Loot Boxes: Legal Pitfalls and Loopholes

[Music] welcome to loot boxes legal pitfalls and loopholes my name is will bucher i'm an ip litigator for a law firm double boys and plimpton in new york city that's a fancy way of saying i help media companies mostly video game companies when they get sued and then i also spend my days helping those companies avoid situations that might get them sued today we're going to be talking about regulation of loot boxes and we're going to focus on three regions the united states the european union and china and i'm going to be talking to you about where there are regulations and in the countries and regions where there are regulations what you need to know about them and what you need to do to modify your game so that you can release in that jurisdiction this is a business and marketing talk and so for the first 27 minutes of this half an hour presentation that's going to be focused on the rules and how you can avoid them for the last three minutes i will talk a little bit about as a community how we

ethically want to use loot boxes but the focus of today's presentation is on the rules because i want to give you the tools and let you decide how you want to use them before we can start talking about loot boxes we have to get on the same page about what a loot box is and i think that question is a little harder than it appears at first most of us have an idea of what a loot box is in our mind we might think of the stereotypical you pay money or some green gems for a box that has some randomized items but the truth is there's a lot of chance involved in everything we do in life and i could argue that anything on this screen is a loot box i'm not going to go through each of these items but i want to point out a couple of the items that are on the screen in the middle there you see just sort of a procedurally generated monster we've had these in games for decades and the mechanics are actually very similar to a loot box right the player gets a random assortment of items most of the time those items are bad

sometimes they're really good and so there's some similarities there right loot boxes really aren't that different from something we've been doing for a long time what about that last example right i call a car a loot box right let's say i invest in bitcoin and i hold all that bitcoin until i can afford my lambo and i go to the dealership and the dealer says to me do you want the extended warranty and i say no i want to save that money to invest in more bitcoin and 366 days later my drive train blows out i'm out half a million bucks but no one is trying to say that i have to take the extended warranty no one's trying to regulate that practice but we face chance in everything we do and because it's so hard to define what a loot box is the answer to what a loot box is in today's presentation is it depends on the regulator we see regulators governing root boxes in different ways and that's because i don't really think loot boxes are a problem in the game development industry but i do think some loot boxes

are symbolic of some very real issues we face i think some loot boxes create compulsion loops these are skinner box mechanics that keep players playing much longer than they actually want to play some loot boxes are symbolic of pay to win mechanics where players feel like they're not being rewarded for their time or their skill but just the money they put in some loot boxes are used in outright fraud and a lot of loot boxes aren't transparent it's not clear to the user what they're going to get and what their odds are and so when we see loot boxes regulated we actually see them targeting these four other practices so with that let's start with the united states now the united states gets a reputation as a country where corporations make all the rules and there's no consumer protection and in the case of loot boxes that's absolutely right there is no government organization no agency none of the 50 states that place any formal rules on the use of loot boxes but there actually are some rules on the use of

loot boxes in the united states so those come from private companies those companies are the esrb that's the ratings organization here in the united states and apple through the app store if you have a mobile game that you're selling on ios devices apple has rules you're going to have to comply with i'll put a little asterisk here that doesn't mean you can just commit outright fraud if you're lying to your consumers that's illegal and that's been illegal for over a century centuries very long time so don't use this as an excuse to do otherwise illegal things but there's no specific loot box regulation so let's talk about those private company rules so for apple you must disclose the odds by item type right and apple defines loot boxes as mechanisms that provide randomized virtual items for purchase so apple's sort of there's three requirements to be in the loot box bucket has to be virtual item has to be randomized and has to be for purchase i think that sort of lines up with most of our notions of loot boxes

right and when i say disclosed by item type what i mean by that is think of sort of the classic game that has a common item rare item an epic item and a legendary item that's what i mean by type you don't have to list every single item and the odds of getting each and every item but you have to list them by categories when you're selling on the app store what about esrb how does the ratings organization define loot boxes well they sort of don't they lump loot boxes in with any in-game purchase right and the requirement for esrb is that you include an in-game purchases label underneath your writing i put an example up there in the lower right hand corner that's what the in-game purchases tab looks like and that's an effort for transparency the people who use ratings most are parents and what parents care most about is how much is their child going to spend in the game and they want to know if their child is going to spend more money they don't really care that it's in the format of a loot box or a randomized capacity so now i'm going to bring us into a

hypothetical i find it's easier to think about these ideas in a context that might be more similar to the one you would face in your own company as a developer or publisher it's not going to be particularly complicated but in our hypothetical today we have a game developer shady corp and they're releasing a game drawn out chess and this is a classic game of chess but it's monetized by selling skins specifically selling skins through loot boxes they release the games with no disclosures no consideration of the regulations and a month later an employee spots the issue right this actually happens a lot people realize after the fact they're doing something wrong and the question is what does the developer do here as a company let's start with esrb what does drawn out chess have to do to comply with the ratings well if they're esrb rated they have to include that sticker but in my hypothetical this game is actually only being released on steam and ios and what that means is they don't need an esrb rating at all

most games published today are not rated by the esrb because neither steam nor the app store require that the games be rated okay so what about for apple well for apple there needs to be a disclosure by item type like i talked about so that means shady corp needs to divide their items into categories and list those percentage odds for the players they can't actually formally backtrack apple says the disclosure has to be before the purchase so there's actually no way to become compliant here and somewhat frustratingly apple doesn't have formal rules for what you do when you mess up so my best advice to shadycorp here would be fix the game start disclosing in advance and then do nothing else and then if apple comes talking to you apologize negotiate with them work out a solution but there's actually no formal process for how to remedy a violation okay here are some takeaways um i know sometimes helpful to sort of have bullet points feel free to take photos of these slides

takeaways for u.s regulation our esrb disc requires disclosure uh but there's no requirement that your game actually have an esrb rating for most online sale platforms all ios games must disclose odds by item type that disclosure must be prior to purchase and there's no regulation on loot boxes but that doesn't mean other laws don't apply so now let's talk about the eu so the in the eu right now there's country-specific regulation that means every country in the eu gets to make up their own decision some countries germany france even peggy which is the equivalent of the esrb in the eu have called for eu-wide regulation but right now we haven't seen any of it so that means right now other than two countries you can do whatever you want in the eu just like in the united states the two countries that have rules are belgium and holland in belgium it's illegal to have any acquirable item

where chance is involved so belgium defines loot boxes as the purchase with real money um or with paid virtual currency that's sort of like the green gems the premium currency in your games um and or chances involved so you can sell items directly to players but you can't sell as you know these sort of randomized loot boxes holland is actually a little more permissive holland makes it illegal where the item is acquirable with real money where there's chance involved and where the final prize is transferable right so you actually have some more options in holland oftentimes the two countries get lumped together but i think it's actually much easier to operate in holland than it is in belgium so we'll continue our hypothetical shady corp expands it's drawn out chess offerings to europe what do they need to do and where okay well the answer for most countries is simple they don't need to do anything for belgium the answer is they'd probably need to put a geofence on the purchase of their loot boxes

right they can publish their game but they can't have those purchasable loot boxes in the game for holland shady corp has another option they could either geofence the purchase of the loot box or they could prohibit players who have ip addresses in holland from transferring their items so you could still have those loot boxes in your game as long as the player can't transfer and oftentimes it's more profitable to restrict the transfer of the items after the fact than to restrict the out like purchase of loot boxes i think what these different regulations highlight and this may become more important in the future if we see other jurisdictions implementing regulations and this is my third bullet point on these takeaways here is that when you as a developer or publisher are building your game you want to make sure every feature of your game can be toggled on and off or at least every monetization feature right because if you're in a position where you can't turn off the sale of loot boxes then that means you just can't sell your game at all in these countries you're limiting yourself from a market that

might still be profitable despite the regulations so as you're building your game build with these considerations in mind that there are rules that are different by country and that those rules may change over time other big takeaways are in holland you have a choice you can restrict the transfer or the sale of loot boxes in belgium you have to restrict the sale of randomized items for purchase and then sort of my final point is i i've seen these calls for eu wide regulation i don't expect it to happen soon although you know you ask a hundred lawyers and you get a hundred different opinions on that so so far the sort of takeaway has been there's not a lot of regulation and it's pretty easy to get around it china's sort of a different story in china loot boxes are regulated by two different organizations one with a focus on content and the other with a focus on monetization and mechanics we're going to start by going through the formal rules and then we'll talk about sort of how that ends up working in practice so formally on the monetization you

cannot have a randomized event right china defines a loot box as any randomized event that seems a little overbroad doesn't it right that seems like everything i put up on that first slide in the presentation today but you can't have a randomized event for purchase with real money or virtual currency this might be a translation issue i think virtual currency actually means paid virtual currency we haven't really seen any enforcement against games where you just have the gold you collect naturally through gameplay but formally it says any virtual currency so as written and as translated into english that could be even the currency you only can earn through game play second rule is the virtual items or services that you offer have to be obtainable by other means what are other means that could mean that you could get it through game play you could get it through randomized drops from killing monsters in the game you could have it so that the only way to get the item is to purchase it out right from the store or get a loot box so you can still have items that are only a purchasable for real money but there has to be some other way to get that

item and then the third requirement is no compulsion loops these are like sort of skinner box mechanics we'll talk about in our hypothetical for this country about what that might look like even in the context where you weren't directly selling the loot boxes but that's not all china has regulations on disclosures and these are super onerous regulations uh the first is you need to provide information about the odds for your loot box up front and that information is not like apple where it's by type you're formally supposed to list your odds of getting every single item in that loot box now that may just mean that you're taking the number of items that are in a category and dividing that category percentage to list them but you know it is a more formal requirement but not only do you have to list your odds in advance those odds have to be transparent to users that means it's easy for a chinese user to find those odds right can't be complicated can't be you

know at the very bottom of your page click here to see the odds basically if they run a search for those odds they should be able to find them and then the final requirement which is incredibly labor intensive is that every game is supposed to keep for 90 days and publicly make available the results of every single loot box outcome in their game thousands or millions of outcomes kept in a chart and it's just be publicly available now you might be thinking to yourself will i bet you you 50 bucks you can't find a single company operating in china that does that and if you're thinking that you'd be up 50 bucks i searched through the top 20 licensed games in china and i wasn't able to find it and so then i called my colleague in hong kong because i said look maybe it's a language barrier and my colleague in hong kong couldn't find a single game that did that either so i think what you see in china is a lot of rules but really inconsistent enforcement of

those rules and the truth is whether or not you can offer a loot box in china depends on whether the government likes your game so now we're going to come into today's last hypothetical uh and this has to do with dynamic odds adjustment so it's march and shady corp's game is doing well but they want it to do better and so they're going to engage in dynamic odds adjustment what do i mean by that that means adjusting the odds of the outcomes for your loot box in the hopes of denying the player what they really want so they keep buying more loot boxes this can target a specific player we might have data and metrics that tell us about an individual player but that sort of odds adjustment can be done on a a wider basis so in our example it's march right saints patrick's day was sunday and shady corp realizes their players really want to play with their st patrick's day themed chess set and so previously when you got one of their legendary chess sets there was an even chance of getting a pirate chest

set a ninja chess set a halloween chess set but they're going to adjust the odds so the odds of getting that st patrick's day chess set go down and not only are they going to do that they realize no one wants a halloween chess set in march so they're going to increase the odds of that chess set and the hope here is that the players don't get what they want and so they keep purchasing more loot boxes so let's talk globally is this practice legal what does shady corp have to do to make it legal well in the united states yeah currently you can do this even apple's terms right only require disclosure of those top level categories and here shady corp isn't changing the odds of getting a legendary item they're just changing the odds a level below that within the odds so they don't even need to change their disclosures to comply with apple's terms it's conceivable that if they were they might get you know an action for fraud

brought against them but if they have a good lawyer they're probably going to be okay right now in the united states what about the eu similar answer although i'd say eu courts are sort of more favorable to sort of creative legal actions so even though there's no strict law prohibiting it probably slightly riskier in the eu obviously can't do this in belgium i think you could still do it in holland as long as you didn't restrict transfers so what about china the country we just talked about well this violates the formal rules for a lot of reasons first it's a purchasable loot box but even if there was geo-fencing for china so the game didn't have purchasing loot purchasable loot boxes there this would still violate their rules because this creates a compulsion loop even if the only way to get the loot box was from gameplay this encourages the players to purchase the loop to get more and more because they're never getting what they want out of it so that's sort of where the compulsion loop rule comes in in china but of course as we've seen in china particularly with the disclosure

requirements often those rules aren't enforced so maybe the answer here would be to work with a partner in china who has influence although that's less successful than it used to be so our takeaways for chinese regulation is no loot box is purchasable with real money or virtual currency there's flexible and unclear rules that give the government a lot of enforcement power and there's a particular focus from the regulatory entities on preventing these compulsion loops there's disclosure requirements that exist in china and in apple's requirements but in practice these requirements can be designed around or simply ignored and then that final point is i'd recommend working with a partner who's established in china if you're doing these practices there so to wrap up my presentation today how are loot boxes regulated well it depends on the regulator but there's no major regulation in western countries outside of holland and belgium and there's inconsistent enforcement in china and that answer's right but there's also

a second right answer which is how loot boxes are regulated depends on what everyone in this room does going forward just because as of march 2019 there's no loot box regulation doesn't mean there won't be tomorrow and whether you realize it or not as a developer or a publisher you're part of a collective dialogue about how we interact with our players our customers and about how we want to be regulated and so i urge you going forward to be careful how you use loot boxes and to take simple steps to prevent problems have parental controls that can be enabled so that young children don't purchase loot boxes you can reach out to players who you think might be exhibiting problematic behavior and who you also think may not have the money to be doing so the simplest and most important thing you can do is when your colleagues or your friends or your parents talk to you about loot boxes don't paint it as a black and white issue don't just say loot boxes are okay or they're bad because the truth is it's not loot boxes that are a problem

which the problem is when loot boxes are used to do other things when they're used to create those compulsion loops to keep players playing longer than they want to when they're used to create pay to win mechanics so players can't win from their skill or time no matter how long they play the game blue box is a problem when they're not transparent when players don't know what's going on and when we frame the discussion as solving these other problems i think we realize that there's all sorts of game mechanics that can run into these issues and the key is how we use the mechanics not whether we use them to be clear i'm not worried about a world where this is regulated i don't want this regulated but i'm okay with it being regulated but i'm concerned the people who are going to pass the regulations aren't gamers they're not lawyers like me who spend their days working on these issues and that instead of getting this regulated what we're going to get is all of this regulated and by having those thoughtful discussions by shaping the dialogue in a way that highlights the real issues while acknowledging that oftentimes loot boxes are fine

we can prevent entering this world where all this is regulated thank you so much i really appreciate you taking the time to come today's talk i put my contact info up on the board i don't know if we have time for questions but if we don't i will be in the wrap-up room there's tables down the hall right outside of 305 i'm happy to stick around and talk about these issues for as long as you guys would like the other reminder i'll give you is to please fill out your feedback surveys last year after i presented i'll say i was really impressed with the detailed feedback you gave and the positive feedback about what i could do better what i could do more of hopefully i've incorporated that this year and i'll try and incorporate it next year too so thank you so much guys uh

oh i don't know no questions no oh okay yeah no i just had a quick question of i was just wondering how you you know do you see this as evolving i mean there's all the you know there's definitely everyone sort of especially europe has you know had a lot of sort of privacy rights and a lot of uh you know movement on other fronts as far as uh you know rights of the consumer um do you see this as like oh we've kind of settled down or oh my gosh it's changing every year um i think it will change i don't think it's to change in the next year now who knows maybe next year there'll be you know presentation loot boxes everything i said last year was wrong and there'll be a bunch of changes but uh no i don't think short-term change is likely but i do think we're going to see very slow movement to recognize these issues um at least in the u.s the ftc is holding a workshop they've yet to set a date but sometime in the next six months they'll

have a discussion and i i hope i'm hopeful that's going to be really valuable because they'll have the opportunity to hear not just from parents and players who are having issues on their side but also from the developers about what they're doing and i'm hoping what we get to is a place where they identify a couple really bad practices and prohibit just those really bad practices and otherwise let us do what we want in our games so that's where i see it going that's where i hope it's going and i don't think we're going to see any legislative change in the next 12 months okay thank you yes thank you by the way great presentation uh i was wondering if you could provide some more detail on defining um or proving or disproving a compulsion loop it sounds like it's rather subjective something that might be compulsive for me might not be compulsive for someone else so how do you kind of navigate that sure look i think that's a fabulous question i think that highlights a reason i don't want to see a chinese-style regulation in the west because it's really hard to define those things um i will say sort of the counter

to that um is you know going back to my slide and here all uh you know going back to this slide right it's clear the desire here is to get the player to spend more than they would spend before you adjusted the odds and so although it is hard to define there are cases where it's pretty clear that that's what you're doing um and i'm not exactly sure how i would design a regulation to prohibit this sort of stuff without being over inclusive and you know like i just said i'm hoping that the ftc is thoughtful about that that we have a discussion and what we result with is like very targeted rules that sort of prohibit specific practices but i agree it's hard to define and i think one of the challenges you face operating in china and with that sort of regulation okay thanks yes um i was curious about that definition of transferability that holland is using right now if that's exclusive to just primary marketplaces or if there is like you know in my mind there is the same ethical quandary if you're aware of the active secondary marketplace out there

and you still implement that design choice so i'm curious how they're kind of drawing the line now sure so transferability right i think is distinguishable from marketplace so the line is do you enable users to transfer between accounts right we recognize that users could sell their whole account right but as long as your game prohibits any transfer of the items between accounts other than selling the whole account there's not much the player can do and i don't think it's your job to regulate that third-party marketplace but you don't get to go away and say oh we have our terms of service that says oh you can't sell it but you can transfer it that doesn't work if it's transferable at all between accounts that's a problem so that's pretty much the line we see in holland right now hey uh you mentioned talking a lot about like fuzzy language with a lot of the china laws we found that we've struggled a lot with that in taiwan and japan too there's a lot of you know fuzzy language that our publisher is pushing for do you have any tips on how to navigate when you are encountering foreign language barriers and there is fuzzy

language in the regulations sure so you know like one strategy is work of a partner who understands them and when that isn't working to be honest the best strategy is to formally not be in that marketplace so most games downloaded in china right now for example are not officially licensed games right and those publishers don't officially market in china they just put them up on steam and the users use vpns and they get around the government restrictions and they download them and so there's sort of this all in or all out approach right like either you're working with a partner you're hiring lawyers you're actively interfacing with the government to figure out what works and for large companies that works well for small companies for companies that are sort of still emerging honestly i think the best practice is to not formally be in that market but then still you know hope that your player base builds an active community and that's very luck driven and it's frustrating but honestly i think that's the the best solution um if you don't have the funds to to really engage thanks so it seems that kind of the major problem with the hypothetical is a non-flat rarity within the types um i was wondering if

you think it is arguable that uh wild card systems kind of like magic arena's system where you're accumulating a wild card that then gives the player choice allows you to get away with uh non-flight rarity schemes easier than without such systems sure i mean that's an interesting question right when you say get away with let's start with these are apple's requirements um and my understanding is the magic platforms that currently exist are not yet on ios maybe they're moving in that direction at least as of when i was last playing it was you know pc only um so there's no formal requirements they have to comply with for apple um i'm not sure it makes it easier to get around although you'll notice here i put magic cards up here and i think what's really interesting about how wishes of the coast is doing magic there's actually three different models you have physical cards that are transferable you have digital cards that are transferable on their old platform and now their newest platform has digital cards that aren't transferable so we sort of see them moving towards a

regime where they're not transferring and certainly in holland right i guess that sort of gets around the issue because you don't have transferability there's a very long way of saying i don't have an answer for your question i haven't really thought about how wildcards affect that i'm sort of skeptical that you could just include wild cards and get around it but right now it's sort of the wild west anyway so thank you hey thanks for the presentation um is there a noted line brighter otherwise or substantive difference with loot boxes that are for purchase versus granite as some sort of progression that you've seen meaning lacks more lacks restrictions on things that are used to be rewards that you can't actually purchase is there a delineation anywhere sure absolutely right and certainly in holland i mean throughout all of europe there's a delineation right you can have progression-based loot boxes in both holland and belgium so long as they're not paying real money for it right in the west what we see almost all the entities attaching to some requirement to is real money right even the esrb which sort of lumps

them all in with their general purchases the key is that you're paying money for it in china no there's not a distinction there and in fact those additional rules about compulsion loops mainly apply to those sort of mechanics because you can't purchase them to begin with so the only time the compulsion loop rules are going to come into play is when you're offering those boxes through gameplay thanks awesome well perfect we are right at the end time now so thank you so much i appreciate all your questions i appreciate you all coming um and again i'm gonna go down to the tables outside 305 if you want to chat some more