Court Rules Virtual Currency Casino Not Illegal Gambling Despite Secondary Market

by Sheppard Mullin Richter & Hampton LLP
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A Maryland court recently dismissed a case in which Plaintiff alleged that a virtual currency casino within a social game constituted illegal gambling, despite the existence of a secondary market for the player accounts. For purposes of assessing whether the game was skill or chance-based game, the Court found that the social game, as a whole, was a game of skill, and refused to adopt the Plaintiff’s approach of considering the “casino” itself a chance-based game. This ruling is significant for social game companies that use virtual currency to engage in gamblification (i.e., the use of gambling mechanics for non-gambling purposes).

In this case, the defendant operated an empire building strategy game for which it offered a virtual currency (“gold”) for real money. However, the gold could only be used to buy things to enhance game play and for playing in a “virtual casino” within the game. In the casino, players could acquire virtual chips to play a spinning wheel. After each spin, players received a virtual prize, ranging from an in-game resource such as virtual wood or stone (useful elsewhere in the game) to additional chips or gold. Defendants offered no mechanism for players to cash-out the gold or virtual goods for real money.

Plaintiff alleged that, over the course of about one year, she lost more than $100 wagering at Defendant’s casino. Plaintiff sued, purporting to represent a nationwide class of players and a subclass of Maryland players, alleging that the casino was an unlawful “slot machine or device” under Cal. Penal Code § 330b; that Defendant (which operated in California) violated California’s UCL by owning and operating this unlawful device, proximately causing Plaintiff and her class economic damages; that Plaintiff and her class have conferred a benefit upon Defendant that Defendant should not be permitted to retain; and that Plaintiff and her subclass are entitled to restitution under Maryland law.

The court granted Defendant’s motion to dismiss for a number of reasons.

The court stated that California law defines a “slot machine or device” as a “machine, apparatus, or device” that is operated by insertion of a coin or other object “or by any other means” and that “by reason of any element of hazard or chance” grants the user any of the following: (1) a “thing of value,” (2) an “additional chance or right to use the slot machine or device,” or (3) a token that may be exchanged for a “thing of value.”

The Court concluded that Defendant’s software was downloaded to an individual’s Apple or Android device, and there is “no cognizable reading of Section 330b that would reach a software developer whose software was only installed onto the devices of others.” Thus, the Court concluded that Defendant’s Casino function is not a “slot machine or device.”

The Court went further, noting that even if the Court were to embrace Plaintiff’s expansive understanding of “slot machine or device,” the Court would still find that Defendant has not violated Section 330b due to an important exception to the statute, which states: “Pinball and other amusement machines or devices, which are predominantly games of skill, whether affording the opportunity of additional chances or free plays or not, are not included within the [proscribed category].”

The Court found that the empire building game, as a whole, is a game of skill, not chance, and that the exception applied. The Court refused to adopt the Plaintiff’s position that the casino itself was a game. On this point, the Court stated: “Plaintiff proffers no authority for the proposition that the Court may excise one particular aspect of an integrated strategy game and evaluate that aspect in isolation. On the contrary, applying Plaintiff’s logic, one could excise the free replay and similar chance-based functions of any number of skill-based games—including pinball—and, viewing those aspects in isolation, find the games to violate section 330b.”

This is a significant conclusion for game companies that offer mini-games as part of a larger game, as was the case here.

Based on these findings that the casino function was not a “slot machine or device,” and because the game as a whole was predominantly a game of skill, the Court concluded that the game does not violate Section 330b.

The Court also dismissed Plaintiffs unfair competition claims, in part because the Court found no cognizable loss.

The court found that there was no real-dollar value attached to gold, chips, or any casino prizes. On the contrary, the Court found that Defendant’s Terms of Service (“ToS”) provide that “Virtual Currency and Virtual Goods may never be redeemed for ‘real world’ money, goods or other items of monetary value from [Defendant] or any other person”; that players receive a nontransferable “revocable license to use the Virtual Goods and Virtual Currency” solely for personal entertainment purposes; and that, aside from the foregoing license, players have “no right, title, or interest in or to any such Virtual Goods or Virtual Currency.”

The Court further noted that although the ToS expressly bar players from buying or selling any “Virtual Currency or Virtual Goods outside the Services or in exchange for ‘real world’ money or items of value”, Plaintiff alleged that players have created secondary markets to buy and sell player accounts. The Court noted that Plaintiff did not allege that Defendant hosted or sanctioned these secondary markets, nor did she allege that she has ever sold or attempted to sell an account nor even that she intends to do so in the future.

The Court further analyzed the facts and found:

Plaintiff was not wagering with dollars; she was playing with virtual gold. Plaintiff acquired that “gold” in the “gold store,” where she exchanged her real-world currency for a nontransferable, revocable license to use virtual currency for entertainment purposes. At the moment of that antecedent transaction, Plaintiff’s “loss,” if any, was complete: then and there she had swapped something of value (real money) for something of whimsy (pretend “gold”).

Plaintiff could spend her “gold” as she pleased within the bounds of Defendant’s ToS:
she could acquire resources to “hasten [her] advancement in the game”, or she could exchange her “gold” for chips to spin the casino wheel. What she could not do is cash out of the game. In this respect, while the casino function aesthetically resembles classic games of chance, the underlying transaction is more akin to purchasing cinema or amusement park tickets. Consumers of such services pay for the pleasure of entertainment per se, not for the prospect of economic gain.

Conclusion

This is a very important case for social game companies that use gamblification. This court expressly ruled that where the game operator merely provides software, it is not a slot machine under Cal. Penal Code § 330b. It also ruled that where the game operator offers no cash-out for virtual items, the items have no value, for gambling analysis purposes, even if there is a secondary market for the virtual items (as long as the secondary market is not hosted or sanctioned by the game operator). Additionally, the court held that for purposes of determining whether a game is a skill-based game, the relevant analysis was based on the game as a whole and that would have been improper to excise a mini-game feature to perform the analysis.

This is one of the first cases to squarely address these facts and issues in connection with virtual currency, gambling mechanics and secondary markets). Although the ruling is relevant to the state statutes and the facts at issue in this case, it is a positive development for social game companies. It is important to remember that other states’ gambling laws differ from the specific wording of the statutes here and other/different facts may lead to a different result. It remains important to carefully assess the use of gamblification features on a state-by-state basis and the specific facts of each offering.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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