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Supercell, the maker of video games Clash of Titans and Clash of Clans is facing a proposed class-action lawsuit alleging that it is using "loot boxes" to promote gambling to children and adults. 

Chinese internet giant, Tencent Holdings (NASDAQ: TCEHY) owns a majority stake in Supercell, which is based in Helsinki. It is also the developer of the popular video games Clash Royale and Brawl Stars.

The plaintiff filed the lawsuit in the federal court in San Jose, California, and is asking for a jury trial.

Gaming or gambling?

In the lawsuit, the plaintiff alleged that Supercell, through its popular Clash Royale and Brawl Stars video games is engaging in predatory practices. It is allegedly using a “Freemium” pricing strategy to entice consumers including children and adults download their products only to get money through the loot boxes for additional features.

The plaintiff also accused Supercell of encouraging its consumers “to engage in gambling and similar addictive conduct in violation of California laws designed to protect consumers and to prohibit such practices.”

Supercell allegedly violated California’s Penal Code 330a,330b, and 330.1, which stated that video games with loot boxes as gambling devices.

According to the lawsuit, “California’s gambling device statutes are broad in their coverage and prohibit any person from owning, renting, or possessing illegal gambling devices. An illegal gambling device has three features: 

1. It is a machine, apparatus, or device (coin operation is not required); 
2. Something of value is given to play the device; and
3. The player has the opportunity to receive something of value by any element of hazard or chance (“something of value” is not limited to coins, bills, or tokens—it also includes free replays, additional playing time, redemption tickets, gift cards, game credits, or anything else with a value, monetary or otherwise.)” 

Under California law, they are illegal “since they are played on a mobile phone, tablet, computer, or other similar devices.”

Buying a Loot Box is not an “in-kind” purchase, but a gamble, the plaintiff contends, because the gamer has no idea what the Loot Box contains until it is opened. It is all based on “randomized chances.”

There is also broad concern that the techniques used by Supercell to entice players to purchase loot boxes may reinforce compulsive and addictive behaviors. The impact of these in-game purchases is negative, especially on younger players.

Millions played and billions made

The lawsuit also claimed that loot boxes are lucrative and predatory. Loot boxes are depicted as a “main revenue generator in the industry.” 

“Supercell is earning huge sums from the unlawful and predatory Loot Boxes sold in its games. Supercell’s business is based mainly on its five mobile app games – each of which is free to download,” the complaint said.

“Nevertheless, as a result of the sale of Loot Boxes and other in-game microtransactions, Supercell reported revenue of $1.6 billion for 2018 and another $1.56 billion in 2019 – a large percentage attributable to Brawl Stars and Clash Royale. For example, in June 2020, Brawl Stars ($58 million) and Clash Royale ($14 million) combined for 60% of Supercell’s reported $120 million monthly revenue,” the complaint summarized.

Loot boxes explained

Loot boxes are in-game rewards that contain a random assortment of virtual items. These items can assist a player in gameplay or items that customize the player’s avatar or dashboard.  

Some games use virtual currency but lawsuits and ongoing disputes are over real money transactions. Real money transactions are known as “micro-transactions” and “in-app purchases.”

Loot boxes produce a growing revenue stream for game developers and the platforms on which they are sold. Google Play and the Apple App Store receive an estimated 30% of the in-app purchase amount. Loot boxes generated up to $40 billion in 2018, this amount is estimated to increase to $50 billion by 2022.

The loot box controversy

The Federal Trade Commission (FTC) is reviewing the matter of microtransactions and the implications of video game loot boxes. The FTC is working with content creators and the platforms they use to encourage more self-regulation but is also considering the development of regulations surrounding loot boxes. 

The game industry recently implemented the Entertainment Software Rating Board (“ESRB”) rating system, and are asking for in disclosures of in-game purchase odds and parental control features. 

In August a class-action complaint was against Electronic Arts, Inc. (NASDAQ: EA) for the use of loot boxes in its games. there were two separate class-action cases brought against Google,  as well as, Apple, Inc (NASDAQ: AAPL). filed earlier this summer in the Northern District of California, San Jose Division.

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