Big trouble for social gaming after Big Fish ruling?

A federal court in Washington State recently ruled that social casino games played at Big Fish Casino constituted illegal gambling, prompting other operators including PokerStars to pull their free play offerings in the state.

Glenn Light, Karl Rutledge and Mary Tran of Lewis Roca Rothgerber Christie analyse the decision and consider whether such caution is warranted.

Many social casino operators offer free chips upon initial registration and during gameplay — i.e. when players run out of chips, more are subsequently added to their account for free —  and as these virtual chips are not redeemable for cash or any merchandise prizes, both providers and players alike typically do not consider that  any illegal gambling is taking place. 

However, this assumption may be mistaken, at least when it comes to Washington residents, after a recent decision by the United States Court of Appeals for the Ninth Circuit on a purported class action lawsuit filed against racetrack and casino operator Churchill Downs Incorporated.

In 2013, the plaintiff, Cheryl Kater, started playing Big Fish Casino, a virtual game platform that offers social gaming in which users may play various casino games (i.e., blackjack, roulette, poker, etc.) using a virtual “currency”.

Users can download the Big Fish Casino application on any mobile device, free of charge. Once downloaded, users are credited a certain number of free virtual casino chips that can be used to play Big Fish Casino games at no cost to the user.

Like most social games, users may obtain additional chips by winning games, via free chip replenishment, or by purchasing additional chips.

Big Fish Casino users must accept Big Fish Casino’s “Terms of Use” before playing. The terms provide that the virtual chips have no cash value, and cannot be exchanged for cash or merchandise, either with the operator or other players.

In 2015, Kater filed a purported class action lawsuit in a federal court in the Western District of Washington against the then-parent of Big Fish Games, Churchill Downs.

Kater claims she bought more than $1,000-worth of chips to continue playing the various casino games and eventually lost the chips during gameplay. Kater sought to recover the lost funds under Washington’s Recovery of Money Lost at Gambling Act (RMLGA). 

Kater alleged that Churchill Downs violated the Washington Consumer Protection Act,  and that Churchill Downs was unjustly enriched (i.e., Churchill Downs unlawfully benefited at the expense of Big Fish Casino users).

The district court determined that because Big Fish Casino chips do not satisfy the requisite prize element, Big Fish Casino does not constitute illegal “gambling” under Washington law and thus, Kater failed to state a cause of action.

The district court granted Churchill Downs’ motion to dismiss the complaint because Kater could not recover funds under the RMLGA if the game at issue was not an illegal gambling game.

On 28 March 2018, Judge Milan D. Smith of the United States Court of Appeals for the Ninth Circuit authored an opinion reversing the district court’s decision, leaving the social gaming industry perplexed and concerned – some operators have since even decided to block Washington residents from their social gaming sites. 

Despite a line of federal cases involving social gaming that ruled in favour of the gaming companies, the three judge panel decided that under Washington law, Kater’s complaint did in fact state a cause of action. This decision revived the lawsuit against Churchill Downs and Kater will now seek certification of the class.

Definition of gambling
Under Washington law, gambling is defined as: (1) staking or risking something of value (2) upon the outcome of a contest of chance or a future contingent event not under the person’s control or influence (3) upon an agreement or understanding that the person or someone else will receive something of value in the event of a certain outcome. 

At issue herein is whether Big Fish Casino awards a prize that would constitute “something of value”.

In the complaint, Kater argued the chips are prizes that constitute “things of value” because, despite the inability to directly redeem chips for cash or merchandise, the chips: (1) extend gameplay for users; and (2) can be sold on a secondary market by using an in-app mechanism where users can transfer chips to other users for a fee. 

Pursuant to Washington law, a “thing of value” is: “Any money or property, any token, object or article exchangeable for money or property, or any form of credit or promise, directly or indirectly, contemplating transfer of money or property or of any interest therein, or involving extension of a service, entertainment or a privilege of playing at a game or scheme without charge.”

2015 dismissal
In the initial 2015 district court filings, both parties relied on Bullseye Distributing LLC v. State Gambling Commission, which at the time, was the only Washington case that discussed “thing of value” as defined in Wash. Rev. Code 9.46.0285.

In Bullseye, an electronic sports card vending machine, designed to emulate a video slot machine, awarded points which extended gameplay. Once a certain threshold of “play points” was met, the points could be exchanged for cash or merchandise.

Finding the “play points” to be a “thing of value,” the Bullseye court held that the machine was a gambling device under Washington state law. 

Kater contended that like the “play points” in Bullseye which extend gameplay, Big Fish Casino chips are also a “thing of value” because they extend the privilege of gameplay without additional charge, thus satisfying the prize element. 

Churchill Downs countered that Big Fish Casino chips are different from the “play points” in Bullseye because the chips cannot be redeemed for cash or merchandise.

The district court agreed with Churchill Downs, acknowledging that extended gameplay in Bullseye was only valuable because the game was not free to play, and the longer the game was played, the greater the likelihood that a player would reach a certain point threshold to win actual cash or merchandise prizes (i.e., play points were required to make additional spins and additional spins increase the likelihood of reaching the prize threshold to redeem the points for cash). 

The district court stated: “While the chips do allow users to continue playing the game, extended gameplay cannot result in any gain to the user, pecuniary or otherwise, aside from the amusement that accompanies continuing to play a game that is already available to play for free. This does not satisfy Washington’s requirement of prize.” 

2018 reversal
The Ninth Circuit was not persuaded by the district court’s reasoning or that of other federal courts that ruled in favour of other social games. The court said the cases cited by Churchill Downs in support of its position involved analyses of various state statutes, state definitions and different games not applicable to the present case. 

In particular, the court found these cases unpersuasive because comparatively, Washington’s broad definition of “thing of value” encompasses more than only monetisation. Furthermore, the district court’s distinction between Bullseye and the present case had no bearing on the court’s decision.

Instead the court agreed with Kater’s position, and held that virtual chips are a “thing of value” because they extend the privilege of playing Big Fish Casino.

The fact that Big Fish Casino users could not redeem the virtual currency for money or merchandise did not change the court’s decision that virtual currency extending gameplay falls within Washington’s definition of a “thing of value”.

Churchill Downs maintained that purchased virtual chips do not extend gameplay, but only enhance it, and therefore, are not “things of value”. The court disagreed, reasoning that without virtual chips, users cannot play the games that Big Fish Casino offers unless they purchase more chips to obtain the privilege of playing the game.

The court’s reasoning, however, does not logically follow because the free virtual chips awarded to players at the time of registration, and throughout gameplay, negate the notion of any “privilege” to play the games.

Accordingly, Churchill Downs also attempted to argue that since users receive free chips throughout gameplay, extending gameplay does not actually cost users anything. However, this argument, which may be a strong defence, was not analysed by the Ccurt because it was “not included in the complaint.” 

The court could only decide whether Kater stated a cause of action based on the complaint.

Churchill Downs also argued the court should defer to the Washington State Gambling Commission’s conclusion that Big Fish Casino does not constitute illegal gambling. Churchill Downs cited a pamphlet offered by the Commission and referred to Commission presentation materials and minutes regarding social gaming.

The court maintained that the cited materials do not indicate any formal position adopted by the commission regarding social gaming. 

Ultimately, the court held that because of Washington’s broad definition of “thing of value”, the RMLGA’s “language encompasses the value of the virtual chips Kater purchased”, thus Kater should be able to seek recovery of her gambling losses. 

The court’s decision requires the case to be argued before the same district court that initially dismissed the lawsuit. Before being sent back to the district court, Churchill Downs can file a petition for a rehearing or rehearing en banc, or ask the United States Supreme Court to hear the case.

Pursuant to a recently granted extension, Churchill Downs’ deadline to file a rehearing petition is 11 May 2018.

Online social gaming companies should monitor this case closely.

If the argument of continuing to award free play fails and a final judgment is made in favour of Kater (i.e., determining that the virtual chips in the Big Fish Casino are a “thing of value” under Washington law), then most games that employ purchasable in-game virtual currency that extend play and allow such currency to be won in chance-based offerings may be deemed an illegal gambling game in the state.

Not only will this ruling significantly alter the legal landscape in Washington, but it would serve as a negative precedent for states with similarly broad definitions of “things of value” to rely on.

Glenn Light and Karl Rutledge are both partners in Lewis Roca Rothgerber Christie's gaming practice group in the firm’s Las Vegas office, while Mary Tran is an associate in the same division.

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