The U.S. Court of Appeals for the Ninth Circuit concluded on March 28 that virtual currency used in mobile games can qualify as a “thing of value” for the purpose of state gambling laws — a conclusion that, until now, has been resisted by other federal courts. In Kater v. Churchill Downs, the Ninth Circuit considered whether customers could attempt to recover money spent on virtual currency under Washington’s Recovery of Money Lost at Gambling Act. Noting that the currency required to play the game-at-issue had value according to the broadly-worded statute, the court held that the game constituted illegal gambling under Washington law. While the decision represents a “first” for federal courts that have confronted this issue, Kater’s larger implications for the games industry remain unclear.
The Kater Lawsuit
In 2013, Cheryl Kater started playing a mobile game called “Big Fish Casino” — a compilation of virtual casino games, including blackjack, poker and slot machines. The game was free to download, but players had to use in-game currency — virtual casino chips — to actually play any of the casino games.
Players started with a free cache of chips upon first downloading the game. They could earn more chips through regular gameplay or as a reward for winning the casino games. Alternatively, players could purchase more chips for prices ranging from $1.99 to $250.
In 2015, Kater sued Churchill Downs, the company that owned Big Fish Casino, alleging that she had lost over $1,000 worth of Big Fish Casino’s virtual chips. She initiated a class action lawsuit to recover the value of those chips, alleging that Big Fish Casino constituted “illegal gambling” under Washington’s Recovery of Money Lost at Gambling Act.
A federal district court dismissed Kater’s lawsuit on the grounds that Big Fish Casino was not illegal gambling because the virtual chips used to play were not “things of value.” Indeed, Big Fish Casino’s terms of use expressly noted that the virtual chips had no monetary value and could not be exchanged “for cash or any other tangible value.” Big Fish did not provide a formal method for converting chips into actual cash.
Kater appealed the district court’s dismissal, arguing that the chips had value because they were required in order to play Big Fish Casino. She also asserted that, even though cash-for-chips exchanges were technically prohibited, Big Fish Casino provided a feature that allowed players to transfer chips between one another. In effect, she argued, this created a secondary market where players would sell Big Fish Casino chips to one another outside of the app and then use the app’s chip transfer mechanism to complete the exchange. Kater’s complaint also alleged that Churchill Downs, Big Fish’s owners, charged a transaction fee for each chip transfer and, therefore, benefited from these unauthorized “cash outs.”
State Gambling Laws & the Definition of “Value”
Online gambling is generally regulated at the state level. Each state gambling statute is different, and the scope of prohibited activities and applicable prohibitions can vary dramatically from state to state. However, many gambling statutes have at least one thing in common: they regulate activities that involve staking or risking “something of value” on a game of chance.
Washington’s gambling statute 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.
It defines a “thing of value” as:
[A]ny money or property, any token, object or article exchangeable for money or property, or any form of credit or promise, directly or indirectly, contemplating transfer of money or property or of any interest therein, or involving extension of a service, entertainment or a privilege of playing at a game or scheme without charge.
A Broad Statute Leads to an Unprecedented Result
On appeal, the Ninth Circuit reversed the district court’s dismissal of Kater’s lawsuit. It held that the Big Fish Casino chips afforded players “the privilege of playing” the Big Fish Casino games, making the chips a “thing of value” and Big Fish Casino an illegal gambling game under Washington law. The fact that Big Fish Casino could not be played without having virtual casino chips was critical, from the court’s perspective, because of the way Washington’s statute defined “thing of value.”
The court dismissed the fact that players were theoretically able to extend their playtime for free by receiving additional chips through gameplay, noting that its analysis was limited to allegations in the plaintiff’s complaint which did not include this argument.
The court also concluded that Big Fish’s casino chips were “things of value” despite a clear statement to the contrary in Big Fish’s terms of use. At first, this seems to suggest that Big Fish’s terms of use were ineffective at shielding it from Washington’s gambling laws. But in a footnote, the court went on to reject Kater’s argument that the cash-for-chips transactions occurring in the secondary market for Big Fish’s casino chips meant the chips had value, because such exchanges were expressly prohibited by the terms of use.
In reaching its conclusion, the court acknowledged but ultimately dismissed other recent federal court decisions that in-game currencies do not qualify as “things of value” for the purpose of gambling statutes. Instead, it cabined its decision on the particularly broad definitions provided by Washington’s statutes. The court expressed no opinion on the value of in-game currencies in other states employing different legal frameworks.
The decision does not mean Kater will ultimately prevail. Rather, it allows her lawsuit to proceed, which includes an opportunity for Churchill Downs to formally respond to the allegations raised in the complaint. It is not yet clear whether Churchill Downs will petition for rehearing before the Ninth Circuit or appeal the decision to the U.S. Supreme Court.
Kater’s Impact on the Games Industry
This decision may have important implications for the games industry. At a minimum, it introduces uncertainty to a previously consistent line of cases rejecting claims similar to those at issue in Kater. In Mason v. Machine Zone (2017), for example, the Fourth Circuit had concluded that the use of in-game currency in conjunction with a game of chance did not constitute illegal gambling.
At a more practical level, Kater suggests that certain game monetization models pose a risk of violating some gambling statutes. But that risk has some notable limitations.
First, the posture of this case may limit its overall impact. The Ninth Circuit’s opinion means that Kater alleged enough in her complaint to proceed with her lawsuit. It does not necessarily mean that her claims will be successful. The court explicitly tabled some of Churchill Downs’ arguments, including the argument that players received free chips over the course of normal gameplay. It remains to be seen whether these arguments will ultimately have an impact on the outcome of this lawsuit.
Second, game companies should note that the “thing of value” factor is only one part of a larger analysis. Most gambling statutes require that a thing of value be staked or wagered on a game of chance. While casino games may fall into this category, it is not clear that games in other genres — including but not limited to puzzle games, strategy games, platforming games — are fairly characterized as “games of chance.”
Third, Kater’s holding may not apply with equal force to games where players can access basic gameplay without in-game currency. Recall that Big Fish Casino required players to use virtual casino chips in order to play. Other games, by contrast, allow players to enjoy basic gameplay at no cost (real or otherwise), but provide the option to access certain premium features in exchange for in-game currency. It is unclear whether Kater applies to this or other kinds of monetization models.
Key Takeaways
Kater suggests that games of chance requiring players to use in-game currency may trigger state gambling laws. Although easy to miss, Kater also underscores the importance of well-drafted terms of use agreements, which can help limit a game company’s potential exposure under state gambling laws. Finally, it highlights the differences between state gambling regimes and the dramatic consequences those differences can have. Game developers should be cognizant of the applicable gambling statutes in their target markets to understand the risk of different monetization and game design models.