Federal Court Rejects Online Gambling Lawsuit Against Valve–McLeod v. Valve

This lawsuit alleged that Valve “allowed an illegal online gambling market” based on its videogame Counter Strike Global Offensive (CSGO) and its Steam platform, an online marketplace where players can buy and sell virtual items and make payments. This lawsuit is similar to ones brought against Machine Zone and Big Fish. Both of those lawsuits were dismissed and are pending on appeal.

Here is the court’s description (citing the complaint) of how players participate in, and gambled via, the marketplace, and Valve’s involvement in the process:

CSGO players can purchase CSGO Skins (Skins), virtual weapons with different “textures” that can be used during gameplay, through Steam. Skins can then be “traded and used as collateral for bets placed on Skins Gambling Websites through linked Steam accounts.” Plaintiffs contend that Skins are like casino chips that have monetary value outside the game itself because of the ability to turn Skins directly into cash through these third-party gambling sites. All Skins are “put into a large pool, and one winner is chosen at random to take all of the Skins.” These Skins can then be sold and converted into cash. Valve allegedly takes a 15% fee on the sale of each Skin through its Steam marketplace and Skins allegedly “never actually leave Valve’s servers.”

In addition to Valve, plaintiffs sued a third party service (CSGO Lotto) that allegedly allowed gambling. Plaintiffs, proceeding as a putative class, brought numerous state law claims plus a single federal law claim: a RICO claim.

The court says that plaintiffs failed to meet the RICO standing requirement. Ninth Circuit RICO jurisprudence makes clear that “gambling losses are not sufficient injury to business or property for RICO standing.” Plaintiffs tried to buttress their RICO standing by pointing to other malfeasance by defendants, but the court says neither of these are sufficient:

• state law and common law gambling violations
• separate or additional allegations of fraud or dishonesty (the CSGO Lotto CEO’s alleged failure to disclose his ownership interest when he promoted the service)

Plaintiffs also alleged state law claims, but the court says it does not have jurisdiction over these claims. There is no diversity jurisdiction. The court says plaintiffs’ allegations fail to satisfy by a preponderance of evidence that the amount in controversy exceeds $5,000,000 (to support jurisdiction under the Class Action Fairness Act). Plaintiffs said it is “common sense” that (1) CSGO is popular and (2) Valve allegedly made more than $567M in revenue from CSGO last year, so plaintiffs must have over $5 million in damages. The court says these speculative allegations are insufficient. Given the dismissal of state law claims on jurisdictional grounds, plaintiffs can re-file these claims in state court.

__

This lawsuit received a lot of attention when it was filed. Unlike the other online gambling lawsuits that merely dealt with purchases of in-game virtual property, Valve allegedly promoted (or its platform “powered”) actual gambling sites where people were clearly betting on the outcome of games. The other lawsuits turned on whether buying a chance to receive valuable in-game property constituted gambling, but this lawsuit seemed different, given the use of Valve’s platform. Indeed, the attention led to Valve issuing cease and desist letter to actual gambling sites who utilized the Steam platform. (See Valve Issues Cease And Desist Letter To 23 Counter-Strike Gambling Sites.)

The big question was how a RICO claim—widely viewed as a tool of choice for crackpot internet commenters—would play out. Apparently the court did not think much of it. The decision will likely be appealed. It will be interesting to see what the Ninth Circuit does with it. Although it wasn’t addressed in this ruling, I’ll note that section 230 may have been another hurdle to plaintiffs trying to hold Valve liable for the actions of participants on its platform.

NB: Valve brought a motion to compel arbitration, but since the court resolved the case on CSGO Lotto’s 12(b)(6) motion, it does not resolve the arbitration issue.

Added: “Valve ordered to stop all gambling-related skin transfers by Washington State Gambling Commission” (The Esports Observer)

Case citation: McLeod v. Valve Corp., 2016 U.S. Dist. LEXIS 137836 (W.D. Wash. Oct. 4, 2016). The initial complaint.

Related posts: Big Fish’s Virtual Casino Doesn’t Violate Washington’s Gambling Statute