On June 12, 2020, two putative class action lawsuits were filed in the Northern District of California against Apple ( Taylor, et al., v. Apple, Inc., No. 20-CV-03906-RS) and Google ( Coffee, et al., v. Google, LLC, No. 20-CV-03901-BLF). Both lawsuits raise the issue of loot box mechanics in mobile games hosted on both Apple and Google's respective app stores. As of January 10, 2022, the district court has dismissed both cases for similar reasons.
Background
While loot boxes can take various forms, they are usually videogame mechanisms that generate randomized virtual items when 'opened' by players. Loot boxes typically contain in-game items such as weapons, virtual apparel for the player's character (also commonly referred to as "skins"), or even additional loot boxes. Players may purchase loot boxes with earned in-game virtual currency or virtual currency purchased using real currency. In both lawsuits, the Plaintiffs alleged that the loot boxes in certain games on the respective app store are a form of gambling because players do not know what the loot box contains until it is opened.
Apple and Google use app stores as a way for smart phone users to download apps, such as mobile games. Generally, these app stores serve as the primary means of distribution for third-party app developers and publishers. Further, distributors such as Apple and Google typically collect a 30% fee from any in-app purchases made through their respective app store. It is this participation of distribution through app stores upon which the Plaintiffs in both lawsuits premise Apple and Google's liability, despite each company not being the developer of the games at issue.
Both the Taylor and Coffee Plaintiffs originally alleged three causes of action against Apple and Google, respectively: (1) Apple and Google have violated California's Unfair Competition Law ("UCL") through "unlawful" and "unfair" business practices; (2) Apple and Google have violated California's Consumers Legal Remedies Act ("CLRA"); and (3) a standalone claim for common law unjust enrichment. In effect, Plaintiffs allege that virtual loot boxes should be considered a "slot machine or device" under California Penal Code § 330a and are therefore in violation of California law. Although California state law does not define gambling, California courts have crafted three general elements that, when present, constitute gambling: "(1) a prize, (2) which is distributed by chance, and (3) consideration paid for the opportunity to win the prize." See Trinkle v. California State Lottery, 105 Cal. App. 4th 1401, 1406 (2003).
January 4, 2022: The Taylor Dismissal
On January 4, 2022, the Taylor court granted Apple's motion to dismiss without leave to amend. After Apple's first motion to dismiss was granted on March 19, 2021, Plaintiffs had amended their complaint to break the UCL claim into two separate claims for relief under the "unlawful" prong and the "unfair" prong and reasserted their original claims under the CLRA and unjust enrichment. The district court focused on Plaintiffs' lack of standing and lack of merit in its decision, primarily addressing Plaintiffs' claims under the UCL before summarily dismissing all of Plaintiffs' claims.
California law requires that plaintiffs seeking relief under the UCL must have suffered a cognizable economic injury, a more stringent standard than federal standing requirements. See Kwikset Corp. v. Superior Ct., 51 Cal. 4th 310, 324 (2011). In its first dismissal order, the Taylor court noted that Plaintiffs, by failing to state a cognizable injury, lacked standing to bring suit against Apple. Plaintiffs subsequently amended their complaint, alleging that Plaintiffs "lost money when [Taylor's son] purchased virtual coins to buy chances on loot boxes." However, the court found this explanation insufficient because it offered no additional substantial factual support to demonstrate Plaintiffs suffered economic harm. The fact remained that Plaintiffs received an equal exchange of in-game currency for real currency, and Plaintiffs chose to use such in-game currency to purchase loot boxes.
The district court also found that Plaintiffs failed to allege any additional factual allegations that supported their claims that Apple violated the UCL, thus lacking sufficient merit to survive a motion to dismiss. The UCL defines unfair competition as any "unlawful, unfair or fraudulent business act or practice." Plaintiffs alleged that Apple violated the UCL through both "unlawful" and "unfair" business practices by hosting and distributing a game on Apple's App Store. However, Apple's alleged "unlawful" and "unfair" business practices rests on the connection between loot boxes and California's statutory regulation of gambling devices – a connection Plaintiffs failed to establish. Existing statutory law in California does not currently prohibit loot boxes. In following this reasoning, the district court similarly dismissed Plaintiffs' claims that Apple's alleged conduct violated the CLRA as "deceptive" business practices and constituted unfair enrichment.
Yet notably, Apple reasserted in its second Motion to Dismiss that Plaintiffs' claims should be entirely barred by the Federal Communications Decency Act ("CDA"). Section 230 of the CDA permits courts to dismiss claims where the alleged conduct exceeds the scope of defendant's role as a publisher of third-party content. Here, the district court again rejected Apple's argument. The court briefly commented that Apple's participation in the "marketing and distribution" of an illicit gambling device would support Apple's liability with regards to similar claims. The district court explained that Apple's argument remains a moot point, as Plaintiffs' claim lacks standing and merit to proceed. Accordingly, the district court dismissed the Taylor Plaintiff's lawsuit without leave to amend.
January 10, 2022: The Coffee Dismissal
The Coffee lawsuit followed a similar pattern to the Taylor lawsuit: on February 10, 2021, the district court granted Google's motion to dismiss with leave to amend, finding that the Plaintiffs had failed to state a claim. Yet, unlike the Taylor court, the Coffee court's prior dismissal order found meritorious Google's argument that it was immune to liability under Section 230 of the CDA. Plaintiffs thereafter filed a first amended complaint, separating their claims to the "unlawful" prong and the "unfair" prong under the UCL. Plaintiffs also realleged their original claims that Google violated the CLRA and brought the same standalone claim for unjust enrichment.
In its recent decision, the Coffee court dealt first with the alleged Section 230 immunity Google asserted and noted that liability may be imposed against defendants only "if it contributed materially to the alleged illegality of the conduct." The court cited to the Ninth Circuit three-prong Barnes test where immunity from liability exists for "(1) a provider or user of an interactive computer service (2) whom a plaintiff seeks to treat, under a state law cause of action, as a publisher or speaker (3) of information provided by another information content provider." See Dyroff v. Ultimate Software Grp., 934 F.3d 1093, 1097 (9th Cir. 2019). The district could held that Google satisfied the first prong and third prongs under the Barnes test, as determined in the court's previous dismissal order.
Under the second prong, Plaintiffs cited the unpublished Taylor order, arguing that Plaintiffs did not seek to hold Google liable as a publisher, but rather for its own conduct in promoting and selling loot boxes through games hosted on Google's app store. Additionally, Plaintiffs argued that the revenue-sharing structure between Google's app store and the game developers exceeded the scope of immunity granted by Section 230. However, the district court rejected Plaintiffs' argument, noting that Google's conduct of processing in-app purchases and collecting a 30% cut of such transactions through its app store is lawful conduct. Rather, the Google app store offers a "neutral means" for third-party developers to publicize their content. Therefore, the court reasoned that Google's alleged conduct "falls squarely within the protection of [Section] 230" and dismissed Plaintiffs' claims on the basis of Section 230 immunity.
The district court similarly addressed Plaintiffs' lack of standing. Just as the Taylor court found, the Coffee court held that Plaintiffs failed to state a cognizable economic injury resulting from Google's conduct and dismissed Plaintiffs' claims under the UCL. Additionally, regarding Plaintiffs' claim under the CLRA, the district court found that the absence of unlawful conduct and lack of a cognizable injury bars Plaintiffs' claim. Plaintiffs purchased virtual currency directly from third-party game developers and received "exactly what they paid for," similarly undermining the merits of the unjust enrichment claim.
Lastly, the court briefly touched on the connection Plaintiffs asserted between illegal slot machines and loot boxes. Plaintiffs argued that loot box prizes have subjective value that could be traded in legitimate digital markets. However, the court noted that a virtual item cannot be a thing of value where the sale of the item would violate any applicable terms of use, and therefore loot box prizes are not things of value under California law. As with the Taylor lawsuit, the district court dismissed the Plaintiffs' claims without leave to amend and with prejudice.
Conclusion
Both the Taylor and Coffee Plaintiffs made identical policy arguments that loot boxes are a form of gambling that may lead to depression and addiction, citing that the Federal Trade Commission recently raised the issue of loot boxes in a workshop hosted in Washington D.C. on August 7, 2019. Since then, formal efforts to regulate loot boxes have not yet proven successful in the U.S., despite other countries such as Japan, the Netherlands, and Belgium enacting loot box policies. Both courts suggested that the solution for loot boxes, if truly as problematic as Plaintiff claims, is a problem for the Legislature to solve.
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