Don't Level up with Loot Boxes: a Reconsideration of Senate Bill 1629

A. Distinguishing microtransactions from downloadable content (DLC)

Ever since the arrival of in-game purchases in the mid-2000s, ¹⁹ modern corporations have redefined marketplace expectations concerning console games. Gamers used to be able to buy the latest FIFA or Halo release without making any supplementary purchases on additional content. ²⁰ Now players fully expect games to be released with the promise of purchasable online add-ons.

There are two main types of in-game purchases: DLC and microtransactions. DLCs include additional content to the base game including extra levels, characters, and challenges. ²¹ Microtransactions are smaller in scope than DLC and are often implemented in free-to-play mobile games. ²² The business model for microtransactions is simple—users have the option to buy cosmetic items ²³ or in-game upgrades which provide a revenue source for developers creating free-to-play games. ²⁴ The distinction between DLCs and microtransactions is often unclear, but the primary difference for this article's purposes is that DLCs are one-time purchases for additional content, and microtransactions are designed to get the player to make repeat purchases.

Video game companies generate billions of dollars a year in revenue from a variety of these online add-ons. ²⁵ EA, the publisher of popular franchises such as FIFA and Star Wars: Battlefront, generated $1.2 billion in revenue from online add-ons alone in 2016. ²⁶ Long gone are the days of the Nintendo 64 and game cartridges ²⁷ with classic releases being sold as all-inclusive—one price for the entire game without any DLC or microtransactions. Although players generally celebrate the release of larger DLCs, such as an exciting new mission to a beloved game, smaller online microtransactions, notably loot boxes, are often criticized as corporate greed. ²⁸

Corporate greed exists within most industries. Companies exist to make profits for shareholders, and it is natural for companies to devise innovative solutions to maximize profit margins. Indeed, DLCs are encouraged by players when they meaningfully expand upon the story of a game and elevate its contents by including new weapons, characters, and lore. ²⁹ Microtransactions and loot boxes, however, are met with less enthusiasm because they operate as purchasing systems that disguise the long-term cost of the activity until children are already financially and psychologically committed. ³⁰

B. Why do parents hate loot boxes?

Why are loot boxes the subject of such heated debate within the gaming industry? Much has been written recently about the loot box and gambling debate. ³¹ Many articles have already covered the historical perspective of loot boxes, but this article will add a brief discussion for context.

Loot boxes are a type of microtransaction. Unlike the majority of microtransactions, loot boxes are not solely found in free-to-play mobile games; they also frequently appear in full-price computer and console games, including those age-rated to be suitable for children. ³² The origins of loot boxes come from randomized baseball card packs and games like Pokémon, which have also stirred up a string of lawsuits pertaining to illegal gambling. ³³ In the mid-2000s, developers applied the randomized card pack concept to video games in online role-playing titles like World of Warcraft and Everquest. ³⁴

Loot boxes are bought with real-world money or in-game currency, or they are gifted upon the completion of in-game tasks. ³⁵ Their contents often are transferred between players giving them the value of real-world money. ³⁶ In laissez-faire game economies, players may freely transfer items that they acquire from loot boxes, while other more controlled economies allow indirect transfers through auction houses controlled by the game company. ³⁷ Loot boxes employ rarity mechanics—they include limited edition or rarer items that are often more difficult to obtain. ³⁸ These rare items are often valued at a higher price within game economies. ³⁹

The global perception of loot boxes and their alleged psychological impact on children has been subject to strong scrutiny by international consumer and parenting groups. ⁴⁰ Several studies have identified links between loot boxes and problem gambling, ⁴¹ with features “known to trigger urges” to continue excitement and spending. ⁴² Some loot boxes award buyers with an in-game power or weapon that gives them a competitive edge over others in multiplayer games. ⁴³ This leads to children exercising impulsive spending habits by continuing to purchase loot boxes in games published by companies like EA. ⁴⁴

Several key factors overlap between loot boxes and slot machines including the “random distribution of prizes, variable value of the prizes, near-miss features plus visual and sound cues associated with participation and reward.” ⁴⁵ Problem gambling addictions that are associated with slot machines ⁴⁶ are also interrelated with loot boxes. ⁴⁷ Therefore, vulnerable groups, especially children, are at risk when they play these games—signaling a call to action for the regulation of loot boxes.

C. Casinos for kids: the differing perceptions of Chuck E. Cheese and loot boxes

Roulette wheels, flashing screens, and eyes-glazed-over customers competing to win enticing prizes: although this description is often a trademark of the Bellagio or Caesars Palace, it also fits the description of Chuck E. Cheese, a place advertised as “where a kid can be a kid.” Chuck E. Cheese offers experiences akin to slot machines at a Las Vegas casino. On their face, amusement games present the same problems as loot boxes. Children or their parents spend money on casino-like devices that cough up winnings (in this instance, tickets redeemable for prizes). In fact, a California mother named Debbie Keller brought a $5 million lawsuit against Chuck E. Cheese claiming that the chain's games were transforming children into gamblers. ⁴⁸ Amusement games, however, have not faced nearly as much backlash as loot boxes concerning gambling addictions among children. Why? The answer lies in distinguishing games of skill from games of chance.

A game of chance's outcome is strongly influenced by a randomizing device, while a game of skill is one where the outcome is determined by a player's mental or physical abilities. People who engage in games of chance run the risk of developing problem gambling addictions. ⁴⁹ These risks include strong dependence on games like dice, playing cards, and roulette wheels. ⁵⁰ Meanwhile, games of skill are based on a player's own abilities: claiming victory is subject to the player's own prowess. ⁵¹ The difficulty lies in distinguishing games of chance from games of skill. Most games of skill involve a degree of chance, due to a coin flip at the start of a game or the natural aspects of the environment. The legal difference between these types of games is often vague and varies widely between jurisdictions. ⁵² As a general rule, games of chance are considered to be a form of gambling and therefore must abide by state gambling laws, while games of skill do not. ⁵³

Keller made the argument that amusement games at Chuck E. Cheese constituted gambling because they functioned as games of chance. ⁵⁴ Keller claimed many of the chain's games were “kiddie slot machines” that awarded children based on chance rather than skill. ⁵⁵ If true, Chuck E. Cheese's entire business model would constitute a California illegal gambling scheme that targets children. Keller's lawyers said that these types of games “create the same highs and lows experienced by adults who gamble their paychecks or the mortgage payment.” ⁵⁶ Ultimately, however, Keller voluntarily dismissed her complaint. ⁵⁷

Many states have expressly rejected the notion that amusement games like those found at Chuck E. Cheese constitute gambling because they contain chance elements. Afterall, as one article put it: “When kids can't win enough tickets to pick up their piece of plastic junk, they end up shrieking, forcing parents to buy game tokens until their offspring hits the jackpot—it's the only way to get [parents] to somewhere more pleasant, somewhere with wine.” ⁵⁸

In 1993, Texas passed a law labeled the “fuzzy animals” bill, which was designed to protect carnival games, such as those played by children at Chuck E. Cheese, from gambling laws. ⁵⁹ Some games at amusement parks including the “Crossbow Shoot”, the “Milk Bottle” game, or the “Balloon and Dart” game are on their face games of skill. ⁶⁰ With Texas denying civil liability for parents seeking damages against amusement game operators, that state essentially put a pin in the Chuck E. Cheese gambling debate by labeling amusement games as ones of skill despite possessing clear chance elements.

Although amusement games contain features of skill and chance, purchasing a loot box possesses no degree of skill besides maybe typing in a parent's credit card number. But the international community disagrees to some extent with the United States' unwillingness to classify loot boxes as forms of gambling. For example, the United Kingdom's Gambling Commission has addressed concerns about whether the purchase of loot boxes is a game of chance and therefore a form of gambling. ⁶¹ The UK's Gambling Commission stated that there are apparent risks with loot boxes and problem gambling, but whether it has the power to intervene in the loot box market is “based on a judgment of whether a particular activity is considered a game of chance played for money or money's worth under relevant provisions of the [United Kingdom Gambling Act].” ⁶²

Meanwhile, Belgium and the Netherlands have ruled that the sale of loot boxes in certain circumstances is a form of gambling under their countries' gambling legislation. ⁶³ China legally requires gaming companies to disclose the probability of obtaining certain rewards within loot boxes. ⁶⁴

Regardless of this international action to regulate loot boxes, EA has elected to equate loot boxes to the plastic toys contained in Kinder Eggs ⁶⁵ instead of addressing concerns of youth problem gambling. ⁶⁶ There is overwhelming evidence regarding how loot boxes employ chance-based and rarity mechanics akin to gambling yet they remain completely unregulated in the United States.

A. The United States: a free market

As the law stands today, the United States has no federal or state regulation concerning loot boxes. ⁶⁸ Minnesota, California, Hawaii, Indiana, and Washington have all tried to take independent approaches to regulate loot boxes through legislation, though none has made it as far as becoming law. ⁶⁹ A common argument against loot box regulation is that such an action would constitute government overreach and take the power of choice away from the consumer. ⁷⁰ As one regulation critic put it, “the responsibility should be placed in the hands of the individual player who gets to choose how they spend their own money.” ⁷¹

Gaming attorneys thus have been forced to challenge loot boxes on a case-by-case approach against different jurisdictions' legal standards of gambling. This case-by-case approach has yielded almost no results. ⁷² The intangible, digital nature of loot box rewards—combined with the fact that few, if any, loot boxes implement a prize scheme, such as a cash reward—fail to meet just about any jurisdiction's gambling standard. ⁷³

The fight to regulate loot boxes in the United States began in California. In January 2019, the plaintiffs in Smith v. Blizzard Entertainment challenged the loot box mechanics of two immensely popular games: Overwatch and Hearthstone. ⁷⁴ A class action lawsuit brought by California gamers against Activision Blizzard Entertainment accused the company of “unfair and deceptive marketing of [card packs] for purchase by Hearthstone users, and of [l]oot [b]oxes for Overwatch users.” ⁷⁵ The plaintiffs clarified that “[p]acks and [l]oot [b]oxes are virtually identical except in name.” ⁷⁶ Players are able to purchase packs and loot boxes with real money to gain items that either increase a player's power and prowess or provide in-game cosmetics. ⁷⁷

The plaintiffs argued that the loot box systems within Overwatch and Hearthstone were “nothing more than lottery tickets that players are coerced into buying without fully realizing their abysmal odds of receiving the [c]ards or items they desire.” ⁷⁸ However, Activision Blizzard Entertainment ultimately won its case in arbitration. ⁷⁹

Following Blizzard, there has been an “increase in putative class actions alleging that game developers, game publishers, and even platforms should be liable for alleged harms flowing from loot boxes in mobile or other electronic games.” ⁸⁰ That same year in California, for example, a similar claim was filed against Epic Games for a loot box system used in the popular online game Fortnite. ⁸¹ Aggrieved gamers sought to capitalize on the court's willingness to hear loot boxes cases as a way to challenge the industry's predatory practices. In all of these cases, defendants claimed that loot boxes “constitute illegal gambling under California law,” with each case ultimately reaching the same result on “partially different grounds.” ⁸²

The cases California trial courts have heard concerning loot boxes have all been dismissed or settled. ⁸³ None of the aforementioned cases has resulted in a large monetary payout in terms of compensatory or punitive damages. In Taylor v. Apple, California plaintiffs asserted that the loot box feature in the game Brawl Stars was an unlawful gambling instrument under California law. ⁸⁴ They contended that Section 330b(d)(3) of the California Penal Code encompasses such games like Brawl Stars as illegal gambling devices because they contain chance elements that entice children to repeatedly play while spending money. ⁸⁵ However, this lawsuit ultimately failed because the court granted Apple's motion to dismiss ruling on the grounds that the plaintiff lacked standing. ⁸⁶

Other loot box companies have succeeded against gambling violation claims on similar standing grounds. ⁸⁷ A parallel California complaint in Coffee v. Google alleged the same causes of action as the plaintiffs in Taylor against Google because Google supposedly advertised games that contained loot boxes. ⁸⁸ The plaintiffs went on to argue that Google took a substantial portion of the revenue from those games. ⁸⁹ One plaintiff alleging injury claimed that he spent hundreds of dollars on loot boxes in several games Google advertised. ⁹⁰ Another plaintiff estimated that her son paid for loot boxes in Dragon Ball Z Dokkan Battle, one of the games that Google prominently featured in their advertisements, spending $100 on the microtransactions. ⁹¹ The court was not persuaded by these arguments, and its ruling mirrored its earlier decision in Taylor. ⁹²

Other than California, state courts have been reluctant to even consider loot boxes as violating gambling laws. ⁹³ Washington and North Carolina both have dismissed loot box gambling claims, ⁹⁴ and no other states have reportedly appeared to address the issue in a civil court. As a result, the United States has operated as a free market for loot boxes and similar in-game features. Gaming companies face almost no restrictions in implementing chance-based mechanics within loot box systems.

Though states have been reluctant to pass legislation concerning loot boxes, the stage is set for the federal government to act and regulate microtransactions. Prior to the COVID-19 pandemic, Representative Sean Quinlan of Hawaii appealed to the Entertainment Software Rating Board (ESRB) to issue rating warnings on games with loot boxes and microtransactions, with some success. ⁹⁵ Senator Josh Hawley of Missouri similarly authored S. 1629 outlining his proposals for federal oversight. ⁹⁶ Given the textualist approach concerning microtransactions the states have seemingly taken in interpreting gambling statutes, ⁹⁷ it is clear that without clear federal guidelines the courts will continue to dismiss civil challenges to loot boxes.

The President of ESRB recommends that parents take advantage of the parental controls available on every game device to manage in-game spending. ⁹⁸ Gaming consoles, like the Xbox One and PlayStation 4, have the ability to set spending limits which the ESRB President likens to an allowance. ⁹⁹ “Other devices, like the Nintendo Switch, may block purchases entirely or require parental approval for every purchase.” ¹⁰⁰ A new study, however, indicates that less than half of United States parents implement these restrictions that ESRB recommends on their children playing computer and video games. ¹⁰¹ This phenomena correlates to a majority of parents not understanding many of the online risks associated with activities like gaming. ¹⁰² ESRB has yet to address the clear link between loot boxes and problem gambling, even though loot boxes appear in games used by nearly 40% of children. ¹⁰³ By killing S. 1629, Congress left plenty of room for the proliferation of loot box mechanics and problem gambling.

B. The Netherlands: fighting back

The loot box landscape in Europe faces far more scrutiny than in the United States. A recent report by the Norwegian Gambling Commission has concluded that loot boxes in games are “exploitative and predatory.” ¹⁰⁴ The report uses FIFA 22 as a case study to demonstrate the “wide arsenal of tricks [companies use] to push consumers into spending as much time and money as possible exploiting consumers [who] hope to receive the reward despite a minuscule chance and likelihood to do so.” ¹⁰⁵ Consumer protection agencies in eighteen countries have since called for better regulation of video games. ¹⁰⁶ In particular, major political parties in the Netherlands, known for its strict gambling laws, have supported banning loot boxes for several years.

The primary piece of legislation that governs gambling in the Netherlands is the Betting and Gaming Act. Article 1(1)(a) of the Betting and Gaming Act provides a definition of games of chance: “[A]n opportunity to compete for prizes or premiums if the winners are designated by means of any calculation of probability over which the participants are generally unable to exercise a dominant influence.” ¹⁰⁷ The Dutch Gambling Authority (DGA) is the organization in the Netherlands that is primarily responsible for regulating games of chance within the country. The DGA is the supervisor and regulator of gambling services and the “sole body competent to award licenses that enable the exploitation of games of chance in the Netherlands.” ¹⁰⁸ This power encompasses all of the “exclusive licenses, as well as licenses for non-incidental games of chance and exploitation licenses for slot machine operators, and remote games of chance.” ¹⁰⁹

In 2018, the DGA completed a study of ten popular games with loot boxes and found that the mechanism “contravened the law” because the content of the loot boxes was determined by chance and the prizes to be won could be “traded outside of the game and hence had a market value.” ¹¹⁰ Thus, the DGA concluded offering this type of gambling to consumers in the Netherlands without a license is a violation of the Dutch Betting and Gaming Act. ¹¹¹

In 2020, the Netherlands garnered international attention in the gambling industry due to a €10 million fine imposed on EA by the DGA. The fine was imposed on EA because its popular FIFA Ultimate Team packs constituted illegal loot boxes. ¹¹² In the case of Dutch Gambling Authority v. EA, the DGA imposed a fine on EA in a case relating to the random gaining of players in tradable card packs that also had a high in-game value. ¹¹³ In response to this litigation, EA disputed the fine by arguing that loot boxes were not a separate game of chance “since they are linked to the game itself, which is a skill-based endeavor with the goal of winning virtual football machines through the agility and competence of different players.” ¹¹⁴ Furthermore, EA contended that loot boxes do not have any real world value because they could not be exchanged for money, and thus could not be considered a form of gambling. ¹¹⁵

The District Court of the Hague ruled in favor of the DGA, asserting that loot boxes were correctly identified as games of chance. ¹¹⁶ In its decision, the court stressed that although part of the skill-based FIFA game, loot boxes could be seen as a separate, individual game not determined by the agility of the player. ¹¹⁷ EA offered loot boxes for players to buy to potentially win items of high economic value within the in-game community. ¹¹⁸ The players had no way to control or influence the contents of the packs they bought. ¹¹⁹

Additionally, the court stated that FIFA Ultimate Team packs could be traded internally qualifying them as unlicensed games of chance. ¹²⁰ The DGA commended the district court's decision stating that it “believes it is crucial to shield vulnerable groups, such as minors, from exposure to gambling. For that reason, the [DGA] supports a strict separation between gaming and gambling. Gamers are often young and therefore particularly susceptible to developing an addiction. As such, gambling elements have no place in games.” ¹²¹

On appeal, EA managed to avoid the €10 million fine. The Dutch Administrative Jurisdiction Division, the country's highest court, said: “[w]hile packs cannot be opened while playing matches and quests, they can be opened in the same [FIFA Ultimate Team] mode. The fact that the packs are opened separately from the match or in-game task does not make it a separate game.” ¹²² The court concluded that loot boxes are not a game of chance and do not require a license because the packs are not a stand-alone game. ¹²³ EA welcomed the new ruling maintaining that its games do not constitute gambling under Dutch law. ¹²⁴

Not long after this decision, the Netherlands moved to pass a bill banning in-game loot boxes. ¹²⁵ Neighboring European countries like Belgium already had laws criminally prosecuting companies releasing games with loot boxes. ¹²⁶ As a result, games excessively featuring loot boxes have not been released in Belgium. ¹²⁷ Following Belgium's example, six political parties in the Netherlands now support the legislation that would compel developers to remove them from video games in the region. ¹²⁸ Currently, the DGA reviews games containing loot boxes on a case-by-case basis. ¹²⁹

Netherlands efforts have not been definitively connected with S. 1629, but United States legislators have cited similar arguments as those made by the DGA when Congress called for new regulation. The future of strict regulatory oversight in the United States is uncertain, but the efforts of foreign countries to protect children from gambling practices appear to be striking chords with some legislators domestically. The recognition by the DGA defining loot boxes as games of chance provides persuasive law and a basis for regulating loot boxes under United States gambling laws.

C. Pending federal action: lessons from domestic efforts to regulate loot boxes

Despite the current lack of federal or state regulation concerning loot boxes in the United States, the growing scrutiny and public awareness surrounding their potential harm may lead to increased pressure for regulatory action in the future. As more reports and studies highlight the exploitative nature of loot boxes, there could be a shift in congressional opinion following the demand for protective measures from the court of public opinion. This could eventually result in the reintroduction of legislation at the federal level to regulate loot boxes, aiming to address concerns of consumer protection and potential gambling-related issues.

The legal challenges and lawsuits against loot box mechanics in various states have faced limited success so far, with cases being dismissed or settled without significant monetary payouts. However, the continued pursuit of legal action, may eventually result in landmark cases like Dutch Gambling Authority that challenge the status quo. As legal professionals and consumer advocates explore alternative legal avenues and refine their approaches at the state level, there may be a breakthrough that leads to a successful legal challenge against loot boxes.

The role of industry self-regulation is likely to become increasingly important in the loot box landscape. ¹³⁰ Gaming companies, recognizing the public concerns and potential regulatory consequences, may take proactive steps to address the issues surrounding loot boxes. This could involve implementing voluntary guidelines, transparency measures, or age restrictions to mitigate the potential risks associated with loot boxes. By demonstrating a commitment to consumer protection and responsible gaming practices, gaming companies can regain public trust and potentially influence the direction of regulatory discussions. Self-regulation efforts may also aim to avoid more stringent government regulations like S. 1629 that could stifle innovation and development within the gaming industry.

Collaboration between federal authorities, state governments, and game developers may play a crucial role in shaping the future of loot box regulation in the United States. ¹³¹ As this issue crosses jurisdictional boundaries, a cooperative approach that brings together different stakeholders could result in more effective and consistent regulations. Task forces, industry working groups, or legislative committees may be formed to foster dialogue and find a balance between consumer protection and industry innovation.

A. Gambling with our children: Electronic Arts and “pay-to-win” gaming

The loot box industry is experiencing rapid growth. The practice continues to rake in billions of dollars for the video game industry each year. ¹³⁴ Despite the push internationally, the United States government continues to ignore the links between loot boxes with problem gambling allowing companies like EA to continue to incorporate loot boxes in minor-oriented games.

EA was founded in 1982 and has been publicly traded since 1991. ¹³⁵ Perhaps motivating the introduction of S. 1629, EA has spearheaded the use of loot boxes within its business platform and plans to “push forward” with loot boxes' continued use. ¹³⁶ EA has been at the center of the loot box controversy for several years and consumer advocates have demanded United States regulators “probe” EA games linking loot boxes to gaming. ¹³⁷

When a beta version of EA's Star Wars Battlefront II was released in October 2016, the gaming community responded in uproar. ¹³⁸ Loot boxes had been expanded beyond the basic microtransaction concept implemented in free-to-play mobile games. Instead of cosmetic items or in-game upgrades providing additional content to the base game, the criticism stemmed from “pay to win” gameplay systems being incorporated in loot boxes. ¹³⁹ A “pay-to-win” mechanic is a design found in video games featuring loot boxes where players can use money to gain an in-game advantage over other players. ¹⁴⁰ For example, in Star Wars Battlefront II, stronger character upgrades from loot boxes could be gained instantaneously if paid for with real money. ¹⁴¹ EA's community team on Reddit responded to this criticism in a now famous post by saying:

The intent is to provide players with a sense of pride and accomplishment for unlocking different heroes. As for cost, we selected initial values based upon data from the Open Beta and other adjustments made to milestone rewards before launch. Among other things, we're looking at average per-player credit earn rates on a daily basis, and we'll be making constant adjustments to ensure that players have challenges that are compelling, rewarding, and of course attainable via gameplay. ¹⁴²

The comment amassed over 600,000 downvotes (dislikes) and became Reddit's most single downvoted comment in the site's history. ¹⁴³ Although microtransactions implemented in free-to-play mobile games vary in terms of their financial reward, allowing players to “pay-to-win” adds additional value to loot box contents and leads to even more problem gambling concerns.

EA's “pay-to-win” mechanics were also used in FIFA Ultimate Team packs, in which players would spend money on player packs because those packs might contain footballers who provide a competitive advantage over other players, ¹⁴⁴ eventually leading to the litigation arising from Dutch Gambling Authority. Although Dutch Gambling Authority was overturned on appeal, ¹⁴⁵ EA has responded by adjusting its loot box system to allow players to see the contents of an Ultimate Team pack prior to purchase. ¹⁴⁶

Consumer activism seems to be having an effect on the microtransaction market even absent large scale reform through legislation. In 2018, EA re-designed Star Wars: Battlefront II's entire progression system in response to the loot box backlash. ¹⁴⁷ The update made progression linear, with items affecting gameplay being earned solely through gameplay as opposed to being “pay-to-win.” ¹⁴⁸

Still, not all loot boxes in FIFA are available as preview packs ¹⁴⁹ and EA continues to gross over $1.62 billion annually in net revenue from loot boxes alone. ¹⁵⁰ EA's total revenue for the twelve months ending September 30, 2022, was reported to be $7.285 billion, a 13.9% year-over-year increase. ¹⁵¹ Thus, loot boxes made up over twenty percent of revenue for EA during the previous fiscal year.

A relatively recent consequence of EA's divisive business practices in the video game industry is that EA has lost the FIFA franchise. Negotiations in a contract renewal between EA and FIFA strained when the two companies “battled over whether EA's exclusivity rights extended to areas beyond the game such as highlights, tournaments and non-fungible tokens.” ¹⁵² Even though no media outlet has reported of any concerns that FIFA has with microtransactions, international and domestic scrutiny on loot boxes and the risk they pose to children created a concerning image for a company seeking to renew a multi-billion dollar contract. As loot boxes gain more industry rejection, EA will wind up having to consider the possible shift away from “pay-to-win” as it was forced to do with Star Wars: Battlefront II.

B. Gamer activism and the multi-billion dollar loot box industry

Though EA has faced particular criticism within the gaming community concerning loot boxes, it has not acted alone. The cruel irony of the Blizzard case is what resulted from Activision Blizzard's sales internationally. This past year, Activision Blizzard did not release its Diablo Immortal game in Belgium and the Netherlands due to the countries' strict loot box laws. ¹⁵³ Additionally, the loot boxes subject to the litigation in Blizzard were not included in the Overwatch sequel. ¹⁵⁴ The plaintiffs may not have won their case in arbitration, but the court of public opinion has shaped microtransaction policies going forward for Activision Blizzard. The loot box regulatory landscape is currently at a standstill domestically but companies like EA and Activision Blizzard have been forced to rethink their microtransaction business models because of their reputation for gambling.

For example, both Fortnite and Rocket League are titles owned by Epic Games, ¹⁵⁵ a leading American video game and software developer. Both games offered players the chance to buy random item loot boxes, but player response was negative after players kept receiving the same, low-value items. ¹⁵⁶ This criticism eventually led to several class action lawsuits (again, trying to raise claims relating to underage gambling). ¹⁵⁷ In 2021, Epic Games reached a settlement agreement by rewarding Fortnite players 1,000 V-Bucks (the equivalent to about $8.00) and Rocket League players 1,000 credits (about $9) to those who had purchased loot boxes. ¹⁵⁸ Furthermore, Epic Games removed loot boxes from its games in favor of more transparent microtransactions that show players what they are buying in advance. ¹⁵⁹

Grassroots movements are altering the course of video game companies and their use of microtransactions, even if legislators refuse to take action domestically. The Federal Trade Commission recently received a letter “signed by more than a dozen organizations including children's advocacy, consumer rights and gambling support groups, alleging EA unfairly exploits children and teens for profit with their loot boxes.” ¹⁶⁰

On the other hand, loot boxes are not going away anytime soon as an industry practice. In 2022, Valve Corporation was awarded summary judgment in the Western District of Washington concerning the use of loot boxes in three of its video games. ¹⁶¹ Plaintiffs claimed violations of the Washington Consumer Protection Act because their “loot boxes constitute online gambling, which Valve failed to disclose.” ¹⁶² Although it is true that Valve Corporation did not disclose any gambling elements, plaintiffs conceded that their “children never purchased any loot boxes in those games, and for that reason, the Court dismissed the claims” because there was no injury to remedy. ¹⁶³

A. The change in public perception: game over for loot boxes?

During the 116th session, Senator Josh Hawley and two Democratic co-sponsors, Senators Richard Blumenthal and Edward Markey, introduced S. 1629, which would ban loot boxes in all games marketed to those 18 and under. Section 1 of the bill imposes a blanket prohibition on game publishers to issue “a minor-oriented game that includes pay-to-win microtransactions or loot boxes; or an update to an existing minor-oriented game that would enable pay-to-win microtransactions or loot boxes in such game.” ¹⁶⁵ Additionally, Section 2 defines a loot box to mean an add-on transaction to an interactive digital entertainment product that “in a randomized… fashion unlocks a feature of the product… or allows the user to make [one] or more additional add-on transactions that the user could not have made without making the first add-on transaction; and the content of which is unknown to the user until after the user has made the first add-on transaction.” ¹⁶⁶

Section 3 of the bill would treat game publishers as partaking in unfair or deceptive trade practices, stating that the attorney general could obtain damages, restitution, or other compensation if they violate the provisions therein. ¹⁶⁷ Section 4 would require a study be submitted to Congress about actions taken by game publishers and digital game distributors to comply with the law. ¹⁶⁸

Section 5 of the bill discusses researching the effects of pay-to-win microtransactions and loot boxes for audiences of all ages. ¹⁶⁹ Moreover, Section 5 describes the substance of the report to include, among other things, an analysis of the use of pay-to-win microtransactions and loot box designs, the psychological effects of pay-to-win microtransactions and loot boxes, and documentation of the different types of pay-to-win microtransactions and loot boxes. ¹⁷⁰ It also considers psychological research on users of interactive digital entertainment products that the committee can incorporate within its report. ¹⁷¹ Upon passing the bill, the S. 1629 committee would submit to Congress no later than two years after the date of enactment a report detailing the use of add-on content, including pay-to-win microtransactions, loot boxes, and other kinds of add-on transactions in the design of interactive digital entertainment products. ¹⁷²

The notion of reintroducing S. 1629 in a post-pandemic world is admittedly difficult. The United States is in a period of partisan government that is likely to usher in a period of legislative gridlock. It is hard to anticipate legislative bipartisan action after Republicans took control of the House of Representatives and Democrats retained control of the Senate after the 2022 midterm elections. However, the fact that S. 1629 was conceived as a bipartisan effort gives some hope. President Joe Biden has managed to pass a $1 trillion infrastructure bill into law, in large part due to bipartisan effort. ¹⁷³ The time may finally be here for uniform loot box regulation from the federal government.

EA's shift from spearheading the use of loot boxes and the phrase “microtransactions give players a sense of pride and accomplishment” to the more recent “we got it wrong” ¹⁷⁴ creates a corollary. It used to be impossible to successfully challenge the presence of loot boxes in video games; now loot boxes are a bad brand. Lobbyists who stand to profit from them may no longer have the sway they had when S. 1629 was first introduced. The old approach of challenging loot boxes as a violation of state gambling laws lacks on-point, legislative teeth.

Today, EA and predatory gaming companies are being challenged on two fronts inside and outside the courtroom. Gamers, organizations, and parenting groups have created a grassroots movement that has caused game and software developers to rethink the “pay-to-win” platform and loot boxes more generally. Meanwhile, international regulation and spectacle cases like Dutch Gambling Authority have shined a light on the loot box issue exposing many of the inherent links between the practice and problem gambling. And now, it has become imperative to ask, “has the loot box landscape finally changed enough where it is possible to pass federal regulation like S. 1629”?

This question requires looking back to the past five years of loot box developments starting with the California litigation and adding the increased international scrutiny. Although loot box litigation in California was not successful at defeating the practice under state gambling laws, it did open the door to other challenges. The negative publicity surrounding Dutch Gambling Authority and the “pay-to-win” platform has forced EA and other companies to make substantive chances to microtransactions in games like FIFA and Star Wars: Battlefront II. Advocacy groups have begun to make headway on the problem gambling issue which, in turn, encouraged gaming companies to remove the chance element from microtransactions. Some removed loot boxes from their games altogether.

Likewise, in perhaps the most successful case brought against loot boxes domestically, Epic Games settled in an underage gambling suit concerning loot boxes in its games and rewarded players refunds in 2022. Game publishers still unburdened by microtransaction regulation may no longer be safe from litigation as they once were just years earlier.

And to take this changing landscape question one step further, the COVID-19 pandemic prompted widespread self-isolation and countrywide lockdowns. The amount of time that children spent on their devices during the pandemic rose by 52%. ¹⁷⁵ A Verizon report found that gaming went up 75% in the first week of lockdown. ¹⁷⁶ Many parents overlooked the vastly increased time children spent on video games and social media. ¹⁷⁷ One child, who pleaded with his father not to restrict his online access, called his cell phone his “whole life.” ¹⁷⁸ It is clear that COVID-19 has stunted child development, ¹⁷⁹ but how do loot boxes factor in? One study by the National Library of Medicine has an answer.

The National Library of Medicine study began with a hypothesis that there is significant positive correlation between pandemic anxiety and spending on loot boxes and risky loot box use. ¹⁸⁰ The concern is that with more people spending time on their devices during lockdown, the more they will be playing video games using loot box mechanics:

The apparent increase in the number of people engaging with video games during the pandemic may result in increased exposure to, and hence opportunities for the purchasing of, loot boxes. This has prompted concerns about increased spending on loot boxes for certain user groups. One study suggests that reducing exposure to loot boxes by removing them from a game appears to reduce spending only among those with higher problem gambling symptoms. Thus it appears that problem gamblers who play games might be more likely to increase their spending on gambling-like features such as loot-boxes during the pandemic. ¹⁸¹

After surveying 1,200 participants on their video game habits, the study found that people particularly concerned with COVID-19 were “associated with small-to-moderately higher excessive gaming and risky loot box engagement scores, and small increases in loot box spending.” ¹⁸² Future work has yet to examine whether this phenomenon remains after lockdown ended, but the data on how the pandemic has made children more dependent on their devices is clear: children are spending more time playing video games and as a result are being exposed to loot boxes at a higher rate.

Even though it is hard to dispute the inherent problems loot boxes pose to children, implementing legislation poses multiple challenges for lawmakers in Congress. Corporate lobbyists have long had a grip on Washington, and video game lobbyists have fiercely opposed anti-loot box legislation. ¹⁸³ The removal of microtransactions from video games creates a pecuniary tension in the minds of game designers who think that dispensing with loot boxes will negatively affect their profit margins. It's very easy to imagine a game designer asking, “Why should I remove loot boxes from my game when they have given billions of dollars to the industry each year?” If the pecuniary tension persists to the point where a game designer refuses to remove loot boxes for fear of lower profits, it raises concerns that conservative lawmakers will be unwilling to approve of any loot box regulation that allegedly causes an undue burden on business.

Indeed, loot boxes have proven to be a very profitable revenue stream for the video game industry, but the assumption that these corporations will suffer without them is perhaps untrue. Some of the most profitable video game franchises of all time seldom use or completely avoid microtransactions. For instance, the Pokémon franchise is the highest-grossing video game franchise of all time and has generated $90 billion worldwide. ¹⁸⁴

Although the Nintendo franchise's mobile outing Pokémon GO has “fully embraced microtransactions to further players' progress, the company's main console and handheld titles have largely steered clear of in-game purchases.” ¹⁸⁵ Pokémon may have earned most of its money from merchandising, but the handheld games Pokémon Red, Green, Blue, and Yellow still rank seventh among the top-selling video games of all time, “topping out at 47,520,000 copies,” ¹⁸⁶ and they have done so without loot boxes. Perhaps the winning formula for developers to maximize their profit margins are not games littered with microtransactions, but simply good story and gameplay.

B. Leveling the playing field: how regulation can address the effects of loot boxes

There's a lot that works with S. 1629. Section 2 includes a comprehensive definition of loot boxes that would likely be effective at combating predatory gaming companies in cases like Dutch Gambling Authority. The loot boxes in FIFA Ultimate Team should meet the bill's definition of being “randomized” and “allow[ing] the user to make [one] or more additional transactions.” The Section 3 cause of action of unfair or deceptive trade practices probably serves as an effective deterrent for implementing loot boxes, although it is hard to predict how effective a remedy it would be because courts will award damages on a case-by-case basis.

Additionally, the Section 5 requirement of a select committee report researching the effects of pay-to-win microtransactions and loot boxes is important to ensure that the statute is effective. In the last two years alone, new scholarship and international legislation have reshaped how the public views the connection between loot boxes and problem gambling. ¹⁸⁷ Legal research provides support for drafting new statutes on complex issues, and it is important to continue investigating the effect of microtransactions on child development to ensure safety and security for young gamers.

Where S. 1629 falters is with its small scope. This is the one glaring issue included within the language of the bill. S. 1629 must go beyond the Section 1 limitation of only banning loot boxes in “minor-oriented” games. ESRB's recommendation that parents take advantage of parental controls on gaming systems to manage their control of in-game spending is not enough to protect children. In fact, the majority of parents let their children play mature games suitable for adults. ¹⁸⁸

A United Kingdom survey of over 2,000 parents found as many as 86% of parents don't follow age restrictions in video games, and more than half allow them to play games suitable for those eighteen years or older. ¹⁸⁹ Another study conducted in part by the Harvard Medical School found that of children who frequently play video games, almost half have played one violent game regularly. ¹⁹⁰ Therein lies the problem with gaming companies merely putting a warning label on games with loot boxes: children will undoubtedly get ahold of them anyway.

Removing loot boxes from all video games is difficult to justify considering many states permit forms of gambling. In the absence of a flat-out loot box ban, S. 1629 should include provisions that focus on age verification, transparent disclosure, consent, and enforcement mechanisms. Robust age verification mechanisms must be implemented to prevent minors from accessing games featuring loot boxes. Transparent disclosure requirements, such as mandating the disclosure of odds and probabilities associated with loot box rewards, will empower consumers to make informed decisions. Furthermore, explicit consent and opt-out options should be emphasized to ensure players have control over their participation in loot box systems. The bill should establish an effective enforcement framework with appropriate penalties such as the Section 4 penalty of deceptive trade practices and authorities to monitor and enforce compliance, promoting accountability within the gaming industry.

Legally, the Supreme Court's ruling in Brown v. Entertainment Merchants Association may have implications on how new loot box regulation should be shaped. The Court struck down a California law which prohibited the sale or rental of “violent video games” to minors, and required that violent video games be placed in packaging that was labeled “18.” ¹⁹¹ The California law defined a violent video game under a variation of the Court's own obscenity test for speech not protected under the First Amendment. ¹⁹² The Court, however, distinguished video games from obscenity likening them to “books, plays, and movies” that qualify for First Amendment Protection because they help to promote the free flow of creative ideas. ¹⁹³ Although ESRB assigns age-specific ratings to each video-game voluntarily submitted to its board, those ratings carry with them no legal authority restricting a child from purchasing a video game. ¹⁹⁴

When reconsidering S. 1629, the federal bill should avoid employing overly broad or vague language when defining loot boxes or regulating their sale. Similar to Brown, if the bill defines loot boxes in a way that encompasses a wide range of content or activities beyond their core features, it may face constitutional challenges for potentially infringing upon First Amendment rights. The regulation of loot boxes involves examining their integration within video games, which are recognized as forms of expressive content protected by the First Amendment. In this context, the manner in which loot boxes are implemented and the impact they have on gameplay and user experience can be seen as aspects of the overall expressive content of the game.

C. A commerce clause solution?

The Commerce Clause, found in Article 1, Section 8 of the U.S. Constitution, is one potential avenue for addressing loot box regulation should Congress decide to pursue a bill similar to S.1629. Article I, Section 8 of the Constitution states, “The Congress shall have the power… to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” ¹⁹⁵

Over the years, the Supreme Court has interpreted the scope of the Commerce Clause differently throughout four distinct eras. During the Gibbons Era (Founding–1880s), the Supreme Court interpreted the Commerce Clause broadly, defining commerce as any commercial activity involving multiple states. ¹⁹⁶ The Lochner Era (1880s–1937) witnessed a narrow view of commerce power, aligned with laissez-faire economic theories and Social Darwinism. ¹⁹⁷ The New Deal Era (1937–1995) saw the Court granting Congress significant deference to regulate interstate commerce, adopting a broader reading of commerce to include instrumentalities, ¹⁹⁸ channels, ¹⁹⁹ and activities that substantially impacted ²⁰⁰ interstate commerce.

In the present Lopez Era (1995–Present), the Court has reined in congressional power, allowing more room for the states to exercise their sovereignty. The case of United States v. Lopez emerged when Alfonso Lopez, Jr. faced charges from Texas for possessing firearms on school premises. ²⁰¹ Chief Justice Rehnquist, in authoring the Court's opinion, concluded that Congress had surpassed its authority under the Commerce Clause by enacting the “Gun-Free School Zones Act of 1990.” ²⁰² The Court deemed the law unrelated to commerce or economic activities, regardless of how broadly those terms were defined. ²⁰³

Although the Court significantly revised Commerce Clause jurisprudence in Lopez by reigning in the federal government's ability to regulate under Article I, the case more so illustrated federal encroachment on the enforcement of criminal laws, a domain traditionally under the jurisdiction of the states. ²⁰⁴ Indeed, on June 6, 2005, the Court largely departed from the limiting principles of Lopez in Raich. The Court upheld congressional authority to regulate the use and production of home-grown marijuana as this activity, taken in the aggregate, could rationally be seen as having a substantial economic effect on interstate commerce. ²⁰⁵ The Court admitted that marijuana's connection to economic activity is attenuated because it is not a legal market, but concluded activities that undermine a federal regulatory scheme are also subject to regulation under the Commerce Clause. ²⁰⁶

So how does the Commerce Clause potentially relate to loot box regulation? Loot boxes have evolved into a lucrative business model, generating substantial revenue for developers and publishers within the video game industry. The federal government's ability to regulate various matters, previously reserved for the states, is growing beyond traditional norms of commerce, and the primary basis for that regulatory expansion is the Commerce Clause. ²⁰⁷ The rapid development of loot boxes has resulted in the creation of a multi-billion dollar industry with transactions occurring across state lines. ²⁰⁸ The interstate nature of loot boxes provides a clear connection to the channels of commerce, providing a strong basis for Congress to regulate these practices in video games.

Following Raich, there has been case precedent establishing the authority of state and federal governments to regulate the internet in the context of child pornography. ²⁰⁹ Consider United States v. Plotts, where the Tenth Circuit held that Congress is empowered under the Commerce Clause to criminalize receipt of child pornography over the internet. ²¹⁰ If Congress can make the production and use of marijuana within a single state illegal, courts have found that it can also make the possession of child pornography, which has been transmitted across multiple states via the internet, illegal. ²¹¹

Drawing comparisons between protecting children from loot boxes and child pornography is not appropriate or accurate, as the latter violates numerous laws and human rights principles. However, congressional commerce power used to regulate child pornography, marijuana, and other activities that seem distant from traditional norms of commerce boil down to the Legislative Branch's ability to regulate those activities with a primarily interstate impact on the overall economy.

The impact of loot boxes extends beyond mere entertainment and has economic ramifications within the United States. Loot boxes are bought, sold, and traded among players across different jurisdictions, creating a cross-border market for these items. The purchasing and trading of virtual items within loot boxes involve financial transactions that can affect consumer behavior and lead to problem gambling. ²¹² Furthermore, the potential for exploitation and deceptive practices associated with loot boxes ²¹³ warrants regulatory intervention to protect consumers and ensure fair practices within the gaming industry. By regulating loot boxes under the Commerce Clause, Congress can establish guidelines and standards to promote transparency, fairness, and consumer protection for children.

However, when there is no explicit legislation by Congress to regulate interstate commerce, the Supreme Court has consistently relied on the “dormant” Commerce Clause to justify its authority in striking down state laws that unreasonably impede the free flow of trade between states. Although state regulation has yet to be passed, the dormant Commerce Clause could potentially be invoked to invalidate state laws that aim to restrict the use of loot boxes, if such regulations are found to impose an undue burden on interstate commerce.

The primary prohibition of the dormant Commerce Clause revolves around state legislation that favors local interests and discriminates against individuals from other states. ²¹⁴ In such cases, the law is subjected to “the strictest scrutiny of any purported legitimate local purpose and of the absence of nondiscriminatory alternatives.” ²¹⁵ State regulations that exhibit discriminatory traits seldom meet these stringent criteria. Another test under the dormant Commerce Clause comes into play when a state law appears neutral but still imposes restrictions on interstate commerce. Within this framework, the Court employs a balancing test that evaluates the impact of a statute on interstate commerce. ²¹⁶ If a statute impartially regulates to serve a valid local public interest, with any effects on interstate commerce being merely unintended or minimal, it will generally be upheld unless the burden it places on interstate commerce is evidently disproportionate to the purported local advantages. ²¹⁷

A growing consensus among courts and scholars suggests that the principles of the dormant Commerce Clause compel the invalidation of a significant portion of state internet regulations, ²¹⁸ which could encompass video game regulation over online platforms. Laws targeting pornographic communications with minors as well as antispam laws ²¹⁹ have been challenged under the dormant Commerce Clause on the basis that they not only have extraterritorial implications but also establish conflicting obligations and impose excessive burdens on interstate commerce, surpassing the benefits they provide at the local level. ²²⁰ For example, defendants in California and Washington have successfully challenged antispam statutes in both states under the dormant Commerce Clause, with the Washington court conducting a more extensive analysis based on the premise that the internet doesn't recognize geographical boundaries and the potential paralysis of internet development due to inconsistent regulatory schemes. ²²¹

The question of whether states could regulate loot boxes without congressional approval turns on whether video game corporations have the tools necessary to make online transactions “sensitive to geographic distinctions” rather than “wholly insensitive.” The Southern District of New York expressed in American Library Association v. Pataki that the internet is “borderless” and “wholly insensitive to geographic distinctions” because online spaces and locations have no connection or real link to physical environments. ²²² Thus, the “nature of the Internet makes it impossible to restrict the effects” of state regulation to conduct only occurring within the state. ²²³

Given how courts have viewed internet architecture, state legislation regulating loot boxes may be challenged under the dormant Commerce Clause because burdens could be extreme affecting internet users everywhere. State regulation on loot boxes could infringe upon the extraterritoriality factor because by regulating online transactions through the internet, a state could be seen as “project[ing] its law into other states whose citizens use the Net” and restricting the free flow of trade. ²²⁴ Federal regulation like S. 1629 would provide a consistent and standardized approach across all states, avoiding the potential for a dormant Commerce Clause challenge and conflicting regulatory schemes that could impede interstate commerce. I would like to thank my friends and family for supporting my academic pursuits: “May the Force be with you.” Special thanks to Professor Nancy Rapoport for her editorial help as well as my brother, Andrew Clark, who helped spark my love of video games.