Game on for the regulation of loot boxes

As innovation in technology increases and price pressures ramp up, business models in the video game industry have increasingly incorporated microtransactions as a way to monetize their content. Loot boxes are a way of facilitating microtransactions that have drawn criticism due to their resemblance to gambling. The controversy has led to concerns over the possible harms and addictive potential of loot boxes being targeted to under-aged youth. Some commentators believe that, while loot boxes may border on illegality, they are legally ambiguous enough to still be considered legal. While a fair statement as a generality, I argue that a specific game, Counter Strike: Global Offensive (‘CS:GO’), has a loot box mechanism that should be considered an illegal lottery scheme. This article attempts to demonstrate that loot boxes in CS:GO satisfy the elements of a lottery game, and that Valve Corporation (“Valve”) is “conducting and managing” an illegal lottery scheme through CS:GO loot boxes.

The game in operation

Counter Strike: Global Offensive is a popular first-person shooter game developed by Valve Corporation and first released in 2012 with the modest price tag of $14.99. In 2018, Valve adopted a different business model and offered the game for free while adding microtransactions such as loot boxes and other opportunities as an alternative way to monetize the popular game. Loot boxes are presented in the form of various ‘cases’ which can either be earned in the game or purchased via the Steam Marketplace. Cases provide an opportunity for players to collect unique and appealing virtual designs, or ‘skins’, for the guns they use during gameplay. Players must purchase a ‘key’ for $3.50 CAD from Valve Cases in order to unlock a case which contains items of varying degrees of rarity and value.

The chances of acquiring a specific gun were revealed after the Chinese Government required all games which contain loot boxes to disclose their odds. The disclosure showed that the rarer and more valuable items (orange and yellow coloured) have only a 0.26-0.64 percent chance of being acquired. The scarcity of these skins leads to their value being increased within the marketplace. For example, the red-coloured Chantico’s Fire (Minimal Wear) acquirable from the Chroma 3 Case as seen above can fetch anywhere between $100-200 CAD on the Steam marketplace.

If a player were to acquire and subsequently sell one of these valuable guns, funds would be deposited into his Steam Wallet after the deduction of a commission by Valve (anywhere between 15 – 30 percent per transaction). Thus, in the transaction, Valve makes money both through the sale of keys and through the brokering of transactions between players. These funds cannot be officially converted into cash but can be spent purchasing other games or on in-game purchases within the Steam marketplace.

Canadian gaming law

In Canada, gambling is illegal and generally prohibited by s. 206 of the Criminal Code, with limited exceptions. This section creates a number of indictable offences proscribing a comprehensive range of gaming and gaming-related activities. In particular, s.207(3) makes it an offence to conduct, manage and operate an unlawful lottery scheme, that is a scheme that does not fall within any specific exemption of s. 207(1) of the Code). It is this provision that I believe is likely to be most problematic with Valve’s CS:GO loot boxes.

Is a loot box a lottery scheme?

In determining whether or not CS:GO may be operating a lottery scheme, the key elements to determine are:

• the elements of a lottery scheme;
• whether loot boxes qualify as a lottery scheme, and;
• what it means to ‘conduct, manage and operate’ a lottery scheme.

1. The elements of a lottery scheme

In s.207(4), defines a lottery scheme as: “a game or any proposal, scheme, plan, means, device, contrivance or operation described in any of paragraphs 206(1) (a) to (g), whether or not it involves betting, pool selling or a pool system of betting…” Accordingly, a game must have three key elements; 1) prize, 2) chance, and 3) consideration.

2.  Do CS:GO loot boxes qualify as lottery scheme?

In order for a loot box to be considered a lottery scheme and thus be prohibited, it must possess the three essential elements of chance, consideration and prize.

Chance: The requirement of chance is easily satisfied. It has been established that a necessary element for the offence of gaming is the chance that participants stand to win or lose money or money’s worth. In this case, the odds of acquiring a valuable item are not guaranteed, neither is skill a factor in acquiring a specific item. As stated above, the odds of acquiring an item are varied. Buying and opening a case does not guarantee that a player will acquire a valuable item and some of the more common items that are obtainable through these loot boxes are less valuable than the cost of the key required to the open the case.

Consideration: Consideration is a foundational principle of contract law and concerns the mutuality of exchange between parties. In this instance, consideration is satisfied through the exchange of a player’s monies ($3.50 CAD) for the virtual key that is necessary to open a loot box.

Prize: Prize is arguably the most controversial element in this loot box scheme. Do these virtual skins constitute a prize in the context of the definition of a lottery scheme? The general perception of a lottery scheme is that an individual will wager money in an attempt to win a cash prize or an item of equivalent value such as a house or a car. In this instance, while a player can exchange skins for other consideration in the marketplace, s.3(c) of Steam’s Subscriber Agreement locks any monetary proceeds of a sale to an individual’s Steam Wallet. These funds expressly have no cash value and, most importantly, are not exchangeable for cash through the official Steam Marketplace. Thus, individuals acquiring funds through the sale of skins are limited to the purchase of other content on the Steam Platform such as other games and subscriptions and are not able to convert these funds into real-world cash.

The question becomes, does a virtual item which has no official monetary value constitute a prize in the context of a lottery scheme? In Canada, there does not appear to be any jurisprudence that has decided this issue. However, in the United States, the courts increasingly hold the view that no prize is present where (a) virtual rewards cannot be redeemed, transferred or exchanged for any items of real-world value, and (b) there is no secondary market for these rewards (at least not a market that the game sponsor endorses, approves, or otherwise knowingly tolerates).

In Mason v. Mach. Zone, Inc., the United States Court of Appeals, Fourth Circuit affirmed a lower court decision that Mason did not ‘lose money’ when she ‘spun’ a virtual wheel in the popular video game, Game of War. In this game, players had the opportunity to spend real-world money to purchase virtual gold, which could be used in the Game of War casino (‘Virtual Casino’), a game of chance where players could use virtual gold to obtain virtual chips which could be ‘spun’ for prizes for use within the game. Ms. Mason alleged that she lost money after paying to spin the wheel and won prizes that were worth less than the amount she spent to spin the wheel. In denying this claim, the Appeal Court found that the intermediary transaction of requiring virtual chips meant that no money was at stake in the spinning of the wheel. As the prizes from the wheel do not amount to money, and are not redeemable for money, Mason could not have lost or won money as a result of her participation in this activity.

Virtual rewards are once again revisited in Kater v. Churchill Downs Inc. whereby Kater alleges that Churchill Downs, owner and operator of the Big Fish Casino app, is conducting illegal gambling. The court agreed with Ms. Kater’s claim that virtual chips in the Big Fish Casino app constituted a ‘thing of value’ pursuant to Washington law, as it was impossible to play without virtual chips, and winning chips extended the privilege of playing the game, thus fulfilling the statutory definition. However, the Court rejected Ms. Kater’s second argument that the virtual chips constituted a ‘thing of value’ because users can sell them for real-world money on the unofficial secondary market. Relying on Mason v. Mach. Zone, the Court also held that items cannot constitute a ‘thing of value’ based on prohibited use that violated the game’s Terms of Use.

These two cases must be approached with caution in the Canadian context, as the claims alleged are primarily driven by statute, where a Canadian equivalent does not currently exist. However, the overarching principles can still be applied to in the context of determining whether CS:GO virtual skins satisfy the element of a prize.

Applying the principles from these two cases, I posit that virtual skins in CS:GO are capable of being classified as a prize due to the nature of the Steam Marketplace. CS:GO virtual skins, obtained through loot boxes, can be exchanged for Steam Wallet Funds which, in turn, can be used to purchase other games in lieu of cash thus attaching ‘real-world value’ to the original items. This could attract the classification of real-world value.

Alternatively, an unofficial secondary market may serve to translate these skins into a prize with real-world value although this raises another question. Both cases affirm the principle that a secondary market cannot turn the virtual skin into a prize where the sponsor (Valve) issuing the item expressly prohibits distribution on a secondary market. However, it could be argued that the sponsor’s failure to address the secondary market amounts to condonement despite their initial position which prohibits such activity in their Terms of Use. Secondary markets have existed for several years with popular sites such as CS.Money and DMarket allowing users the ability and opportunity to monetize their virtual skins for real-world cash. Valve’s inaction in responding to these illicit third-party sites can be interpreted as being indifferent to these operations.

Valve’s failure to act in this case contrasts with past instances where it has acted swiftly. After defeating previous allegations that it allowed gambling with virtual skins through third party sites, Valve promptly and aggressively pursued secondary market sites which allowed users to gamble with their virtual skins.  In so doing, they showed they have several options available to act against the secondary market, and their inaction can be perceived as condonment of third-party sites. 

To conclude, virtual skins may fulfill the requirement of constituting a prize when exchanged through the Steam Marketplace for Steam Wallet Funds, or alternatively through the black market which Valve appears to implicitly condone through their inactions. In a practical context, the loot box and the virtual key would serve as the ‘ticket’ for a lottery game, with the ‘prize’ constituting a potentially rare virtual skin worth hundreds of dollars. Thus, it is likely that CS:GO loot boxes could satisfy all the legal elements to be considered a lottery scheme.

3. Does Valve “Conduct and Manage” a lottery scheme?

Section 207(3)(a) of the Criminal Code prohibits the conduct, management and operation of an unauthorized lottery scheme. Only provincial governments, charities, fairs and license holders are allowed to conduct, manage and operate a lottery scheme under the s.207(1) exception to gambling offences in the Criminal Code. However, the term “conduct and manage” is not specifically defined in the Criminal Code. The seminal case of Keystone Bingo Centre Inc. v. Manitoba Lotteries clarifies that ‘conduct and manage’ is determined by who is deemed to be the ‘operating mind’ of the lottery scheme. When attempting to determine who is the operating mind of a lottery scheme, the courts will look at all the indicia of control and management in the unique circumstances of the case. These include factors such as the percentage distribution of profit-sharing, installation, technical support, monitoring and setting of games and payouts.

In this case, Valve is the creator of the CS:GO game and the associated virtual skins within the game. Valve owns all the intellectual property associated with CS:GO. From a transactional perspective, Valve receives compensation through two avenues: once during the purchase of a key required to unlock a case, and again during the sale of a skin on the Steam Marketplace where Valve charges a percentage-based commission on each transaction. While Valve may not directly control the purse in the sense that they are simply an intermediary facilitating the transfer of funds between two individuals (i.e. money and liquidity comes directly from the purchaser and not through Valve); the fact that Valve charges commission to individuals selling their skins lends weight to a finding that Valve should be considered the operating mind of this scheme. In the secondary market context, while Valve may not receive their percentage-based commission on an illicit transaction, Valve still profits from the sale of keys required to open cases.

Additionally, Valve operates all the back-end infrastructure required to maintain and operate the CS:GO video game, including the hosting and maintenance of servers. Given these factors, it is likely that Valve is the operating mind, and can be found to ‘conduct and manage’ an illegal lottery scheme through the sale of virtual skins on CS:GO.

Jurisdictional issues for operators outside Canada

One issue that should be considered is the potential for jurisdictional issues i.e. which laws apply to these video game companies. The Criminal Code restricts internet gaming to provincial gaming operators only, however, Valve operates out of Bellevue, Washington in the United States. Given the global reach of video games, do Canadian laws apply to Valve?

Canadian courts have yet to grapple with this specific issue in gaming law. As gambling prohibitions were written in the 1970s, prior to the advent of the Internet, a majority of the case law is limited to brick and mortar gaming operations. However, non-gaming jurisprudence suggests that Valve may have a ‘local presence’ by virtue of providing services in Canada regardless of the fact that it has no physical presence within the country. This may attract the application of Canadian gaming law and the relevant Criminal Code prohibitions to Valve’s operations.

This possibility will continue to present an interesting challenge for courts to deal with, particularly if lobbying efforts to legitimize loot boxes are successful in Valve’s home state of Washington, resulting in further legal complexity and ambiguity.

Potential remedies

If video game companies are operating illegal lottery schemes, what are some ways to address this situation? I offer two suggestions; passing legislative amendments and pursuing equitable remedies.

Legislative Amendments

Canada’s gaming laws are long overdue an update. Initially drafted in the 1970s, gaming prohibitions in the Criminal Code serve to outlaw gaming and lotteries with expressly limited exceptions. However, the advent of the Internet and innovation in the gambling and video game industries are starting to reveal gaps in these prohibitions. The accessibility of online gaming offerings from legitimate foreign operators (PokerStars, Bet360, etc.) and the increased prevalence of loot boxes within video games demonstrates how difficult it may be to enforce these prohibitions in a virtually connected world. Foreign operators may conduct their operations legitimately in their own jurisdiction where similar gaming prohibitions do not exist, yet offer their product globally to consumers in jurisdictions such as Canada where there are gaming prohibitions. This leads to a “grey-market” whereby operators conduct business in an area of legal ambiguity.

As such, the Federal Government should undertake a review and revision of Canada’s current gaming laws, and recognize loot boxes as harmful gambling, similar to measures taken in other jurisdictions. The governments of Belgium and the Netherlands determined that Valve’s loot boxes in CS:GO constituted gambling and Valve responded by disabling the opening of loot boxes in these two jurisdictions. This demonstrates that legislative amendments will be effective in combating this issue and that other jurisdictions can follow the same path.

Equitable Remedies

In the absence of legislative intervention, individuals ‘conducting and managing’ an illegal lottery scheme through CS:GO loot boxes may be liable to a claim for unjust enrichment would serve to deprive Valve of all the benefit they may have obtained through the introduction of loot boxes. Alternatively, their profits could be considered proceeds of crime. A class action lawsuit seeking a claim of unjust enrichment would pose a serious risk to Valve’s operations and may induce them to consider changing their business model. Valve’s user agreement prohibits class action proceedings in favor of arbitration. However, recent Canadian jurisprudence on unconscionability may undermine the validity of this clause, and thus could still make this option viable. See also, Ian Burns, “Class action on video game ‘loot boxes’ could have massive impact, lawyer says”, The Lawyer’s Daily (17 November 2020).

Conclusion

Given the functionality of CS:GO and its loot boxes, it is likely that it can be classified as a lottery game. Furthermore, Valve is likely to be ‘conducting and managing’ a lottery scheme in its operation of CS:GO which falls outside Canada’s list of exemptions and is thus illegal. Canada’s outdated gaming laws are long overdue reform to respond to innovations in gaming. After all, if it looks like gambling, feels like gambling, and acts like gambling; it’s probably gambling.