The Ninth Circuit Court of Appeals recently held that a plaintiff who played free online games and purchased virtual credits to extend game play could state a claim for illegal gambling under the laws of the State of Washington. Big Fish’s games included traditional casino games like craps, slots and blackjack. The court wrote: “… despite collecting millions in revenue, Churchill Downs, like Captain Renault in Casablanca, purports to be shocked—shocked!—to find that Big Fish Casino could constitute illegal gambling. “ Kater v. Churchill Downs Inc., 2018 U.S. App. LEXIS 7739 (9th Cir. Mar. 28, 2018) (“Kater’). (Before the decision was published Churchill Downs sold Big Fish to Aristocrat).
Casino games can produce compulsive behaviors and therefore spending money to play games of chance is the type of behavior or activity that arguably should be controlled under gambling laws. Yet there are many other types of games that do not use casino themes but do use a similar “freemium” model where a player can play for free but can buy extended or enhanced game play when free play chips or credits run out and before the free chips are replenished. Because these games can also be compulsive and appeal to younger players, Kater may signal a trend in applying gambling laws more broadly consistent with the policy reasons for limiting or regulating gambling.
That said, in other states Kater could turn out more like Much Ado About Nothing than Casablanca. Courts in other states have given a narrower interpretation to gambling laws. But the optics of games where money changes hands, where compulsive behavior can take hold, where some outcomes depend on chance, and where the games appeal to younger or vulnerable players may over time overwhelm a narrower legal approach.
I.
In the United States each state makes its own laws about gambling. As a result, the legal framework for online games is a confusing patchwork of state and federal laws and court decisions of uncertain application to new technology, mediums or ideas. The laws can be outdated and indeterminate.
What the vast majority of states do agree on is that gambling usually involves three elements: prize, chance and consideration. The game operators argue that freemium games lack both “consideration” since play is free, and lack a “prize” since the additional purchased features can only enhance or extend game play. Some freemium games also may involve skill.
II.
Washington defines “gambling” as “(1) staking or risking something of value, (2) upon the outcome of a contest of chance or a future contingent event not under the person’s control or influence, (3) upon an agreement or understanding that the person or someone else will receive something of value in the event of a certain outcome.”
Because Washington law defines “something of value” quite broadly – expressly including extended game play or free replays — the appeals court held that Big Fish Casino chips are “something of value.” However, the court did the freemium games industry a favor when it noted that transfers of game credits in a secondary market were irrelevant if the game’s terms of service prohibit transfers for value. In most states this finding will be helpful in arguing that there is no “prize” because any credits earned or won at least officially cannot be converted to something with economic value.
In addition, when an appeal is taken from the initial dismissal of a complaint, the court of appeals’ review is confined to determining solely whether if plaintiff’s factual allegations are true, the complaint states a legal claim. The court cannot consider any facts from the defendant. Therefore, the Kater court could not consider that Big Fish also provides free play chips, or how often or in what amounts the free chips are provided or replenished. The court noted: “Churchill Downs argues that this does not matter, because users receive free chips throughout gameplay, such that extending gameplay costs them nothing. But because Churchill Downs’ allegation is not included in the complaint, we do not further address this contention.” The appeals court remanded the case to the federal district court “for further proceedings consistent with this opinion.”
Those commentators who have declared the case to be over do not have it quite right. Big Fish has filed a petition for rehearing en banc before the Ninth Circuit Court of Appeals, which may result in the alteration of the Ninth Circuit’s opinion.
Even if a petition does not succeed, in the district court Big Fish will have the opportunity to answer the complaint and present its facts and defenses. Although the plaintiff will argue that the issues have all been effectively decided by the court of appeal, officially all the Ninth Circuit did was reverse an order dismissing plaintiff’s complaint noting that it could not consider facts presented by Big Fish that would support Big Fish’s legal arguments. Big Fish may argue before the district court that players are provided ample free chips and that free replays or extended play is something of value only if there is an initial charge to play the game. After the district court rules the case would return to the Ninth Circuit and likely would be heard by a different panel of judges than those who decided the first appeal. The second appeals panel may decide that an ample supply of free chips is irrelevant under Washington law, or decide that because the first panel could not consider this argument that the second Ninth Circuit panel is free to rule against Kater. As unusual as this scenario may sound it happens occasionally.
III.
Kater’s impact in other states may be limited. “Something of value” or a prize in most states means money or something reducible to money, so obtaining more of something already offered for free cannot be a prize. Because at one time amusement devices were programmed to provide replays and operators would illegally “cash out” the replays, some states have laws similar to Washington’s including free replays in “something of value,” but these laws are often interpreted to apply only where there is an initial charge to play the game.
Other states also have gambling loss recovery statutes that limit recovery to recouping losses. But selling chips or tokens does not involving winning or losing. The operator realizes their profits from selling the tokens regardless of the game outcomes (although it could be argued that it is only when players lose their free tokens that they need to buy more).
The decision in Kater also did not clearly address consideration. In the majority of states and under federal law the test for consideration for gambling is whether the participant provides something of “economic value” in exchange for participation. Offering participants a free means of entry will usually avoid the element of consideration, provided that the free means of entry is not burdensome and gives the participant an equal opportunity to win. This is true even if some people participate through the purchase of a product or service.
Washington is in a minority of states that instead focus on whether there is any benefit to the operator, or detriment to the participant, sometimes called “simple contract consideration.” Under this test, consideration means anything of value transferred from the participant to the promoter or which requires any action that is a burden to the participants. While this weaker test is not helpful to Big Fish, it does not foreclose the possibility that consideration may be lacking where free play opportunities are ample. The question will be whether there is consideration because some persons used “money or property” to purchase more chips, or whether the court will find consideration by measuring the actual or likely benefit to Big Fish.
In any event, if Big Fish ultimately loses it will be most likely because Washington’s legal tests for gambling diverge from most states.
We may need to wait a bit longer to see what if any trend develops as a result of the Kater decision. Many people have assumed that free play games cannot be regarded as gambling but that argument appears to have lost here. Often it is only after you have lost something that you begin to value what you no longer have.
For it falls out That what we have we prize not to the worth
Whiles we enjoy it, but being lacked and lost,
Why, then we rack the value, then we find
The virtue that possession would not show us
While it was ours.
Shakespeare, Much Ado About Nothing.
