Goodwin Gaming
November 23, 2016

eSports Lawsuit Over For Now, But State Action May Follow

On October 4, 2016, a federal judge in the Western District of Washington dismissed a suit against Valve Corporation (“Valve”) alleging that Valve and third-party websites had facilitated online gambling in violation of state gambling and consumer protection laws, in addition to a Racketeer Influenced and Corrupt Organizations Act (RICO) claim.

The court held the RICO claim failed because there was no qualifying injury. Under Ninth Circuit precedent, gambling losses are not sufficient injury to business or property for RICO standing. Furthermore, the state-law gambling claims cannot be a basis for standing under RICO, and additional allegations of fraud or dishonesty were insufficient to establish RICO standing where Plaintiffs failed to plead facts to show any connection between alleged gambling and injury suffered by plaintiffs.

The remaining state law claims failed for procedural reasons. Plaintiffs alleged the court had supplemental jurisdiction over the state law claims, and the Court also analyzed jurisdiction under the Class Action Fairness Act (CAFA), although Plaintiffs did not mention CAFA in the complaint. Under CAFA, 1) an injury allegation needs to exceed $5 million, 2) at least one plaintiff must be a citizen of a state different than one defendant, and 3) there must be at least one hundred members of the class. Even if Plaintiffs had alleged CAFA jurisdiction, their claim would have failed as they did not provide any factual support that the injury totaled more than $5 million. With the only Federal claim dismissed and no CAFA jurisdiction, the Court lacked Federal subject matter jurisdiction over the state law claims. The Court declined to exercise supplemental jurisdiction over the pendent state claims.

By claiming that “gambling losses” are not sufficient injury to create RICO standing, the Judge presupposed that skin gambling is in fact gambling. This is a departure from Mason v. Machine Zone, where the judge did not accept this underlying presumption, instead asserting the need to distinguish between real and virtual worlds, and finding no real world losses, harm, or injuries in game users’ wagers for virtual gold.

State Action Against Valve

The Washington State Gambling Commission (“WSGC”) sent a cease and desist letter to Valve on October 5th, the day after the Court granted Defendants’ Motion to Dismiss, threatening civil or criminal charges against Valve for its part in the Skins Gambling enterprise if they do not stop facilitating gambling through its Steam Platform. Washington State Gambling Commissioner Chris Stearns said, “In Washington, and everywhere else in the United States, skins betting on esports remains a large, unregulated black market for gambling. And that carries great risk for the players who remain wholly unprotected in an unregulated environment. We are also required to pay attention to and investigate the risk of underage gambling which is especially heightened in the esports world. It is our sincere hope that Valve will not only comply but also take proactive steps to work with the Commission on future measures that will benefit the public and protect consumers.”

Valve sent a strongly worded response on October 18th, forcefully refuting allegations that Valve is engaged in gambling, promoting gambling or facilitating gambling, claiming it has “no business relationship” with operators of skin gambling sites and neither promotes nor profits from gambling. They wrote, “If there is a specific criminal statute or regulation you believe Valve is violating please provide a citation,” and concluded their letter by referencing the cease and desist letters it sent to gambling site operators in mid-July.

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