A new $5 Million Class Action was filed against Apple on Friday in the U.S. District Court in San Jose in a very important case relating to the promotion of video games that have in-app purchase mechanisms that are primarily aimed at children and addicted gamblers. Apple's iPhone and iPad are considered illegal "slot machines or devices" in California. In-app purchases in this case are deemed to be "Loot Boxes" or "Loot Crates."

The issue is quickly becoming an issue in Europe with both Belgium and the U.K. now demanding that the government modernize its gambling laws to include "Loot Boxes" especially targeting children. While Apple legally tried to protect themselves by creating mild restrictions on its developers, the bottom line is that they allow this practice considered gambling, and more importantly, profit handsomely from "Loot Box" purchases, according to the pending Class Action.

This type of Class Action is long overdue in the U.S. and will be an important one for the gaming industry as a whole.

The Class Action begins with a quote from Tim Sweeney, Co-Founder of Epic Games as follows:

"We should be very reticent of creating an experience where the outcome can be influenced by spending money. Loot boxes play on all the mechanics of gambling except for the ability to get more money out in the end. Do we want to be like Las Vegas, with slot machines or do we want to be widely respected as creators of products that customers can trust? We have businesses that profit by doing their customers harm."

 

Nature of the Action

The action filed on Friday, after the quote from Sweeney, begins with the "Nature of the Action" as follows in-part below. Any emphasis presented below in bold type or highlighter has been added by Patently Apple.

The California legislature has declared: "Gambling can become addictive and is not an activity to be promoted or legitimized as entertainment for children and families."

Through the games it sells and offers for free to consumers through its "App Store," Apple engages in predatory practices enticing consumers, including children to engage in gambling and similar addictive conduct in violation of this and other laws designed to protect consumers and to prohibit such practices.

Not unlike Big Tobacco’s "Joe Camel" advertising campaign, Apple relies on creating addictive behaviors in kids to generate huge profits for the Company. Over the last four years Defendant’s App Store games have brought in billions of dollars, even though the vast majority of the games are free to download.

A large percentage of Apple’s revenues from App Store games come from the in-game purchases of what are known in the gaming industry as "loot boxes" or "loot crates." Dozens (if not hundreds) of App Store games rely on some form of Loot Box or similar gambling mechanism to generate billions of dollars, much of it from kids.

Loot Boxes are purchased using real money, but are simply randomized chances within the game to obtain important or better weapons, costumes or player appearance (called “skins”), or some other in-game item or feature that is designed to enhance game-play. If obtained, these weapons, skins, and other items can help the player advance in the game and enhance the game playing experience. But buying a Loot Box is a gamble, because the player does not know what the Loot Box actually contains until it is opened.

Unsurprisingly, the perceived best "loot" in the game is also the most difficult to obtain, and least likely to be received via Loot Box. Conversely, most items in the Loot Boxes tend to be "common" or undesirable to the player – either because it is easily obtained or because the player already possesses the item.

Some of these specific high-demand items in the game can be so difficult (and costly) to obtain that a "gray market" has sprung up on the internet – websites where the game accounts and in some cases individual items can be (and are) bought and sold for real money outside of the game itself. Numerous websites have been created to broker these transactions, bringing buyer and seller together to sell these items and accounts, for real money outside of the game.

Loot Boxes have all the hallmarks of a Las Vegas-style slot machine, including the psychological aspects to encourage and create addiction – especially among adolescents. Moreover, under California law they constitute illegal "slot machines or devices" when played on an iPhone, iPad, or other similar device. 

California's Penal Code broadly defines an unlawful "slot machine or device" as, a machine, apparatus, or device that is adapted, or may readily be converted, for use in a way that, as a result of the insertion of any piece of money or coin or other object, or by any other means, the machine or device is caused to operate or may be operated, and by reason of any element of hazard or chance or of other outcome of operation unpredictable by him or her, the user may receive or become entitled to receive any piece of money, credit, allowance, or thing of value, or additional chance or right to use the slot machine or device, or any check, slug, token, or memorandum, whether of value or otherwise, which may be exchanged for any money, credit, allowance, or thing of value, or which may be given in trade, irrespective of whether it may, apart from any  element of hazard or chance or unpredictable outcome of operation, also sell, deliver, or present  some  merchandise,  indication  of  weight,  entertainment,  or other thing of value.

Governments, regulators, and psychologists, all agree that Loot Boxes like the ones in games Defendant offers through its App Store, operate as gambling devices for those that play the game, including minors, and that they create and reinforce addictive behaviors.

For instance, the Government of Belgium examined the use of Loot Boxes in various video games and determined that they violated that country’s gambling laws, specifically finding, the paid loot boxes in the examined games Overwatch, FIFA 18 and Counter-Strike: Global  Offensive  fit  the  description  of  a  game  of  chance  because  all  of  the constitutive elements of gambling are present (game, wager, chance, win/loss).

Likewise, in September 2019 Great Britain Parliament’s Digital, Culture, Media and Sport Committee issued a report to Parliament determining that Loot Boxes constitute gambling and encourage addictive behavior, and recommending that the sale of Loot Boxes to children should be banned.

Committee Chair Damian Collins MP said: Loot boxes are particularly lucrative for games companies but come at a high cost, particularly for problem gamblers, while exposing children to potential harm. Buying a loot box is playing a game of chance and it is high time the gambling laws caught up. We challenge the Government to explain why loot boxes should be exempt from the Gambling Act.

Similarly, psychologists who have studied the issue agree that Loot Boxes correlate with problem gambling, especially among adolescents. For example, one such survey analysis of current studies concluded, the findings are very consistent that there is an association between problem gambling and loot box buying among both adolescents and adults (and that the association may be even stronger among adolescents).

Even Apple implicitly concedes the Loot Boxes in its App Store games are a form of gambling. Like the California state lottery, Apple requires its App Developers to disclose the "odds of winning" particular items in the Loot Boxes for the games it distributes.

Apple’s “App Store Review Guidelines” for App Developers states: Apps offering "loot boxes" or other mechanisms that provide randomized virtual items for purchase  must  disclose the  odds of receiving each type of item to customers prior to purchase.

While Apple does not itself create these games and the Loot Box mechanism used to entice  children  to  gamble,  Apple profits handsomely by 1)marketing, selling,  and/or  distributing the games to kids on Apple products and through its App Store platform; 2) acting as the agent for the developer in selling the Loot Boxes; and 3) handling the money in all of the transactions –taking a 30% cut of all money spent by players before transferring the remainder to the developer."

Causes for Action

The Class Action consists of three specific actions as follows:

Count 1: Unlawful and Unfair Business Practices in Violation of California’s Unfair Competition Law

Count 2: Unfair and Deceptive Acts and Practices in Violation of California’s Consumers Legal Remedies Act

Count 3: Unjust Enrichment

The graphic below is in-part from the digital court docket that illustrates that the lawsuit is for $5 million. Considering how lucrative the "Loot Box" mechanism and feature is to the gaming industry and to Apple specifically, it's surprising that the amount for this Class Action wasn't set much higher so as to inflict more pain on Apple. Apple likely makes $5 million a day on games and so, even if they lost, $5 million is chump change for Apple.

The more important outcome of the Class Action would be to get a ruling from the court that the practice of including "loot boxes" in games on the App Store be deemed illegal. This would allow Apple to warn their gaming developers that all games in the future offering this feature would be disallowed on the App Store.

For more details on this case, review the full Class Action lawsuit filing presented below, courtesy of Patently Apple.

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