The Legality of Social Gaming

Given its scope, how closely should regulators look at social gaming?

From a legal perspective, social gaming is not well-defined. Many want to lump in several types of offerings that have much different legal considerations. These include sweepstakes-based subscription sites, which often share a common structure. A person could purchase a monthly subscription, typically .95, which entitles him to multiple benefits including magazines, blogs and other benefits. The subscription, however, also includes the ability to play in cash games and tournaments.

Other sites allow persons to wager on the outcome of games of skill. They host online competitions that intensify casual games with the thrill of playing for cash and prizes.

Here, we focus on what is truly social gaming: prizeless social-network gaming. Most social networking sites have applications where its members can engage in casual games or traditional gambling  games like poker.

Game developers monetize these games through four principal sources: micro-transactions, virtual goods, advertising and marketing offers. Effectively, regardless of the game offered, the players cannot earn anything of tangible nature. Instead, they can only achieve virtual items that may have utility in the game itself, or in-game currency that cannot be exchanged for real currency. The only value of in-game currency is its use in the game or to buy virtual items like clothing or hats worn by a player’s avatar in the game.

Sometimes these social gaming activities are free, and in others, persons can buy chips, tokens or virtual currency to play the games. The most common gambling prohibition is games of chance. This is where a person pays consideration, usually money, for the opportunity to win a prize in a game of chance. If the elements of consideration and chance are present but the award of a prize is eliminated, then the activity will be legal, in most, if not all states.

But, understanding the differences in state law affects the risk in that state. Alabama has a typical gambling statute that defines gambling as risking “something of value upon the outcome of a contest of chance or a future contingent event not under the person’s control,” with the goal of winning something of value. The Alabama statute, however, includes a broad definition of what “winning something of value” means. It states that something of value is defined as “any 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.”

On social networking games, people can buy tokens or virtual currency that enables them to play the gambling games. The tokens or virtual currency cannot be redeemable for cash, but only to play the games to win either additional tokens or virtual currency or “virtual prizes.”

The virtual prizes can then bound to the player’s character—i.e., they could not be sold outside the game. These items cannot be bought or sold and players have no way to redeem the items for either cash, prizes or other thing of value. The virtual prizes will have real value if they can be sold in any fashion, such as through an exchange or an auction site. For this model to avoid legal issues, the virtual prizes cannot acquire independent market value.

Therefore, the question is whether the awarding of tokens or virtual currency, which can be used to win more tokens or virtual prizes based upon the outcome of these games, constitutes a prize.

Two issues arise when considering whether an item has value. The first is whether the item itself has a market value. While a prize does not have to be money, courts generally require it have a reasonably determined value. Therefore, a strong argument can be made that a difference exists between an honor and a prize, i.e., merely being crowned a champion or receiving an acknowledgement in a virtual item versus receiving goods or services that have a defined market value.

The second is whether the item, despite having no market value, can be exchanged for cash or an item of value. The virtual prizes have real value if they can be sold.

If the virtual items have no independent value and cannot be sold or traded, they should avoid the prize element under most state laws. This prevents a monetary value from being given to the virtual items.

A few states, like Alabama noted above, have defined the prize element to include an extension of a service as something of value. In states that find something of value to include extended play, the awarding of additional tokens as winnings may be deemed a gambling activity because players risk something of value (real-world money entry) on the outcome of a game of chance on the understanding the users will receive something else of value (more tokens and, therefore, extended play).

Many sites attempt to avoid this issue by always awarding additional tokens when a player exhausts his or her supply. The only difference is the level of game that the person qualifies to play—e.g., a lower-limit poker game. Without the ability of a person to consistently obtain free chips to continue play, a greater risk exists that the winning of tokens could be considered an “extension of a service entertainment” under the state laws that have such a prohibition.

Anthony Cabot is one of the premier legal experts in land-based and online gaming, and is a partner in Lewis & Roca in Las Vegas. He is also a partner in the iGaming North America Conference.