December 20, 2018 GPSolo | Best of ABA Sections

Gam(bl)ing 2.0: Old Laws in an Era of New Games

By Andrew Kim

Digital gaming has seen explosive growth over the past decade. It owes its meteoric rise in large part to a particular subset of the industry—digital games that are played online. This article highlights two problems posed by gambling laws that may trouble digital gaming developers. The first is a new take on a familiar problem—the issue of uniformity. Although most states use the same rudimentary formula with the same elements for determining whether a game can be considered “gambling,” they vary as to how much of each ingredient is necessary to violate the law. The second is a problem likely unforeseen when the gambling laws were first passed—the issue of secondary markets (i.e., how players place real-world value on otherwise worthless in-game items and use those items to place wagers on in-game events).

Digital games and gambling laws: The need for uniformity. The type of law most problematic for modern gaming also happens to be the most general: a prohibition on “gambling.” Most states have a statute that bans “gambling” as a general matter. “Gambling” is usually defined as a person offering a thing of value, placed on the outcome of a contest, for the opportunity to win a thing of value. These laws also have a third element: chance, described as “something that happens unpredictably without any discernible human intention or direction and in dissociation from any observable pattern” (People v. Shira, 133 Cal. Rptr. 94, 105 n.12 (Ct. App. 1976)).

In all but two states, the contest on which a wager is placed must be a contest of chance for gambling to occur. The rest of the states require at least a scintilla of chance for a wager placed on a contest to be considered gambling. In the vast majority of states, chance must predominate over skill for the game to be considered gambling. The second-largest group of states requires a “material” element of chance in the game, although these states differ on what the word “material” means. And the ambiguity of the word “material” itself causes problems because materiality is often difficult to quantify. Finally, for a small minority of states, any degree of chance is sufficient for determining whether there is gambling.

Another complication is the kind of role that chance must play. States generally require that chance be a part of the game’s design for a game to constitute “gambling.” On the other hand, random events that befall the competitors of a lawful skill-based game do not somehow transform the game into a contest of chance (even in states where “any” chance will do), as the design of the game itself would not contemplate or foresee the randomness.

In the abstract, these concepts may seem straightforward; in practice, particularly with “modern” digital gaming, the lines are difficult to draw. Take fantasy sports, for instance. Proponents assert that the game is one of analytics—athletes are selected as part of fantasy sports teams, but those athletes merely serve as vehicles for statistics and variables, with the endgame being to “create a lineup that will produce extreme outcomes” (tinyurl.com/zgagw6l) and better than everyone else’s. Detractors claim that the game is one of chance because “players exercise no control or influence over the actions of players” (tinyurl.com/j6byxsm) and because of random considerations such as injury, weather, and officiating. The protracted confusion over whether fantasy sports are games of skill or games of chance has forced state legislatures to step in to clarify that they are not gambling contests.

The skill/chance issue, standing alone, is not an insurmountable obstacle for game developers—in-game chance elements can be added and removed. But what inhibits some digital game innovators—whose success depends on the ability to reach as many players as they can, across the country and around the world—is the uncertainty created by a patchwork of different laws. Because states vary on how much chance is required for a game to be considered “gambling” to occur, it is difficult for developers to create a game that would neatly accommodate every law.

The problem of secondary markets. One unexpected source of potential legal problems is a feature of many digital games: in-game items. Although a game developer may not attribute any real-world value to an in-game item, the players themselves may assign it real-world value, which in turn has created legal headaches for developers. Most digital games are not designed with a real-world prize in mind: Players can collect in-game items, but those items have no inherent real-world value. So, in ordinary circumstances, they come nowhere close to violating the gambling laws because there is no opportunity to win anything of value.

Despite the lack of value, players may be able to use a platform as a vehicle for gambling by exploiting features that allow for the trading of in-game items. Some players may engage in a virtual quid pro quo arrangement—one player beats another, and the loser “trades” an item to the winner. But once value is ascribed to in-game items, the gambling can take other forms: Players bet on other third-party contests, or “trade” their items to third-party accounts in exchange for credit in online casino-like environments.

What results from this marketplace of in-game items is a thriving secondary market, where items and accounts are assigned real-world value by the players themselves, not the developer. And that market has spawned an unseemly outgrowth for those developers: gambling through the secondary market. These transactions raise the question of whether developers—who have no intention of fostering a gambling environment when they first release their games—could be liable for allowing gambling to occur through their games and on their systems. To be sure, no developer has been found civilly or criminally liable for violating the gambling laws of any state on a secondary market gambling theory, and it is highly unlikely that any will.

Recommendations. There are three steps states can take to alleviate the problems mentioned in this article. To address the lack of uniformity on the skill/chance question, states should approach the definition of gambling as a binary choice: Chance should either predominate, or it should not matter at all.

As for the issue of secondary market gambling, states should consider adopting laws preemptively clearing developers of any liability under the gambling laws for such activity. Developers should be held liable only if they intentionally design their game so that players could covertly use it as a means of gambling. Another approach is to hold developers liable only for intentional design or if they know their game is being used for gambling and they take no steps to put a stop to such secondary market gambling. Finally, states should stay ahead of the curve and keep abreast of the latest gaming trends. Education and cooperation with the digital gaming industry are the best ways to address other challenges that may arise as digital games play a more prominent role in American society.

ABA Criminal Justice Section

This article is an abridged and edited version of one that originally appeared on page 4 of Criminal Justice, Spring 2017 (32:1).

For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

WEBSITE: americanbar.org/crimjust

PERIODICALS: Criminal Justice, quarterly magazine; Criminal Justice Newsletter, three times per year; White Collar Crime Newsletter, two times per year (electronic).

BOOKS AND OTHER RECENT PUBLICATIONS: Trial Tactics; Street Legal; The Citizenship Flowchart; The State of Criminal Justice; Leapholes (fiction); Achieving Justice: Freeing the Innocent, Convicting the Guilty; ABA Standards for Criminal Justice; Annual Survey of Supreme Court Decisions; Asset Forfeiture: Practice and Procedure in State and Federal Courts; The Child Witness in Criminal Cases; The Criminal Lawyer’s Guide to Immigration Law; The Shadow of Justice (fiction).

Andrew Kim is an associate in the Washington, D.C., office of Goodwin Procter LLP.

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