#SGSConfLV

1. Gamblification!
Interaction between Social Games and Online Gambling
James Gatto
Leader, Social Media & Games Team
Social Gambling & Gaming Summit
December 10, 2013
Pillsbury Winthrop Shaw Pittman LLP

2. GAMBLIFICATION
High Reward
High Risk
Convicted on 103 of 104 Counts on Internet Café Sweepstakes
Faces Up to 30 Years in Prison
2 | Gamblification!

3. Enforcements are Increasing
 Internet Sweepstakes Enforcements – FL, OH, CA, NC ….
 Internet Gambling Arrests
 Prediction Markets – Intrade
 And the list goes on!
3 | Gamblification!

4. Key Takeaways
The law lags innovative technology/business models
Recognize there is great risk … including jail
Understand that there is subjectivity in the law
Details make a difference
May not get certainty, but can certainly minimize risk
if …..
Get knowledgeable counsel and follow advice
4 | Gamblification!

5. Social Media/Games Meets Gambling Mechanics
5 | Gamblification!

6. Gamblification
Range of Activities
 Illegal gambling
 Lotteries
Not-gamblification
 Legal, regulated gambling
 Non-real money casino games
 Contests/sweepstakes business models
 Win stuff in games/mini-games
 Non-real money prediction markets
6 | Gamblification!
Gamblification

7. Overview of Competitive Landscape
 Casinos
 Gambling Technology Companies (IGT, Aristocrat, SG, etc.)
 Social Games Companies
 Legal Online Gambling Operators (off-shore)
 Platform Providers
7 | Gamblification!

8. Sample Acquisitions
 Caesar’s – Buffalo Studios and Playtika
 IGT – Doubledown
 Bally Technologies - SHFL Entertainment
8 | Gamblification!

9. Legal Issues
9 | Gamblification!

10. Patents
Where there is rapid innovation…
there are significant patent filings
Gamblification is no exception!
10 | Gamblification!

11. What CAN be patented?
Short answer:
If you can build it, you can patent it!
 Features
 Functions
 Processes
 Business methods
 More
11 | Gamblification!

12. What CANNOT be patented?
The only three categories the Supreme Court has ruled to be
not patentable:
Abstract Ideas
Laws of Nature
Natural Phenomena
What these exclusions have in common is all are not tangible
12 | Gamblification!

13. US Patent Office
Entire Classifications Related to Aspects of Gamblification
13 | Gamblification!

14. US PATENT CLASSIFICATIONS
Class: 273 Amusement Devices: Games
Sub-class
Title
269
Lotto or bingo type
270
With attached pieces
271
Alignment games (e.g., tic-tac-toe, go-moko)
272
Word, sentence, or equation forming (e.g., SCRABBLE, hangman)
273
Memory or matching games (e.g., concentration)
274
Betting or wagering board (e.g., casino)
14 | Gamblification!

15. US PATENT CLASSIFICATIONS
Class: 463 Amusement Devices: Games
Sub-class
9
Title
In a game requiring strategy or problem solving by a participant (e.g., problem eliciting response, puzzle, etc.)
10
With chance element or event (e.g., backgammon, Scrabble, etc.)
11
Card- or tile-type (e.g., bridge, dominoes, etc.)
12
Ultimate outcome dependent upon summation of plural card or tile values (e.g., blackjack, etc.)
13
Ultimate outcome dependent upon relative odds of a card or tile combination (e.g., poker, etc.)
16
In a game of chance (e.g., lot, etc.)
17
Lot match or lot combination (e.g., roulette, lottery, etc.)
18
Plural lots (e.g., keno, etc.)
19
Plural matches create pattern (e.g., bingo, etc.)
20
Lot-to-lot combination (e.g., slot machine, etc.)
21
Having means to alter combination probability
22
Lot generator (e.g., card distribution, simulated dice, random number generator, etc.)
25
Credit/debit monitoring or manipulation (e.g., game entry, betting, prize level, etc.)
15 | Gamblification!

16. US PATENT CLASSIFICATIONS
Class: 700 Data processing
Sub-class
Title
90
Specific Application, Apparatus or Process
91
Contest or contestant analysis, management, or monitoring (e.g., statistical analysis, handicapping, scoring)
92
Scoring
93
Probability determination or handicapping
16 | Gamblification!

17. US PATENT CLASSIFICATIONS
Class: 705 Data processing: financial, business practice,
management, or cost/price determination
Sub-class
14.1
Title
Discount or incentive (e.g., coupon, rebate, offer, upsale, etc.)
14.11
Trade or exchange of a good or service for an incentive
14.12
Incentive awarded or redeemed in connection with the playing of a video game
14.13
Determining discount or incentive effectiveness
14.14
Chance discount or incentive
14.16
Referral award system
319
Social networking
17 | Gamblification!

18. US PATENT CLASSIFICATIONS
Class: 715 Data processing: presentation processing of document,
operator interface processing, and screen saver display processing
Sub-class
Title
700
Operator Interface (e.g., graphical user interface)
757
Virtual 3D environment
848
Interface represented by 3D space
850
Navigation within 3D space
851
On-screen navigation control
18 | Gamblification!

19. US PATENT CLASSIFICATIONS
Class: 902 Electronic funds transfer
Sub-class
23
Title
Electronic transfer of funds for an entertainment, amusement, or gambling application
19 | Gamblification!

20. Common Misconceptions | Patents Take Too Long
Misconceptions
Truth

Getting a patent takes too long


The games industry moves so
quickly that patents are obsolete
before they issue
Can take 2-5 years to obtain a
patent under normal process

Properly drafted patents apply to
more than one game

Innovative features, functions, and
mechanics typically last through
several generations of games within
a genre

Track I procedure can cut time to 69 months
20 | Gamblification!

21. Common Misconceptions | Only Valuable if Enforced
Misconception
Truth
Patents are only valuable if they are
enforced

Patents have many types of value –
offensive and defensive

Patents can act as a deterrent for
competitors with patents

Filing patent applications can make
obtaining patents harder for
competitors

Patents are assets that add to the
overall value of a company

New patent rules enhance defensive
value of patents (First to File)
21 | Gamblification!

22. Legal Issues with Gamblification
How do you ensure that you stay on the legal side of things?
Comply with U.S. Federal and State Law
and Foreign Laws
22 | Gamblification!

23. Overview of US Federal Laws

Most federal laws do not define gambling

Most federal statutes facilitate enforcement against activities that
violate state (or federal) gambling and illegal lottery laws

except sports betting
23 | Gamblification!

24. Overview of Federal Laws
UIGEA
prohibits businesses from knowingly accepting payments in connection
with the participation of another person in a bet or wager that involves
the use of the Internet and that is unlawful under any federal or state
law.
Targets financial institutions/payment processors
24 | Gamblification!

25. Overview of Federal Laws
UIGEA
Does Bitcoin get around this?
No payment processor?
Even if so, need to address state law
25 | Gamblification!

26. Overview of Federal Laws
Important UIGEA exclusions for Gamblification
participation in any game or contest in which participants do not stake or
risk anything of value other than:
i.personal efforts of the participants in playing the game or contest or
obtaining access to the Internet; or
ii.points or credits that the sponsor of the game or contest provides to
participants free of charge and that can be used or redeemed only for
participation in games or contests offered by the sponsor
The points or credits exclusion may cover various forms of
virtual currency
But still need to consider state law
26 | Gamblification!

27. Overview of State Laws
State Lottery/Gambling Laws

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Most substantive law is state law
Most states have laws prohibiting illegal lotteries
Many have separate anti-gambling laws
Many state laws were written pre-Internet
Some states are now crafting specific legislation to address online
gambling
27 | Gamblification!

28. The Formula for Gambling
Consideration + Chance + Prize = Illegal
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29. The Formula for Gambling
Typical scenario
 User pays money to participate in an activity
 Receives a chance to win
 A cash prize or valuable tangible goods
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30. The Formula for Gamblification
Remove one of the three components
 Remove consideration/payment: prize + chance = Sweepstakes
 Remove chance: prize + consideration = skill-based contest
 Remove prize: consideration + chance = ???
(who would pay for a chance to win nothing of value?)
30 | Gamblification!

31. Consideration
not every time a user pays money
is there the type of consideration that triggers gambling
money is not the only type of consideration that may be relevant
(consideration can be non-monetary)
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32. Consideration?
Examples: Product Promotion Sweepstakes
McDonald's Monopoly Game
Buy Big Mac/fires; get prize token for
chance to win $$$
Illegal? – pay, chance to win, prize
No! – because free AMOE (no purchase necessary)
32 | Gamblification!

33. Consideration?
Examples: Text to Win Sweepstakes
Get chance to win by sending text
Illegal?
Yes (in some states because
premium text charge)
33 | Gamblification!

34. Consideration?
Examples: Fantasy sports
pay entry fee
for chance to win league
monetary prize
Illegal gambling?
No – payment for services/predetermined prize not based fees
Humphries v. Viacom (NJ)
34 | Gamblification!

35. Chance vs. Skill
Some states:



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Predominantly skill = skill even if some chance
Material degree of chance
Any chance
Pure chance
35 | Gamblification!

36. Prize
Prize must be something of value
Zynga poker - buy chips for real money, earn chips, but can not cash
out
Man convicted in UK for stealing $12 million Zynga poker chips
Virtual goods usable only in game = value?
36 | Gamblification!

37. Impact of Virtual Goods/Currency
When virtual goods or currencies are used, determining if there is a
payment or prize can be more complicated
Does virtual good/currency have value?
How did the player acquired the virtual good/currency?
What can the player do with the virtual good/ currency?
With whom can the virtual currency be used?
Is it a “dual currency” model?
Is there a secondary market?
Check out our paper: Overview of Legal Issues with Virtual Currency
(www.socialgameslaw.com)
37 | Gamblification!

38. Secondary Markets
Online markets where virtual goods, virtual currency, accounts, avatars,
etc. are bought, sold, traded
Most contravene the terms of service and can result in termination of
user account
38 | Gamblification!

39. Impact of Second Markets on Value
Do Secondary Markets create “value” for virtual goods?
What if you can sell Zynga poker chips for real money?
Could this impact a lottery/gambling analysis?
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40. Impact of Secondary Markets on Value?
NCAA Lottery Case
 People interested in NCAA Final Four tickets sent in $150 per ticket
and $6 handling fee (consideration)
 Winners determined “randomly” (chance)
 For losers, NCAA returned the $150 but kept the $6
 For winners, NCAA kept the $150 + the $6
40 | Gamblification!

41. Impact of Secondary Markets on Value?
NCAA Lottery Case
 Illegal Lottery?
Consideration = ($6)?
Chance (random draw)
Prize (ticket that can be scalped for multiples of face value)?
41 | Gamblification!

42. Impact of Secondary Markets on Value
NCAA Lottery Case
Court concluded the tickets were not prizes
 NCAA created the primary market for the tickets, and the value
realized by the NCAA is in fact the face value of the tickets
 But for the NCAA issuing tickets to one of its events, there could
never be a secondary market
 Mere speculation that the tickets would have an increased value in a
secondary market
42 | Gamblification!

43. Impact of Secondary Markets on Value
Key Takeaway from NCAA Lottery Case?
 An item is not a prize in a lottery if no market exists for the item before
it is offered by the person running the purported lottery
 Beneficial ruling for social media and game companies that issue
virtual goods or currency in certain gamblification models
Caveat: these facts, this court; others facts/states might differ
43 | Gamblification!

44. Internet Sweepstakes Cafés
pay for time
chance to win
free AMOE
like
McDonald’s
Monopoly
Sweepstakes
44 | Gamblification!

45. Kompu Gacha
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Creative monetization model
Could only win virtual goods – no cash out!
Declared illegal – Japanese FTC
Several major game companies
Stocks dropped 20%
Targeted kids?
No fixed odds/consumer complaints?
If consumers complain – regulators will focus
Just cause others are doing it … doesn’t make it legal
45 | Gamblification!

46. Check out our blog for more on gamblification
www.socialgameslaw.com
46 | Gamblification!

47. Questions?
James Gatto
Pillsbury Winthrop Shaw Pittman LLP
Social Media & Games Team Leader
Tel: 703-770-7754
1650 Tysons Boulevard, McLean, VA 22102-4856
Email: james.gatto@pillsburylaw.com
www.pillsburylaw.com/socialmedia
47 | Gamblification!