james gatto

Pillsbury Winthrop Shaw Pittman LLP

Gamblification!

Interaction between Social Games and Online Gambling

James GattoLeader, Social Media & Games Team

Social Gambling & Gaming SummitDecember 10, 2013

2 | Gamblification!

GAMBLIFICATION

High Reward High Risk

Convicted on 103 of 104 Counts on Internet Café Sweepstakes

Faces Up to 30 Years in Prison

Enforcements are Increasing

Internet Sweepstakes Enforcements – FL, OH, CA, NC ….

Internet Gambling Arrests

Prediction Markets – Intrade

And the list goes on!

3 | Gamblification!

Key Takeaways

The law lags innovative technology/business models

Recognize there is great risk … including jail

Understand that there is subjectivity in the law

Details make a difference

May not get certainty, but can certainly minimize riskif …..

Get knowledgeable counsel and follow advice

4 | Gamblification!

Social Media/Games Meets Gambling Mechanics

5 | Gamblification!

Range of Activities

Illegal gambling

Lotteries

Legal, regulated gambling

Non-real money casino games

Contests/sweepstakes business models

Win stuff in games/mini-games

Non-real money prediction markets

Gamblification

6 | Gamblification!

Not-gamblification

Gamblification

Casinos

Gambling Technology Companies (IGT, Aristocrat, SG, etc.)

Social Games Companies

Legal Online Gambling Operators (off-shore)

Platform Providers

Overview of Competitive Landscape

7 | Gamblification!

Caesar’s – Buffalo Studios and Playtika

IGT – Doubledown

Bally Technologies - SHFL Entertainment

Sample Acquisitions

8 | Gamblification!

9 | Gamblification!

Legal Issues

Where there is rapid innovation…there are significant patent filings

Gamblification is no exception!

Patents

10 | Gamblification!

What CAN be patented?

Short answer:

If you can build it, you can patent it!

Features

Functions

Processes

Business methods

More


What CANNOT be patented?

The only three categories the Supreme Court has ruled to be not patentable:

Abstract Ideas

Laws of Nature

Natural Phenomena

What these exclusions have in common is all are not tangible


Entire Classifications Related to Aspects of Gamblification

US Patent Office


US PATENT CLASSIFICATIONS

Sub-class Title

269 Lotto or bingo type

270 With attached pieces

271 Alignment games (e.g., tic-tac-toe, go-moko)

272 Word, sentence, or equation forming (e.g., SCRABBLE, hangman)

273 Memory or matching games (e.g., concentration)

274 Betting or wagering board (e.g., casino)

Class: 273 Amusement Devices: Games



Sub-class Title

9 In a game requiring strategy or problem solving by a participant (e.g., problem eliciting response, puzzle, etc.)

10 With chance element or event (e.g., backgammon, Scrabble, etc.)

11 Card- or tile-type (e.g., bridge, dominoes, etc.)

12 Ultimate outcome dependent upon summation of plural card or tile values (e.g., blackjack, etc.)

13 Ultimate outcome dependent upon relative odds of a card or tile combination (e.g., poker, etc.)

16 In a game of chance (e.g., lot, etc.)

17 Lot match or lot combination (e.g., roulette, lottery, etc.)

18 Plural lots (e.g., keno, etc.)

19 Plural matches create pattern (e.g., bingo, etc.)

20 Lot-to-lot combination (e.g., slot machine, etc.)

21 Having means to alter combination probability

22 Lot generator (e.g., card distribution, simulated dice, random number generator, etc.)

25 Credit/debit monitoring or manipulation (e.g., game entry, betting, prize level, etc.)

Class: 463 Amusement Devices: Games



Sub-class Title

90 Specific Application, Apparatus or Process

91 Contest or contestant analysis, management, or monitoring (e.g., statistical analysis, handicapping, scoring)

92 Scoring

93 Probability determination or handicapping

Class: 700 Data processing



Sub-class Title

14.1 Discount or incentive (e.g., coupon, rebate, offer, upsale, etc.)

14.11 Trade or exchange of a good or service for an incentive

14.12 Incentive awarded or redeemed in connection with the playing of a video game

14.13 Determining discount or incentive effectiveness

14.14 Chance discount or incentive

14.16 Referral award system

319 Social networking

Class: 705 Data processing: financial, business practice, management, or cost/price determination



Sub-class Title

700 Operator Interface (e.g., graphical user interface)

757 Virtual 3D environment

848 Interface represented by 3D space

850 Navigation within 3D space

851 On-screen navigation control

Class: 715 Data processing: presentation processing of document, operator interface processing, and screen saver display processing



Sub-class Title

23 Electronic transfer of funds for an entertainment, amusement, or gambling application

Class: 902 Electronic funds transfer


Common Misconceptions | Patents Take Too Long

Misconceptions

Getting a patent takes too long

The games industry moves so quickly that patents are obsolete before they issue

Truth

Can take 2-5 years to obtain a patent under normal process

Properly drafted patents apply to more than one game

Innovative features, functions, and mechanics typically last through several generations of games within a genre

Track I procedure can cut time to 6-9 months


Misconception

Patents are only valuable if they are enforced

Common Misconceptions | Only Valuable if Enforced

Truth

Patents have many types of value – offensive and defensive

Patents can act as a deterrent for competitors with patents

Filing patent applications can make obtaining patents harder for competitors

Patents are assets that add to the overall value of a company

New patent rules enhance defensive value of patents (First to File)


How do you ensure that you stay on the legal side of things?

Comply with U.S. Federal and State Law

and Foreign Laws

Legal Issues with Gamblification


Most federal laws do not define gambling

Most federal statutes facilitate enforcement against activities that violate state (or federal) gambling and illegal lottery laws

except sports betting

Overview of US Federal Laws


UIGEAprohibits businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.

Targets financial institutions/payment processors

Overview of Federal Laws


UIGEA

Does Bitcoin get around this?

No payment processor?

Even if so, need to address state law



Important UIGEA exclusions for Gamblification

participation in any game or contest in which participants do not stake or risk anything of value other than:

i.personal efforts of the participants in playing the game or contest or obtaining access to the Internet; or

ii.points or credits that the sponsor of the game or contest provides to participants free of charge and that can be used or redeemed only for participation in games or contests offered by the sponsor

The points or credits exclusion may cover various forms of virtual currency

But still need to consider state law



State Lottery/Gambling Laws

Most substantive law is state law

Most states have laws prohibiting illegal lotteries

Many have separate anti-gambling laws

Many state laws were written pre-Internet

Some states are now crafting specific legislation to address online gambling

Overview of State Laws


The Formula for Gambling


Consideration + Chance + Prize = Illegal

The Formula for Gambling


Typical scenario

User pays money to participate in an activity

Receives a chance to win

A cash prize or valuable tangible goods

Remove one of the three components

The Formula for Gamblification


Remove consideration/payment: prize + chance

Remove chance: prize + consideration

Remove prize: consideration + chance

(who would pay for a chance to win nothing of value?)

= Sweepstakes

= skill-based contest

= ???

not every time a user pays money

is there the type of consideration that triggers gambling

money is not the only type of consideration that may be relevant (consideration can be non-monetary)

Consideration


Examples: Product Promotion Sweepstakes

McDonald's Monopoly Game

Buy Big Mac/fires; get prize token for chance to win $$$

Illegal? – pay, chance to win, prize

No! – because free AMOE (no purchase necessary)

Consideration?


Get chance to win by sending text

Illegal?

Yes (in some states because premium text charge)

Consideration?


Examples: Text to Win Sweepstakes

Examples: Fantasy sports

pay entry fee

for chance to win league

monetary prize

Illegal gambling?

No – payment for services/predetermined prize not based feesHumphries v. Viacom (NJ)

Consideration?


Some states:

Predominantly skill = skill even if some chance

Material degree of chance

Any chance

Pure chance

Chance vs. Skill


Prize must be something of value

Zynga poker - buy chips for real money, earn chips, but can not cash out

Man convicted in UK for stealing $12 million Zynga poker chips

Virtual goods usable only in game = value?

Prize


Impact of Virtual Goods/Currency


When virtual goods or currencies are used, determining if there is a payment or prize can be more complicated

Does virtual good/currency have value?

How did the player acquired the virtual good/currency?

What can the player do with the virtual good/ currency?

With whom can the virtual currency be used?

Is it a “dual currency” model?

Is there a secondary market?

Check out our paper: Overview of Legal Issues with Virtual Currency (www.socialgameslaw.com)

Secondary Markets


Online markets where virtual goods, virtual currency, accounts, avatars, etc. are bought, sold, traded

Most contravene the terms of service and can result in termination of user account

Impact of Second Markets on Value


Do Secondary Markets create “value” for virtual goods?

What if you can sell Zynga poker chips for real money?

Could this impact a lottery/gambling analysis?

Impact of Secondary Markets on Value?


NCAA Lottery Case

People interested in NCAA Final Four tickets sent in $150 per ticket and $6 handling fee (consideration)

Winners determined “randomly” (chance)

For losers, NCAA returned the $150 but kept the $6

For winners, NCAA kept the $150 + the $6

Impact of Secondary Markets on Value?


NCAA Lottery Case

Illegal Lottery?

Consideration = ($6)?

Chance (random draw)

Prize (ticket that can be scalped for multiples of face value)?

Impact of Secondary Markets on Value


NCAA Lottery Case

Court concluded the tickets were not prizes

NCAA created the primary market for the tickets, and the value realized by the NCAA is in fact the face value of the tickets

But for the NCAA issuing tickets to one of its events, there could never be a secondary market

Mere speculation that the tickets would have an increased value in a secondary market

Impact of Secondary Markets on Value


Key Takeaway from NCAA Lottery Case?

An item is not a prize in a lottery if no market exists for the item before it is offered by the person running the purported lottery

Beneficial ruling for social media and game companies that issue virtual goods or currency in certain gamblification models

Caveat: these facts, this court; others facts/states might differ


Internet Sweepstakes Cafés

pay for time

chance to win

free AMOE

like McDonald’s Monopoly Sweepstakes

Kompu Gacha


Creative monetization model Could only win virtual goods – no cash out! Declared illegal – Japanese FTC Several major game companies Stocks dropped 20% Targeted kids? No fixed odds/consumer complaints?

If consumers complain – regulators will focusJust cause others are doing it … doesn’t make it legal

Check out our blog for more on gamblification


www.socialgameslaw.com

James GattoPillsbury Winthrop Shaw Pittman LLPSocial Media & Games Team Leader

Tel: 703-770-77541650 Tysons Boulevard, McLean, VA 22102-4856

Email: [email protected]

www.pillsburylaw.com/socialmedia

Questions?


mailto:[email protected]

james gatto

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