ADventures in Law

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As of relatively recently, gambling was generally prohibited in the United States. You could visit a casino in places like Las Vegas, participate in some state lotteries, and buy tickets for charitable raffles, but options for casino gaming or sports betting were typically limited. That changed in 2018, when the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association lifted the federal ban on sports betting. Since then, dozens of states have legalized sports betting in some form. This change appears to have also benefited the broader commercial gaming industry, with several states legalizing commercial casinos or approving new casino licenses in recent years.

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This wave of legalization has unsurprisingly led to massive growth in gambling revenue. According to the <a href="https://www.americangaming.org/resources/state-of-the-states-2024/" target="_blank" rel="noreferrer noopener">American Gaming Association</a>, commercial gaming revenue has grown over 50 percent since 2017. As with gambling, however, operators that seek to benefit from this rapid growth are also subject to risk. In this case, legal risk. Gambling is a highly regulated industry, and even though it may generally be legal in certain states, that doesn’t mean your game is in compliance with applicable law. As a threshold issue, if your game qualifies as “gambling,” then it likely needs to be licensed in the states where you operate. Considering the burden of obtaining a license, the limited number of licenses available, and the ongoing regulatory requirements for licensed entities, this is a significant restriction.

As a result, it’s no surprise that there is heavy debate over what qualifies as gambling. One industry that has been at the forefront of legal tests in this area is social casinos. Social casinos mimic real casinos, but generally there is a free-to-play option and no opportunity to cash out. As anyone who’s played the lottery likely understands, gambling is when a payment is required in order to play for a chance to win a prize. There must be three elements present: 1) consideration (i.e., the payment); 2) chance; and 3) a prize. Social casinos remove not just one but two of these elements – the payment and the prize – leaving only chance, which on its own is not illegal. Despite this, several lawsuits in recent years have tested this premise and challenged social casinos as unlawful gambling.

The most notable of these is Kater v. Churchill Downs, which led to a 9th Circuit decision finding that the virtual chips used in a social casino constituted “something of value.” Washington state’s gambling law, which was at issue in the case, defines gambling as risking something of value upon an uncertain event to receive something of value. The law further defines a “thing of value” to include a “credit … involving extension of a service, entertainment or a privilege of playing at a game or scheme without charge.” This generally matches the traditional definition of gambling (consideration, chance, and prize), but it expands upon it by further defining what those terms mean. The court found that because the chips that users win (or lose) could be used for additional plays of the game, they constituted a thing of value and the game by extension was gambling. While this didn’t lead to criminal penalties – it was a civil suit seeking recovery of losses – the defendants still settled for over $150 million. Despite the game nominally being free to play, plaintiffs could allege losses because the free virtual chips were limited. If their free chips ran out, then participants had to spend money on the game to play more.

The primary result of this case and similar ones is that social casinos do not operate in Washington and often not in other states with comparable “extension of a … game” statutory language. Or if they do operate in these states, it’s on a limited basis. Even operators taking this more conservative approach, however, may be vulnerable to allegations of illegal gambling in other states. This again goes back to the consideration, chance, and prize analysis, which applies to each state’s law. To avoid the consideration element of gambling, games will typically incorporate some sort of free entry option, but if players can still pay to participate, then a plaintiff may allege there is consideration. The chance element would be the most difficult to remove for these operators – chance presumably exists when offering a game that mimics traditional games of chance offered at casinos. With respect to the prize element of the gambling analysis, while many other states do not include the “extension of a … game” language like Washington does, the definition of a “prize” is still relatively broad. A court could find that chips used for additional plays of the game constitute a prize based on its interpretation of what that term means. Operators in this area should carefully consider state laws and recent lawsuits to determine both how to structure their games and where to operate.

Additionally, even companies that don’t offer casino-style games must go through this same analysis. It is not enough that a game incorporates some skill – different states have different standards with respect to how much skill is required such that chance is removed and a game does not constitute gambling. For example, Royal Match, a tile-matching game, does not resemble any traditional casino games, but it is the subject of a class action lawsuit alleging it violates Washington’s gambling law. Plaintiffs state that the game offers free “coins” but then requires a purchase to continue playing once those coins are exhausted. The coins that players win can then be used to continue playing. This in large part matches the Kater analysis described above, but it’s less clear that Royal Match incorporates chance. The social casino in Kater offered traditional games of chance, like slots, a fact that the defendant is sure to highlight. It’s unclear how this case will shake out due to that difference, but it’s notable that the class action bar is utilizing the Kater theory of liability against other pay-to-play mobile games.

Another item of note from this case is that it was filed against a Turkish developer. The defendant may also see this as an avenue of defense, but foreign corporations that operate in the United States are generally subject to U.S. law. This could, of course, complicate any enforcement, but if the company wants to continue to offer its services here, it will need to comply with any decision.

When Is a Pay-to-Play Game Gambling?