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Mobile In-App Games: Mindless Fun or Illegal Gambling?

As competition increases among companies to introduce the next chart topping application, a popular feature of mobile apps has become a game or sweepstakes where users have the chance to win prizes.

Just like the thrill of winning a stuffed animal on a boardwalk game of chance, companies have introduced in-app games to lure consumers to their platform and keep them engaged with new opportunities to rise in the leaderboards.

With this combination of marketing and technology, there are legal considerations that companies must consider when sponsoring in-app games or sweepstakes. These considerations center on whether such a promotion operates as an unlawful lottery under contest and sweepstakes laws, which are governed by the states. For the purposes of this article, a sweepstakes is a promotion in which prizes are awarded on the basis of chance, while prizes are awarded in a contest on the basis of skill. While the laws differ from state to state in terms of details such as compliance requirements and penalties, they are generally consistent in terms of what is defined as an “illegal lottery.”

Using New York as an example, an illegal lottery involves three elements: (1) participants pay, or agree to pay, something of value for chances represented and differentiated by numbers, a combination of numbers or other media to win (“consideration”); (2) winning chances are determined by a drawing or other method based on the element of chance (“chance”); and (3) the holder of the winning chances receives something of value (“prize”).1

Consideration in mobile in-app games

For a mobile in-app game to be legal, at least one of these elements must be eliminated. Removing the “chance” element, which would make the promotion a “game of skill,” typically isn’t feasible for a game that utilizes features like a spinning wheel or slot machine (or arguably most mobile app games that run off an algorithm). Likewise, removing the prize is also not ideal, as this is what attracts consumers and keeps them engaged. As a result, for an in-app game to comply with the applicable state laws, removing consideration is often the most practical solution.

“Consideration” is commonly seen through an entry fee to participate in the sweepstakes or contest, but in the context of in-app games, even removing this requirement may not be sufficient to eliminate this element. “Consideration” comes in many forms, such as (1) purchasing a product to be eligible for the sweepstakes or contest, (2) an SMS text, (3) subscription fees, or (4) otherwise engaging in a time-consuming or onerous activity in order to gain entry. Particularly for mobile, in-app games, an inherent requirement is that the consumer have a smartphone or mobile device that is capable of downloading and utilizing the app. Of course, smartphones are ubiquitous, but there are still many consumers who may not own such a device; therefore, the requirement that consumers obtain one in order to enter the contest or sweepstakes may be deemed “consideration.”

In order to eliminate that de facto consideration element, mobile app operators are keen to provide a universally available, alternative method of entry (AMOE) by which consumers can participate in the contest or sweepstakes via a mechanism other than the mobile app itself. This AMOE can be accomplished, under certain circumstances, via a simple entry form on a corresponding website, or like the historical example popularized by cereal boxes — by sending a selfaddressed, stamped envelope (the cost of mailing has been held to be acceptable for purposes of “free” entry), which would then be sent back with an entry included.

While the Ninth Circuit’s decision could be read narrowly, based on the specific definition of “thing of value” in the RMLGA, app developers and promoters of mobile contest and sweepstakes must remain keenly aware of the nature of any virtual prizes they are offering and analyze the specific definitions in any gambling laws in each jurisdiction where their users are located.

However, providing an AMOE on its own may not be enough to make the contest legal if it does not provide “equal dignity” so as to not give an advantage to those who pay for entries versus those who got the free method. Accordingly, courts have held that a game in which participants could purchase multiple paid entries at one time, but had a limit of one entry per day for the AMOE, violated state gambling laws.2 As a further caveat, under certain state laws, entrants who have paid consideration must receive something of value for the payment, which “return value” must be equivalent to the value paid for the app or the entry. Such legal interpretation has led Apple, out of an abundance of caution, to limit its app developers from creating “promotional” sweepstakes and contests and promoting them in its app store. Facebook has also prohibited sweepstakes that condition entry upon an AMOE, such as purchasing a product or completing a task.

Virtual prizes

When it comes to the “prize” element, many sponsors of in-app games have attempted to obscure whether a “thing of value” is offered by only awarding prizes in the form of virtual or digital items (“coins,” “diamonds,” “hearts,” “rubies,” etc.) that are limited to use on the platform and cannot be used to obtain any realworld or cash value. As such, chance based games that provide the opportunity to win virtual rewards or currency raise the question of whether such purely virtual items have sufficient real-world value to be deemed “prizes” under state lottery laws. Unfortunately, there is no concrete answer here, as the courts that have addressed these fact patterns have disagreed on whether virtual prizes are “prizes” for purposes of determining whether the sweepstakes or contest is an illegal lottery.

Where courts have found that virtual rewards are not a “prize,” the determination was conditioned on the premise that (1) the virtual rewards cannot be redeemed, transferred or exchanged for any items of real-world value, and (2) there is no secondary market, meaning that the app’s terms of use expressly state that the virtual currency cannot be redeemed for “real world” money, goods or other items of monetary value from the platform or any other person.3

In contrast, a 2018 decision from the US Court of Appeals for the Ninth Circuit held that mobile games using virtual chips, hypothetical winnings and no cash out mechanism can still be an illegal lottery under Washington’s Recovery of Money Lost at Gambling Act (the RMLGA).4 According to the court, a mobile app that allowed users to play casino games with virtual chips and purchase additional virtual chips once they ran out with no ability to cash out was illegal on the basis that the virtual currency was, in fact, a “thing of value” because “a user needs these virtual chips in order to play the various games that are included within [the game].”5

(1) N.Y. Penal Law § 225.00(10).

(2) See Black North Assocs., Inc. v. Kelly, 722 N.Y.S.2d 666 (4th Dep’t 2001).

(3) See Mason v. Machine Zone: In a similar ruling, in Mason v. Mach. Zone, Inc., 851 F.3d 315 (4th Cir. 2017); Soto v. Sky Union: In Soto v. Sky Union, LLC, 159 F. Supp. 3d 871, 881 (N.D. Ill. 2016).

(4) See Kater v. Churchill Downs, 886 F.3d 784 (9th Cir. 2018).

(5) Id. at 785

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 217

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About this Author

Jeremy Merkel Privacy, Data & Cybersecurity Attorney Katten Muchin Rosenman New York, NY
Associate

Jeremy Merkel counsels businesses and organizations across a range of industries on privacy and data security matters. Combining his knowledge of the cybersecurity landscape with his technical experience, Jeremy is a trusted advisor to companies during the critical moments of identifying and responding to data security incidents. From the moment a breach is identified, Jeremy leverages resources to understand the scope of an incident, assess the risk to data and sensitive information and mitigate legal exposure.

The legal framework of privacy and data security laws is constantly...

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