Regulation of loot boxes

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How lottery-like mechanisms in video games are and should be regulated

Candidate number: 585

Submission deadline: 25 April 2019 at 12 PM Word count: 17 967

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1 Introduction

1.1 Subject matter and topicality

This thesis examines the issue of loot boxes in video games – how they are and should be regulated. A loot box¹ does not have an unequivocal definition, but it can be described as a virtual container embedded in certain video games holding randomly determined virtual in- game items, such as costumes for characters in the game, or new characters and weapons for the player to use in the game. When a player acquires a loot box by e.g. purchasing or winning one in the game, its contents are unknown to the player. Which virtual items they get from the loot box, is only revealed after it has been acquired and opened. The introduction of loot box mechanisms to video games has been alleged to blur the lines between gaming and gambling.

For players of video games, the appeal of loot boxes lies in that they can provide a short-cut to unlocking features the player otherwise might have to “grind”² for or purchase directly in the game for a higher price than that of the loot box. For game developers, loot boxes are a means of generating revenue when players directly or indirectly use real-world currencies to purchase them, allowing game developers to monetise on their games. It is estimated that trade in loot boxes (together with the related phenomenon of skin betting) would have represented a nearly USD 30 billion industry globally in 2018, expected to grow to USD 50 billion by 2022.³

In recent years, loot boxes have been put under increasing scrutiny by gaming and gambling authorities in different jurisdictions, as concerns have been raised due to loot box mechanisms bearing a resemblance to lotteries and gambling. There are similarities: a player acquires a loot box without knowing what is inside, and a random mechanism reveals the reward it contains – which could be something the player hoped for or something useless for them.

Research at University of York St John found links between loot box spending and problem

1 Also known as "loot crates", "prize crates" and "mystery boxes"

2 "Grinding" means spending lots of time playing the game in order to progress

3 Juniper Research (2018)

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gambling claiming that loot boxes are psychologically similar to gambling.⁴ Parents worry their children are being taught gambling-like behaviour and becoming more prone to addiction later in life. Players with inadequate impulse control have spent more than they can afford on loot boxes, some with devastating results.⁵

Due to these concerns, there have been calls to regulate or ban these mechanisms across the globe. Some national gambling and consumer protection authorities have assessed whether loot boxes fall within their respective definitions of gambling or lotteries. Responses have varied. For example, in Belgium loot boxes are considered illegal gambling⁶, in China loot boxes are legal as long as odds for winning different items are published⁷, whereas in Denmark loot boxes have not been found to be gambling⁸. In the United States, the Federal Trade Commission will hold a public workshop on loot boxes in order to bring industry groups and advocates together as a non-law enforcement option,⁹ and in South Korea, game developers have been fined for “deceiving customers in promoting their randomized in-game items"¹⁰. In 2018, gambling authorities in fifteen nations and one US state released a joint declaration on “concerns related to the blurring lines between gambling and gaming”, in which the regulators stated:

“This common action will enable an informed dialogue with the video games and social gaming industries to ensure the appropriate and efficient implementation of our national laws and regulations.

Each gambling regulator will of course reserve the right to use instruments of enforcement given by its national gambling regulatory framework. We will also work closely with our consumer protection enforcement authorities.”¹¹

4 Zendle (2018)

5 See e.g. Ashcraft (2019) "Man Arrested After Threatening To Kill Square Enix Staff"; Thomas (2019) "'I spent

£700 on loot boxes in a month'"; Kelly (2019) "How loot boxes hooked gamers and left regulators spinning - 'When your brain works like mine, you can't stop'"

6 Belgian Gaming Comission (2018) p. 16

7 See e.g. Gartenberg (2017)

8 Spillemyndigheden (2017)

9 Federal Trade Commission (2019)

10 Sohn (2018)

11 UK Gambling Commission (2018)

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As of yet, this inter-governmental cooperation has not resulted in any joint policy or action on loot boxes.

The Norwegian Gaming Authority¹² is one of the signatories to the declaration. The Gaming Authority has stated that it has not been “legally clarified whether the current Lottery Act is meant to encompass loot boxes and similar grey zone concepts.”¹³ It is likely that the Gaming Authority will take results of the international cooperation into consideration if it takes action on loot boxes.

With the elements in loot boxes resembling gambling, some might argue along the lines of abductive reasoning: “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” Even though some loot box mechanisms echo those of gambling, from a legal point of view, they can only be labelled as such by examining them case by case on the basis of current law or by changing the law to encompass them.

1.2 Research question and demarcation

The first research question of this thesis will be whether and how loot boxes are regulated by current Norwegian law. I will conduct an analysis of loot boxes de lege lata based on Norwegian gambling regulation, namely examining whether certain types of loot boxes fall under the lottery definition in Section 1 Paragraph 1 a) of the Lottery Act. I will also examine whether some loot box implementations contravene with the Marketing Act's provisions on commercial practices that affect consumers and special provisions relating to the protection of children.

The second research question is how loot boxes should be regulated de lege ferenda. I will identify potentially harmful aspects of loot boxes and evaluate whether the current Lottery and Marketing Acts are sufficiently regulating these aspects, after which I will present suggestions for addressing discrepancies between the current regulation and potentially harmful, currently unregulated loot box implementations.

12 Nor. Lotteritilsynet

13 The Gaming Authority (2019) p. 17 (my translation)

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Due to the limitations the thesis form poses, there are certain matters related closely to loot boxes as well as gambling and consumer protection regulation that fall outside the scope of this thesis. First, the phenomena of so-called skin betting and e-sports betting will not be discussed. Second, the scope of examination of gambling legislation will be limited in that a possible sub-category of lotteries¹⁴ a loot box could be considered, is outside the scope – the research question is limited to whether the lottery definition itself is fulfilled. Third, administrative procedures related to lottery permits, and sanctions for illegal lotteries or prohibited commercial practices, and other enforcement matters will not be examined. Fourth, outside the scope of this thesis, is other consumer protection than the Marketing Act Chapters 2 and 4. This leaves the rest of the Marketing Act and other legislation, such as the Cancellation Act¹⁵ and Consumer Purchases Act¹⁶ outside of the scope. Finally, questions of private international law will not be discussed.

1.3 Working definition of loot boxes

In the calls to regulate or ban loot boxes there is an important nuance that has in some cases been forgotten or ignored: what, exactly, is a loot box? In the absence of a clear definition of loot boxes, the term has been used as encompassing a heterogeneous group of mechanisms embedded in various video games for PC and gaming consoles as well as mobile games. In their 2018 article “Are Loot Boxes Gambling? Random Reward Mechanisms in Video Games” Lundedal Nielsen and Grabarczyk argue that the term “loot box” has been used rather haphazardly in the public debate and that the term is not sufficiently precise for academic use.

Therefore, they introduce the neutral notion of “random reward mechanisms” (RRMs).

A common trait for all RRMs is that they all consist of three components: eligibility condition, random procedure and reward.¹⁷ RRMs are different from game to game in terms of their eligibility conditions and types of randomised rewards. The “eligibility condition” is

14 Lottery Act Section 1 Paragraph 1 b)-e)

15 Nor. Angrerettloven

16 Nor. Forbrukerkjøpsloven

17 Lundedal Nielsen (2018) p. 2. These three components bear resemblance to the cumulative criteria in the lottery definition in the Lottery Act, which I will return to below in chapter 2.2.

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“the requirement the player has to meet in order to trigger the random procedure”¹⁸ which determines the reward. The eligibility condition could, for example, be making some sort of payment, or to play the game for a certain amount of time. Rewards also come in various virtual shapes and sizes. Depending on the video game, rewards can be "cosmetic" or "game- enhancing",¹⁹ or both. Cosmetic items can, for example, be new outfits for the game characters or a new look for the character’s weapon, while game-enhancing items include new characters or weapons with potentially better abilities.²⁰ The "random procedure" lies in that only after the eligibility condition has been fulfilled and the RRM acquired, can it be opened, revealing to the player whether it contains something she or he desires.

While I do agree with Lundedal Nielsen and Grabarczyk’s criticism of the imprecise use of the term “loot box” in the public discourse and with their introduction of the concept of RRMs, I see no reason not to use the term “loot box” in this context. For clarity, I will specify that for the purposes of this thesis the term “loot box” will include any and all consumable virtual items in video games on any platform that include the three RRM characteristics (eligibility condition, random procedure and reward) identified by Lundedal Nielsen and Grabarczyk and described in this chapter, unless otherwise stated.

1.4 Methodology and sources of law

The first research question will examine loot boxes from a de lege lata perspective. Thus the Norwegian general legal method will be applied to address this question. The second research question examines loot box regulation from a de lege ferenda perspective.

For the question of loot box regulation de lege lata, the most central sources of law are the Lottery Act²¹ and the Marketing Act²². The official versions of Norwegian acts of law are available only in Norwegian. As the language of this thesis is English, I will use unofficial

18 Lundedal Nielsen (2018) p. 2

19 See e.g. Lundedal Nielsen (2018) p. 13 and Forum for Gaming Trends (2018) p. 9

20 Game-enhancing rewards have been, somewhat derogatorily, called "pay-to-win" rewards, as they give an advantage to players willing to spend (additional) money on the game.

21 Nor. Lotteriloven

22 Nor. Markedsføringsloven

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translations by government bodies available online, where possible. My own translations of statutes and other sources will be indicated as such.

While the Lottery Act is purely national legislation as the field of gambling is not harmonised in the EU/EEA,²³ the field of consumer protection is harmonised, and the parts of the Marketing Act addressed in this thesis are largely implementing the Unfair Commercial Practices Directive (2005/29/EC). The directive and related case law by the European Court of Justice will serve as factors for interpretation of the Marketing Act.

There are challenges connected to the interpretation of the lottery definition in Section 1 of the Lottery Act since authoritative legal sources giving factors of interpretation are sparse.

There have been no cases in the Supreme Court, nor in the courts of appeal or district courts, that would give guidance on how to interpret the lottery definition against a phenomenon even distantly similar to loot boxes. Further, the preparatory works to the Lottery Act do not address a large portion of the questions that arise when measuring loot boxes towards the lottery definition. Discussions on the matter in Norwegian jurisprudence have also been very limited.

Therefore, in the absence of authoritative sources, it is at times necessary to resort to alternative sources for the interpretation of the Lottery Act when examining the research question related thereto. A central source for factors of interpretation is a report on loot boxes by the Forum for Gaming Trends, an interdisciplinary working group appointed by the Norwegian Gaming Authority by mission of the Ministry of Culture. Other sources include a report to the Storting, administrative practice and guidelines by the Gaming Authority.

In addition to these national sources, some comparative glances are directed at how the relationship between loot boxes and gambling regulation have been solved elsewhere, for which statements by gambling authorities in other jurisdictions serve as a source of arguments. Further, there has been active discussion on loot boxes and their regulation in the

23 See e.g. C-212/08 paragraphs 39-40: "(M)oral, religious or cultural factors, as well as the morally and financially harmful consequences for the individual and for society associated with betting and gaming, may serve to justify a margin of discretion for the national authorities, sufficient to enable them to determine, in accordance with their own scale of values, what is required in order to ensure consumer protection and the protection of society (…) Consequently, the Member States are, in principle, free to set the objectives of their policy on betting and gaming and, where appropriate, to define in detail the level of protection sought."

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news and in scientific publications. Argumentation in these articles is of relevance in particular in the de lege ferenda chapter.

1.5 Structure of the thesis

In order to answer the research questions, I will commence with analysing the current regulatory landscape surrounding loot boxes de lege lata in chapter 2, beginning with examining whether any loot box implementations fall under the scope of the Lottery Act (chapter 2.2), before proceeding to evaluate the Marketing Act's implications on loot boxes (chapter 2.3). In chapter 3 the perspective will change from de lege lata to de lege ferenda when I analyse how loot boxes should be regulated. In chapter 4 I will summarise the central findings of this thesis.

2 Current law and loot boxes

2.1 Introduction

Loot boxes are not explicitly regulated in the Norwegian legal system. In the absence of such regulation, potential regimes that could govern loot boxes are gambling and customer protection legislation.

In Norway, gambling activities are regulated by three laws: the Gaming Scheme Act²⁴, the Lottery Act and the Totalizator Act²⁵. These laws determine which subjects can offer, market and arrange lotteries and gambling in Norway.²⁶ Of these, the Lottery Act regulates gambling in general²⁷, and is potentially applicable to video game loot boxes, as this is the statute aimed towards private lotteries²⁸. The two other acts authorise the state monopolies in the gambling field, Norsk Rikstoto and Norsk Tipping AS.²⁹ Compliance with the gambling regime is

24 Nor. Pengespilloven

25 Nor. Totalisatorloven

26 Meld.St.12 (2016-2017) p. 11

27 Ot.prp.nr.44 (2002-2003) p. 9

28 Ot.prp.nr.58 (1993-1994) p. 5

29 Ot.prp.nr.44 (2002-2003) p. 9

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monitored by the Lottery Gaming Board,³⁰ also known as the Gaming Authority³¹. The Lottery Appeal Board³² functions as the administrative appeal body for decisions made by the Gaming Authority.³³

Whether certain loot boxes are within the ambit of the Norwegian gambling regime depends on whether they fall within the definition of a lottery in Section 1 Paragraph 1 a) of the Lottery Act. It is not possible to determine once and for all whether all loot boxes fall within the lottery definition. They vary from game to game in terms of types of eligibility conditions and rewards – elements that are essential to the assessment. Hence, they cannot be seen as one but must be evaluated concretely on a case-by-case basis.³⁴ Pursuant to Section 1 Paragraph 2 of the Lottery Act, the Ministry of Culture has the authority to decide with binding effect whether a lottery exists if the case is doubtful. The question of loot boxes has not been up for review with the Ministry of Culture to date, nor has the Gaming Authority made a statement on the matter, and thus the status of loot boxes in relation to the Lottery Act remains unclear.

Regardless of whether a loot box implementation falls under the scope of the Lottery Act, they will be subject to consumer protection regulation, in particular, the Marketing Act. Thus, I will return to the Marketing Act's implications on loot boxes under chapter 2.3 below.

2.2 Lottery Act

2.2.1 Lottery definition: three criteria

Section 1 Paragraph 1 a) of the Lottery Act defines a lottery as follows:

“Lottery: activity in which participants may for a stake acquire a prize as a result of a draw, guesswork, or other procedure which wholly or in part produces a random outcome.”

As the wording stands, there are three cumulative criteria for an activity to be considered a lottery and consequently fall under the scope of the Norwegian gambling regime: first, there has to be a stake for which a person participates in the lottery; second, there has to be a prize

30 Lottery Act Section 4 Paragraph 1

31 The Gaming Authority (2016)

32 Nor. Lotterinemnda

33 Lottery Act Section 4a Paragraph 1

34 Meld.St.12 (2016-2017) p. 106

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that the participant can win, and third, the outcome must be at least partly random. If any one of these criteria is not fulfilled, the activity will fall outside the lottery definition and thus also outside the gambling regime. Should all three criteria be fulfilled, the activity is considered a lottery. Pursuant to the Lottery Act lotteries may (with some exceptions) “only be held for the benefit of a humanitarian or socially beneficial aim”,³⁵ and with a permit by the Gaming Authority³⁶. Further, it is prohibited to market and convey lotteries that do not have a permit.³⁷

The current Lottery Act adopted in 1995 predominantly extended the definition of lotteries from the previous act of 1939, apart from the condition of a random outcome which was expanded to include also partly random outcomes.³⁸ In the early 1990s, before the current Lottery Act was adopted, lotteries had taken the forms of for example scratch tickets, tombolas, wheels of fortune, bingos and prize machines – all “physical” (as opposed to

“virtual”) forms of gambling. The first online lottery appears to have surfaced in Liechtenstein in 1995.³⁹ In the drafting of the Lottery Act, attention was also drawn to these emerging new technologies, and it was recognised that this development requires public regulation in order to prevent the evolution of games with strong gambling-like characteristics.⁴⁰

The ever faster-evolving technology has posed some challenges to the legal framework and its applicability. A plethora of activities, including loot boxes, are measured up to the lottery definition even though the criteria may not always be very well suited to these new technologies. The Ministry of Culture is currently working on a proposition for new gambling regulation where the three statutes would be merged and updated⁴¹ and it is expected to be

37 Lottery Act Section 11

38 Ot.prp.nr.58 (1993-1994) p. 32

39 Diaconu (2010) p. 12

40 Ot.prp.nr.58 (1993-1994) p. 5

41 Meld.St.12 (2016-2017) p. 80

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sent out for comment in the autumn of 2019⁴². It remains to be seen if and how loot boxes and other newer technologies in the borderlands between gaming and gambling will be addressed.

According to the Ministry of Culture,⁴³ Norwegian gambling regulation is strict, with the objective of protecting the players. The Ministry states that some of the most important considerations behind today’s gambling regulation are preventing problematic gaming behaviour, controlling gaming companies and protecting consumers.⁴⁴ These considerations will be highly relevant when examining loot boxes in light of the lottery definition.

In the Report to the Storting, Meld.St.12 (2016-2017), the Ministry of Culture stated:

“The gambling regulation does not apply to video games and social gaming where participation is free of charge or the game yields no reward or where skills and knowledge determine the outcome.”⁴⁵

When measuring loot boxes as an “activity” up to the lottery definition, the question is whether all three criteria are fulfilled: is there a stake for which a loot box is acquired; is there a random mechanism involved in determining the reward; and is the reward a prize in the sense of the Lottery Act? In the following chapters, I will be considering the contents of each of the criteria and whether different types of loot box implementations fulfil those, before summarising whether certain loot boxes fall under the ambit of the Lottery Act.

2.2.2 Stake

2.2.2.1 The content of the stake criterion

If lotteries are viewed as contracts between the provider of the lottery and the participant, wagering the stake is the participant’s remuneration that constitutes their part of the contract, whereas the lottery provider’s obligation is to grant access to the lottery for the participant to have a possibility at winning a prize. In the context of loot boxes, Lundedal Nielsen and Grabarczyk call this activity by which the player gains a loot box the "eligibility condition", i.e. a condition that has to be fulfilled in order for the player to acquire or open a loot box. The

42 Tronsli Drabløs (2018)

43 The Ministry of Culture has the main responsibility for the administration of gambling and lotteries, see Ministry of Culture (undated)

44 Meld.St.12 (2016-2017) p. 106

45 p. 13 (my translation)

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eligibility condition might be for example defeating an enemy in the game, returning to the game for consecutive days, playing a certain amount of time, “levelling up” or a purchase made through a microtransaction⁴⁶.⁴⁷ The eligibility condition will vary depending on the game, and one game might have several different eligibility conditions – purchases usually being one of them, as loot boxes are a means of monetisation for game developers.

According to the lottery definition, for an activity to be considered a lottery, a person participating must wager a stake for participation in the activity.⁴⁸ Games in which participation is free of charge fall outside the scope of the lottery definition⁴⁹ even if they have rewards determined by chance. The question then becomes: what types of eligibility conditions are viewed as stakes for acquiring a loot box in the sense of the lottery definition, and when is acquiring a loot box viewed as being free of charge?

The term “stake” (Nor. innskudd) has no clear definition. The Norwegian word “innskudd” is traditionally also used as meaning “deposit” in connection with banking, as in making a cash deposit to an account. In the lottery definition, the wording is “for a stake” (Nor. “mot innskudd”) which connects the stake to being a means to access the lottery for a chance at a prize. Therefore, in this context, a “stake” can be characterised as something one risks on an uncertain event⁵⁰. This, however, does not give us answers on what constitutes a stake under the lottery definition.

To determine what different types of eligibility conditions constitute a stake for a loot box, it is important to study not only the relevant provision of the Lottery Act but also the legislative objectives and considerations. Why does the Lottery Act only apply to chance-based games that the participant pays for? While the preparatory works for the Lottery Act⁵¹ do not

46 Microtransactions are a business model in which users can purchase virtual content via micropayments, see e.g. Schwiddessen (2018) p. 18

48 Lottery Act Section 1 Paragraph 1 a)

49 Ot.prp.nr.58 (1993-1994) p. 18

50 Merriam-Webster (undated)

51 Ot.prp.nr.58 (1993-1994)

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elaborate on the objectives behind this criterion specifically, the lottery definition should be seen in the light of the statutory objective of the Lottery Act, stated in its Section 1a:

“The objective of this Act is to ensure that lotteries are held in an adequate manner under public control with the aim to prevent negative social consequences of lotteries while accommodating for lotteries to be a good source of income for community serving and humanitarian work.”⁵²

In other words, the Lottery Act recognises problems that excess gambling might cause to an individual’s life and personal economy, and that this is something gambling regulation should strive to protect. The lottery definition only encompasses games where participation is dependent on wagering a stake because only these games may pose a threat of “negative social consequences”.

2.2.2.2 Direct payments in “real currency”

Before proceeding to consider more ambiguous and less traditional forms of eligibility conditions, it can be stated that direct payments in real currencies are considered to fulfil this criterion. This applies to lotteries in general⁵³ and thus for loot boxes as well⁵⁴. In traditional lotteries, the stake can be in the form of a cash payment by which the participant purchases, for example, a lottery ticket or a scratch lottery card from an authorised vendor. For loot boxes, direct payments in real currencies would be for example a credit card payment made to the game developer as so-called in-game or in-app purchases through which the player acquires a loot box. Payments in real currencies are at the centre of the stake criterion since the negative social consequences that the Lottery Act aims to prevent might take the form of financial difficulties as a consequence of problem gambling.⁵⁵

2.2.2.3 Game-play currency and in-game currency

Many games operate with so-called game-play and in-game currencies. These differ from real currencies in that they only exist within a particular game taking the form of, for instance, virtual “coins”, “gold”, “gems” or “diamonds” and are not accepted as a means of payment

52 My translation

53 See e.g. Meld.St.12 (2016-2017) p. 104 "A game falls in under the current lottery and gambling regime in Norway if (…) it costs money to participate." (my translation)

54 Forum for Gaming Trends (2018) p. 13

55 Meld.St.12 (2016-2017) p. 33-34

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outside the game. Depending on the game, game-play currency and in-game currency can be used by players to purchase for example upgrades or, in some games, loot boxes. The difference between game-play currency and in-game currency is that the former can only be accumulated by playing the game, while the latter can be purchased by making a payment in real currency and therefore functions as a proprietary currency usable only within the game⁵⁶. It is also not uncommon that in-game currency can substitute game-play currency but not vice versa.

In its report, the Forum for Gaming Trends states that “purchasing loot boxes for (…) ordinary money or for the game’s internal currency purchased with money will fulfil the (stake) criterion.”⁵⁷ Consequently, the Forum considers purchasing a loot box by using in- game currency to be acquiring the loot box “for a stake”. National gambling regulators internationally have also come to similar conclusions – see for example statements by the Belgian Gaming Commission⁵⁸ and the Finnish Gambling Administration⁵⁹. If comparing loot boxes with gambling in casinos, using in-game currency to buy a loot box is similar to using casino chips to place a stake in order to participate in a game; the value of both the casino chip and the in-game currency is expressible in real currency and both function as an indirect means payment in real currency for participation.

Making a distinction between loot boxes purchased with real currency and in-game currency would be artificial as in-game currency directly represents a certain value in real currency.

The consideration for problem gamblers and potential financial difficulties also applies to in- game currencies as a stake. In fact, in the case of in-game currency, it could be argued that this consideration is even more valid, as in-game currency might make it unclear for the player how much the real currency equivalence is and thus spending it can feel abstract and less serious. This is especially true for adolescent players.⁶⁰

57 Forum for Gaming Trends (2018) p. 13 (my translation)

58 Belgian Gaming Commission (2018) p. 10

59 Finnish Gambling Administration (2018) p. 2 and 3

60 Meld.St.12 (2016-2017) p. 105

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Whether a loot box acquired by game-play currency will fulfil the stake criterion is unclear.⁶¹ Game-play currency exists within a game independently of real currency as it cannot be purchased but is earned by playing. Neither the Lottery Act nor its preparatory works elaborate on whether other stakes than those of monetary value should be considered stakes.

In Meld.St.12 (2016-2017) it is stated that “a game falls in under the current lottery and gambling regime in Norway if (…) it costs money to participate.”⁶² Should this be interpreted exhaustively, so that only “money” is considered a stake in the meaning of the lottery definition? If purchasing a loot box for game-play currency falls outside the stake criterion, this would probably not be in contradiction with the legislative objective; since game-play currency is accumulated through only playing the game, no real currency is spent and can therefore not cause financial difficulties. This is an argument against considering game-play currencies to be a “stake” in the sense of the lottery definition.

From an international perspective, it can be mentioned that the Finnish Lotteries Act also operates with a criterion of a “charge for participation” for an activity to be considered a lottery.⁶³ In the Finnish Gambling Administration’s statement on loot boxes, it is stated that game-play currency “does not meet the definition of payment because the currency needed to unlock the loot box has been acquired by playing and actual payment is not required.”⁶⁴ Presumably, the Norwegian Lottery Act should also be interpreted not to apply to loot boxes where the stake consists solely of game-play currency, considering the legislative objective of Act.

2.2.2.4 Time spent and achievements

In addition to real and virtual currencies, other examples of eligibility conditions for obtaining a loot box could be spending a certain amount of time playing the game, returning to the game

61 Forum for Gaming Trends (2018) p. 13 "It is uncertain whether (...) virtual stakes earned in a game fall within the current stake term" (my translation)

62 Meld.St.12 (2016-2017) p. 104 (my translation)

63 Lotteries Act Section 2 "For the purposes of this Act, a lottery means an activity in which participants may win, in full or in part, a prize of monetary value based on chance and in which there is a charge for participation."

64 Finnish Gambling Administration (2018) p. 2 (my translation)

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on consecutive days, watching an advertisement video, or reaching certain achievements in the game, such as defeating an enemy or “levelling up”. In these cases, loot boxes are a way to reward the player for playing the game or advancing in it and creating an incentive for the player to increase her or his time or effort playing. It is said that time is money but does this apply to the stake criterion of the lottery definition?

When considering the legislative objective of the Lottery Act⁶⁵, preventing negative social consequences of gambling, it should be considered how widely “negative social consequences” is to be understood. At the centre of this are the negative consequences problem gambling causes directly on an individual’s life. Money lost on gambling could negatively affect the personal economy rather directly, but could a loss of time also be seen as a “negative social consequence”? After all, people only have a limited amount of time per day at their disposal. This investment of time spent on playing video games in hopes of obtaining loot boxes is time away from other activities. As a parallel, most people also have a limited amount of money at their disposal and money spent on loot boxes is money that cannot be spent on other things.

However, Lundedal Nielsen and Grabarczyk point to a significant difference between investments of time and investments of money: it is impossible to win back lost time, whereas someone who has lost more money than they can afford to, could take up a loan in hopes of trying to redeem the losses they have incurred.⁶⁶ The loss of players’ time does not seem as crucial to protect by the gambling regulation as their finances. Any negative social consequences of lost time are more indirect, and the potential threat lost time poses to a person’s well-being is not as imminent.

As discussed above, the wording “stake” in the Lottery Act Section 1 primarily refers to payments in currencies and investments of time does not fall under the general comprehension of the term “stake”. Considering how the nature of investments in time diverges from payments in currencies, it would be a stretch to equate the two.

65 Section 1a

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2.2.2.5 Personal data

In recent years many online products and services have become “free” for the consumers in the sense that the consumer does not pay any money for them. The providers of those products and services process the consumers’ personal data, and their revenue may come from selling targeted advertisements, based on the personal data, to other businesses. This is roughly how for example social media giant Facebook generates much of its revenue,⁶⁷ and commercialisation of personal data is the reality of today⁶⁸.

When playing a game, the player may in many cases provide various forms of personal data⁶⁹. Collecting and using this personal data is considered “processing” in terms of the General Data Protection Regulation (GDPR).⁷⁰ Going into details on the privacy aspects of processing players’ personal data in video games would be outside the scope of this thesis. However, in some cases, personal data might function as an eligibility condition for the player to acquire a loot box. This is acknowledged in the Report on Grey Zone Games, where the Forum for Gaming Trends contemplates whether personal data supplied by the player could also be viewed as a stake in the lottery definition.⁷¹

While the gambling regulation is not harmonized on the EU level,⁷² consumer protection is. I will return to consumer protection regulation and loot boxes in more detail below (in chapter 2.3). When it comes to considering whether personal data could be a “stake” in the sense of the Lottery Act, arguments might be found in EU consumer protection law. The Commission has proposed amendments to the Consumer Rights Directive (2011/83/EU) and identified

“extending protection of consumers to ‘free services’” as one of the focus points of modernising the Directive.

“Another gap in consumer protection occurs in ‘free’ digital services for which consumers provide their personal data, instead of paying with money. These ‘free’ services include cloud storage, social media

67 House Committee on Energy & Commerce (2018) p. 173

68 Langhanke (2015) p. 219

69 See definition: GDPR Article 4 Paragraph 1, see Personal Data Act Section 1

70 See definition: GDPR Article 4 Paragraph 2, see Personal Data Act Section 1

71 Forum for Gaming Trends (2018) p. 12-13

72 See e.g. 2014/478/EU Preamble (5)

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and email accounts. Given the increasing economic value of personal data, those services cannot be regarded as simply ‘free’.”⁷³

If providing personal data might be seen as payment for digital services in the future, could it also fulfil the stake criterion in the current lottery definition? The Forum for Gaming Trends notes that providing personal data and payment in currencies cannot be equated – at least not in all cases.⁷⁴ The Forum points to the vast consequences this would have as the lottery definition would encompass practically all online competitions. Further, the different considerations and legislative objectives behind the consumer protection regime and the gambling regime are arguments for not equating providing personal data with payment in currencies. The relevant legislative objective of the Lottery Act being the prevention of negative social consequences,⁷⁵ the need to protect problem gamblers is not as manifest if the player does not stand at a risk of losing money.

Whereas the differing considerations behind consumer protection and gambling regulation is an argument against considering personal data as a “stake” in the sense of the lottery definition, the potential interaction between personal data and loot boxes has not gone unnoticed with gambling regulators internationally. In the activity report of the French online games regulatory authority, Autorité de régulation des jeux en ligne (ARJEL), concerns were raised that if personal data is provided in the game, this could be exploited in order to influence an individual player’s odds to win certain items and inciting the player to play more.⁷⁶ This statement is not connected to eligibility conditions – it is a general concern ARJEL draws attention to as such manipulation of the random mechanism of the loot box might “undermine the public policy of gambling”.⁷⁷ Even though such exploitation of personal data in the loot box mechanism could be an issue from the perspective of preventing negative social consequences of gambling, it cannot be said that the player providing personal data would fulfil the stake criterion under current law.

73 COM(2018)183 p. 3

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76 ARJEL (2018) p. 4

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2.2.2.6 Different forms of eligibility conditions in one game

In a video game with loot boxes, there might often be different types of eligibility conditions by which a player can acquire a loot box. For example, a player might automatically receive a loot box when loading the game, and loot boxes may also be available for purchase with real or in-game currency. Loot boxes being a means of monetisation for game developers, it is likely there will always be a purchasing option for real or in-game currencies. The question is whether only the purchased loot boxes fulfil the stake criterion, or do all loot boxes in that particular video game fulfil the criterion.

In its Report on Grey Zone Games, the Forum for Gaming Trends states:

“There is a clear practice for interpreting the Lottery Act in a manner that if one can pay to participate in a draw, the “stake” criterion is fulfilled for the entire concept even if it would be possible to participate free of charge as well.”⁷⁸

The Forum gives no references to cases by any court or government body, which would express this "clear practice". Upon enquiry, the Gaming Authority did not present any examples on this. Therefore, it is uncertain what the rationale behind the statement is.

Presumably, the thinking is, that the concept is seen as a whole: if the stake criterion is fulfilled at least for parts of the lottery, the risk of negative social consequences manifests itself for the entire concept, as there is a purchasing option present. This means that the stake criterion will always be fulfilled for all loot boxes in a game if there is an option for purchase by real or in-game currencies.

2.2.3 Random outcome

The second criterion of the lottery definition is that of the wholly or partly random outcome.

The prize a participant can acquire, if any, must be the result of “a draw, guesswork, or other procedure”⁷⁹ that is at least in part chance-based in order for the activity to be considered a lottery. Something can be said to be “random” (Norwegian: tilfeldig) if it is “made, done or happening without method or conscious decision.”⁸⁰ An outcome is fully random if there is no

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influence skills or knowledge, and partly random where at least some part of the outcome cannot be determined by skills or knowledge.⁸¹

In many traditional forms of lotteries and gambling, the player stands at risk to not win anything. If I buy a scratch ticket or a row of Lotto numbers, the outcome could very well be that I win nothing, and the result is random. A loot box always contains a reward, i.e. it is never empty, and the player always receives something. Therefore, whether there is a reward or not, is not random. The fact that a player always wins something was decisive for the American body assigning ratings for video games, Entertainment Software Rating Board (ESRB), when determining not to rate video games featuring loot boxes as gambling.⁸² However, the element of randomness is still certainly prevalent when looking at what the reward is. The very concept of a loot box is based on a mechanism where the player acquires a loot box and decides to open it without knowing what it might reveal, in hopes of getting something they desire. There is no skill nor knowledge involved in the determination of what the player gets. Presumably, which items the loot box reveals is based on some algorithm, and for the player opening a loot box is a game of chance. The random outcome is intrinsic to loot boxes, and the lottery definition’s criterion of a random outcome is fulfilled.

2.2.4 Prize

2.2.4.1 The content of the prize criterion

The third and final criterion in the lottery definition is that there has to be a prize which the player may acquire as a result of the draw or other random procedure.⁸³ If, again, the lottery is seen as a contract between the provider of the lottery and the player, the prize will be the lottery provider’s remuneration, which is due only if the player, by chance, wins. In a traditional lottery, the player might participate in order to win for example a cash prize, a holiday, a car or items of less value. In many cases, the prospect of winning a prize is the motivation for a person to participate in the lottery, but they might be left empty-handed as a result of the random procedure.

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In loot boxes the reward is not cash nor are they empty. As mentioned above, a loot box always contains virtual items the player gets after having obtained a loot box and opened it.

The question is whether any of these virtual items in a certain loot box fulfil the prize criterion in the lottery definition. In order to measure different types of virtual items from loot boxes towards the criterion, I will first attempt to identify the meaning of the term “prize” as specifically as possible in this chapter before proceeding to analyse loot box rewards in light of these findings in chapters 2.2.4.2 to 2.2.4.4.

The Norwegian word for “prize” in the lottery definition, “gevinst”, is a noun derived from the verb “vinne” (“to win”). Therefore, a prize can be seen as something that is won. The word “gevinst” is both used with this meaning in the context of lotteries, as well as a term for an increase in wealth or assets in the field of business economics,⁸⁴ which could be translated as “profit” or “gain” in English. It is unclear whether there is a connection between the stake and prize criteria in that the prize needs to represent something of greater value than the stake wagered and thus constituting a profit. In the context of lotteries, “prize” means something that can be won as a result of participating in the lottery.⁸⁵ The term in itself does not include a requirement of increase in wealth or economic gain to the winner.

However, it is expressively stated in the preparatory works of the Lottery Act, that in order for something to be considered a prize, it must have “economic value”.⁸⁶ The reason for this requirement of economic value for a prize is unclear; this exclusion of prizes without economic value from the lottery definition receives no elaboration or explanation in the preparatory works. Other sources of law also remain silent with regards to this question.

The Gaming Authority does give some elaboration on the criterion stating in their guidelines that a prize can be currencies, objects or other assets of economic value and that generally anything of value could be considered a prize.⁸⁷ The Authority goes on to specify that cash and other assets that are convertible into other benefits will always be seen as a prize of

84 Store norske leksikon (2018)

85 See wording "may (…) acquire a prize" in Lottery Act Section 1 Paragraph 1 a)

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economic value. If a person gambling at a casino receives their prize in chips, which in themselves are just pieces of plastic, the chips will be seen as prizes of economic value, as they can be converted to cash.

The Gaming Authority further specifies that items of negligible value will not fulfil the prize criterion. Examples of items that have such insignificant value are “simple merchandising and/or symbols of competition entry such as mugs, posters, t-shirts, CD-singles and the like.”⁸⁸ A minimum limit for economic value has never been set,⁸⁹ but the Gaming Authority has specified that “negligible value” shall be interpreted strictly⁹⁰. Therefore even an item of small economic value can be considered a prize and only items of negligible value fall outside the criterion. All items of economic value exceeding “negligible value” are prizes in the sense of the lottery definition.

When considering loot boxes in light of the prize criterion, the most pressing question is not what the potential economic value of an item is, but whether any of its items have economic value, to begin with.⁹¹ Does a prize have economic value if it can be purchased directly in addition to being won, even if the reward’s value cannot be realised by converting it to cash or other assets? In this scenario, the economic value would lie in the fact that the player can pay an “under-price” for the item if purchasing the loot box costs less than purchasing the item directly. Another possible approach for determining whether a prize has economic value could be to examine whether it can be realised by converting it into cash or other assets of economic value. The Lottery Act, its preparatory works and guidelines issued by the Gaming Authority give no instruction on which method to apply in order to determine the existence of economic value.

There is one case by Lottery Appeal Board in which it considered whether a prize of economic value exists: the case of Alta Laksefiskeri Interessentskap (LOTN-2010-29). The case concerned the drawing of a limited number of “queue numbers” that would grant the

90 Felde (2019): In an e-mail Trude Felde from the Gaming Authority points out that "negligible value" is subject to a strict interpretation.

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right to purchase fishing licences for the Alta River. Locals and non-locals could pay 200 NOK and 400 NOK respectively in order to register for a draw which for winners would result in a queue number. It was not disputed that the stake and random outcome criteria were fulfilled. The question for the Appeal Board was whether the right to purchase a fishing licence was a prize of economic value, and thus whether the draw was a lottery. If the answer was affirmative, the lottery would be deemed illegal, see Lottery Act Sections 5 and 6.

After a concrete assessment, the Lottery Appeal Board came to the conclusion that the prize criterion was fulfilled for the non-locals, but not for the locals. Hence, the draw was found partly to fulfil the lottery definition and be a partly illegal lottery. In its evaluation, it was a central distinction for the Appeal Board that for the locals the fishing licence was not resellable and for the non-locals they were resellable. For the locals, there was a prohibition against reselling the fishing licence purchased through having won in the draw. The Appeal Board assessed that this prohibition was true, enforceable and actually enforced. For the non- locals, there had not been a prohibition against reselling the fishing licence. They could potentially gain an economic profit by reselling the fishing licence to a third party. This potential for economic profit by selling the fishing licence was the decisive factor for the Appeal Board as they concluded that the prize had economic value for the non-locals but not for the locals.

The Forum for Gaming Trends refers to this case by the Lottery Appeal Board.⁹² The Forum's interpretation is that the criterion of a prize of economic value will always be fulfilled the prize it can be sold for profit, but the Forum does not necessarily interpret this exhaustively.

The Forum states that it is unclear whether the prize criterion could also be fulfilled by determining another form of economic value, than the possibility to gain economic profit by reselling the prize.⁹³

Also, the Lottery Appeal Board’s position in the above-mentioned case alludes to another potential form of fulfilment of the condition:

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“The (Gaming Authority) states in its recommendation to the Lottery Appeal Board that there will be a prize if the participants can obtain economic gain by purchasing an item at under-price. The Lottery Appeal Board concurs in this. However, the Lottery Appeal Board finds that in this case there cannot be said to exist a real under-price as long as the fishing licences cannot be purchased on the open market.”⁹⁴

The Appeal Board appears to be open towards accepting a second way of determining whether there is a prize of economic value: if the stake paid for participating in the lottery is lower than what the prize item would cost through direct purchase, the stake wagered is considered under-price for the item, and the prize will, therefore, have economic value. It seems that the Appeal Board accepts that the criterion would be fulfilled even if the prize item could not be resold for profit. In order to attribute economic value to the prize, it would suffice that the player “saves” money in wagering a stake smaller than the prize’s value on the open market. Attributing economic value through this method will then, of course, require the item being obtainable through direct purchase as an alternative to winning it through the lottery.

The two manners in which economic value might be attributed to a prize differ in at least one significant aspect. If a prize can be said to have economic value by its resale value, this would mean that the economic value is a (latent) economic profit the player can realise. This method has a connection to what is at the core of the prize criterion: cash prizes. Even though the considerations behind the criterion are not mentioned in the preparatory works or other sources of law, it could be theorised that prizes are required to have economic value because games fulfilling this criterion are the ones that pose the most imminent threat of addiction and negative social consequences (see Lottery Act Section 1a). The thinking behind the criterion could be that, in hopes of winning cash prizes or prizes that can be converted to cash, players stand at a risk of incurring large financial losses or debt – initially in an attempt to increase their wealth and later to cover their losses. It is perhaps less likely that a player would stand at a risk of losing as much money if the player cannot increase their wealth by playing, in cases where the prize cannot be resold, and financial gain cannot be made.

Contrary to this, if economic value is attributed to a prize by the player paying “under-price”

by wagering a stake lower than the prize item’s price on the open market (without a

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possibility to resell the item), the player’s motivation for participating cannot be achieving an increase in wealth. It might be that the player hopes to win an item they would not be willing to or have the ability to purchase directly. They might also be motivated by the chance of

“saving” money. The risk of problem playing behaviour and negative social consequences does not seem as imminent since a player’s motivation cannot be to obtain financial gain or to cover losses from playing.

When considering methods of attributing economic value to prizes in loot boxes, the Forum for Gaming Trends states that “if the virtual item can be bought in the game’s own store, we can make this price the basis of the item’s value.”⁹⁵ The Forum does not detail whether there is any requirement of under-price (the payment of the loot box being lower than the price of the prize in such in-game store). Perhaps the Forum considers in-game items purchasable in the store for the same amount as the stake or less, as being of negligible value and thus falling outside of the prize criterion. It is unfortunate that the Forum does not comment on its grounds for determining the existence of economic value by looking to its price in the game’s store, or whether there is a requirement of under-price in the Forum’s opinion.

To summarise, there is uncertainty about how the existence of economic value of a prize is determined by current law. In any case, the rewards of a certain loot box will all have to be seen as one when examining them in light of the prize criterion, and the criterion will be fulfilled if any one of them can be deemed to have economic value. In light of the sparse sources available on this question, it seems that at least in cases where a prize item can be sold for cash or other benefits, it can be said to have economic value. Attributing economic value to the prize through the under-price method seems to have even weaker sources of law in its corner. Despite this, I will analyse loot box rewards by both of these methods, as there is no clarity as to which method is the appropriate one.

2.2.4.2 Economic value by resellability

According to the Lottery Appeal Board’s practice, assessment of a prize’s economic value can be based on whether the item’s value can be realised. The law in other Nordic countries has a comparable test. The Finnish Lotteries Act has a criterion of “a prize of monetary value” in its

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lottery definition.⁹⁶ Also, the Danish Gaming Act⁹⁷ operates with a similar criterion of a

“win” translatable into “financial terms”.⁹⁸ Gambling authorities in both jurisdictions have taken a stance on how the existence of monetary value in loot box rewards is assessed. The Danish authorities have concluded that only prizes that “can be converted into financial means” fulfil the criterion.⁹⁹ Similarly, the Finnish authorities state that only items that can be

“converted into money” are considered to be prizes of monetary value.¹⁰⁰ This seems to be similar to what the Appeal Board established in LOTN-2010-29 when stating that the right to purchase a fishing license was a reward in the sense of the lottery definition if the license could be resold, i.e. converted into something of economic value.

As virtual items obtained from loot boxes in principle only exist in their respective video games, they do not have an “intrinsic” economic value. This begs the essential question: can these virtual items be converted into something of economic value? In most games, items obtained from loot boxes are not intended to be converted into other assets. They are meant for the player’s personal use in the game; if a player wins a skin for a weapon they can choose to use that skin and enjoy a new look on the weapon, and unlocking a new character can open new opportunities within the game.

A virtual item from a loot box will have economic value if it can be converted into real currency in the game, as real currency has economic value. If the game has functionalities and policies allowing a player to trade their virtual items to the game or with other players of the game for cash, the item is resellable, and this will attribute economic value to the item, and the prize criterion will be fulfilled. In games where this is possible, a player might be tempted to acquire loot boxes in hopes of winning items not for personal use, but for resale if they have market value when traded with the game or fellow players. In cases where the stake is real currency or in-game currency, there is a risk of negative social consequences as the result

96 Lotteries Act Section 2 Paragraph 1

97 Spilleloven

98 Spillemyndigheden (2017)

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of a player investing more than they can afford in loot boxes in hopes of gaining wealth or covering up for losses from previous loot box spending.

What about if players can trade virtual items obtained from loot boxes within the game only for in-game or game-play currency, without a possibility to take out the “value” in real currency? With such rewards, the player does not gain “real world” wealth as the virtual currency cannot be traded for goods and services outside the game. The player still gains wealth within the game’s own economy and can use the virtual currency they acquired from trading loot box items to make additional purchases in the game. The result of this is merely an enhanced game experience, and it does not directly translate into economic value. Such trading increasing a player’s virtual currency cannot be said to give the loot box reward item economic value.

In some games, the player automatically receives virtual currency in the game for duplicates, i.e. items the player wins from loot boxes that they already have in their inventory from before. For example, if a player has previously purchased or won a certain skin and it is already in the player’s inventory, and the player opens a loot box receiving an identical copy of the item, they will in some games receive virtual currency to their in-game account. The items in loot boxes are often ranked as e.g. Common, Rare, Epic and Legendary based on how coveted or powerful they are in the game. The amount of virtual currency the player receives for a duplicate is usually fixed based on the rank. As with the trading for in-game or game- play currencies, these duplicate refunds only have an effect within the game’s ecosystem, and should not be seen as giving the prize economic value.

Another possibility for a player to use her or his loot box rewards could in some games be to exchange the virtual item for another in-game item without being able to gain any virtual or real currencies in the trade. Such exchanges cannot be said to attribute economic value to the loot box reward item, as it does not free any assets for the player to use on anything else, in the game or outside of it.

2.2.4.3 Resellability through illicit trading

The above examples have all represented potential forms of converting or exchanging the loot box reward item into something else within what the game is intended for and what is in accordance with the agreement between the player and the game provider. When starting to play a video game, the player and the game provider enter into an agreement, which governs

Regulation of loot boxes - How lottery-like mechanisms in video games are and should be regulated