Rolling the dice with micro-transactions: a Ninth Circuit decision takes a hard stance against a social casino app developer facing a class action



April 05, 2018

Class Action Alert

Author(s): Christopher Queenin

The U.S. Court of Appeals for the Ninth Circuit concluded that a social casino on a mobile app constituted illegal gambling under Washington State law. The decision serves as a warning for developers who include micro-transactions in their games.

Last week, the U.S. Court of Appeals for the Ninth Circuit concluded that a social casino on a mobile app constituted illegal gambling under Washington State law—even though users were provided free virtual chips that could not be redeemed for monetary value. The decision serves as a warning for developers who include micro-transactions in their games.

The plaintiff in Kater v. Churchill Downs Inc. was an avid player of the mobile game Big Fish Casino. The app, which was free to download, was a “virtual casino” that included blackjack, poker, slot machines and other traditional casino games. Upon downloading the app, first-time users were given free virtual chips to play the games. The plaintiff alleged that players earned additional virtual chips in two ways: first, by gambling and winning at the casino games; and second, by purchasing additional virtual chips with real money. The prices for additional virtual chips ranged from $1.99 to $250.

Unfortunately, the plaintiff’s luck ran out and she needed additional virtual chips. She eventually bought, and then lost, over $1,000 worth of chips. Soon thereafter, she brought a class action against Churchill Downs Inc., the owner of Big Fish Casino, for violations of Washington State’s consumer protection act and gambling loss recovery statute.

Washington’s gambling loss recovery statute requires that a person “los[e] money or anything of value” through illegal gambling in order to recover from the game operator. In Washington, like in most states, gambling means (1) staking or risking something of value, (2) upon a contest of chance, (3) to win a thing of value. These three elements of gambling are commonly referred to as consideration, chance and prize.

The dispute here surrounded the prize element and, specifically, whether or not awarding virtual chips constituted a “thing of value.” Washington law defines a “thing of value” broadly and includes “any …form of credit…involving extension of…entertainment or a privilege of playing at a game or scheme without charge.”

The plaintiff, on behalf of the class, argued that the virtual chips fit within the state’s definition of a “thing of value” because the chips were a form of credit that extended the privilege of playing Big Fish Casino without charge. Churchill Downs argued that the chips were not a “thing of value” because, as set forth in the app’s terms of use, the chips could not be redeemed for real money or merchandise. Churchill Downs further argued that, while chips were necessary to play the games, users periodically received additional free virtual chips (beyond the amount initially received for downloading the app), and so players could extend gameplay for free (provided they were patient enough).

The court agreed with the plaintiff and found that the virtual chips were a “thing of value” because once a user lost all chips, the user had to purchase more to extend the gameplay. Likewise, if the user won chips, the user won the privilege of playing the games without further charge. The court relied on Bullseye Distributing LLC v. State Gambling Commission, in which a Washington court held that a sports card vending machine designed to emulate a video slot machine was a gambling device. In Bullseye, players utilized “play points” that they obtained either by purchase, by redeeming a once-a-day promotional voucher, or by winning a game on the machine. The decision held that the play points were “things of value.”

Since Big Fish Casino constituted an illegal gambling game, the plaintiff could recover “the value of the thing so lost” from these games under the state’s gambling recovery statute. Churchill Downs argued that the plaintiff could only recover money lost gambling, and the virtual chips did not constitute money. The court found that Washington’s statute was broadly written to recover “money or anything of value,” which included the virtual chips.

Takeaways

Despite the fact that Churchill Downs did not redeem virtual chips for money or merchandise, the court found, based on the facts before it, that Washington State’s gambling loss recovery statute was broad enough to cover the virtual chips. Prior to this, courts that have addressed virtual game currencies have found that developers do not run afoul of state gambling laws so long as the virtual currencies have no transferrable monetary value outside of the game.

Developers have sought to avoid the perception that their games constitute illegal gambling by including terms of use that prohibit the sale and transfer of virtual currency, and by refraining from facilitating third-party websites that establish exchanges to trade and “cash out” in-game currencies. Indeed, the plaintiff here also alleged that the virtual chips were “things of value” because players could transfer them to others and “cash out” winnings on (as the court described it) the “secondary black market.” The court rejected the argument based on Big Fish Casino’s terms of use, which forbid such activity.

Notably, the Ninth Circuit did not consider Churchill Downs’ assertion that players also earned free chips periodically (in addition to those earned for downloading the app) so they could play the games without making a purchase. This type periodic (usually daily) “gift” is common in game apps that employ a “freemium” pricing strategy. Players of such games are allowed to play consecutively for a limited amount of time or turns before they must wait a period of time to play more—or else purchase the right to play more. Here, however, the court sidestepped Churchill Downs’ argument on procedural grounds: the case came before it on a motion to dismiss, which required that the court only consider the facts set forth in the plaintiff’s complaint. Since the plaintiff’s complaint simply asserted that virtual chips were required to play the games—and made no mention of additional free chips—the court proceeded on those facts. While Churchill Downs may have more luck on a motion for summary judgment (where the court can consider facts outside of the complaint), the Ninth Circuit’s reliance on Bullseye may prove problematic because in that case, players could also redeem a daily free “voucher” to play the slot game. In Bullseye, however, the players could redeem prize points earned in the slot game for cash and merchandise, which was not the case with Big Fish Casino.

The legal landscape is rapidly changing as many states are passing or considering laws regulating online gaming, fantasy sports and sports betting. These laws may expand how game developers can structure in-game currencies and micro-transactions. Still, regulators, prosecutors and plaintiffs are relying on older—and, in some cases, antiquated—gambling laws to address new technology. This case demonstrates that game developers must proceed with caution and consider individual state statutes governing gambling to determine whether or not they too could be liable when users lose actual money in their apps.

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