Undoubtedly, loot boxes are among those video games related topics which have been causing the most heated discussions over recent years. Although this category of monetization schemes in games mostly avoided regulation in the EU so far, with some local exceptions, it continues to raise increased concerns of the relevant authorities and consumer protection bodies.

If you are a video games enthusiast, irrespective of your beloved platform, whether it be PC, console or mobile, you are probably familiar with the concept of loot boxes. For those who are not, loot boxes are mystery packages of digital content in video games which can be purchased for small sums and in exchange a random in-game content can be received by the player. They may give advantages or virtual items for use within the context of the game. For example, they may be customization options for a player's avatar or game-changing equipment such as weapons or armor. Studies show that they may demonstrate certain commonalities with the mechanisms known in the traditional games of chance, thus they remain an object of increasing interests of regulators and consumer protection bodies, and what is worth noting, a very lucrative one, since it is estimated that they generated more than US$15 billion globally for the industry in 2020.¹  Let’s have a closer look on the recent regulatory developments in the EU.

European Parliament wants better consumer protection for online video games while boosting the sector’s potential

In January 2023, the European Parliament adopted a report calling for harmonized EU rules to achieve better player protection in the online video game sector.²  Considerable attention in the report was devoted to the matter of loot boxes. The Parliament called on the European Commission to analyze the way in which loot boxes are sold as well as to take the necessary steps to bring about a common European approach to ensure protection of consumers. The Parliament stressed that consumers should have all the necessary information about the presence of in-game purchases such as loot boxes and other apparently randomized in-game purchases and should be aware of the type of content before starting to play and during the game. The Parliament called for greater transparency from video games developers on the probabilities in loot box mechanisms, including information in plain language about what algorithms are devised to achieve. The Parliament further stressed that the proposed legislation should assess whether an obligation to disable in-game payments and loot boxes mechanisms by default or a ban on paid loot boxes should be proposed to protect minors, avoid the fragmentation of the single market and ensure that consumers benefit from the same level of protection, no matter of their place of residence.

In the report the Parliament also referred to the results of another study released by the Norwegian Consumer Council back in May 2022, concerning the ongoing impact of loot boxes on the games industry, which was backed by 20 consumer organizations in 18 European countries. The nearly sixty-page long report titled “INSERT COIN: How the gaming industry exploits consumers using loot boxes” highlighted problematic practices, including exploiting cognitive biases and vulnerabilities of consumers through deceptive design and marketing, using layers of virtual currencies to mask/distort real-world monetary costs, and targeting loot boxes and manipulative practices towards minors. The report suggested actions which the industry and regulators should consider improving gamer protection, including banning the aforementioned deceptive design, denoting all in-game purchases in real-world currency, excluding loot boxes from games targeted at minors, and increasing transparency around algorithms that determine the outcome of a purchase. Finally, a ban on paid loot boxes was proposed, should other remedies not alleviate the problems.

Belgium and the Netherlands – a strict approach

Far-reaching scenarios against loot boxes have already materialized in some jurisdictions even before the above-described reports were produced. Belgium is among the countries which adopted such a strict approach. In 2018 the Belgian Gaming Commission published a report in which it presented a position that all loot boxes which are purchased by real-world money constitute gambling, irrespective of whether targeted at minors or adults.³  The Gaming Commission concluded that paid loot boxes in the examined games Overwatch, FIFA 18 and Counter-Strike: Global Offensive fit the description of a game of chance because all of the constitutive elements of gambling are present (game, wager, chance, win/loss). Although the effectiveness of enforcement of a ban on loot boxes in that jurisdiction raises concerns, many major companies decided to remove loot boxes from the local version their games, or refrained from publishing there, which included such titles as Diablo Immortal from Blizzard Entertainment.

Another country which adopted anti-loot box position is the Netherlands, whose Gaming Authority published a study in 2018, which revealed that four out of the ten reviewed loot boxes contravened the law.⁴  According to the report, whenever the content of loot boxes is determined by chance and the prizes to be won can be traded outside of a game and thus have a market value, offering these types of games of chance to Dutch consumers constitutes gambling and is prohibited without a license. As a result, many companies disabled the possibility to transfer loot box prizes between players. However, Electronic Arts elected not to do so with respect to its FIFA series, as result of which an enforcement action has been brought which ended with a €10 million fine being imposed. Although EA lost its first battle, as the decision was later upheld by the District Court in Hague in 2020, the ruling was reversed in March 2022, when the Administrative Jurisdiction Division decided the appeal in EA's favor, namely, that loot boxes in FIFA games do not contravene Dutch gambling law. The court concluded that when analyzing loot boxes to verify if they constitute gambling, it must first be established if they constitute a standalone game which may separately be subject to such a test. If that is not the case, one should consider whether an entire video game constitutes a game of chance. In this particular case the court concluded that Ultimate Team packs in FIFA constitute only a part of a wider game of skill with the accompanying element of chance, having considered the manner in which players enjoy the game. The court also pointed out that the possibility to trade cards does not change that conclusion, as in practice complete accounts are traded rather than individual packs.

Considering that most of the video games usually should pass the test of a “game of skill” where an element of chance is only a secondary addition, the above-described judgment quite dramatically overturned the initial, strict approach. However, subsequently in November 2022 the Netherlands Authority for Consumers and Markets proposed to consider an outright ban on loot boxes in videogames altogether, as according to the authority, it is unlikely that transparency requirements will sufficiently mitigate risks for the players.⁵  Consequently, one may anticipate further development in the matter in the near future.

The United Kingdom encourages the industry to improve self-regulation

In July 2022, the UK Government published its awaited response to the loot box consultation.⁶  The call for evidence has shown that loot box purchases may be linked to a variety of harmful effects. In particular, there is robust evidence of an association with problem gambling. However, research has not established whether a causal relationship exists between loot box purchases and problem gambling and there are a range of plausible explanations that could underpin this association. In response to the findings, the Government wants to see improved protections for children, young people and adults, and to support better longer term research into the impact of video games. The Government’s view is that purchases of loot boxes should be unavailable to all children unless and until they are enabled by parents, as well as that all players should have access to spending controls and transparent information to support safe and responsible gaming. The Government has considered three types of responses that could be pursued, namely improved industry-led protections by games companies and platforms, making changes to the Gambling Act 2005, and strengthening other statutory consumer protection measures. Eventually the Government decided against changing the definition of gambling to include loot boxes. The response emphasized that loot box rewards usually have no real-world monetary value outside of the game. Instead, it welcomed progress made on industry-led protections for children and consumers in recent years and concluded that there is still more that can and should be done across games platforms and publishers to mitigate the risk of harm from loot boxes for all players.

Germany – USK rating to include loot boxes in its test criteria

Unterhaltungssoftware Selbstkontrolle (“USK”), the German age rating board, has expanded its test criteria and will now include loot boxes, other in-game transactions and online chat features within the "possible online risks" category when classifying a game. The new rules came into effect on January 1, 2023. Although loot boxes will not necessarily increase the age rating, the USK age rating labels will include information on additional features such as loot boxes, online purchases and online chat functionality.

A comprehensive draft law proposed in Spain

On July 1, 2022, the Ministry of Consumer Affairs of the Spanish Government published a draft law which would comprehensively regulate randomized reward mechanisms in video games, including loot boxes. The regulation would apply to loot boxes purchased with money or a virtual currency acquired with money, where the player would be granted a prize which could be transferred between the players or exchanged for money or virtual items. The prohibitions and obligations envisaged in the draft include: (i) a ban on access to loot boxes by minors and a requirement to implement age verification which may be performed with the use of biometric analysis systems; (ii) restrictions related to advertising, including by communicating loot box related ads on audio-visual media only between 1 and 5 a.m.; (iii) information obligations concerning a probability of winning, conditions to participate and information on risks and safe use, and (iv) implementation of self-exclusion mechanisms which would allow users to temporarily suspend the use of loot boxes for a period of 3 months to 5 years, without the possibility to modify this once it is set, as well as mechanisms allowing users to cap their expenses for a period of 3 months. In the case of a non-compliance with the new law, the authority would be able to impose sanctions of up to €3 million for the most severe infringements, as well as to suspend the service. This pioneer regulation is aimed to come into force in January 2024.

Draft bill to regulate loot boxes as a form of gambling in Finland

Another example of continuing legislative interest in monetization schemes involving an element of chance comes from Finland, where in September 2022 a member of the Finnish Parliament proposed a bill to regulate loot boxes as a form of gambling.⁷  By amending the Lotteries Act, the legal definition of a lottery would include “virtually utilizable profits” or prizes with virtual value. Such a change would mean that loot boxes would be considered a form of gambling even if prizes do not have monetary value, cannot be sold or traded, and can only be used in-game. These characteristics of loot boxes have held them safe from qualification as gambling in most EU jurisdictions, thus it would seem that the new law could put Finland on the list of the strictest EU member states. However, it is too early to anticipate the outcome at this stage, as the legislative process will take time.

Austrian court applied local gambling laws to loot boxes

Although local gambling laws across EU jurisdictions are well-established, designed to cover classic gambling activities and do not recognize such modern reward mechanisms as loot boxes, their application cannot be entirely excluded. It is often the case that their provisions leave room for broad interpretation, thus some risk always remains. Sony has discovered this to be true in Austria, where it has been sued by FIFA players in relation to Ultimate Team's card packs which have been sold via the PlayStation Store. In February 2023, the district court in Hermagor ruled that the card packs constitute gambling subject to licensing obligations. It would seem that the main reasoning behind this decision was that the players are able to sell cards on the secondary market and make a profit from it, which would practically result in these virtual items having financial value. The decision is not final, thus we may expect further development in the matter.

Poland – loot boxes fall outside of Gambling Law Act, Ministry of Finances says

Polish Gambling Law Act does not recognize randomized reward mechanisms used in interactive entertainment. Loot boxes should fall outside Polish regulation due to the fact that virtual items do not constitute cash or material prizes. Usually, any such virtual content cannot be traded outside of a game and as a result obtain real money in exchange, thus no cash is actually earned even indirectly. Furthermore, one may argue that such a virtual content may not be considered as a material prize within the meaning of the Act, as it is does not have any tangible form.

On the other hand, concerns may arise from the fact that that the Gambling Law Act considers the possibility to start another game or extend the present one as a material prize, even though no cash or material prizes within the classic meaning are actually granted. The Act also envisages that a qualification as machine games (or their digital equivalents) is possible even if the payer is not able to win any cash or material prizes but the game is organized for commercial purposes and involves an element of chance. Further concerns may follow from the jurisprudence which is fairly strict and seemed to interpret vague terms of the Act quite broadly in cases concerning classic machine games or promotion lotteries.

Despite the above, the Polish Ministry of Finances responded to a press inquiry in 2019 that loot boxes should not fall within the definition of any games of chance envisaged in the Gambling Law Act. The mere existence of an element of chance does not automatically result in a game being considered gambling.

If the regulator would change its position and consider loot boxes as gambling due to the aforementioned concerns, it would be impossible to offer them it via the Internet (in the case of qualification as machine games) or it would entail practical obstacles and requirements such as e.g. obtaining a prior permit, the approval of the terms of participating and the possibility to organize it on a one-off basis (in the case of qualification as promotion lotteries), which would make their offering practically impossible. The provision of loot boxes in breach of statutory requirements in such case could result not only in an administrative and criminal liability, including fines, but also in the potential entering of the domain used to offer such games into the register of domains which operate in breach of the gambling regulation. The telecommunication service providers would be required to block the access to such domain.

Conclusions

The above examples show that the dominoes have already started falling when it comes to loot box regulation in the EU. Legal uncertainty with respect to the matter and the commonalities with gambling that some of the exploitative loot box designs show, result in a need to ensure better protection on regulatory level, especially with respect to minors, to prevent the detrimental effect some mechanisms may have on them. However, to prevent babies from being got rid of with the bathwater, any regulation should be preceded by a thorough market analysis and consultation with the industry, so that a balanced and legitimate random-draw models are not unjustly excluded. In the current state of things, industry actors should play an active role also by self-regulating, and the successful examples of that are already not isolated. In any case, further development in the matter in the EU may definitely be expected in the near future.

Author of the article: Marcin Przybysz, Senior Associate, Intellectual Property and New Technologies Practice Group

More insights together with some numbers and statistics in our Video games industry report

1. Forbrukerrådet (Norwegian Consumer Council), INSERT COIN: How the gaming industry exploits consumers using loot boxes, May 31, 2022.
2. European Parliament resolution of January 18, 2023 on consumer protection in online video games: a European single market approach (2022/2014(INI)).
3. Belgian Gaming Commission, Research Report on Loot Boxes, April 2018.
4. The Netherlands Gambling Authority, Study into loot boxes. A treasure or a burden? April 10, 2018.
5. The Netherlands Authority for Consumers and Markets, EU Fitness Check on Digital Fairness, Protecting Consumers in Digital Environments, November 2022.
6. UK Government, Department for Digital, Culture, Media & Sport, Government response to the call for evidence on loot boxes in video games, July 18, 2022.
7. Gamesindustry.biz, Exploring Finland's proposed loot box regulation, December 15, 2022.