Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

An Update for Practitioners on Social Gaming

By Cheryl Miller
September 02, 2013

The marriage of digital media and entertainment content has grown to include a range of possibilities and issues that entertainment law practitioners may encounter. The boom in social gaming is one of these.

Millions worldwide are flocking to online casino-style gaming sites that feature all the interactive flash that Silicon Valley designers can conjure. They can spin the wheels on virtual slot machines, play Texas Hold 'Em at a table of high-rolling avatars or double down on a hot blackjack hand. The only thing they can't do is cash out their winnings. Internet gambling is still illegal in California and most other states, so online gamers play instead for virtual chips, points, tokens or just the pride of seeing their names on a leader board. Meanwhile, site operators and developers like Zynga Inc., Electronic Arts Inc. and International Gaming Technology are reaping, or at least dreaming of, the big payouts.

Practice Area Emerges

Some see the realistic casino-style sites as an entr'e into the online gambling world that is already available overseas and that may be California's future. Others are grinding out revenue with free-to-play gaming that entices users to pay real money for extra chips or more turns ' even though they can never redeem a cent of winnings.

Either way, corporate players are making big bets in this as-yet unregulated market. They're lobbying at the state and federal levels to expand online social games into real-money gambling. And all that action has given rise to a niche legal practice aimed at keeping fast-moving entrepreneurs from unwittingly crossing the line into the highly scrutinized arena of gambling. “The lack of sophistication about gambling is what can get these startup-mentality developers into trouble,” says Mitchell Kamin, a partner at Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg in Los Angeles.

And then there's the still-developing legal thicket that gaming site operators can face even if they never intend to become online gambling moguls. Who owns and controls players' online possessions? What about virtual currency? Are children's privacy rights being adequately protected? Should the odds of winning a game be posted?

Think social gaming and Zynga's free-to-play FarmVille probably comes to mind. But the genre has exploded since FarmVille launched in 2009. Users can now pick from any number of sites that offer games of chance like bingo, blackjack and baccarat under the same “freemium” model. There's no cost to play although users use real money to buy things like faster access to higher game levels.

The percentage of players who pay freemiums is small, but their financial impact is huge. A November 2012 report by Morgan Stanley Research pegged annual revenues from casino-style online gaming at $1.7 billion ' which includes some advertising dollars and projected that the number could grow to $2.5 billion by 2015.

“Gamblification,” a controversial industry term that refers to the convergence of traditional gambling and social gaming, troubles I. Nelson Rose (www.gamblingandthelaw.com), a Whittier Law School professor and gaming law expert. “The thing that worries me most about social games is the ones designed to look like real casino games,” Rose says.

Operators can set the odds as they like. And they can change them during a game, Rose says, to keep the interest of a player who's losing or to chill someone who's winning too easily. “You can set these for 101% or 120% payouts,” when a land-based game may only average an 85% return on investment, Rose says. “Kids in particular could be playing on this site and say, 'Wow, now I can win on the real thing.'”

Regulating Online Gaming

Self-regulation is a hot topic in the online gaming industry. Some have suggested that site operators should voluntary disclose that they offer better odds than casinos or do more to discourage children from playing casino-style games. For now, there doesn't seem to be much interest from state or federal gambling regulators to treat online social gaming as anything more than entertainment. In California for example, a spokeswoman for the state's Office of the Attorney General, which houses the state's Bureau of Gambling Control, says the agency has not reviewed online social gaming and is primarily focused on working with local agencies on traditional gambling sources like card rooms.

Other countries, however, have begun to scrutinize online games. The United Kingdom's Gambling Commission launched a review of casino-style gaming with a particular eye on potential “consumer exploitation.” See, “An Exploration of the Risks Posed By the Convergence of Social Gaming and Gambling in a Regulatory Context.” Industry trade groups have said they will cooperate. Some Australian legislators, too, have proposed expanding gambling regulations to cover free-to-play games. See, “Australian Perspectives on Social Gaming,” Uhiro Games.

Rose says that, given the growing international scrutiny, it's only a matter of time before U.S. regulators follow suit. “I think there's some potential here for a real crackdown,” Rose says. Critics are “not happy that the gambling industry is trying to pretend [casino-style games] are the same as 'FarmVille' or 'Angry Birds.'”

While the industry has, so far, escaped regulatory scrutiny in the United States, the growth in online gaming has generated significant legal work. The Federal Trade Commission (FTC) last year announced a settlement with social game operator RockYou over alleged violations of the Children's Online Privacy Protection Act (COPPA). The FTC said RockYou, which offers the game Zoo World as well as bingo and poker for older users, collected 179,000 children's e-mail addresses and passwords without their parents' consent. RockYou agreed to stop making deceptive claims, to beef up its data security and to pay a $250,000 penalty. See, “FTC Charges That Security Flaws in RockYou Game Site Exposed 32 Million Email Addresses and Passwords.”'

Growing Industry

There have also been legal battles over virtual currency possession and unauthorized secondary markets, not to mention the more traditional work of trademark lawsuits and acquisitions in the fast-growing industry. See, “Zynga Files Several More Trademark Infringement Lawsuits,” InsideSocialGames.com. Bird Marella's Kamin added social gaming to his IP and business litigation portfolio two years ago. Pillsbury Winthrop Shaw Pittman has a social media and games team. The field “is just something totally different and new and yet it has the historical look and feel of gambling, and that can confuse people,” Kamin says.

Zynga executives have already made clear in regulatory filings that they believe a transition to real money games is the company's path to financial redemption. In April the San Francisco-based company partnered with bwin.party, a Gibraltar-incorporated online gaming operator, to launch pay-to-play poker and casino game websites in the United Kingdom.

Zynga has applied for a gaming license in Nevada. (Delaware and New Jersey have also approved online real gambling.) If approved, only Silver State residents would be allowed to gamble on Zynga's sites. But some say completing Nevada's rigorous licensing process would allow the company to eventually offer online gambling to the 38 million residents of California. For years, California legislators have toyed with the idea of authorizing intrastate online poker games. Zynga, International Gaming Technology and Caesars have all retained Sacramento lobbyists to help push the expansion.

But advocates have never been able to navigate through the politically connected minefield of potential opponents that include Indian gaming tribes, card clubs and horse track operators. Another bill has surfaced this year, yet with just three months left in the California legislative season it has yet to come up for a vote. But with so much money at stake ' including significant potential tax revenue for the state ' Gambling Control Commission member Richard Schuetz told a conference of gaming interests in April that online gambling is inevitable.

Big-name Nevada companies see the online-gaming potential in California and elsewhere. Caesars Interactive Entertainment acquired Slotomania creator Playtika in 2011 and Bingo Blitz developer Buffalo Studios last year. International Gaming Technology picked up DoubleDown Interactive for $500 million in 2012.


Cheryl Miller is a Senior Reporter for The Recorder, an ALM affiliate of Entertainment Law & Finance.

The marriage of digital media and entertainment content has grown to include a range of possibilities and issues that entertainment law practitioners may encounter. The boom in social gaming is one of these.

Millions worldwide are flocking to online casino-style gaming sites that feature all the interactive flash that Silicon Valley designers can conjure. They can spin the wheels on virtual slot machines, play Texas Hold 'Em at a table of high-rolling avatars or double down on a hot blackjack hand. The only thing they can't do is cash out their winnings. Internet gambling is still illegal in California and most other states, so online gamers play instead for virtual chips, points, tokens or just the pride of seeing their names on a leader board. Meanwhile, site operators and developers like Zynga Inc., Electronic Arts Inc. and International Gaming Technology are reaping, or at least dreaming of, the big payouts.

Practice Area Emerges

Some see the realistic casino-style sites as an entr'e into the online gambling world that is already available overseas and that may be California's future. Others are grinding out revenue with free-to-play gaming that entices users to pay real money for extra chips or more turns ' even though they can never redeem a cent of winnings.

Either way, corporate players are making big bets in this as-yet unregulated market. They're lobbying at the state and federal levels to expand online social games into real-money gambling. And all that action has given rise to a niche legal practice aimed at keeping fast-moving entrepreneurs from unwittingly crossing the line into the highly scrutinized arena of gambling. “The lack of sophistication about gambling is what can get these startup-mentality developers into trouble,” says Mitchell Kamin, a partner at Bird, Marella, Boxer, Wolpert, Nessim, Drooks & Lincenberg in Los Angeles.

And then there's the still-developing legal thicket that gaming site operators can face even if they never intend to become online gambling moguls. Who owns and controls players' online possessions? What about virtual currency? Are children's privacy rights being adequately protected? Should the odds of winning a game be posted?

Think social gaming and Zynga's free-to-play FarmVille probably comes to mind. But the genre has exploded since FarmVille launched in 2009. Users can now pick from any number of sites that offer games of chance like bingo, blackjack and baccarat under the same “freemium” model. There's no cost to play although users use real money to buy things like faster access to higher game levels.

The percentage of players who pay freemiums is small, but their financial impact is huge. A November 2012 report by Morgan Stanley Research pegged annual revenues from casino-style online gaming at $1.7 billion ' which includes some advertising dollars and projected that the number could grow to $2.5 billion by 2015.

“Gamblification,” a controversial industry term that refers to the convergence of traditional gambling and social gaming, troubles I. Nelson Rose (www.gamblingandthelaw.com), a Whittier Law School professor and gaming law expert. “The thing that worries me most about social games is the ones designed to look like real casino games,” Rose says.

Operators can set the odds as they like. And they can change them during a game, Rose says, to keep the interest of a player who's losing or to chill someone who's winning too easily. “You can set these for 101% or 120% payouts,” when a land-based game may only average an 85% return on investment, Rose says. “Kids in particular could be playing on this site and say, 'Wow, now I can win on the real thing.'”

Regulating Online Gaming

Self-regulation is a hot topic in the online gaming industry. Some have suggested that site operators should voluntary disclose that they offer better odds than casinos or do more to discourage children from playing casino-style games. For now, there doesn't seem to be much interest from state or federal gambling regulators to treat online social gaming as anything more than entertainment. In California for example, a spokeswoman for the state's Office of the Attorney General, which houses the state's Bureau of Gambling Control, says the agency has not reviewed online social gaming and is primarily focused on working with local agencies on traditional gambling sources like card rooms.

Other countries, however, have begun to scrutinize online games. The United Kingdom's Gambling Commission launched a review of casino-style gaming with a particular eye on potential “consumer exploitation.” See, “An Exploration of the Risks Posed By the Convergence of Social Gaming and Gambling in a Regulatory Context.” Industry trade groups have said they will cooperate. Some Australian legislators, too, have proposed expanding gambling regulations to cover free-to-play games. See, “Australian Perspectives on Social Gaming,” Uhiro Games.

Rose says that, given the growing international scrutiny, it's only a matter of time before U.S. regulators follow suit. “I think there's some potential here for a real crackdown,” Rose says. Critics are “not happy that the gambling industry is trying to pretend [casino-style games] are the same as 'FarmVille' or 'Angry Birds.'”

While the industry has, so far, escaped regulatory scrutiny in the United States, the growth in online gaming has generated significant legal work. The Federal Trade Commission (FTC) last year announced a settlement with social game operator RockYou over alleged violations of the Children's Online Privacy Protection Act (COPPA). The FTC said RockYou, which offers the game Zoo World as well as bingo and poker for older users, collected 179,000 children's e-mail addresses and passwords without their parents' consent. RockYou agreed to stop making deceptive claims, to beef up its data security and to pay a $250,000 penalty. See, “FTC Charges That Security Flaws in RockYou Game Site Exposed 32 Million Email Addresses and Passwords.”'

Growing Industry

There have also been legal battles over virtual currency possession and unauthorized secondary markets, not to mention the more traditional work of trademark lawsuits and acquisitions in the fast-growing industry. See, “Zynga Files Several More Trademark Infringement Lawsuits,” InsideSocialGames.com. Bird Marella's Kamin added social gaming to his IP and business litigation portfolio two years ago. Pillsbury Winthrop Shaw Pittman has a social media and games team. The field “is just something totally different and new and yet it has the historical look and feel of gambling, and that can confuse people,” Kamin says.

Zynga executives have already made clear in regulatory filings that they believe a transition to real money games is the company's path to financial redemption. In April the San Francisco-based company partnered with bwin.party, a Gibraltar-incorporated online gaming operator, to launch pay-to-play poker and casino game websites in the United Kingdom.

Zynga has applied for a gaming license in Nevada. (Delaware and New Jersey have also approved online real gambling.) If approved, only Silver State residents would be allowed to gamble on Zynga's sites. But some say completing Nevada's rigorous licensing process would allow the company to eventually offer online gambling to the 38 million residents of California. For years, California legislators have toyed with the idea of authorizing intrastate online poker games. Zynga, International Gaming Technology and Caesars have all retained Sacramento lobbyists to help push the expansion.

But advocates have never been able to navigate through the politically connected minefield of potential opponents that include Indian gaming tribes, card clubs and horse track operators. Another bill has surfaced this year, yet with just three months left in the California legislative season it has yet to come up for a vote. But with so much money at stake ' including significant potential tax revenue for the state ' Gambling Control Commission member Richard Schuetz told a conference of gaming interests in April that online gambling is inevitable.

Big-name Nevada companies see the online-gaming potential in California and elsewhere. Caesars Interactive Entertainment acquired Slotomania creator Playtika in 2011 and Bingo Blitz developer Buffalo Studios last year. International Gaming Technology picked up DoubleDown Interactive for $500 million in 2012.


Cheryl Miller is a Senior Reporter for The Recorder, an ALM affiliate of Entertainment Law & Finance.

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
COVID-19 and Lease Negotiations: Early Termination Provisions Image

During the COVID-19 pandemic, some tenants were able to negotiate termination agreements with their landlords. But even though a landlord may agree to terminate a lease to regain control of a defaulting tenant's space without costly and lengthy litigation, typically a defaulting tenant that otherwise has no contractual right to terminate its lease will be in a much weaker bargaining position with respect to the conditions for termination.

How Secure Is the AI System Your Law Firm Is Using? Image

What Law Firms Need to Know Before Trusting AI Systems with Confidential Information In a profession where confidentiality is paramount, failing to address AI security concerns could have disastrous consequences. It is vital that law firms and those in related industries ask the right questions about AI security to protect their clients and their reputation.

Generative AI and the 2024 Elections: Risks, Realities, and Lessons for Businesses Image

GenAI's ability to produce highly sophisticated and convincing content at a fraction of the previous cost has raised fears that it could amplify misinformation. The dissemination of fake audio, images and text could reshape how voters perceive candidates and parties. Businesses, too, face challenges in managing their reputations and navigating this new terrain of manipulated content.

Pleading Importation: ITC Decisions Highlight Need for Adequate Evidentiary Support Image

The International Trade Commission is empowered to block the importation into the United States of products that infringe U.S. intellectual property rights, In the past, the ITC generally instituted investigations without questioning the importation allegations in the complaint, however in several recent cases, the ITC declined to institute an investigation as to certain proposed respondents due to inadequate pleading of importation.

Authentic Communications Today Increase Success for Value-Driven Clients Image

As the relationship between in-house and outside counsel continues to evolve, lawyers must continue to foster a client-first mindset, offer business-focused solutions, and embrace technology that helps deliver work faster and more efficiently.