In February, a court in Washington State approved the settlement of a class action lawsuit against Churchill Downs Inc. (CDI) and Aristocrat Leisure Ltd.
The suit was filed by two patrons of an online social casino called Big Fish Games, acquired by Aristocrat from CDI in 2018. The plaintiffs alleged that the site constituted illegal gambling, because it allowed players to buy virtual chips when they used up their free play.
Both co-plaintiffs reported spending $1,000 or more to top off their pile; they claimed their purchases were equivalent to losses, and said BFG was “exploiting the same psychological triggers as casino operators.”
While the operators denied breaking the law, they agreed last fall to jointly pay $155 million “to avoid the uncertainties and expenses associated with continuing the case.” It was a tough blow for BFG, which shouldered most of the payoff; within 24 hours of the announcement, the company laid off some 250 people in its Seattle office.
The case isn’t an isolated one. In 2018, disgruntled social gamers took on Huuuge Games, also Washington-based, for similar reasons in a case that was settled for $6.5 million. Other targets have included DoubleDown Interactive, High 5 Games and Playtika. One plaintiff claimed losses as little as $20, another as high as $300,000.
According to gaming attorney Harry Jackson, senior associate with the law firm Fox Rothschild, part of the problem is that gambling laws “are handled on state-by-state basis; there’s no federal standard for what’s defined as gambling activity.”
Three Pillars of Gambling
“When we look at different states,” said Jackson, “there are three pillars that define gambling: a prize based on some chance-based determination, following some sort of consideration or payment.”
If any of the three is missing—the payment, the prize, or the element of chance—in most states, it’s not gambling.
While the social casino model includes the prize (virtual chips or tokens), and the element of chance (the games use random number generators to determine the outcome), the games are free to enter, so in Jackson’s view, the third pillar is missing.
“You get a certain amount of chips when you first log in, and once they’re used, there might be a cool-down period of a few hours or days before you get more,” he said, “but you’re not being charged to play the game.”
Judge Milan D. Smith of the Ninth Circuit of the U.S. Court of Appeals took a different view. According to Smith’s interpretation, the virtual chips in the Big Fish games had actual value, though they hold no intrinsic monetary worth and cannot be cashed out. Smith defined gambling as any game that “risks something of value on the outcome of a contest of chance or a future contingent event.”
“All it took was for one court to agree to that,” said Jackson, “and now it’s sort of thrown into chaos the social casino model in Washington State,” home of a number of tech and gaming companies.
“Other games may be inadvertently pulled in, too—any kind of game with a free-to-play model where you can buy in for more chances to play. If a rogue court out was really proactive and sided with the Washington court, it could pull in match-3 games like Candy Crush as well. And that’s alarming for any kind of social game operator, at least in Washington.”
In Search of Clarity
The settlements have created a minefield for operators, but also led lawmakers like Washington Senator Mark Mullet (D-Issaquah) to try to clarify the definition of gambling and remove the threat.
Mullet’s bill, as well as one filed in the House by former Rep. Chad Hudgins, seeks to “close the loophole, and really solidify the fact that, no, these companies are indemnified from any of these kinds of lawsuits as long as the chips cannot be cashed out for real money,” said Jackson.
If that happens, the short-term pain could be offset by a more airtight business model. In the language of the bills, Mullet et al. recognized that the class-action suits “pose a substantial financial risk for video game development in this state. The further possibility exists that companies based in Washington will move their base of operations to other states, which would remove thousands of jobs from the state” along with “a currently incalculable, but materially significant, amount of tax dollars.“ The legislation wants to “remove this economic uncertainty.” And it really matters in Washington, which is home to about one-fifth of the social gaming industry.
Such cases aren’t limited by geography. A lawsuit filed in California alleged that tech giant Apple illegally profited from social casino apps on its App Store. That complaint included some breathtaking language—it accused Apple of “racketeering activities,” “collection of unlawful debts,” and violating California law by running online casinos.
Like the Big Fish suit, this one was filed by two players who reported spending thousands of dollars on virtual currency after they ran out of the free stuff. A third lawsuit in Alabama takes aim at social casino apps available on Google’s Android and Apple’s iOS platforms.
Another Solution: Flip from FTP to RMG
Ross Krasner, co-founder and CEO of RYU Games, suggests that social casinos should dispense with the free-to-play model and elevate to real-money gaming.
The San Francisco-based tech startup helps developers add real-money tournaments to their suite of mobile games. “Game developers see this exciting, emerging trend of skill-based real-money gaming, but they struggle to get into this industry,” Krasner told GGB News. “One, you need state-by-state compliance. Two, it’s kind of a challenging technical product to build because you have to match up players by skill; you don’t want a beginner coming in and getting crushed by a veteran player.”
RYU Games’ software development kit (SDK) streamlines those processes for an industry that’s expected to skyrocket. The end products have been categorized as skill-based, “hyper-casual” games. According to Krasner, “We’re much closer to esports tournaments in terms of competitive game play, but having money on the line does make the games more exciting
“It’s similar to the early days of daily fantasy sports. It’s not gambling, it’s a specific exemption that allows for more players in more areas to be able to participate in this type of real-money gaming. This is the direction we’re moving, and an industry that’s in its infancy. I like to say we’re in the bottom of the first of a nine-inning game.”
According to a March issue of App Developer magazine, competitive cash tournament gaming or esports are expected to reap more than $1.1 billion in 2020, up 15.7 percent from 2019. It noted the potential pitfalls of state-by-state regulation, and said Ryu’s cash-tournaments SDK “makes navigating this regulation easy, enabling developers to turn any mobile game into a cash tournament game.”
Could these game categories be vulnerable to interpretation, like social casino games? The kingpins of DFS like DraftKings and FanDuel spent several years and millions of dollars to convince state legislatures that their skill-based contests didn’t amount to gambling, but last year, the Internal Revenue Service ruled otherwise. Once again, its determination was less than clear-cut, and still leaves the final call to the states where DFS operators do business.
According to the IRS memo, “A DFS operator may try to differentiate taxable wagers from non-taxable entry fees into skill-based contests. In state courts and state legislature discussions of DFS, the issue of DFS’s legality within each state typically turns on whether DFS is a game of skill or a game of chance (that is, gambling) under the state’s laws.”
Either way, shifting from free-to-play to real-money games is no simple task, said Jackson. “It’s complicated and expensive to the point of being cost-prohibitive. It all comes back to those three pillars of gambling, how these games may fit if all three pillars are present, and how a state defines ‘consideration.’”
While all this is being worked out, “We may see a lot more lawsuits,” he added. “The Big Fish suit was successful, so a lot of plaintiffs in other states will want to see if the argument can stick there. All you need to do is find one sympathetic court, and you can get a windfall for your plaintiffs.”
As for social games, should there be across-the-board federal regulations? “Well, I think it would help clarify how social games are different,” said Jackson. “It would help unify the structure so you don’t have different states interpreting the issue in different ways. We do have a patchwork system across the country, and it’s difficult for some operators to know how to avoid running afoul” of courts in different states.
Meanwhile, the Big Fish Casino website, which offers 100,000 free chips to start playing, continues insists through a disclaimer that its games “(do) not offer gambling or an opportunity to win real money or prizes. Practice or success at social gaming does not imply future success at gambling.”
