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Regulatory Shifts and Market Reactions in China’s Gaming Industry

A recent ousting of a high-ranking government official in China, coupled with a significant downturn in gaming stocks triggered by proposed new game regulations, highlights the intricate interplay between regulatory oversight and market dynamics in the world’s largest video game market.

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The Incident and Its Immediate Aftermath

The focal point of this upheaval is the dismissal of a key official from the publishing unit of the Communist Party’s Publicity Department. This move followed closely on the heels of the National Press and Publication Administration’s (NPPA) announcement of new gaming restrictions. These restrictions, targeting certain monetization tactics in video games, precipitated a steep decline in the stock values of major gaming companies. Tencent’s shares tumbled by as much as 16%, while NetEase saw a 25% drop.

NPPA’s Regulatory Proposals

The NPPA’s proposed measures, including spending limits on players and a mandate for publishers to operate all servers for Chinese games within China, were part of a broader initiative to tackle gaming addiction and the influence of video games on youth. These regulations reflect the government’s ongoing concern about the social impact of gaming.

Market Response and Regulatory Backtracking

The market’s swift and significant backlash to these proposals underscored the gaming industry’s susceptibility to regulatory shifts in China. In response, the NPPA quickly amended its stance, indicating a willingness to consider public opinion in refining the proposed restrictions. This appeared as a conciliatory gesture towards an industry that has been navigating a sea of regulatory uncertainties.

Feng Shixin’s Removal

The removal of Feng Shixin, a pivotal figure in China’s gaming regulation, added complexity to the situation. Feng played a crucial role in the government’s regulatory efforts in the gaming sector, including game approvals and gamer verification processes. However, the specifics of his removal, particularly its direct link to the regulatory proposals and their market impact, remain shrouded in ambiguity.

Historical Context of China’s Gaming Regulations

China’s gaming industry has long been under tight regulatory scrutiny. In 2021, the government imposed severe playtime limits for minors and halted new video game approvals for about eight months. These measures, aimed at curbing gaming addiction and safeguarding the mental health of young people, were part of a broader regulatory tightening across various sectors.

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Impact on the Gaming Industry

The regulatory environment in China has presented formidable challenges for the gaming industry. The 2021 crackdown led to the industry’s first revenue contraction. However, the sector rebounded the following year, with domestic revenue climbing by 14% to 303 billion yuan ($42.47 billion).

Investor Sentiment and Market Dynamics

The recent regulatory proposals and the ensuing market reaction underscore the ongoing tension between the Chinese government’s regulatory objectives and investor confidence. The gaming industry, while resilient, is sensitive to policy shifts, and investor sentiment is easily swayed by regulatory uncertainties.

Looking Ahead: Balancing Regulation and Growth

As the Chinese gaming industry grapples with these regulatory challenges, a critical question looms: how will the government balance its social and health concerns with the need to nurture a thriving gaming sector? The industry’s capacity to adapt to regulatory changes while sustaining growth will be pivotal in the years ahead.

Global Implications

The developments in China’s gaming industry carry global significance, given the country’s role as a major player in the esports and gaming market. International companies and investors are keenly observing these regulatory shifts, aware of their potential ripple effects on global gaming trends and collaborations.

Conclusion

The ousting of a key figure in China’s gaming regulatory framework, following market turmoil induced by new gaming proposals, illustrates the complex relationship between regulation and market dynamics in the esports and gaming industry. As China continues to refine its regulatory approach, the global gaming community remains vigilant, recognizing that these decisions will shape the future of esports and gaming not just domestically, but worldwide. The industry’s resilience and ability to adapt will be crucial as it seeks to balance compliance with innovation, navigating the challenging waters of regulation.

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Based on information from Reuters, Yahoo!, and Forbes

Author

  • Leonid Shmatenko

    Leonid Shmatenko is part of Eversheds Sutherlands’ data protection and technology law team. He has vast experience in regulatory and general issues in the areas of eSports and Blockchain. He advises eSports associations and clubs on all legal issues, advises and supports crypto startups in all matters from planning, preparation to execution of private and public token offerings (so-called Initial Coin Offerings or ICOs). Furthermore, Leonid Shmatenko specializes in international arbitration and has participated in several arbitration proceedings (SAC, ICC, DIS, UNCITRAL, ICSID, ad hoc) as a party representative and secretary of the tribunal. Leonid Shmatenko studied at the Heinrich Heine University in Düsseldorf and is currently pursuing a PhD in international law. After his successful first state examination (2011), he completed his legal clerkship, inter alia, at the German Embassy in Lima and within international law firms in Düsseldorf and Paris. He passed the second state examination in 2015. He is an external lecturer at the National Law University of Ukraine “Yaroslav Mudryi”, where he teaches International Investment Law. He is admitted to the Bar in Switzerland and Germany. Before joining Eversheds Sutherland, Leonid Shmatenko worked as an attorney at leading law firms in Geneva, Munich and Paris.

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Legal Regulation of eSports in Chile

eSports presents novel legal challenges for regulators globally, with Chile experiencing its unique set of complications due to existing legislative frameworks. This analysis explores the intersection of Chilean gambling laws and eSports, emphasizing the legislative gaps and ambiguities that currently govern this rapidly growing industry. The paper aims to dissect the pertinent legal provisions and propose avenues for legislative reform, ensuring that eSports can thrive within a clearly defined legal environment in Chile.

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Esports in Chile | ELN

Introduction

In Chile, the rise of eSports has highlighted significant gaps in the existing legal framework, particularly concerning the classification and regulation of these activities. Unlike traditional sports, eSports involve virtual competitions that can include elements typically associated with gambling, such as entry fees and monetary rewards. This article examines Chile’s gambling laws, their applicability to eSports, and the legal challenges that arise from the current regulatory landscape.

Chile’s legal approach to gambling is primarily governed by the Ley N° 19.995, which establishes the bases for the authorization, functioning, and supervision of casino games. The regulatory body, Superintendencia de Casinos de Juego (SCJ), oversees these activities. However, eSports fall outside the explicit regulatory scope of this law, as they are not conducted in physical venues like casinos and are not solely dependent on chance.

  1. Article 3 of Ley N° 19.995: This article defines games of chance as those where the outcomes are predominantly subject to chance rather than player skill. eSports, where outcomes predominantly depend on players’ skills, strategies, and decision-making, challenge this definition. However, the lack of explicit recognition and differentiation in the law creates a gray area regarding their regulation.
  2. Decree No. 2385 on Municipal Revenues: This law grants municipalities the authority to regulate and license certain types of local games. While designed for traditional games, its broad language could theoretically extend to eSports events, adding another layer of complexity for organizers who must navigate local regulations that are not tailored to the digital nature of eSports.
  3. Consumer Protection Law (Ley N° 21.081): While not directly regulating gambling or eSports, this law protects consumers against misleading practices. It becomes relevant when considering how eSports are marketed and the clarity provided to participants regarding the nature of their participation and the use of their entry fees.

Challenges Arising from Current Legislation

The primary challenge in the current legal framework is the lack of specific provisions addressing the digital and virtual nature of eSports. This omission leads to several practical issues:

  • Uncertainty and Inconsistency: Event organizers and participants face uncertainty about the legality of their activities, potential liabilities, and the applicability of gambling laws.
  • Inadequate Consumer Protection: Without clear regulations, consumers may not be adequately informed about their rights or the nature of the events in which they are participating, potentially leading to disputes and dissatisfaction.
  • Inhibiting Industry Growth: The legal uncertainty can deter investment and hinder the development of a structured eSports market in Chile, which is crucial for the professionalization and global competitiveness of this sector.

Proposed Solutions for Legislative Reform

To foster a conducive environment for the growth of eSports in Chile, the following legislative reforms could help eSports:

  1. Explicit Recognition and Definition: Introduce specific legislation that clearly defines eSports, distinguishing them from gambling activities based on their skill-based nature.
  2. Regulatory Framework Development: Develop a tailored regulatory framework that addresses both the digital nature of eSports and the physical venues where events might be held.
  3. Stakeholder Engagement: Involve key stakeholders, including gamers, event organizers, legal experts, and consumer protection agencies, in the legislative process to ensure that the regulations are comprehensive and practical.

Conclusion

The legal challenges currently facing the eSports industry in Chile require thoughtful consideration and action from lawmakers. By addressing the gaps in the existing legal framework and introducing clear, tailored legislation, Chile can better support the growth and sustainability of eSports while protecting the interests of all parties involved. Establishing such a legal foundation is essential for Chile to remain competitive and innovative in the global eSports arena.

With material from: La Voz de Chile

Author

  • Leonid Shmatenko

    Leonid Shmatenko is part of Eversheds Sutherlands’ data protection and technology law team. He has vast experience in regulatory and general issues in the areas of eSports and Blockchain. He advises eSports associations and clubs on all legal issues, advises and supports crypto startups in all matters from planning, preparation to execution of private and public token offerings (so-called Initial Coin Offerings or ICOs). Furthermore, Leonid Shmatenko specializes in international arbitration and has participated in several arbitration proceedings (SAC, ICC, DIS, UNCITRAL, ICSID, ad hoc) as a party representative and secretary of the tribunal. Leonid Shmatenko studied at the Heinrich Heine University in Düsseldorf and is currently pursuing a PhD in international law. After his successful first state examination (2011), he completed his legal clerkship, inter alia, at the German Embassy in Lima and within international law firms in Düsseldorf and Paris. He passed the second state examination in 2015. He is an external lecturer at the National Law University of Ukraine “Yaroslav Mudryi”, where he teaches International Investment Law. He is admitted to the Bar in Switzerland and Germany. Before joining Eversheds Sutherland, Leonid Shmatenko worked as an attorney at leading law firms in Geneva, Munich and Paris.

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Alleged Video Games Addiction Leads to Lawsuit (Updated)

In a developing legal battle reminiscent of the Colvin et al v. Roblox Corporation et al case that challenged Roblox’s alleged facilitation of illegal gambling with minors, a new lawsuit has been filed in Missouri against major players in the video game industry alleging video games addiction.

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Video Games Addiction

This lawsuit, just like Casey Dunn et al. v. Activision Blizzard et al., on which ELN reported before, accuses companies, including Epic Games, Mojang Studios, and Roblox, of designing games that create an excessive video games addiction in children, leading to serious detrimental effects on their physical, social, and mental health.

Context and Background of the Case

In a legal filing that marks a significant escalation in the scrutiny of video game companies’ practices, a lawsuit has been filed in the U.S. District Court for the Western District of Missouri, Central Division. The case, bearing the number 2:24-cv-4055, has been initiated by Carey Courtwright, representing her minor child K.C. This legal action addresses serious concerns about the design and operation of video games that allegedly lead to addiction among young players. K.C., who began engaging with video games at the tender age of six, is presented as a victim of these manipulative gaming practices.

Defendants in the Lawsuit

The defendants listed in this lawsuit are some of the most prominent names in the gaming industry:

  • Epic Games, known for Fortnite
  • Mojang Studios, the creators of Minecraft
  • Meta Platforms, the conglomerate formerly known as Facebook
  • Roblox Corporation

These companies are accused of creating and maintaining gaming environments that exploit psychological vulnerabilities in children.

Detailed Allegations of Video Games Addiction Triggers

The lawsuit articulates specific tactics employed by the defendants which are purportedly designed to foster addiction:

  • Reward Systems and Feedback Loops: Games are structured to release dopamine in response to achievements within the game, perpetuating a cycle of engagement that can lead to excessive and unhealthy gaming habits.
  • Limited Transparency and Predatory Monetization: The true costs of in-game transactions are often concealed or minimized, exploiting cognitive biases and leading players, particularly young ones, to spend money without a full appreciation of the cumulative costs.
  • Fear of Missing Out (FOMO): By introducing time-limited events and exclusive in-game items, the games tap into a player’s fear of missing out, which can compel continuous or increased expenditure to remain competitive or included in gaming communities.
  • Targeting of ‘Whales’: These companies strategically identify and exploit major spenders within their games — often referred to as “whales” — by encouraging them to spend large amounts of money through tailored incentives.
  • Lack of Parental Controls: The complaint criticizes the insufficient mechanisms provided to parents to monitor and control their children’s gaming activity effectively, which exacerbates the problem of unregulated access and expenditure.

Human Costs and Plaintiff’s Burden

The complaint vividly describes the adverse effects on K.C.’s life due to the alleged gaming addiction. These include a noticeable decline in academic performance, social withdrawal from peers and activities, and the development of physical symptoms such as pain in the hands, eyes, and back, as well as disrupted eating patterns. Moreover, K.C. has reportedly suffered from mental health issues, including depression and anxiety, which were intensified by the inability to disengage from gaming. The plaintiff, Carey Courtwright, shares the emotional and financial burden inflicted by this ordeal, emphasizing the considerable expenses accrued through medical treatments and in-game spending by K.C.

This lawsuit is part of an emerging trend where legal actions are increasingly highlighting the potential negative impacts of video games on minors. Similar to the issues raised in Colvin et al v. Roblox Corporation et al, this case underscores the urgent need for the industry to adopt more ethical practices in game design and marketing. The outcome of such lawsuits could potentially lead to stricter regulations and standards governing game development and marketing, particularly regarding the mechanisms that promote prolonged engagement and spending in games.

Entertainment Software Association’s Statement (Update)

Having read our article, the Entertainment Software Association (ESA) has provided a statement that offers a broader industry perspective. The ESA, a trade association that represents the U.S. video game industry and includes several of the defendants in the lawsuit as its members, has articulated its stance on the issues central to the lawsuit.

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The ESA emphasized its commitment to player safety and digital wellness, stating:

“Video games are among the most dynamic, widely enjoyed forms of entertainment in the world. We prioritize creating positive experiences for the entire player community and provide easy-to-use tools for players, parents, and caregivers to manage numerous aspects of gameplay.”

Moreover, the ESA addressed the claims made in the lawsuit directly, noting:

“Claims that say otherwise are not rooted in fact and ignore the reality that billions of people globally, of all ages and backgrounds, play video games in a healthy, balanced way.”

This statement underscores the ESA’s viewpoint that while the lawsuit raises important concerns about player safety and addiction, the claims do not necessarily reflect the broader reality of gaming as an activity enjoyed healthily by a vast global audience.

Conclusion

This lawsuit could set important precedents regarding the accountability of video game developers and platforms in safeguarding the well-being of their youngest and most vulnerable users. The broader implications for the industry could include a reevaluation of game design ethics, the introduction of more stringent parental controls, and a more transparent communication regarding the costs associated with in-game content. The video game industry may need to balance commercial interests with a heightened responsibility towards its user base, especially children, in light of growing legal scrutiny.

Image source: DallE3

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Carey Courtwright, individually and on behalf of K.C., a Minor v. Epic Games et al

Court: United States District Court for the Western District of Missouri, Central Division
Case No.: 2:24-cv-4055

Defendants

  1. Epic Games
    • Counsel not listed
  2. Mojang Studios
    • Counsel not listed
  3. Meta Platforms
    • Counsel not listed
  4. Roblox Corporation
    • Counsel not listed

Plaintiff

  1. Carey Courtwright (Individually and on behalf of her minor child, K.C.)
    • Counsel to Carey Courtwright:
      • Tyler W. Hudson, Eric D. Barton, and Melody R. Dickson of Wagstaff & Cartmell LLP
      • Breean “BW” Walas, Tina Bullock, and Danielle Ward Mason of Bullock Ward Mason LLC
      • Charles M. Stam of Thompson Stam PLLC

Author

  • Leonid Shmatenko

    Leonid Shmatenko is part of Eversheds Sutherlands’ data protection and technology law team. He has vast experience in regulatory and general issues in the areas of eSports and Blockchain. He advises eSports associations and clubs on all legal issues, advises and supports crypto startups in all matters from planning, preparation to execution of private and public token offerings (so-called Initial Coin Offerings or ICOs). Furthermore, Leonid Shmatenko specializes in international arbitration and has participated in several arbitration proceedings (SAC, ICC, DIS, UNCITRAL, ICSID, ad hoc) as a party representative and secretary of the tribunal. Leonid Shmatenko studied at the Heinrich Heine University in Düsseldorf and is currently pursuing a PhD in international law. After his successful first state examination (2011), he completed his legal clerkship, inter alia, at the German Embassy in Lima and within international law firms in Düsseldorf and Paris. He passed the second state examination in 2015. He is an external lecturer at the National Law University of Ukraine “Yaroslav Mudryi”, where he teaches International Investment Law. He is admitted to the Bar in Switzerland and Germany. Before joining Eversheds Sutherland, Leonid Shmatenko worked as an attorney at leading law firms in Geneva, Munich and Paris.

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Another Roblox Litigation – An Illegal Gambling Ring for Kids?

In an era where digital platforms intertwine with daily activities, the lawsuit against Roblox Corporation has sparked significant legal and ethical debates. This case, officially cited as Colvin et al v. Roblox Corporation et al, No. 3:23-cv-04146, filed in the Northern District of California, brings to the fore critical issues surrounding gambling in video games and the responsibilities of platform providers.

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Roblox Litigation

Case Background of the Roblox Litigation

Roblox, a platform that combines gaming with social networking, has been accused of facilitating illegal gambling activities targeted at minors through its virtual currency, Robux. Plaintiffs Rachelle Colvin and Danielle Sass allege that Roblox’s system enabled minors to engage in gambling via third-party sites that were intricately linked to the Roblox platform, thus breaching the Racketeer Influenced and Corrupt Organizations Act (RICO) and other pertinent statutes​​. This is just one of many cases against Roblox.

Specific Allegations Against Roblox

  1. Misleading Representations: Roblox’s terms of service claim that it does not allow activities involving simulated gambling using Robux. However, the lawsuit asserts that Roblox has misled consumers, particularly parents, about the safety and appropriateness of its platform for children​​.
  2. Facilitation of Gambling: Despite these terms, Roblox is accused of actively facilitating and profiting from gambling activities by tracking and recording the flow of Robux used for gambling on third-party sites, thereby enabling this ecosystem​​.
  3. Profit from Illegal Activities: It is alleged that Roblox profits significantly from these transactions by charging a transaction fee, including when Robux are converted back into real currency by these gambling entities, effectively receiving a cut from the illegal use of its platform​​.

Claims Made in the Roblox Litigation

The lawsuit brings multiple claims under both federal and state laws, including violations of the RICO, the California Unfair Competition Act (UCL)1, and for negligence, among others. These claims focus on the creation and maintenance of an illegal gambling operation, misleading business practices, and the unjust enrichment of Roblox at the expense of its users​​.

Relief Sought

The plaintiffs seek monetary damages, restitution for the losses incurred by the minor users and their guardians, and injunctive relief to prevent further illegal gambling operations. They also demand a jury trial to adjudicate these claims​​.

The Motion to Dismiss

On 26 and 28 March 2024, the court partially granted Roblox’s motion to dismiss. The court dismissed the RICO claims which was significant. The court held that the plaintiffs failed to demonstrate that Roblox was engaged in a “qualifying enterprise” under RICO, as they could not show a common purpose or concerted action beyond regular business operations. The court’s findings demonstrate a challenge plaintiffs usually face when applying traditional legal frameworks like RICO to the fluid, expansive, and often nebulous operations of digital platforms, which are designed to maximize user engagement and revenue through complex, layered interactions that may not neatly fit into existing legal categories.

Claims Advancement

However, the advancement of claims under the UCL and for negligence opens substantial grounds for legal debate and analysis. The UCL’s broad scope, aimed at combating unlawful, unfair, or fraudulent business acts or practices, provides a robust framework for addressing alleged misconduct in digital settings. The court’s decision to let these claims proceed suggests a recognition of potential oversight and management failures by Roblox in preventing the use of its platform for gambling activities, especially those involving minors.

The negligence claims hinge on whether Roblox failed to exercise reasonable care to avoid foreseeable harm to its users, particularly children, who might be drawn into gambling with real-world economic consequences.

Unjust Enrichment

The court also allowed the unjust enrichment claim to proceed. By allowing this claim to proceed, the judge recognized that the compensation sought by the plaintiffs might not be covered fully by direct monetary damages. This decision emphasizes the need to consider a broader economic context of transactions on platforms like Roblox, where the company’s revenue model directly benefits from the engagement and expenditures of its users, including those activities that skirt or cross legal boundaries.

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Implications for Digital Currency and Platform Liability

This litigation spotlights the need for stricter regulatory scrutiny of digital currencies like Robux or gambling aspects in video games in general. As these currencies blur the lines between virtual assets and real-world value, the potential for misuse increases, necessitating clearer regulations and standards. This case could prompt lawmakers and regulators to examine more closely how digital currencies are managed on platforms, especially those accessible to minors.

The case also raises critical questions about the duty of platforms to protect users from harm. The allegations suggest that Roblox could and should have done more to prevent its platform from being used for gambling.

Conclusion

Colvin et al v. Roblox Corporation et al is an interesting case at the intersection of technology, law, and ethics, offering a crucial legal precedent for digital platform governance. As the case progresses, it will provide valuable insights into how digital platforms can be held accountable for the activities they enable and profit from.

This case will likely have far-reaching implications for legal practices, platform operations, and the legislative landscape governing digital interactions and economies, making it a critical watchpoint for legal professionals and platform operators alike.

Colvin et al v. Roblox Corporation et al

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Court: United States District Court, Northern District of California
Case No.: 3:23-cv-04146

Defendant Roblox Corporation

  • Counsel to Roblox Corporation: Cooley LLP
    • Kyle Wong
    • Robby Lee Ray Saldana, Washington, DC
    • Tiana A. Demas, Chicago, IL

Defendant RBLXWild Entertainment LLC

  • Counsel not listed

Defendant Satozuki Limited B.V.

  • Counsel not listed

Defendant Studs Entertainment Ltd.

  • Counsel not listed

Plaintiffs Rachelle Colvin and Danielle Sass

  • Counsel to Plaintiffs: Weitz & Luxenberg, P.C.
    • Aaron Freedman, New York, NY
    • Devin Lynn Bolton, Los Angeles, CA
    • James J. Bilsborrow, New York, NY

Minor Plaintiffs G.D. and L.C.

  • Represented by the same counsel as Rachelle Colvin and Danielle Sass.
  1. Cal. Bus. & Prof. Code § 17200 et seq. ↩︎

Author

  • Leonid Shmatenko

    Leonid Shmatenko is part of Eversheds Sutherlands’ data protection and technology law team. He has vast experience in regulatory and general issues in the areas of eSports and Blockchain. He advises eSports associations and clubs on all legal issues, advises and supports crypto startups in all matters from planning, preparation to execution of private and public token offerings (so-called Initial Coin Offerings or ICOs). Furthermore, Leonid Shmatenko specializes in international arbitration and has participated in several arbitration proceedings (SAC, ICC, DIS, UNCITRAL, ICSID, ad hoc) as a party representative and secretary of the tribunal. Leonid Shmatenko studied at the Heinrich Heine University in Düsseldorf and is currently pursuing a PhD in international law. After his successful first state examination (2011), he completed his legal clerkship, inter alia, at the German Embassy in Lima and within international law firms in Düsseldorf and Paris. He passed the second state examination in 2015. He is an external lecturer at the National Law University of Ukraine “Yaroslav Mudryi”, where he teaches International Investment Law. He is admitted to the Bar in Switzerland and Germany. Before joining Eversheds Sutherland, Leonid Shmatenko worked as an attorney at leading law firms in Geneva, Munich and Paris.

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