Goodwin Gaming
July 11, 2016

Skin in the Game: Is There Online Gambling in the World of eSports?

Over a billion people around the world have caught eSports fever.  eSports, also known as electronic sports or competitive video gaming, describes a wide array of online games spanning from traditional sports games to multiplayer battle arena games to first-person shooter games, for which players use computer interfaces to compete. The popularity of eSports surged in the late 2000s and early 2010s, with millions of people competing worldwide. Two examples of eSports’ explosive popularity include a sell-out League of Legends Event at Madison Square Garden and TBS broadcasts of first person shooter video games.  And the popularity is paying dividends—the total global market was valued at $748 million in 2015, and the market is predicted to reach $1.9 billion by 2018.  In an effort to boost revenue and draw millennial crowds to their doors, casinos are now pivoting towards eSports contests, a notable shift from traditional gambling.

But explosive growth and popularity is often followed by increased legal scrutiny.  A recently filed lawsuit, McLeod v. Valve, has raised questions about whether certain eSports practices, namely “skin-betting,” i.e., users wagering in-game items on their own performance in eSports matches or on professional competitions, are lawful.  Although the plaintiff in the suit is unlikely to prevail, its mere existence should serve as a warning to operators about the pitfalls that could arise collaterally to eSports game development.

What Is Skin-Betting?

One of the most popular eSports games is Counter-Strike: Global Offensive (“CS:GO”), a first-person shooter video game made by Valve Corporation (“Valve”). Played by more than 380,000 people at any given time, CS:GO operates in short rounds that end when all players on one side are “dead” or a team’s objective is completed. Players purchase in-game items such as weapons and equipment at the beginning of every round with virtual money awarded based on performance in completing objectives. Valve created a platform called “Steam” which allows players to play games, communicate with other users, initiate trades of in-game items, list items for sale, buy games, buy items and participate in forum discussions.

Many players gamble with in-game items in a practice called “skin-betting.” Players stake skins—virtual weapons and other in-game items—on their performance.  “Steam” allows skin-betting to occur on third-party websites where skins are traded in for virtual currency, with at least one secondary market allowing for the conversion of skins to cold, hard cash.

McLeod v. Valve

On June 23, 2016, Michael McLeod filed a class action lawsuit against Valve in the District of Connecticut, alleging that the company is actively involved in the illegal skin-betting market, thereby promoting and profiting from illegal online gambling. McLeod claims that users deposit real money on Valve’s website in exchange for skins, connect the accounts with third-party websites directly associated with Valve where users can participate in illegal forms of gambling using skins, and ultimately cash out their account balances by converting skins into real money. McLeod contends Valve knows exactly what these sites are for and what users are doing, yet still affirmatively supports these transactions and receives income therefrom.

This theory of gambling is somewhat novel, but Valve has favorable case law on its side.  In Mason v. Machine Zone, 140 F. Supp. 3d 457 (D. Md. 2015), a federal judge rejected similar claims of illegal gambling predicated on secondary markets.  The Mason plaintiff never alleged that Machine Zone hosted or sanctioned these secondary markets, nor did she allege any credible real-world injury. The judge criticized the plaintiff’s complaint, arguing that “[p]erceived unfairness in the operation and outcome of a game, where there are no real world losses, harm, or injuries . . . cannot give rise to the award of a private monetary remedy by a real world court.”

Although there certainly are differences between Game of War and CS:GO (not to mention other eSports products), Mason will prove useful in defeating the McLeod plaintiff’s claim that Valve partook in illegal gambling because of its knowledge of the secondary market.  That said, Mason may not be entirely dispositive. The Mason court left open the possibility that proof of support for secondary markets and allegations of real-world injuries might be sufficient to state a claim. McLeod alleges Valve knowingly allows, supports, facilitates and even directly profits from third party websites in the skin-betting market, and repeatedly asserts that skins can be converted into real currency in the attempt to show he has experienced a real-world injury.

While the advent of skins (and the corresponding interest in the “skins” market) precipitated a sharp increase in CS:GO’s popularity, McLeod will have trouble proving Valve directly profits from skin-gambling sites, as users transfer skins to these sites using a free and permissible trade function. While McLeod has made broad claims of an unregulated market “ripe for scams, cheating, fraud and other harms,” he continues to have trouble alleging specific real world injuries that require, as the Mason court put it, “a private monetary remedy by a real world court.”  McLeod is unlikely to prevail in his lawsuit, but his case and Mason demonstrate that plaintiffs are becoming increasingly creative in trying to prove that eSports games, which are facially and obviously not gambling, are somehow illegal.