Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates skadden.com
August/September 2019
Also in this issue:
3 Side Quests
Recent holdings
in video game and
related lawsuits
5 Patch Notes
Updates on litigation,
regulation and
legislation impacting
the industry
7 Contacts
On April 5, 2019, the U.S. Federal Trade Commission (FTC) announced that it will be holding
a public workshop on August 7, 2019, to examine consumer protection issues related to “loot
boxes” — in-game rewards players can buy while playing a video game. The FTC’s decision to
consider potential regulation of loot boxes is just the latest in a long line of legislative and admin-
istrative reactions to this growing trend in video games.
1
While, to date, most attempts to ban or
regulate loot boxes have been unsuccessful, the growing scrutiny of such practices by govern-
ment officials deserves the attention of anyone with a connection to the video game industry. In
this article, we discuss potential challenges facing loot box systems, current attempts to regulate
this mechanic and strategies for reducing risk during this period of uncertainty.
The Rise of the Loot Box
The term “loot box” generally refers to any mechanism allowing players to obtain a set of
unknown virtual items for use in a game. A loot box could be a booster pack in a collectible card
game, a weapons crate in a first-person shooter or a llama-shaped piñata in a battle royale game.
In most, though not all, instances of loot boxes, the available items have varying degrees of rarity,
with more desirable items appearing less frequently.
Loot boxes and other micro-transaction mechanics have grown increasingly popular in the last
several years, paralleling the growth of the free-to-play market and rising development costs
across the video game industry.
Are Loot Boxes Legal?
Today, most forms of loot boxes remain legal and unregulated worldwide.
2
However, propo-
nents of loot box regulation argue that the chance and rarity mechanics make loot boxes akin to
gambling and constitute predatory practices focused toward minors.
3
While this comparison may seem overblown to some (particularly those with small children
who are familiar with the rampant use of “surprise mechanics” in toys), a careful examination of
relevant statutes and analogous cases demonstrates the potential risk posed by loot box systems.
For example, the three federal statutes governing online gambling (the Wire Act, the Unlawful
1
Press Release, FTC, FTC to Hold August Workshop on Consumer Issues Related to Loot Boxes (Apr. 5, 2019).
2
See below for a discussion of the narrow exceptions to this general principle.
3
See, e.g., Letter from Sen. Margaret Wood Hassan, D-N.H., to Patricia Vance (Feb. 14, 2018); Senator Hawley to
Introduce Legislation Banning Manipulative Video Game Features Aimed at Children, Josh Hawley (May 8, 2019).
Is My Loot Box Legal?
Mitigating Legal Risk for
Game Developers and Publishers
Main Quest
2 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
August/September 2019
Internet Gambling Enforcement Act and the Illegal Gambling Busi-
ness Act), as well as each state’s individual gambling laws, generally
require three elements for a particular activity to constitute an illegal
“wager”: (1) risking something of value, (2) on the occurrence of a
chance event, (3) for a potential valuable prize.
4
Arguably, each of
these elements may be satisfied by certain loot box systems.
For instance, courts have already held that in the context of
mobile games, virtual currency constitutes something of value
and thus may satisfy the first element.
5
Additionally, given that
many loot box systems involve some aspect of chance, a court
would likely find the second element satisfied as well.
With respect to the final element, while most courts that have
considered the issue in the context of mobile games have found
that “prizes” awarded in video games do not constitute a thing
of value where players cannot sell such prizes,
6
the U.S. Court
of Appeals for the Ninth Circuit recently held that in the context
of a casino games mobile app, the chips that a player could win
were an item of value, because the chips allowed the player
to continue playing the game.
7
While this decision remains an
outlier, it establishes at least one arguably analogous situation
under which a video game system has been determined to
constitute gambling.
Potential Sources of Challenge
Given the above discussion, video game developers and distrib-
utors should keep in mind the potential avenues for challenges
to loot box systems. For example, state attorneys general may
bring criminal or civil actions against a company if they believe
that a game’s loot box system constitutes illegal gambling. Addi-
tionally, most states provide a private right of action to anyone
who lost money as a result of an illegal gambling operation
under either a qui tam statute or anti-gambling statute.
8
Thus,
aggrieved consumers need not wait for government enforce-
ment to challenge a loot box system.
4
See, e.g., 18 U.S.C. §§ 1084, 1955; 31 U.S.C. § 5362; Cal. Penal Code §
330b (California law); 720 Ill. Comp. Stat. 5/28-1(a)(1) (Illinois law); Wash.
Rev. Code § 9.46.0237 (Washington law).
5
See, e.g., Kater v. Churchill Downs Inc., 886 F.3d 784 (9th Cir. 2018);
Soto v. Sky Union, LLC, 159 F. Supp. 3d 871 (N.D. Ill. 2016).
6
See, e.g., Mason v. Machine Zone, Inc., 851 F.3d 315 (4th Cir. 2017);
Phillips v. Double Down Interactive LLC, 173 F. Supp. 3d 731 (N.D. Ill. 2016);
Sky Union, 159 F. Supp. 3d 871.
7
See Kater, 886 F.3d at 787. It should also be noted that in Sky Union, the
court stated that a digital prize would constitute a thing of value under
California’s gambling statute if it extended the privilege of playing the game
for free. See Sky Union, 159 F. Supp. 3d at 880.
8
See, e.g., Humphrey v. Viacom, Inc., No. 06-2768 (DMC), 2007 WL
1797648 (D.N.J. June 20, 2007).
Even if loot boxes are presumptively legal and do not constitute
gambling, other challenges to the marketing and sale of loot
boxes may be raised. For example, consumers may also bring
lawsuits based on consumer protection or false advertising stat-
utes to the extent that loot boxes are marketed in an arguably
misleading way. Indeed, a putative class action lawsuit was
recently filed against Epic Games alleging that loot boxes in Fort-
nite were falsely and unfairly advertised.
9
Moreover, sensitivities
about the marketing of loot boxes and scrutiny of video game
companies’ practices may be heightened to the extent that loot
boxes may be targeted to minors.
Recent Attempts at Regulation
In light of these concerns, many government officials, both in
the U.S. and abroad, have taken steps directed at regulating
loot boxes. For example, state legislatures in at least four states
have introduced bills aimed at regulating loot box sales.
10
While
many of these bills have since died in committee, bills in Indiana,
Minnesota and New York remain under consideration. Further,
the Protecting Children From Abusive Games Act was intro-
duced in the U.S. Senate this year, seeking to prohibit loot boxes
and pay-to-win mechanics in any game targeted toward
or played by minors.
11
Internationally, the issue of loot boxes has been considered
by at least a dozen countries, three of which — Belgium, the
Netherlands and China — have outlawed loot boxes to some
extent.
12
In fact, the gambling commissions of Belgium and the
Netherlands found that most forms of loot boxes constituted
gambling under the same wager, chance and valuable prize
structure discussed above.
9
See R.A. v. Epic Games, Inc., No. 5:19-cv-00325 (E.D.N.C. filed Feb. 28,
2019).
10
See, e.g., H.R. Con. Res. 224, 30th Leg. (Haw. 2019); H.R. Res. 199,
30th Leg. (Haw. 2019); H.R. HF 4460, 90th Leg. (Minn. 2018); S. 6266,
65th Leg., 2018 Reg. Sess. (Wash. 2018); Assemb. 2194, 2017-18 Reg.
Sess. (Cal. 2018).
11
Senators Hawley, Markey, and Blumenthal File Legislation to Stop
Manipulative Video Game Practices Aimed at Children, Josh Hawley
(May 23, 2019).
12
See Research Report on Loot Boxes, Belgian Gaming Commission
(Apr. 2018); Tracey Tang, China: A Middle-Ground Approach: How China
Regulates Loot Boxes and Gambling Features in Online Games, Mondaq
(May 16, 2018); Loot Boxes and Netherlands Gaming Authority’s Findings,
Dutch Games Association (Apr. 19, 2018).
3 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
August/September 2019
Recent judicial decisions and enacted statutes or regulations that are likely to impact the video game industry
Steve Jackson Games, Inc. v. inXile Entm’t, Inc., No. 91225722
(T.T.A .B. 2019)
- In a nonprecedential opinion, the TTAB sustained Steve Jack-
son Games, Inc.’s opposition to inXile Entertainment, Inc.’s
application to register the mark AUTODUEL for video games,
based on Steve Jackson Games’ use of its own AUTODUEL
mark for a series of tabletop role-playing games.
- The TTAB found that tabletop games and video games, while
distinct, may be related in the eyes of consumers, and it noted
that trademarks for video games may be licensed to makers of
tabletop games, and vice versa.
- The TTAB highlighted that Steve Jackson Games presented
evidence that it had previously licensed the AUTODUEL mark
to Origin Systems, Inc. for a vehicle combat video game and
that a related mark, GURPS, had been used by Steve Jackson
Games along with licenses from the makers of the Myth and
Alpha Centauri video games.
- This holding, and a similar holding from In re Restoration
Games, LLC, No. 87457730 (T.T.A.B. 2019), provide a good
reminder that when clearing a name for an upcoming game,
developers and publishers should not only look to existing
video games but other related media entertainment, such
as tabletop or card games, to avoid claims of likelihood of
confusion.
Hayden v. 2K Games, Inc., No. 1:17CV2635, 2019 WL 1299943
(N.D. Ohio Mar. 21, 2019)
- On March 21, 2019, the U.S. District Court for the Northern
District of Ohio granted in part 2K Games, Inc.’s motion
to dismiss claims brought against it by tattoo artist James
Hayden in connection with 2K’s depiction of NBA players
(along with their tattoos) in its NBA 2K series of video games.
- In December 2017, Hayden filed suit against 2K asserting
claims for direct and indirect copyright infringement, unjust
enrichment/restitution, violation of the Visual Artists Rights
Act, and for a judgment declaring 2K’s copyright registrations
in its NBA 2K16, 2K17 and 2K18 games invalid on the grounds
of fraud on the Copyright Office.
Strategy Guide
Given the uncertainties present in the current landscape, video game companies should examine their loot box practices
closely and keep in mind the following strategies to minimize legal risk:
Take steps to avoid creating a wager, chance or win/loss
structure required for a finding of gambling. For example:
- Make the currency used to purchase loot boxes also
acquirable from in-game action, not simply available for
direct purchase.
- Remove chance by showing players in advance what
they will get in a loot box (a strategy Fortnite has
recently employed).
- Allow players to use duplicate items to progress in the
game in some other way, so loot boxes always provide
players with some value.
- Prevent players from exchanging items received in loot
boxes, and enforce pre-existing prohibitions on sales of
items and/or accounts.
Consider parental controls on loot box purchases made
by minors;
Ensure that loot boxes are promoted with clear, conspicuous
terms or fees that consumers could not plausibly contend
are “hidden” or obscured; and
Continue working with lawmakers and regulators through
self-regulatory bodies like the ESRB to foster an environ-
ment of self-regulation.
Side Quests
4 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
August/September 2019
- The court dismissed Hayden’s unjust enrichment claim, hold-
ing that it was preempted by the Copyright Act, and dismissed
Hayden’s declaratory judgment claim, holding that because
2K had never asserted its copyright registrations against
Hayden, nor threatened to do so, there was no judiciable case
or controversy.
- However, the court denied 2K’s attempts to dismiss Hayden’s
copyright claims seeking statutory damages and attorneys’
fees for tattoos that were not registered when NBA 2K16 was
published but had been registered by the time NBA 2K17 and
2K18 were released.
• 2K had argued that yearly installments of a video game
franchise that feature the same depictions of the same
players in each release do not constitute separate acts of
infringement but rather should be considered a continuing
series of acts.
• The court rejected this argument, holding that further
discovery was needed on this issue.
- The court has set a settlement conference for November 7,
2019.
Genuine Enabling Tech., LLC v. Nintendo Co., Ltd., 369 F. Supp.
3d 590 (D. Del. 2019)
- On February 25, 2019, the U.S. District Court for the District
of Delaware granted Nintendo of America, Inc.’s motion to
transfer venue in a patent infringement action.
- The patent venue statute, 28 U.S.C. § 1400(b), provides that
“[a]ny civil action for patent infringement may be brought in
the judicial district where the defendant resides, or where the
defendant has committed acts of infringement and has a regu-
lar and established place of business,” and constitutes “the
exclusive provision controlling venue in patent infringement
proceedings.”
- The U.S. Supreme Court recently clarified this statute in TC
Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514,
1518 (2017), holding that, in a patent infringement action,
venue is proper only:
• In a district within the corporate defendant’s state of incor-
poration; or
• In a district where the corporate defendant has a regular and
established place of business and has committed acts of
infringement.
- Nintendo of America is incorporated in Washington, and while
it is registered to do business in Delaware, it does not have a
regular and established place of business there.
- Accordingly, the court held that venue was improper in Dela-
ware and transferred the case to the U.S. District Court for the
Western District of Washington.
Color Switch LLC v. Fortafy Games DMCC, No. 118 -cv-00419-
DAD-JLT, 2019 WL 1427975 (E.D. Cal. Mar. 29, 2019)
- The U.S. District Court for the Eastern District of California
granted a motion to dismiss in a copyright infringement action
based on a forum selection clause in the parties’ publishing
agreement.
- In 2015, plaintiff Color Switch LLC developed a mobile game
and entered into a publishing agreement with EyeBoxGames
FZE (later Fortafy Games), based in the United Arab Emirates,
to assist with publishing and marketing the game.
- The agreement contained a forum selection clause stating
that the agreement itself, as well as any noncontractual
obligations arising out of or in connection to the agreement,
will be governed by UAE law and submitted to the exclusive
jurisdiction of the Court of Dubai.
- After Color Switch terminated the publishing agreement,
Fortafy refused to turn over the most recent version of the
game, claiming that the agreement gave it the exclusive rights
to any updates.
- Color Switch filed suit, but Fortafy moved to dismiss, citing
the forum selection clause, and notified the court of pending
related matters in the UAE.
- The court granted the motion, holding that the forum selec-
tion clause applied not only to Color Switch’s breach of
contract claims but to its copyright claims as well. It noted
that the Ninth Circuit has not yet weighed in on the question
of whether copyright claims are subject to forum selection
clauses when the contract at issue is raised as a defense, but
that the Ninth Circuit has held that such clauses cover tort
claims if the interpretation of the contract is necessary to their
adjudication.
- The court also determined that enforcing the forum selection
clause would not deprive Color Switch of its day in court, as
the UAE had adequate — if less robust — copyright protec-
tions. Nor was enforcement contrary to public policy.
- On April 23, 2019, Color Switch appealed the decision to the
Ninth Circuit, and briefing is set to begin in September 2019.
5 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
August/September 2019
New litigation filings and proposed legislation and regulations that may lead to important legal developments
in the video game industry
AM General LLC v. Activision Blizzard, Inc., No. 1:17-cv-08644-
GBD-JLC (S.D.N.Y. filed Nov. 11, 2017)
- On May 31, 2019, Activision Blizzard, Inc. the publisher of
the popular Call of Duty series, filed a motion for summary
judgment in a trademark infringement lawsuit brought against
it by AM General, LLC, the manufacturer of Humvee vehicles
for the U.S. military.
- AM General has accused Activision of trademark infringement,
trade dress infringement, false advertising, false designation
of origin and dilution in connection with Activision’s use of
Humvee vehicles in its Call of Duty game.
- Activision’s brief argues that AM General cannot satisfy the
U.S. Court of Appeals for the Second Circuit’s Rogers v.
Grimaldi test, which governs the use of trademarks in expres-
sive or artistic works.
- Briefing is ongoing and the court has scheduled oral argument
for September 17, 2019.
Niantic, Inc. v. Global++, No. 3:19-cv-03425-JST (N.D. Cal.
filed June 14, 2019)
- The creator of the popular mobile game Pokémon Go and the
recently released Harry Potter: Wizards Unite geo-location
game, has sued alleged hackers for copyright infringement and
is seeking a preliminary injunction.
- In the complaint, filed June 14, 2019, Niantic, Inc. claims that
Global++ and several of its members acquired legitimate
versions of Niantic’s games and then worked around the
security systems to create unauthorized derivative programs
that allow other players to cheat.
- Niantic’s complaint alleges copyright infringement for its code,
in addition to claims sounding in violation of cybersecurity
laws, unfair competition and breach of contract.
- Briefing on the preliminary injunction is ongoing and the court
has scheduled oral argument for September 4, 2019.
Iron Maiden Holdings Ltd. v. 3D Realms Entm’t ApS,
No. 2:19-cv-04606-DSF-JC (C.D. Cal. filed May 28, 2019)
- On May 28, 2019, Iron Maiden Holdings Ltd., the holding
company for heavy metal band Iron Maiden, filed a complaint
against 3D Realms Entertainment ApS, most famous for its
Duke Nukem franchise, alleging trademark infringement as
a result of 3D Realms’ latest game — Ion Maiden, a retro
first-person shooter.
- While Iron Maiden is most recognized for its music, it has also
released a number of video games, including a 2016 mobile
game titled “Legacy of the Beast.”
- The complaint alleges that Iron Maiden not only shares a
similar “look and feel” with Legacy of the Beast but trades on
several additional associations with Iron Maiden, including: the
name of its main character, Shelly Harrison, which is similar
to Iron Maiden founder Steve Harris, the game’s use of a logo
presented in a “steel-cut” font similar to Iron Maiden’s logo
and the title featuring a “bomb” emoji that is similar to Iron
Maiden’s “Eddie” mascot.
- The complaint includes claims for trademark infringement,
false designation of origin, unfair competition and dilution.
Tenney v. FaZe Clan Inc., No. 19STCV17341 (Cal. Super. Ct.
filed May 20, 2019)
- Professional eSports gamer Turner Tenney — known as
Tfue — has sued gaming company FaZe Clan, Inc., alleging
that FaZe Clan has trapped him in a “grossly oppressive,
onerous and one-sided” contract.
- The complaint includes claims for termination of Tfue’s
agreement with FaZe Clan, unfair business practices, return of
money had and received, quantum meruit, breach of contract,
breach of fiduciary duty and a declaration that the agreement
contains anti-competitive restrictions on Tfue.
- In the complaint, Tfue alleges that FaZe Clan’s practices are
industry standard, and that eSport companies generally are
preying on young and unsophisticated gamers to saddle them
with unfair contracts, stripping them of most of their earnings
and exploiting them for the companies’ own profit.
Patch Notes
6 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
August/September 2019
- In addition to the complaint, Tfue has filed a petition with the
California Labor Commissioner’s Office that seeks to have
FaZe Clan forced to acquire a talent agency license, and Tfue
has alleged that FaZe Clan uses its unlicensed status to avoid
complying with certain labor regulations.
Epic Games, Inc. v. C.B., No. 5:19-cv-00250-FL (E.D.N.C. filed
June 18, 2019)
- On June 18, 2019, Epic Games, Inc. filed a lawsuit against
a teen user, accusing the user of using cheating software
for its popular Fortnite game and alleging claims for direct
and contributory copyright infringement, circumvention of
technological measures in violation of the Digital Millennium
Copyright Act and trafficking in circumvention devices.
- Epic alleges that the gamer, a minor, circumvented measures
Epic placed into Fortnite to prevent players from cheating, and
that he offers his cheating software to other players for a fee.
- Epic also alleges that the player operates a YouTube channel,
where he has posted videos that show him cheating at the
game, and which he uses to promote his hacks.
- This lawsuit represents the seventh time Epic has gone to
court to stop accused cheaters
Twitch Interactive, Inc. v. John and Jane Does 1 through 100,
No. 3:19-cv-03418-WHO (N.D. Cal. filed June 14, 2019)
- On June 14, 2019, popular game streaming service Twitch,
owned by Amazon.com, filed a lawsuit demanding that a
group of currently unknown users cease using bots to stream
inappropriate content, including violent videos, hardcore
pornography, and copyrighted movies and television shows,
on its Twitch.tv service.
- The complaint alleges that the users relied on bots, new
accounts and accounts bought from other Twitch members
to coordinate an attack on the Twitch service, flooding the
directory dedicated to the game Artifact with the inappropriate
content.
- In response to efforts by Twitch to combat the attack, the
users also created a Twitter account and website that used the
Twitch logo and trademarks.
- The complaint contains claims for trademark infringement,
breach of contract, fraud and trespass to chattels, and Twitch
is seeking a preliminary injunction as well as restitution, statu-
tory, compensatory and punitive damages, and attorneys’ fees.
FTC to Hold Public Workshop on Loot Boxes
- As mentioned in the “Main Quest” article above, the FTC will
be holding a public workshop on August 7, 2019, to discuss
consumer protection issues related to video games’ use of
loot boxes.
- The workshop will bring together members from the indus-
try, consumer advocates, trade associations, academics and
government officials to discuss concerns regarding the use
and marketing of loot boxes, as well as consider whether loot
boxes and similar in-game mechanics should be regulated.
- Topics will include the current in-game transaction landscape,
research regarding consumer behavior (and particularly
children’s behavior) as it pertains to in-game transactions,
and consumer awareness and education about in-game
transactions.
- The FTC is currently accepting public comments and
will continue to do so following the workshop, through
October 11, 2019.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for
educational and informational purposes only and is not intended and should not be construed as
legal advice. This memorandum is considered advertising under applicable state laws.
Four Times Square / New York, NY 10036 / 212.735.3000
Anthony J. Dreyer
Partner / New York
212.735.3097
anthony.dreyer@skadden.com
James Y. Pak
Counsel / Palo Alto
650.470.3197
P. Anthony Sammi
Partner / New York
212.735.2307
anthony.sammi@skadden.com
David M. Lamb
Associate / New York
212.735.3421
Jordan Feirman
Counsel / New York
212.735.3067
jordan.feir[email protected]m
Andrew K. Patrick
Associate / New York
212.735.3291
andrew.patrick@skadden.com
7 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
August/September 2019
Contacts
