Loot Boxes Should Be Regulated, but Not by the United States Government

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Microtransactions and loot boxes are a hot button topic among the gaming community. But this issue is about to hit the congressional floor. On Tuesday, November 27, FTC Chairman Joseph Simmons pledged to the committee that he is dedicated to investigating video game loot boxes to ensure that children are being protected and parents are educated on the matter. Additionally, Senator Hassan, a Democrat from New Hampshire, spoke on the issue of loot boxes as gambling and urged the administration to act. 

While a lot has happened in the last few days, this issue is a long time coming. In Hawaii, state lawmakers introduced four bills that would regulate the sale of video games by prohibiting the sale of loot box games to consumers younger than 21 years old. While the bills failed to pass, it remains a hotly debated issue among representatives. Similarly, loot boxes are being reviewed by an Australian Senate committee and were declared illegal under Belgium and the Netherlands gambling laws.

Speaking about her testimony, Senator Hassan told Variety“While I have appreciated working with the ESRB on this issue, I have also said that the Federal Trade Commission has a responsibility to look at this issue,” she said. “The need for FTC action becomes more apparent given the recent report from the Gambling Commission of Great Britain and the steps other countries have taken to regulate loot boxes. I hope the FTC will move quickly to begin their investigation and look forward to working with all parties on this issue.”

Under the United State’s Constitution’s Commerce Clause, Congress the power to regulate interstate gambling, international gambling, and relations between the United States and Native American territories. Additionally, states have differing legal gambling ages while some states restrict gambling altogether.

For some clarity, a loot box is a consumable virtual item which can be redeemed to receive a randomized selection of further virtual items. These boxes are often purchased with real money. Loot boxes differ from microtransactions because with microtransactions users are guaranteed the product they want. Loot boxes are randomized which is why many government bodies are debating if they are gambling.

Traditionally, the games industry has been able to avoid government interference by regulating itself and being a champion for free speech. The Entertainment Software Rating Board (ESRB) was created 1994 as a response to criticism video games with excessively violent or sexual content. The organization functions as a “non-profit, self-regulatory body that assigns ratings for video games and apps so parents can make informed choices.” 

On the topic of loot boxes, the ESRB previously ruled that they did not see loot boxes as gambling. An ESRB spokesperson in an e-mail to Kotaku said, “While there’s an element of chance in these mechanics, the player is always guaranteed to receive in-game content (even if the player, unfortunately, receives something they don’t want). We think of it as a similar principle to collectible card games: Sometimes you’ll open a pack and get a brand new holographic card you’ve had your eye on for a while. But other times you’ll end up with a pack of cards you already have.” 

In multiple cases, judges have ruled that baseball cards, Pokémon cards, and even Magic the Gathering cards are not gambling. In 1998 Pinnacle Brands, a trading card company from 1988 to 1998, was sued on the grounds that Pinnacle’s trading cards “comprises all the elements of illegal gambling.” Gambling under federal law consists of three elements: consideration, chance, and a prize that can be won. In this particular case, consideration means persons must purchase card packages in order to try to win a valuable chase card, the chance is defined by valuable chase cards are randomly inserted in the packages and the prize would be chase cards.

Ultimately, the court ruled in favor of Pinnacle with an appeals court holding the decision. U.S. District Judge Robert Maloney cited the plaintiffs did not have standing to sue since they did not suffer any concrete economic injury, a requirement when suing under the Racketeer Influenced and Corrupt Organizations Act (RICO), a U.S. federal statute which provides criminal penalties and civil action for any act performed as a part of an ongoing criminal organization. Furthermore, Maloney ruled in his opinion that in buying packages of sports trading cards they got what they paid for.

This court decision was elaborated on further by Self-titled video game lawyer Ryan Morrison echoed this sentiment while on Funhaus’ podcast Dude Soap in 2017. He does, however, add that most people know they will not be getting a high-value card in the pack of baseball cards but most people buy a loot box for one specific item. His example was buying an Overwatch loot box for a Symmetra skin is like buying a pack of baseball cards for a Mickey Mantle rookie card. Statistically speaking it is highly unlikely but the fact people buy loot boxes like that create an economic precedent that baseball cards do not have. He also disagrees with the sentiment that every loot box has a prize. Speaking again to Overwatch, emotes and voice lines are not considered a prize compared to a skin.

In regards to card games, loot boxes most accurately resemble Magic: The Gathering, a game where players use cards to cast spells on their opponents. Like baseball cards, Magic cards are sold in small packs with random sets of cards with some a higher value than others. However, unlike baseball cards, and more similar to loot boxes, is that people buy specific card packs hoping for that one rare card. Yet, this analogy while more accurate is irrelevant. The only similar court case to loot boxes is the Pinnacle case mentioned above. A court of law will rule on cases based on current precedent. Because of that, it would be very easy for Congress and subsequently a team of US attorneys to argue that loot boxes are gambling.

The idea of a judge ruling on an issue that has such a niche culture and requires that niche understanding is scary. Unless we specifically have judges, attorneys, and politicians who are well versed in the gaming world it will be immensely difficult to make arguments that are understood and translated to non-gamers. I do not play multi-player titles so I even feel that my knowledge of loot boxes is limited and I am a gamer who is well-versed in this culture.

There is a lot at stake for game companies and the ESRB. Games with “real” gambling are given an “Adults Only” rating, which is more or less unsellable since most retailers will not carry games with an AO rating. This more or less means if loot boxes are defined as gambling in the United States the ESRB will have to update their rating system or games will have to forgo the revenue stream entirely. In her testimony, Senator Hassan acknowledged that between casual gaming, mobile gaming and more, loot boxes are a 50 billion dollar industry. 

ESRB rating guide for ADULTS ONLY games

In 2017 alone the developer of Overwatch, Activision Blizzard, made $4 billion in microtransactions including loot boxes. An important thing to note is $2 billion of that is from King’s mobile games such as Candy Crush. EA has banked, pun intended, a lot on loot boxes within their games. EA CEO Andrew Wilson told investors, “Going forward, we believe that live services that include optional digital monetization, when done right, provide a very important element of choice that can extend and enhance the experience in our games.” EA’s digital net bookings for “live services,” which includes loot boxes, came to $787 million.

So what is the answer?

I am not a lawyer but I can tell you anything involving the FTC and the Commerce Clause, enumerated power listed in the United States Constitution that states the United States Congress shall have power “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes,” will be messy. It is hard for everyday consumers to comment on the state of Commerce laws since they are full of legal jargon and beyond convoluted. However, I can say, at this point in time, the gaming industry needs to regulate itself before the government steps in.

To avoid the potential repercussions to the industry in regards to loot boxes, microtransactions, and even third-party resale companies cannot control, ESRB has to act. Morrison mentioned during Funhaus’ podcast that the companies that will be hurt will not be juggernauts like EA, Activision, or Blizzard. The government will instead go after indie developers that have litigation teams that are ill-equipped to face a lawsuit. The government will use these companies to set precedents that they will then attempt to enact into law that could eventually hurt bigger gaming companies.

For example, Belguim has already warned that several games including Counter Strike: Global OffensiveFIFA 18′, and Overwatch violate the country’s gaming legislation. The country is threatening to drop heavy fines or even prison sentences on offenders. Blizzard disabled loot box purchases in Belgium following the new regulations. On the other hand, Belgium’s gaming commission has launched a criminal investigation into the game developer EA Sports. While I have no doubt EA will come out fine even if they have to pay a hefty price or pay to change their game at the last minute, a smaller developer would cripple under those consequences and probably end up out of business. 

FIFA 18′ microtransaction menu

The ESRB is not a government agency and they are one of the main reasons video games in the United States are afforded so many protections that don’t exist in other countries including Brazil, Germany, and other parts of Europe. If the gaming industry is not policing itself, the government will step in, legal murkiness aside. That is the dirty truth of this issue. The legality barely matters when those making laws and policy cannot begin to understand the culture or argument.

There is no easy answer but the gaming industry needs to get involved before the government regulates on something they know little to nothing about. Considering how video games have been scapegoated for everything from school shootings to promiscuous behavior and now addiction, it is immensely important the ESRB update their ruling and get ahead of the incoming legal crisis.