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On January 17, the Federal Trade Commission (FTC) announced a proposed settlement with Cognosphere Pte. Ltd and its subsidiary Cognosphere, LLC, doing business as Hoyoverse, developer of gacha video games such as Genshin Impact and Zenless Zone Zero, over allegations that Hoyoverse’s loot boxes and children’s data collection practices violated various federal laws. What is a gacha video game? Generally, a “gacha” video game is one that can be downloaded and played for free but is monetized by selling in-game currency that can be spent on chance-based rewards, which the FTC refers to as “loot boxes.” The loot box rewards range from playable characters to cosmetics to equipment for specific characters, but the reward a player receives is based on chance (e.g., one percent chance to receive X reward) and which reward a player received is revealed only after the player has paid to open the loot box. In games such as Genshin Impact, certain rewards are often featured and available for limited periods of time. For example, if a new character is introduced into the game, the character is typically only available as a rare loot box reward for, say, three weeks. The character is not available for direct purchase, and if the player misses the character as a reward, a rerun of the character as a loot box reward may not happen for months or even years. According to the FTC, this causes players to “purchase dozens of loot boxes, at the cost of hundreds of dollars,” to obtain the featured characters within the limited availability time frame. What did Hoyoverse allegedly do? According to the FTC’s complaint, Hoyoverse violated the FTC Act by misrepresenting the odds and cost of their loot boxes and violated the Children’s Online Privacy Protection Act (COPPA) by failing to provide notice to and collect sufficient consent for children younger than 13 years old.

• The FTC Act

The FTC claims that Hoyoverse violated the FTC act by making false or misleading representations in advertisements, marketing, and promotions about the odds of obtaining a particular reward in a loot box. For example, Hoyoverse’s social media ads claimed that certain rewards would have a “huge drop-rate boost,” when in reality, the purported “boost” in odds was referring to a featured prize being available to obtain “at all” during the limited availability period, “while the underlying odds of obtaining the featured prize remain[ed] the same.” So, the odds for the reward essentially went from zero percent to the standard percent for the given reward tier (e.g., 5-star rewards may be one percent). The FTC further claims that Hoyoverse’s loot box system constitutes an unfair act or practice, because purchasing a loot box requires the player to navigate a “complex and confusing multi-tier virtual currency exchange system” to purchase a loot box. This system typically requires the player – including children and teenagers, according to the FTC – to purchase in-game currency with actual money and transform that in-game currency into other in-game currency, sometimes multiple times, before being able to purchase a loot box. This multi-tier virtual currency system poses an increased risk for children and teenagers, “whose executive function skills are not yet fully developed” and therefore are “particularly susceptible” to the system’s monetization and pressure to spend money on virtual currency. As such, because children and teenagers can purchase virtual currency in the multi-tier system without first obtaining parental consent to such purchases, the FTC alleged that the system, in the context of children and teenagers, violated the FTC Act as an unfair act or practice.

• COPPA

According to the FTC, Hoyoverse’s Genshin Impact is covered by COPPA because it is an online service directed to children, and Hoyoverse had actual knowledge that it collected personal information from children under the age of 13. The FTC alleged that Genshin Impact is directed to children under 13 because, in part, the game features matter, visual content, animated characters, and activities that are directed to children. For example, the gameplay and subject matter revolve around exploring, role-playing and collecting a team of heroes, and “engaging in fantasy combat with no blood or gore,” which the FTC claimed are all mechanics like those in other games “popular with children.” And Genshin Impact’s use of anime-style cartoon graphics and colorful animation, according to the FTC, further emphasizes the game’s appeal to children. In particular, Hoyoverse’s use of child-like characters such as Paimon and Klee in promotional materials (e.g., the game’s icon in app stores) serves as evidence of the game’s appeal to children. Despite the applicability of COPPA to Genshin Impact, Hoyoverse failed to satisfy COPPA’s requirements. Specifically, the FTC alleged that Hoyoverse violated COPPA by:

1. Failing to provide notice on their website or in Genshin Impact of the information collected from children, how they used that information, and to whom they disclosed the information;
2. Failing to provide the above information directly to parents; and,
3. Failing to obtain consent from parents before collecting personal information from children.

In addition, because violations of COPPA can constitute an unfair or deceptive act or practice under the FTC Act, the FTC also included such a violation amongst their COPPA-related allegations. What does the $20 million settlement obligate Hoyoverse to do? To settle the FTC’s claims against Hoyoverse, Hoyoverse entered into a proposed settlement order, which will require Hoyoverse to pay a $20 million fine and make changes to address the allegations in the complaint. Hoyoverse will be:

• Prohibited from allowing children under 16 to purchase loot boxes in Genshin Impact or other Hoyoverse video games without a parent’s affirmative express consent;
• Prohibited from selling loot boxes using virtual currency without providing an option for consumers to purchase loot boxes directly with real money;
• Prohibited from misrepresenting loot box odds, prices, and features;
• Required to disclose loot box odds and exchange rates for multi-tiered virtual currency;
• Required to delete any personal data previously collected from children under 13 unless they obtain parental consent to retain such data; and,
• Required to comply with COPPA, including its notice and consent requirements.

Key takeaways? While much of the FTC’s complaint and proposed settlement order references loot boxes in the alleged violations, the FTC’s allegations are more focused on how Hoyoverse promoted and operated its loot box system and to whom they were selling loot boxes. First, if a video game company seeks to monetize their game using loot boxes, the company should consider whether their advertising and promotional material obscures or otherwise inaccurately details the odds of winning a particular reward. For example, there is greater risk in saying a particular reward is “boosted” or its odds are “increased,” when the odds are going from zero percent to the usual percentage rate for a given reward rarity. Second, if a video game uses anime-style graphics, child-like characters, and no blood or gore, the video game should consider satisfying COPPA’s obligations, which may include informing children and parents about the game’s information practices and collecting consent from parents to collect such information. Lastly, if the game sells loot boxes to children under 13 and teenagers under 16, the game may need to satisfy a parental consent requirement before allowing either the children or teenagers to purchase virtual currency or loot boxes.