Lootboxes. Apparently everyone hates lootboxes except those who spend hundreds and sometimes thousands of dollars on the damn things. Sometimes attitudes change based upon the age of the people doing the purchasing. What is fine for adults becomes a horrible crime worthy of a government issuing many millions of dollars in fines against a game publisher. Such was the case for perhaps the final Federal Trade Commission action under the Biden Administration.
On Friday the FTC issued a press release about a settlement between the regulatory agency and the Singapore-based Cognosphere PTE Ltd and its U.S. subsidiary.
The maker of the video game Genshin Impact has agreed to pay $20 million and to block children under 16 from making in-game purchases without parental consent to settle Federal Trade Commission allegations the company violated a children’s privacy law and deceived children and other users about the real costs of in-game transactions and odds of obtaining rare prizes.
“Genshin Impact deceived children, teens, and other players into spending hundreds of dollars on prizes they stood little chance of winning,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “Companies that deploy these dark-pattern tactics will be held accountable if they deceive players, particularly kids and teens, about the true costs of in-game transactions.”
A complaint, filed by the Department of Justice upon referral from the Commission, alleged that Singapore-based Cognosphere Pte. Ltd and its California-based subsidiary Cognosphere LLC, which do business in the United States as HoYoverse, actively marketed Genshin Impact to children and collected personal information from them in violation of the Children’s Online Privacy Protection Rule (COPPA). The complaint further charged that HoYoverse deceived players about the odds of winning particular sought-after “five-star” loot box prizes and how much it would cost to open loot boxes to win the prizes. It also alleged that the confusing virtual currency system that players had to navigate to open loot boxes and the marketing and promotion tactics used to entice players to open loot boxes were unfair to children and teenagers.
Popular among children and teens, Genshin Impact is free to download but has generated significant revenue through the sale of in-game virtual currency and other content. Players advance in the game by collecting virtual heroes, forming a team and using heroes’ abilities to complete tasks. Five-star heroes are the most desirable to collect given their powers, and they can only be obtained by opening loot boxes, which players can purchase using virtual currency.
I'm going to go down the rabbit hole a little deeper. Many times over the years stories have told of game publishers not publishing accurate odds of obtaining items from lootboxes. The case, U.S. v Cognosphere, spelled out what occurred in Genshin Impact. Considering the below is the argument for count 3 in the case, I thought I'd provide the details.
73. In many instances, HoYoverse has represented that consumers who open loot boxes corresponding with Event Banner promotions will receive increased odds of obtaining the 5-star hero featured on the Event Banner. For example, social media ads like Figure 10 have touted a “huge drop-rate boost,” and HoYoverse has instructed influencer-promoters to highlight “boosted rate[s],” or odds, if players open loot boxes during the Event Banner promotion.
74. In reality, the purported “boost” in odds refers to the featured prize being available to obtain at all during the promotional period, while the underlying odds of obtaining the featured prize remains the same.
75. Within the Genshin Impact game itself, HoYoverse makes further misstatements concerning purportedly increased odds of obtaining featured 5-star heroes.
76. The Genshin Impact game represents that consumers can view complete information about the game’s loot box odds by engaging with a “Details” menu navigation button below the Event Banner (like the second button from the left in Figure 9), and navigating through several sub-menus.
77. The consumer is presented with a “Promotional Items” subsection, which depicts the featured 5-star hero with the phrase “Increased Drop Rates!” and a statement that this hero’s “Percentage of 5-Star Item Drops” is “50%”, without adequate additional context. A second “Details” sub-menu within this interface states that the “[b]ase probability of winning 5-star character = 0.600%; consolidated probability (incl. guarantee) = 1.600%; guaranteed to win 5-star character at least once per 90 attempts,” and indicates that the featured hero has a “huge drop-rate boost.” A third “List of Items” sub-menu similarly states that the odds of obtaining the featured hero are “UP!,” but does not disclose actual or relative rates at which HoYoverse awards loot box prizes.
78. In reality, HoYoverse offers consumers only a 0.3% (three in one thousand) chance of obtaining the specific featured hero when they open loot boxes. To put these low odds into perspective, this means that, even if a consumer opens 50 loot boxes in a row, the consumer has odds of less than 15% to obtain the 5-star prize featured on the banner.
79. Consumers are also misled by HoYoverse’s “guarantee[] to win 5-star character at least once per 90 attempts” because they are led to believe that it applies to the 5-star character prominently featured in the Event Banner. As shown in Figures 9 and 10 above, a picture and name of a character is featured next to language touting the opportunity to open loot boxes for the chance to win an “event-exclusive 5-star character.” In reality, if a player opens 90 loot boxes, HoYoverse frequently does not provide the player with the featured five-star character: half of the time, HoYoverse will instead award the player an unrelated, and typically less desirable, 5-star prize not featured on the Event Banner. If this happens, the player must then open as many as 90 additional loot boxes, at which point HoYoverse is finally certain to award the prize featured on the Event Banner.
80. In other words, a consumer may need to open as many as 180 loot boxes, at a cost of $2–3 per loot box (or as much as $360–540 in total), simply to get the prize that HoYoverse features on the Event Banner.
81. Taken as a whole, HoYoverse’s representations and misleading disclosures serve to convey the message that consumers who purchase loot boxes are more likely to obtain rare prizes than they are in reality.
Well, in this post, figures 9 & 10 are below.
I should note that the deal has not been approved by a judge, although in most cases approval is pretty much a formality if both sides agree to the terms. But in addition to paying $20 million to the federal government, HoYoverse will be:
- Prohibited from allowing children under 16 to purchase loot boxes in their video games without a parent’s affirmative express consent
- Prohibited from selling loot boxes using virtual currency without providing an option for consumers to purchase them directly with real money
- Prohibited from misrepresenting loot box odds, prices and features
- Required to disclose loot box odds and exchange rates for multi-tiered virtual currency
- Required to delete any personal information previously collected from children under 13 unless they obtain parental consent to retain such data
- Required to comply with COPPA including its notice and consent requirements.
Now, since today is the day Trump was inaugurated, we need to look at the voting amongst the FTC commissioners on the referrals of the counts to the Department of Justice in the case. Here are the five counts:
- Count I: COPPA Rule
- Count II: Misrepresentations of Lootbox Odds
- Count III: Misrepresentations of Cost of Loot Box Prizes
- Count IV: Unfair Selling and Offering a Multi-Tier Virtual Currency System to Children and Teenagers
- Count V: Unfair Promotion and Sale of Loot Boxes to Children and Teenagers
On the first two counts, the commissioners voted 5-0 to approve referring the counts to the DoJ. But the other three counts were approved on a 3-2 party line vote, with former solicitor general of Virginia Andrew Ferguson and former solicitor general of Utah Melissa Holyoak opposed. I'll just provide a link to Ferguson's statement on the case for his reasoning. I also want to post his dissent to count 5.
Finally, Count V accuses Cognosphere of further unfairness for marketing a loot box system to children and teenagers. I cannot tell whether the Commission here rests its theory on the overly enticing nature of loot boxes as a marketing scheme for children and teenagers, or merely the further unfairness of targeting children and teenagers with the sort of deception alleged in Counts II and III. Either way, I dissent. If this count simply mirrors the allegations of deceptive conduct in Counts II and III, then it adds nothing. And none of our precedents hold that marketing violates the FTC Act when it is too enticing. As I said in November, I will not support novel theories of liability advanced in the final hours of the Biden-Harris Administration. That principle applies to Count V.
None of this should be taken to mean I favor the loot-box scheme. I do not. But the FTC Act does not authorize us to prohibit unsavory or unseemly business practices. It forbids only unfair or deceptive acts and practices. I do not foreclose the possibility that targeting certain kinds of addictive activities to children and teenagers—such as virtual slot machines in the form of loot boxes—could violate Section 5’s prohibition of unfair acts and practices. But demonstrating such a violation would require us to assemble strong evidence of substantial injury, unavoidability, and the absence of countervailing benefits to consumers or competition. We have not done that here. I therefore dissent from Count V both because the Biden-Harris FTC should not be advancing wholly novel theories as the sun sets on this Administration, and because we do not have the evidence required to demonstrate that marketing loot boxes to children and teenagers categorically violates Section 5.
That's the rub. How much of this stuff is political and might turn on who's president? How much is getting floated out by an outgoing administration looking to burnish its legacy and/or influence policy even when out of office?
And how much will occur because of factors outside of video gaming, like the worsening relations between the United States and the People's Republic of China? I didn't go into the fact that while Cognosphere is the publisher for Genshin Impact, the developer is Shanghai-based miHoYo, of which Tencent owns 25.8%. Tencent was recently placed on the Defense Department's list of Chinese military companies.
EDIT: But perhaps most important question is: how will this all affect Honkai: Star Rail? If I read the order correctly, the settlement affects all games that Cognosphere publishes, not just Genshin Impact. Here is the definition of "Covered Product or Service" from the proposed settlement.
“Covered Product or Service” means Genshin Impact or any video game or video game service, such as HoYoLAB, controlled, distributed, or operated, directly or indirectly, by Defendants, marketed, promoted, sold, or otherwise distributed or made available in the United States. For purposes of this Order, to the extent that, after entry of this Order, Defendants obtains direct or indirect control over a video game or video game service, such video game or video game service becomes a Covered Product or Service ninety (90) days after the date on which Defendants obtained such control.
So the order would also cover Honkai: Star Rail. But I'm just an internet space lawyer. We'll have to see what, if anything, changes.
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