FTC loot box investigation: What happens next?

To date, the U.S. Federal Trade Commission’s public involvement into video game loot boxes has been restricted to a single word. In a Congressional oversight committee meeting on Tuesday, FTC chairman Joe Simons replied “yes” to a request from Senator Maggie Hassan (D-N.H.) that the organization look into, and report back, on loot boxes.

So, what happens now? And is the FTC likely to hand down legal restrictions on loot boxes? These in-game devices offer consumers a chance to win in-game items, sometimes in exchange for cash. They have been compared to gambling.

Reached for comment, an FTC spokesperson said, “we don’t have anything to add at this point” to Simons’ affirmation. But the Commission has a standard set of procedures that it follows when investigating either individual companies or entire industries, which offer useful clues to future events.

I spoke to Bill Rothbard, a former FTC lawyer who now specializes in FTC-related work. “They have a number of different procedures, avenues and remedies to pursue an investigation,” he said. “If they are looking at a practice that is industry-wide, like loot boxes, they have the statutory authority to initiate a rule-making proceeding.”

A rule-making proceeding is, essentially, a public meeting in which interested parties get to present their cases to the FTC. Game company representatives would be required to face questions from the FTC on loot boxes. Public interest, consumer groups and anti-loot box campaigners, such as those who believe the practice is a gateway to gambling, would state their views, including any research findings.

“The FTC would determine if loot boxes are unfair or deceptive,” explained Rothbard. “If so, that would warrant the promulgation of a regulation that would cover the entire industry.”

The FTC has the authority to pass rules that have the force of law. In theory, the FTC could call a rule-making procedure and implement a ban on loot boxes. However, that is an unlikely scenario.

“There was a time in the late ’70s and early ’80s when the FTC initiated numerous procedures against entire industries,” said Rothbard. “Children’s advertising, tobacco, the funeral industry and real estate, for example. But I can’t think of one that covers an entire industry in the in the last several years.”

Rothbard said the FTC is less liberal than in the past, and is reluctant to pass new rules governing entire industries.

But an investigation has been promised, and will go ahead. This will likely take the form of letters sent out by FTC staff attorneys to game companies requesting information about their businesses and how loot boxes work.

“They’ll want to know how they market loot boxes, how they impact their businesses and anything else that’s relevant,” said Rothbard.

If the game companies are slow to respond, the FTC has the option of sending out a Civil Investigative Demand, which has the force of a subpoena, requiring that the companies respond in full.

The game companies are represented at government level by trade body the Entertainment Software Association. It is likely that the ESA will step in and negotiate directly with the FTC, stating the game companies’ case for loot boxes. The ESA’s statement to the media this week offers some clue to its strategy, which cleaves to a firm denial that loot boxes are connected with gambling.

“Loot boxes are one way that players can enhance the experience that video games offer,” the ESA said. “Contrary to assertions, loot boxes are not gambling. They have no real-world value, players always receive something that enhances their experience, and they are entirely optional to purchase. They can enhance the experience for those who choose to use them, but have no impact on those who do not.”

The ESA is also likely to point toward market forces that have altered game companies’ approach to loot boxes. In the year since the release of Star Wars Battlefront 2, which was notoriously geared toward loot box sales, companies have moved away from loot boxes. Fortnite-style “season passes.” which allow players to earn assets they might otherwise find in loot boxes, are now the fashion. They do not carry the negative connotations of loot boxes which, despite the ESA’s denials about gambling, include a heavy element of chance.

Today, the International Game Developers Association warned game companies to take action, and so avoid government-level legal rulings. Legislators in countries such as Japan, Belgium and the Netherlands have indicated a desire to combat loot boxes, a move that would be disruptive to game companies. Executive director Jen Maclean called for action from the game industry, including a commitment to cease marketing loot boxes to children, a disclosure of all odds for achieving loot box rewards and an education campaign.

“By not taking significant action as an industry and global game developer community to self-regulate how loot boxes are used,” Maclean added, “we run the very real risk that governments around the world will take that action for us, and perhaps create significantly restrictive laws that could impact any random reward elements in games.”

In its negotiations with the FTC, the ESA could offer one or more of these measures as a last resort, but is more likely to seek to win the argument and avoid any kind of concession. In the meantime, consumers have shown their increasing hostility to loot boxes, which appear to be on the decline. This shift will certainly play to the FTC’s innate resistance to meddling at an industry-wide level.

“If the game industry feels exposure here, they could approach the FTC directly and try to convince them that their concerns about loot boxes are unwarranted and unfounded,” said Rothbard. “The best outcome for them is to engage in a cooperative exchange of information with the FTC and try to get them to see the industry’s point of view, and to determine that there really isn’t a problem here.”