ALERT Sports and Entertainment Practice JULY 2020 Esports Alert: The Global Crackdown On Loot Boxes Darius Gambino Do video games need to be regulated under gambling laws? That’s exactly the direction things are heading. The United Kingdom’s House of Lords Gambling Committee recently issued a Report recommending that video games be classified as “games of chance,” and regulated under the UK Gambling Act 2005[1]. Referring specifically to loot boxes within video games, the Lords stated: “If a product looks like gambling and feels like gambling, it should be regulated as gambling.” Loot boxes have become a major issue in the video game industry in the last ten years. Loot boxes are a type of Downloadable Content (DLC) that can be purchased for use with some video games. Specifically, loot boxes may be described as any type of in-game virtual package that provides a randomized reward to the player. For example, a loot box could include a more powerful weapon to use in a first person shooter game, or a more proficient athlete to use in a sports game. Hugely popular sports franchises like FIFA 20, Madden 20, NBA 2K20, NHL20 and MLB The Show 20 all include some form of loot boxes. So do esports franchises like Call of Duty, Counter Strike: Global Offensive (CS:GO), Rocket League and Overwatch. In some games (like Overwatch), loot boxes offer purely aesthetic rewards (skins); in other games the rewards actually improve your status and abilities within the game. To acquire loot boxes, players must typically either spend real money, or spend time completing in-game challenges. In games like NBA 2K20, loot boxes take the form of virtual ‘packs’ of basketball cards, with players looking to ‘find’ top NBA players in packs for use in-game. For many, the allure of short-cutting the time and effort required to complete in-game challenges by spending a few dollars on a loot box is tempting. Some even refer to these systems as ‘pay-to-win’ because the player can pay actual money to make their player or team better, and thus increase their chances of winning the game. This was one of the primary concerns expressed by the Lords in the Report – that players under the age of 18 will be tempted to spend real money on loot boxes as a means of improving their proficiency within a game. The Report states that 55,000 problem gamblers are aged between 11-16, and also highlighted esports betting as potential gateway for young people. The Report goes farther, stating “There is academic research which proves that there is a connection…between loot box spending and problem gambling.” Because loot boxes are randomized, there is no guarantee that a player will get what they want the first time they ‘open’ one. High-value items are often only in a select few loot boxes (e.g., 1 in 50). This, in turn, may encourage players to continue spending money and opening loot boxes until they achieve the reward they desire. In the NBA 2K20 example, a Ben Simmons or LeBron James card may only exist in one out of every 100 packs a user opens, with each pack going for roughly $1 to $2. In some games, the odds of getting a particular reward are provided to the player, in others they are not. The UK is not the only country concerned with loot boxes. In May of last year, Senator Josh Hawley (R. Missouri) introduced legislation into the US Senate to ban loot boxes in all games marketed to those 18 and under. Since then, not much has happened with the bill (S. 1629), but that may change as other countries start to set their stance. Belgium banned loot boxes in 2018, and China has restricted the number of loot boxes players can open each day. Recently, the company that issues game ratings for North America, the Entertainment Software Ratings Board (ESRB), stated that DELAWARE FLORIDA ILLINOIS MARYLAND MASSACHUSETTS MINNESOTA NEW JERSEY NEW YORK PENNSYLVANIA WASHINGTON, DC www.saul.com ALERT SPORTS AND ENTERTAINMENT PRACTICE they would be updating warnings for games with “loot boxes, item or card packs, prize wheels, [and] treasure chests.” This banning or restriction of loot boxes is a major concern for video game developers and publishers, who make roughly 25-50 percent of their yearly revenue off DLC, with loot boxes being a large part of that revenue stream. Video game developers devote significant financial resources to innovating content, and they should have the right to sell DLC such as loot boxes to adults who understand the risks. Removing loot boxes entirely from video games could have significant ripple effects throughout the industry. It could, for example, result in layoffs, decreased investment in content development and higher game prices. It could also potentially result in decreased interest in video games and esports in general. While governments around the world watch closely, video game industry developers and publishers may want to take this opportunity to reassess their current stance on loot boxes. Industry analysts seem split on the issue, with some believing that government regulation of some kind is inevitable, and others believing that the industry will band together and formulate their own solution (e.g., stronger parental controls, odds disclosures, alternate game modes, etc.). In the meantime, we can only continue gaming. 1. https://www.parliament.uk/business/committees/committees-a-z/lords-select/gambling-committee/news-parlia- ment-2019/lords-gambling-report-published/. This alert was written by Darius C. Gambino, a member of the Firm’s Litigation Practice. Darius can be reached at (215) 972-7173 or at Darius. [email protected]. This publication has been prepared for information purposes only. Did you find this information useful? Please provide your feedback here and also let us know if there are other legal topics of interest to you. The provision and receipt of the information in this publication (a) should not be considered legal advice, (b) does not create a lawyer-client relationship, and (c) should not be acted on without seeking professional counsel who have been informed of the specific facts. Under the rules of certain jurisdic- tions, this communication may constitute “Attorney Advertising.” COPYRIGHT © 2020 SAUL EWING ARNSTEIN & LEHR LLP, A DELAWARE LIMITED LIABILITY PARTNERSHIP. ALL RIGHTS RESERVED. 2 .