By: Lawrence G. Walters

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Overview

Everyone loves surprises. Not knowing what’s in the box makes gift giving fun. The concept of opening an unknown gift has made its way into the world of online gaming in the form of mystery box websites. The idea is simple: offer users the opportunity to open a box containing contents that are determined by chance, in exchange for payment. So long as the user always receives an item or combination of items worth the amount paid to open the box, no gambling concern is triggered. However, the devil is always in the details.

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The Elements of Gambling

An activity will generally be deemed to be gambling if it contains all of the following elements: 1) a prize of value; 2) chance (i.e., a risk of loss); and 3) consideration (i.e., payment). Interstate online gambling is prohibited in the United States. Most states’ laws prohibit various activities related to gambling as well. While some states permit intrastate online gambling, which is offered by licensed operators to players physically located in the licensed state, such licenses can be difficult and time-consuming to obtain, where available. The mystery box business model seeks to eliminate the “risk of loss” element of gambling by ensuring that each user that opens a box receives one or more goods or services that have a combined value that is at least equal the amount paid. Successfully doing so removes the activity from the realm of gambling, even though the good or service received may be considered a prize of value that is determined by chance in exchange for a payment.

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Eliminating Risk of Loss

The mystery box business model seeks to eliminate the “risk of loss” element of gambling by ensuring that each user that opens a box receives one or more goods or services that have a combined value that is at least equal the amount paid.

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Physical Mystery Boxes

The manufacturers and sellers of physical mystery boxes approach legal compliance in various ways, and each has different levels of risk. Many manufacturers and sellers commonly operate under a relatively untested legal theory that no gambling occurs when a mystery box is sold so long as the combined fair market value of all goods within each box is at least equal to the amount paid by the customer.

For example, a manufacturer may sell physical mystery boxes with a MSRP of $20 that contain three randomly assigned figurines, including one of ten large figurines and two of twenty small figurines. Zealous prosecutors could attempt to make an argument that the three elements of gambling are present, because $20 has been paid for three randomly assigned figurines. However, the manufacturer could potentially defend itself by arguing that no gambling is occurring, because the customer always walks away with merchandise that has a combined fair market value of at least $20. More specifically, the manufacturer may assert that the fair market value of the large figurine is $10, and the fair market value of each small figurine is $5 each, ensuring that the customer never faces a risk of loss by receiving merchandise with a combined fair market value less than the price paid for the physical mystery box.

Often, mystery box manufacturers utilize certain marketing tactics to increase sales which may increase the risks of illegal gambling. For example, of the ten potential large figurines that may come in any single box, eight of the large figurines may be common and have a 12% chance of appearing in any single box, while the remaining two large figurines may be rare and have only a 2% chance of appearing in any single box. This element of rarity incentivizes customers to purchase multiple boxes in hopes of being able to collect a complete set and therefore, potentially, excites the “spirit of cupidity” (i.e., the term that courts often use when analyzing gambling considerations).

Further, this element of rarity often creates a secondary marketplace where customers resell the common figurines at a price less than the value that would be argued by the manufacturer, and the uncommon figurines at a price more than the value that would be claimed by the manufacturer. For example, customers may resell the common large figurines on eBay or similar sites for a reduced $6 while selling the uncommon large figurines for an increased $40. The creation of this secondary marketplace for the figurines potentially frustrates the manufacturer’s ability to assert that all ten of the large figurines have a fair market value of $10. Generally, the manufacturers of mystery boxes can take the position that the values assigned to those figurines on a secondary marketplace have no impact on the initial fair market value of the physical mystery box and the figurines therein, so long as the manufacturer does not participate in the secondary marketplace for the figurines.

Sellers of mystery boxes also have different considerations when evaluating the risk of a potential gambling violation than do the manufacturers of those mystery boxes. In particular, the gambling risks are lower for sellers that do not participate in the secondary marketplace compared to those sellers who do participate in the secondary marketplace.

For example, a big box retailer like Target may sell mystery boxes and be able to make the same legal arguments as the manufacturer, because the big box retailer does not participate in the secondary marketplace for the figurines. On the other hand, a trading card and collectibles shop where those mystery boxes are sold may offer customers the opportunity to sell the common large figurines back to the shop for $6 apiece and to sell the uncommon large figurines back to the shop for $40 apiece. In turn, the shop may then resell those common figurines to other customers for $8 apiece and the uncommon figurines to customers for $50 apiece. The shop’s participation in both the initial marketplace for the mystery boxes and the secondary marketplace for the figurines increases the spirit of cupidity involved in their transactions and may limit their ability to successfully assert the defenses that would likely be raised by manufacturers and big box retailers that do not participate in the secondary marketplace for figurines.

Physical mystery boxes can also be sold by e-tailers. For example, online clothing retailers often sell mystery packages containing one or more randomly assigned articles of clothing, such as a pair of underwear, socks, or shoes. Typically, clothing retailers use these online mystery boxes to offload styles that are out of date, seasonal, or otherwise difficult to sell. This tactic raises its own gambling concerns, especially where those clothing articles can no longer be sold for the price at which the mystery box is being sold.

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Skins and Loot Boxes

Video game developers and other loot box operators approach legal compliance in various ways, and each has different levels of risk. Many developers and loot box operators commonly operate under a relatively unsettled legal theory that no gambling occurs when a loot box is opened, because video game skins are not a thing of value which thereby removes the prize of value element.

For example, a video game developer may sell loot boxes for $5 that contain one of ten randomly assigned skins. Often, most of these skins will be extremely common, while one or a small subset of the potential skins will be extremely rare. As with the physical mystery boxes discussed above, this element of rarity motivates customers to purchase multiple loot boxes in hopes of being able to obtain the rarer skins and therefore, arguably, excites the spirit of cupidity. Zealous prosecutors could attempt to make an argument that the three elements of gambling are present, because $5 has been paid for the chance to win a rare randomly assigned skin. However, the video game developer could potentially counter by arguing that no gambling is occurring, because the customer always walks away with a skin that has no real-world value and cannot be used outside of the video game.

However, video game developers often allow users to trade skins which technically enables users to create a secondary marketplace where those skins can be bought and sold for a price that is significantly less than or significantly more than the price of the loot boxes from which that skin was obtained. Generally, video game developers can take the position that the values assigned to those skins on a secondary marketplace have no impact on the initial fair market value of the loot boxes and the skins therein, so long as the developer does not participate in the secondary marketplace for the skins. Many developers further limit their legal risks by prohibiting the trading of skins for money or other things of real-world value on the platforms, while permitting users to trade skins for skins.

Within this secondary marketplace, an additional business model has developed where third-party operators of skins betting sites allow users to wager skins for coins, or to purchase coins, that can then be used to play games that provide a chance to win more coins which can then be traded for other skins. The operators of these sites may argue that no gambling is occurring, since skins are not a thing of value. However, the operators of these sites have different considerations than the video game developers, since the operators of these sites are not participating in the initial marketplace for the loot boxes and are essentially creating a secondary marketplace of repackaged loot boxes. While this approach is viable, operators must ensure that the prohibitions on resale of the skins are strictly enforced. Further, courts in some jurisdictions may consider skins to constitute prizes of value, in certain limited circumstances.

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Online Mystery Boxes

The contents of a mystery box need not be a physical good or digital skin. Online mystery box operators may include digital goods (such as downloadable video games) and services (such as exclusive access to entertainment content and benefits) as a potential component of an online mystery box. These digital goods and services may be mixed in with physical goods and services which are shipped to the user, so long as the combined fair market value of all goods and services received is at least equal to the price paid to open the online mystery box.

Some online mystery box operators will offer experience points as a potential service that may be received when opening an online mystery box. Alternatively, these experience points can be purchased directly from the operator at the same price at which those experience points are valued when received as a component of an online mystery box.

The ability to purchase experience points directly from the online mystery box operator is analogous to the rewards points programs offered in other industries, such as in airline or credit card loyalty programs. Such businesses typically assign a specific dollar value to the points and allow them to be purchased independently of any products or services. The same approach should be considered by mystery box operators. Users may have the ability to purchase experience points directly from the operator using the same dollar value assigned to the points awarded in boxes. Such purchases by users constitute compelling evidence that the points are worth the value assigned.

Regardless of whether the user obtained the experience points by direct purchase or by opening an online mystery box, the user gains the same exclusive access to certain entertainment content and benefits. For example, a user may purchase $20 worth of experience points to gain a monthly subscription to a Twitch stream, while another user may purchase a $100 online mystery box that randomly reveals a watch worth $80 and $20 worth of experience points that provide access to that Twitch stream. So long as the combined fair market value of the contents of the online mystery box is at $100, no risk of loss occurs, and thus no gambling.

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Determining Prize Value

Mystery box operators must carefully assign fair market value to the prizes contained in any given box to avoid the risk of loss. Artificially inflating the value of prizes can create significant risks of gambling violations. While operators have some flexibility to include a reasonable retail profit in the fair market value calculation, assigning unrealistically high values to prizes will not effectively eliminate the risk of loss.

Determining the value of digital goods and services can be more challenging than physical goods that are readily available in the general marketplace and thus have a known market value. For example, providing access to media such as videos, songs, games, or NFTs as a component of an online mystery box likely has some value, however unless the media is readily available from other sellers, determining its fair market value can be difficult. Operators are cautioned to investigate the value of similar items available for direct purchase from third party retailers that do not utilize any gamified shopping marketing efforts to assist in determining appropriate value.

Importantly, the benefits associated with any experience points awarded or sold must be sufficient to support the value assigned. Operators can consider granting users access to unique platform features based on their experience point level such as unique avatars, the ability to upload media, access to messaging boards, participation in real world events, and other benefits. If challenged, a mystery box operator will be required to demonstrate that the benefits provided by purchasing or obtaining experience points justifies the dollar amount assigned. As noted above, direct purchase of the points by users is the best evidence of their value.

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Other Considerations

While concerns with avoiding gambling are paramount with a mystery box business model, additional considerations apply. For example, failure to disclose the chances of winning any given prize or combination of prizes prior to purchase can trigger potential violations of deceptive and unfair trade practices laws. Users should always know what they are purchasing and the likelihood of receiving any specific prize. Other issues include intellectual property concerns, particularly when including copyrighted images or trademarked brands to show the prizes. Many famous brands prefer to avoid any association with chance gaming, even if the activity does not meet the legal definition of gambling. It is important for operators to ensure that they have all necessary rights to display any images or trademarks of products awarded as prizes. Finally, like all online marketplaces, mystery box operators should ensure that their terms of service, privacy policies, and know-your-customer (“KYC”) policies meet current industry standards and legal compliance obligations.

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Final Thoughts

The mystery box business model offers an exciting experience for users and an enticing opportunity for operators. By ensuring that gambling and other legal issues are addressed, operators can effectively mitigate risks while maximizing business opportunities.

Lawrence Walters heads up Walters Law Group and frequently represents clients in the mystery box gamified shopping field. Nothing in this article is intended as legal advice. You can contact Mr. Walters through his website, www.firstamendment.com, or on social media @walterslawgroup.

January 31, 2025

1. Introduction

The American public has a fascination with gaming. Numerous online gaming business models can be found on mobile app marketplaces, websites, and social media platforms. Potential gaming business operators often seek information on the legality of their proposed services. So, what gaming businesses are legal? The answers can be complicated but start with a distinction between “gaming” and “gambling”.

Gaming is a general term that covers a multitude of entertainment platforms that incorporate some type of user engagement to win a prize. Those prizes can be limited to in-game credits or items, but sometimes involve merchandise or real money. Gambling activity is a sub-set of gaming, which involves the following 3 essential elements: 1) a prize of value; 2) chance; and 3) consideration (i.e., a bet).

2. Prize

To qualify as a prize, for purposes of the gambling analysis, the winner of the game must receive something of value. Clearly, money is a “thing of value” in such instance. However, any merchandise, gift card, cryptocurrency, or cash equivalent typically qualifies as well. In general, any in-game digital prize or credit is not considered a prize. However, this is where things get tricky. In some states, an in-game prize or credit can be considered a valuable prize if it allows the player the opportunity to extend the game or if the prize can be readily exchanged for money on a secondary market. Take, for example, an online social casino that allows users to win credits which may not be exchanged for money or any thing of value on the platform. Those credits are generally not considered a prize since they have no value in the real world. However, if the credits can be re-wagered to play another game, the laws in some states will treat the credits as a prize for purposes of gambling since they allow the users to play more games. This is known as the “right of replay.” Alternatively, in some states, the ability to easily sell a digital item on a third party marketplace can give the item sufficient value to be deemed a prize. While this is the minority view in the U.S., operators must be aware of the jurisdictions that treat such items as prizes in the gambling context.

3. Chance

In order to qualify as gambling, the gaming activity must determine the winner by means of chance. Therefore, if the winner is determined by methods such as a card flip, slot machine reels, or a roulette wheel, the game is one of chance. What if skill determines the outcome of the game? Skill gaming is unregulated – and therefore legal – in the majority of U.S. states. However, some states restrict skill gaming, in addition to gambling, through statutes or case law. A separate question that arises in this part of the gambling analysis is: how much skill? The outcome of many games is determined based on a mixture of chance and skill. The courts in the U.S. have developed various tests to determine whether the skill element has been satisfied. For more information on that issue, see our post here. As a result of the different tests, some skill games may be legal in one state, but illegal gambling in another. Careful attention must be paid to the tests used by the courts, and the statutory restrictions, when considering a skill gaming business model.

Another factor that may come into play with the chance analysis is “risk of loss.” In order for the chance element to be present, there must be both an opportunity to win a prize and a risk of losing the staked bet. This issue is best illustrated with business models that offer purchases of “mystery boxes” or trading card packets. The “player” purchases an item for an agreed amount but does not know exactly what the item will be. The player could “win” an expensive pair of sneakers or a mixture of smaller items and/or digital prizes. To eliminate the risk of loss, the player must always receive items that equal the amount paid. The player may receive something more, in such a gamified shopping experience, but cannot receive less than the amount paid to participate. Using the trading card analogy; one purchases a pack of Pokémon or baseball cards for $5.00, not knowing if the pack will contain commonly distributed cards or possibly a card of great value. Either way, there is no risk of loss if the buyer receives the number of cards purchased.

4. Consideration

The final element to evaluate when deciding if an activity constitutes gambling, is consideration. This is commonly referred to as the bet or wager – meaning the amount paid to play the game. If no consideration is paid, real world prizes can be awarded by chance without running afoul of gambling prohibitions. The element of consideration is commonly eliminated in a prize giveaway, sweepstakes, or a raffle.

Prize giveaways are simple. A business or charitable organization decides to give away various prizes to certain users who register for the chance to win. No money changes hands for any goods, services, or donations. Giveaways may be used for various purposes to call attention to a new business, a political campaign, or a charitable cause.

In a sweepstakes, prizes can be awarded by chance (or skill), but entries cannot be purchased. Instead, entries may only be given away in connection with the sale of goods and/or services, or awarded for engaging in some alternative method of entry such as mailing a postcard or registering for a new account. Sweepstakes are commonly offered throughout the U.S. by large companies such as McDonalds and Pepsi. However, sweepstakes are regulated in certain states. For example, some states require that sweepstakes promoters who offer prizes which exceed certain limits must register with the state, obtain a bond to secure payment of prizes, and keep various records regarding prizes and winners. Other states prohibit the use of casino-style games in a sweepstakes, or the award of cash prizes. Various disclosure requirements can be imposed on sweepstakes operators as well, in relation to the amount of prizes or odds of winning. The goods and services sold in connection with a sweepstakes must be legitimate, and not merely be used as a ruse or sham to avoid gambling prohibitions. More information about sweepstakes requirements can be found here.

Raffles can typically only be offered by established charitable or civic organizations. In a raffle, a qualified operator offers chances to win a prize in exchange for a donation to the organization. Generally, donations cannot be required, but suggested donations are allowed. In this way, the entry into a raffle eliminates the element of consideration, since any payment is deemed a donation to the organization, and the raffle entry is a bonus.

5. Conclusions

For many years, creative entrepreneurs have sought to eliminate one of the three elements of gambling discussed above, to avoid the onerous restrictions on gambling activity or licensure requirements in the U.S. Courts are sensitive to these efforts and will punish abuse when detected. However, if any of the elements are not present, the activity is not gambling. It may be something else, such as skill gaming or sweepstakes, which are subject to their own restrictions. By understanding the essential elements of gambling, operators can be careful to avoid inadvertently straying into this highly regulated activity.

Lawrence G. Walters heads up Walters Law Group and has represented clients involved with online gaming for over 30 years. Nothing in this article is intended as legal advice. Mr. Walters can be contacted through the firm’s website, www.firstamendment.com, or on social media @WaltersLawGroup.