I think that’s unlikely).
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