A Seattle federal appeals court ruling that the Big Fish social casino constitutes illegal online gambling will likely require operator to block players from a state that has been a mecca for social gaming developers, gaming attorneys told GamblingCompliance.
“This opinion is a disaster for Washington [state] consumers who enjoy free social games,” said Jeff Ifrah, founder of Ifrah Law in Washington, D.C. “As a result, operators in Washington will have to block Washington going forward.”
A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit ruled last Wednesday that virtual games offered by Big Fish Casino, the social gaming platform operated by Kentucky’s Churchill Downs and recently sold to Aristocrat Technologies, “constituted illegal gambling under Washington law.”
Ifrah said this opinion shouldn’t impact legal decisions in other states that have found that social games are not gambling.
Big Fish Casino offers a series of games like slots, blackjack and roulette that use virtual chips. The chips have no monetary value themselves, but players can play the social casino games only as long as they have chips.
“Thus, if a user runs out of virtual chips and wants to continue playing Big Fish Casino, she must buy more chips to have ‘the privilege of playing the game,’” Judge Milan D. Smith Jr. with the Ninth Circuit Court of Appeals wrote in his 11-page opinion.
“Likewise, if a user wins chips, the user wins the privilege of playing Big Fish Casino without charge. In sum, these virtual chips extend the privilege of playing Big Fish Casino.”
Overturning the finding of lower court, the three-judge panel found that the chips represent “something of value,” according to Washington state law governing gaming.
Smith described virtual chips as a credit that allows a user to place another wager or re-spin a slot machine. His ruling also cited the ability to players to sell virtual chips to one another, with Big Fish charging a transaction fee for enabling such a transfer.
“Despite collecting millions in revenue, Churchill Downs, like Captain Renault in Casablanca, purports to be shocked – shocked! – to find that Big Fish Casino could constitute illegal gambling. We are not. Big Fish Casino constitutes illegal gambling under state law,” Judge Milan Smith wrote on behalf of the panel of three appellate judges.
The legal dispute began in 2015 when plaintiff Cheryl Kater sued Big Fish’s former parent company Churchill Downs, claiming she lost over $1,000 worth of virtual chips while playing online slots since 2013.
Wednesday’s ruling held Kater was entitled to proceed with her complaint against Churchill Downs to recover her losses.
“The ruling comes as a surprise to us given that all prior cases including a case heard in the Fourth Circuit (Court of Appeals in Maryland) last year against Machine Zone had been dismissed,” Adam Krejick, principal with the research firm Eilers and Krejick Gaming, wrote in a research note to clients on Thursday.
Krejick said he expects the ruling will inevitably be appealed and likely overturned, or at a worst case confined to just Washington State.
“As such, we do not view this as a cataclysmic event for the industry, but it does raise the possibility of Washington creating some type of ‘block list’ or highly restrictive operating environment – this would be a terrible precedent and path to go down given the state has long been considered a mecca for social gaming and undoubtedly a driver of its economic wealth,” Krejick wrote.
Wednesday’s ruling is also confusing in light of previous guidance from Washington’s gambling regulator.
A two-page brochure published by the Washington State Gambling Commission has said social gaming is legal in the state if no gambling takes place. Such games become gambling only when they involve a prize; consideration – the staking of something of value, wager, or fee to play; and chance, the commission wrote.
“Legal social gaming websites will not let players cash in their virtual winnings or points for ‘real’ money or prizes,” the commission wrote. “If the virtual money can be sold or redeemed for ‘real’ money or a prize, the game is gambling.”
“We are still reviewing the decision and we will be working to determine what, if any, implications the decision has on the gaming industry in Washington,” Heather Songer, a spokeswoman with the Washington State Gambling Commission, said Friday.
A U.S. District Court judge in Seattle had initially dismissed Kater’s complaint in 2016. Wednesday’s opinion reverses that ruling and sends the case back to the district court, according to Behnam Dayanim, chair of the gaming group at Paul Hastings law firm.
“The ruling only applies to Washington state,” Dayanim told GamblingCompliance. “It is the only case in this space that ruled this way. That said, it will have an impact.”
Smith wrote the court wasn’t persuaded by the argument that federal courts in Maryland, Illinois and California have previously held that certain “free to play” games are not illegal gambling under those states’ statutes.
Dayanim noted that should another social casino company find itself before a judge, it would be wise to “explain fully to the court that the game is free.”
Free or not, Smith’s opinion noted that Big Fish’s former owner Churchill Downs made millions of dollars in revenues from the social gaming platform.
“Despite collecting millions in revenue, Churchill Downs, like Captain Renault in Casablanca, purports to be shocked – shocked! – to find that Big Fish Casino could constitute illegal gambling,” Smith wrote. “We are not. Big Fish Casino constitutes illegal gambling under state law.”
A Churchill Downs spokesman did not respond to a request for comment on Thursday.
The company does have the option to appeal the ruling for en banc decision by all sitting judges in the Ninth Circuit, or even make a long-shot bid for the U.S. Supreme Court o take up case.
“I believe at this point the best thing for Churchill Downs to do is to go back to the gambling commission and see if the commission will agree to sponsor some sort of legislative fix to recognize social casino free-to-play games,” Ifrah told GamblingCompliance in an email.
Churchill Downs bought Seattle-based Big Fish Games in 2014 for $885m. In November, the company announced it had sold the social games business to Australia-based Aristocrat for $990m.
“The gaming commission in Washington state has actually been on top of this issue for some time and there is even reference to some of the materials that Churchill Downs provided the court … so it’s possible that with some help, the commission could help ensure a change is made to bring free-to-play games back to consumers in Washington State,” Ifrah said.
In the meantime, it would be possible to block social casino players in Washington by using the same technology deployed by internet gambling operators in states like New Jersey, said David Briggs, CEO of geolocation provider GeoComply.
Briggs noted daily fantasy sports companies have had to block players in certain states like Nevada in order to avoid violations of local gambling laws.
“I don’t see this as too dramatic a shock to the industry as in many ways the precedent for this has already been set in the DFS space,” Briggs said. “I would not be surprised if the same thing does not happen again now for social gaming.”
From an investor standpoint, Krejick said shares of publicly traded companies with exposure to social casino gaming, including Scientific Games, Zynga and Aristocrat, could come under pressure especially if the state of Washington or other jurisdictions continue to “move in a hostile fashion.”
“That being said, at this time we would view any such related weakness as ‘noise,’” Krejick wrote.
Additional reporting by James Kilsby.