Video games are big business — $3 billion “big” according to most estimates. So, while these may be “just games,” there is a lot of money at stake. This makes gaming very tempting to various types of “bad actors,” including the owners and developers of the games, online service providers, website operators, cybercriminals, and more. There is a wide range of dangers and risks attached to online video gaming, including identity theft, privacy invasion, fraud, hacking, etc.

The Federal Trade Commission is one federal agency that is given authority to regulate aspects of the video gaming industry pursuant to federal statutes like the Federal Trade Commission Act and the Children’s Online Privacy Protection Act (“COPPA”). Of particular relevance in the Trade Commission Act are prohibitions against unfair and deceptive business practices. COPPA protects the privacy of children using the internet and requires online platforms and websites to obtain parental permission before underage users can make purchases.

As described in a Yahoo News report here and in the FTC media release here, the FTC recently punished a company called Cognosphere LLC for violations of the FTC Act and COPPA with respect to “loot boxes” found in their free-to-play video game called Genshin Impact. Genshin Impact is known by Cognosphere (and others in the industry) to be very popular with children, pre-teens, and teens. In fact, the game is marketed to those demographics. As described in the link, Genshin Impact uses anime-style cartoon graphics, a color palette that is bright and colorful, and depicts characters who are drawn to look like children and sound like children. This makes the game appealing to younger gamers. Loot boxes — which are common in many video games — are either found within the game or can be purchased with virtual currency. Likewise, virtual currency can be gained in-game, but can also be obtained by converting real currency into virtual currency through the company’s online platform.

Generally speaking, loot boxes contain various items depending on the game. In Genshin Impact, loot boxes are the only source of what are called “5-star heroes.” The game involves players collecting virtual heroes and completing various quests with the heroes. The most powerful heroes are the 5-star heroes, and, as noted, 5-star heroes can only be obtained by opening the Genshin Impact loot boxes.

The FTC investigated Cognosphere for allegedly committing false and deceptive business practices related to the loot boxes and the currency conversion. Currency conversion is a well-known problem in video gaming where real money is used to buy various in-game products, but the conversion is never exact, and many games offer strange and unusual denominations for conversion. Thus, often, real money is left ove,r encouraging players to purchase additional products they do not want or need.

The FTC argued that Cognosphere’s purchasing process was even more confusing than most. The FTC claimed that based on the confusing nature of the process, some players failed to understand that they were spending hundreds and even thousands of dollars to obtain 5-star heroes and other loot box prizes. The FTC noted that confusion about currency conversion was a particular issue for younger gamers.

The FTC also charged Cognosphere with deceptive advertising involving the hiring of social media influencers to promote the game on platforms like YouTube, TikTok, and Twitch. The influencers were paid millions over the years, but many of them never disclosed that they were being paid to recommend the game and various aspects of the game (like the loot boxes). The FTC also claimed that Cognosphere provided misleading information about the odds of getting the most coveted prizes from the loot boxes.

The FTC also alleged violations of COPPA in three respects. First, Cognosphere failed to provide notice to parents about the information that would be collected about their children. Second, Cognosphere failed to obtain parental consent to collect and use the information. Finally, with many users, Cognosphere failed to verify the age of the user and, as such, also failed to get parental permission for purchases.

After the investigation, Cognosphere ultimately agreed to settle the administrative action by:

• Paying $20 million in damages
• Instituting policies and procedures to bring Cognosphere into compliance with COPPA, including banning underage users from making purchases without parental consent
• Making the required disclosures with respect to the loot boxes and
• Providing options for gamers to buy loot boxes directly with real currency instead of having to engage in the complicated and confusing process of conversion

Contact the Video Gaming Attorneys at Revision Legal

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