FTC Takes on Genshin Impact | Loot Boxes, Dark Patterns, and Legal Showdowns

In this episode, Richard Hoeg examines the FTC's lawsuit against Genshin Impact, focusing on loot boxes and transparency. He discusses the FTC's charges, including concerns over "dark pattern tactics" and COPPA compliance, and the implications for free-to-play games. The episode explores Hoyoverse's business practices, misleading loot box disclosures, and the FTC's authority under sections 5 and 6g. Richard also addresses marketing to children, settlement terms, and the broader impact on the gaming industry, concluding with a look at internal FTC debates.

Episode Transcript

(00:14):
Hello, and welcome to another episode ofVirtual Legality.
I'm your host, Richard Hogue, managing memberof the Hogue Law Business Law Firm of
Northville, Michigan.
And on your screen right now is the landingpage for a very popular video game called
Genshin Impact, which allows players topurchase loot boxes to gain heroes to explore a
world very similar to Zelda or games like it.

(00:36):
It is also the subject of what may be thebiggest story in video games that as best I can
tell, really no one is talking about.
So let's talk about it here.
On January 17th this year, the Federal TradeCommission of the United States issued both a
press release and a legal complaint document, alawsuit against the makers of Genshin Impact,

(00:59):
which is headlined as follows.
Genshin Impact game developer will be bannedfrom selling loot boxes to teens under 16
without parental consent, pay a $20,000,000fine to settle FTC charges, and it's
subheadlined as game developer Cognosphere,which was not a name that I recognized, but is
apparently the legal name of the entity thatoperates in the, US under the name Hoyoverse,

(01:24):
allegedly unfairly marketed loot boxes tochildren that obscured real costs and misled
all players about the odds of obtaining prizes.
And for those of you that are regularly in thisspace, you know that virtual reality has
covered a lot of the discussion regarding lootboxes.
The ability to purchase boxes that you don'tknow what is in, and get something that is used
in your game, whether it's cosmetics or in thiscase heroes, as well as potential cosmetics.

(01:50):
And whether or not that is gambling, whether ornot that should be legal in the United States
or other jurisdictions.
And in the videos that I did in virtualreality, I told you that from a legal
perspective, it probably wasn't gambling as weknow it, because what you were getting out of
these loot boxes was not of individual value.
It could be of psychological value to theplayer that wants the 5 star hero, that wants

(02:11):
whatever the fancy cosmetic is for Overwatch,which I think was the game that we were
discussing when we first talked about this invirtual legality.
But it wasn't transferable, it wasn't sellableon a separate market.
And so US gambling laws, and most jurisdictionsgambling laws, would say, yes, you're putting
money into this slot machine type thing, butyou never have any understanding of getting

(02:32):
anything out.
So it's not really gambling.
There's nothing we can do about it.
But the Federal Trade Commission has a broaderambit.
It has some authority that is stillcontroversial.
It's still under contention from various sidesof the US government that we will talk about as
part of this video, but it has some authorityto go and say that thing that you're doing is
bad.
It's unfair.

(02:52):
It's deceptive.
What have you, and we are going to stop it.
And that is the premise of this lawsuit thatwe're gonna talk about today, and it very well
could lead to a complete change in businessmodel and the way loot boxes fun fun video
games, especially free to play video games inthe United States.
I have my doubts that that will happen off ofthis, but I think it's important to discuss.
So let's read what they were charged with.

(03:14):
The maker of the video game, Genshin Impact,has agreed to pay 20,000,000 US dollars and to
block children under 16 for making in gamepurchases without parental consent.
To settle Federal Trade Commission allegations,the company violated a children's privacy law
and deceived children and other users about thereal cost of in game transactions and odds of
obtaining rare prizes.
And having played Genshin Impact and other freeto play gotcha based games like Genshin Impact

(03:40):
on my consoles and otherwise, I was actuallysurprised to see this headline and this
complaint because Genshin Impact and theHoyoverse games that I have played have a lot
of the percentages and a lot of the informationfor what's in a loot box and what your chances
are of getting something from a loot boxavailable in game.
It does take a few menu presses to get to, andI could understand why that could be of concern

(04:01):
to US agencies.
But I was surprised to see this particularlawsuit because I generally think of the
Hoyoverse games as pretty transparent or moretransparent than like games in the App Store
for instance.
The quote here is that Genshin Impact deceivedchildren, teens, and other players into
spending 100 of dollars on prizes they stoodlittle chance of winning, said Samuel Levin,

(04:24):
director of the FTC's Bureau of ConsumerProtection.
Now that raises an eyebrow for me just at thestart because what the Federal Trade Commission
should be most concerned about here, what itsprimary ambit is is deception on these kinds of
things.
So this quote sounds to me like the FederalTrade Commission actually has an issue with how
low the rate of getting 5 star heroes is in theloot boxes in Genshin Impact, which seems

(04:47):
separate to me from telling you whether or notthose percentages are accurate.
Companies that deploy these dark patterntactics, put a pin in that, will be held
accountable if they deceive players,particularly kids and teens, about the true
costs of in game transactions.
So the 2nd eyebrow raise for me in this quoteis that phrase dark pattern tactics, which

(05:08):
we've seen the Federal Trade Commission overthe last few years use to say, well, any given
part of this might not be illegal, butaltogether you have the ability to put people
in places that is disadvantageous to them, andwe find these dark patterns to maybe be an
unfair practice on its own.
That seems to be a couple of steps removed fromwhat their actual authority is under the law.

(05:29):
We'll talk about that in just a minute.
But I'm also concerned with this quote becauseit focuses on kids and teens.
And generally speaking, the law isn't writtento just focus on where children and teenagers
can be most impacted.
We don't write our economics rules or ourbusiness operations rules to say, well, a child
could be very confused by this.

(05:49):
Now the difference there is COPPA, which wewill talk about.
That's the children's privacy law referencedabove.
But outside of that, I've already got myeyebrows raised just from this quote, and we're
gonna take a look at this complaint document aspart of this entire press release in this
video.
A complaint filed by the Department of Justice,that's the United States government, upon
referral from the commission alleged thatSingapore based Cognisphere Private Limited and

(06:14):
its California based subsidiary CognisphereLLC, which do business in the United States as
Hoyoverse, actively marketed Genshin Impact tochildren and collected personal information
from them in violation of the children's onlineprivacy protection rule, COPPA.
Now this is actually an inaccurate rendition ofthis.
COPPA is a statute.
It's a law.
The rule promulgated by the FTC under COPPA isthe COPPA rule, not COPPA itself, but that's

(06:40):
okay.
It's just an FTC press release.
That's fine.
The complaint further charged that Hoyoversedeceived players about the odds of winning
particular sought after 5 star loot box prizesand how much it would cost to open loot boxes
to win the prizes.
It also alleged that the confusing virtualcurrency system that players had to navigate to
open loot boxes and the marketing and promotiontactics used to entice players to open loot

(07:02):
boxes were unfair to children and teenagers.
Now this whole paragraph labels a lot of thingsas potentially problematic for Genshin Impact,
but in my eye the biggest issue here is thatalmost every free to play game that funds
itself even remotely similarly to GenshinImpact would fall a foul of at least the broad

(07:22):
description included in this paragraph, thatthey use multiple currencies to get you to
where you need to have the currency to buywhatever their loot box is and whether it's
called a wish or a prayer or what have you inthese various different games.
It's going to have this kind of multi tieredcurrency concept.
So this is why I wanted to raise this with youall today is because it looks like the FTC is

(07:43):
using Genshin Impact as a front runner for thisparticular claim, but it wouldn't end at least
if this complaint and settlement is agreed to,with just Genshin Impact.
The Genshin Impact was selected to be used forthis purpose, but primarily because it was so
successful in my eyes and because honestly in2025, it is located or headquartered in China,

(08:09):
which is its own separate kind of ball of waxfrom political spectrum kind of approach for
the FTC and every other US government agency.
But that said, let's take a look at thecomplaint itself.
So here is the complaint filed by the UnitedStates of America against Cognisphere, both
entities that we saw described in the pressrelease.

(08:31):
It says, plaintiff, Federal Trade Commission,brings this action for defendant's violations
of section 5 a of the Federal Trade CommissionAct, which we've talked about before, COPPA,
the statute, and the COPPA rule, which is arule promulgated to interpret the statute for
purposes of the FTC making actions like thisone.
Now 5 a jumps out at you if you've been invirtual reality with us for any length of time

(08:54):
because this is the section of the law wherethe Federal Trade Commission is given authority
to essentially police deceptive and unfairacts, but it does have some rules around it.
Unfair methods of competition, that's theantitrust side of things that we talked about
with topics like Activision Blizzard, andunfair or deceptive acts or practices, which is

(09:15):
what's at issue here, are hereby declaredunlawful.
Thanks, Congress.
That's great.
What does that mean?
The commission is hereby empowered and directedto prevent persons, partnerships, or
corporations, except a few, from using unfairmethods of competition in or affected commerce
and unfair or deceptive acts or practices in oraffected commerce.
So we declare these things that are otherwisenot terribly well defined right here as

(09:39):
unlawful, illegal, those things are a violationof our laws, and then we empower the Federal
Trade Commission, here just the commission, togo and police those things.
Prevent people from engaging in unfair methodsof competition and unfair or deceptive acts or
practices.
Now that's pretty straightforward, except thatwithout definitions, we don't exactly know what
the Federal Trade Commission is allowed to do.

(10:00):
So at the very end of this long list of laws,we see that there is at least some guardrail
put on what the Federal Trade Commission canenforce here.
It says the commission shall have no authorityunder this section to declare unlawful an act
or practice on the grounds that such act orpractice is unfair, unless the act or practice

(10:21):
causes or is likely to cause substantial injuryto consumers, which is not reasonably avoidable
by consumers themselves and not outweighed bycountervailing benefits to consumers or to
competition.
So we'll see this phraseology come up again inthe complaint, but it's important to note that
when we're talking about what the Federal TradeCommission can do, they don't have a lot of

(10:44):
guardrails, but they do have one, which is tosay that you're only supposed to talk about
unfair things if consumers can't protectthemselves, and there isn't a competitive
reason for whatever business we're talkingabout here, the makers of Genshin Impact, to do
what it is they are doing.
And that'll be a part of this complaintdocument that we will definitely discuss.
So back to the document, we're gonna talk aboutGenshin Impact.

(11:07):
Genshin Impact is popular among children andteenagers, some of whom who have spent 100 or
1,000 of dollars to obtain select chance basedprizes in the game, to their parents' surprise.
Now that's an interesting sentence in and ofitself because as far as I'm aware, the only
way to really get Genshin Impact virtualcurrency is through a credit card payment
system, either through your console or yourphone, and people might come into the comments

(11:32):
here and say something else about gift cards.
That might be the true as well, but the pointof purchase I would assume that almost all of
these transactions are happening through creditcards.
And what's interesting about that for purposesof our conversation is that credit cards are
generally thought to be a good indicia in theUnited States of an adult, certainly not anyone
that is under the age of 13, which is whatwe're talking about with respect to this rule.

(11:53):
The game features anime style cartoon graphics,bright and colorful animation, and several
heroes who have the speech or appearance ofchildren.
And this sentence is included because as we'llsee when we look at the copper rule a little
bit more closely, what's important here is thatthe game or online service is directed to
children, that's people under the age of 13,non teenagers.

(12:14):
And in order to establish that, the FederalTrade Commission basically has to say, well,
you used cartoony graphics, you used childrenin various roles, you used children like
voices, you used children facing influencersand things of that nature.
And so it becomes a very complicated analysis.
It's all fact based.
It's very difficult to fight one way or theother.
We saw this when YouTube started imposingvarious copper rules on its creators in this

(12:38):
space.
I did a series of videos in virtual reality onthat.
You can check that out on this channel.
But it is a kind of controversial, somewhatambiguous state of affairs, but they that's how
they're describing Get Your Impact becausethey're trying to establish that it is a
service directed at children, not justincluding children in the audience because
that's obvious enough when you're talking abouta video game, but actually directed at

(13:00):
children.
Defendants have also engaged in unfair businesspractices relating to loot box transactions in
Genshin Impact.
1st, defendants sell players virtual currencythat can be used to purchase loot boxes only
after engaging in a complicated and confusingseries of transactions involving multiple tiers
of currency with different exchange rates.
This serves to obscure the true amount of moneythat players are spending on the game and the

(13:22):
true amount that players must spend to obtainrare loot box prizes.
Now if you've played any free to play game atall in video gaming, you know that a number of
these services use different currencies toobscure the amount of real money that you have
spent or will spend.
That's obvious enough.
Whether or not that's unfair, whether or notthat's in and of itself deceptive is going to

(13:45):
be an argument for policymakers, forlegislatures around the globe.
But here, the Federal Trade Commission issaying because we have this broad ability to
fight unfair practices to to unfair businesspractices and deceptive practices, that we can
declare that loot boxes in this configurationare themselves illegal, and that's going to be
a bit of a sticking point for at least 1commissioner that we'll see at the end.

(14:08):
They talk about the jurisdiction of this case.
That's pretty obvious.
They talk about section 5 of the FTC act thatsays, under the act, we can prohibit unfair and
deceptive acts and practices in or affectingcommerce.
And then CAPA, which says to protect the safetyand privacy of children, we prohibit the
unauthorized or unnecessary collection ofchildren's personal information by operators of
Internet websites and online services,specifically those directed towards children.

(14:32):
CAPA directed the commission to promulgate arule implementing CAPA.
We call that the COPA rule.
The COPA rule applies to any operator of acommercial website or online service directed
to children and to any operator of a commercialwebsite or online service that is actual
knowledge that it is collecting or maintainingpersonal information from children.
More on that in a minute as well.
The rule requires an operator to meet specificrequirements before collecting online using or

(14:55):
disclosing personal information from children,including but not limited to, and they put
forth a set of instructions here, but we canlook at the rule itself.
Part 312, the children's online privacyprotection rule, which states, first and
foremost, that a child means an individualunder the age of 13.
So for purposes of COPPA, we're talking aboutnon teenagers, people below the age of 13, and

(15:18):
when we're talking about who is impacted bythis rule, we are talking specifically about a
commercial website or online service that istargeted to children.
In determining whether something is directed tochildren, the commission will consider its
subject matter, visual content, use of animatedcharacters or child oriented activities and
incentives, music or other audio content, ageof models, presence of child celebrities or

(15:44):
celebrities who appeal to children, language,or other characteristics of the website or
online service, as well as whether advertising,promoting, or appearing on the website or
online service is directed to children.
The commission will also consider competent andreliable empirical evidence regarding audience
composition and evidence regarding the intendedaudience.
So if they had emails at Hoyoverse saying, hey,we want only people under the age of 13 to play

(16:07):
this game, or if they had a set of analysisdocuments that said that the only people
playing Genshin Impact were under the age of13, they could use that as essentially
subjective evidence that that was the purposeof this game being created and marketed in the
way that it was.
A website or online service that is directed tochildren under the criteria set forth in
paragraph 1, the one we just read, but thatdoes not target children as its primary

(16:31):
audience shall not be deemed directed tochildren if it does not collect personal
information from any visitor prior to collectedage information, so if there's an age gate, and
it prevents the collection, use, or disclosureof personal information from visitors who
identify themselves as under 13 without firstcomplying with notice and parental consent
provisions.
So if they use an age gate and then blockedeveryone out that said they were under 13, then

(16:54):
that might get them out of all of this COPPArule stuff, but Genshin Impact doesn't do that
at least as alleged by the FTC.
And so they find themselves having to acquirewith the following.
It shall be unlawful for any operator of awebsite or online service directed to children
to collect personal information from a child ina manner that violates the regulations
prescribed under this part.

(17:15):
And what are those regulations?
An operator must provide notice on its websiteor service of what information it collects from
children.
It must obtain parental consent prior to anycollection, use, or disclosure of personal
information from children.
It must provide a reasonable means for a parentto review the information collected.
It must not condition a child's participationin a game, the offering of a prize, or other

(17:38):
activity on the child disclosing moreinformation than would be reasonably necessary
to participate, and it will establish andmaintain reasonable procedures to protect the
confidentiality, security, and integrity ofpersonal information collected from children.
So long story short, if you find yourselfoperating a website or application that is
directed to children, as the FTC mightdetermine, and here we see it's if you're using

(18:01):
cartoon characters or cartoon characters thatfeature children, then we're likely to find
that at the FTC, then you have to providenotice on the web of how you use children's
information, and you have to get verifiableparental consent prior to the collection of
data from children.
Now you also have the option of using an agegate to try to get out of all of this entirely,
but it's important to note that the FTC isultimately the ones that are deciding whether

(18:24):
or not you are directed to children.
It's all kind of hand waving.
It's all feels.
It's all vibes as my cohost of the bit cast atSeasoned Gaming, Ainsley Bowden might say.
But when we get right down to it, it'sinteresting because one of the ways that you
can have verifiable parental consent under thisrule is that you can require a parent in

(18:45):
connection with a monetary transaction to use acredit card or other online payment system that
provides notification of each discreettransaction to the primary account holder.
And because the way that you buy things inGenshin Impact and basically every other gotcha
or free to play game that I'm aware of is touse a credit card either told to your phone
operator or your console operator, this wouldseem to be mostly covered by the way that you

(19:10):
actually have to buy things through thoseplatforms, but that's not enough for the FTC at
this point.
So they go through the COPPA rule, they say theplaintiff is us, the FTC, the defendants are
the Hoyoverse, and we see them describe it asoperating as the Hoyoverse in trade in the
United States since at least February of 2022.
They're acting together so we can have boththese defendants on the same claim, and then

(19:34):
what do they do?
They make Genshin Impact.
Genshin Impact launched in September 2020 andquickly grew a large following including among
teenagers under 18 years old and children under13 years old.
Now important to note here is outside of theCOPPA rule, which we will discuss first as part
of this complaint, the unfair businesspractices and the deceptive trade practices

(19:55):
that we discussed in the Federal TradeCommission Act don't actually have a separate
requirement for children and teens over regularconsumers in the economy.
So the FTC is putting the copper rule issuehere first and foremost in an effort, in my
opinion, to get to a place where they can saythese deceptive acts are deliberately targeting

(20:16):
children.
We know this because they weren't they weren'tfollowing the COPPA rule like they were
supposed to be.
And that presents a unique situation here toprotect these children in this case, even
though our ambit doesn't specifically talkabout separating out different sophistication
levels amongst the economy members.

(20:37):
So it's a confusing set of complaint documentshere, but you can see what they're trying to
do.
The copper rule 1 is gonna be the more clear asa violation, so they're starting there.
Through the Genshin Impact online service,Hoyoverse collects players personal information
as defined in the Copper Rule.
Unlike many other popular video games, GenshinImpact does not screen players ages by way of

(20:58):
an age gate.
So one thing if we're looking at this from asecond order kind of analysis is that you can
expect more of your gacha based games, more ofyour free to play games if you're a video
gamer, to have age gates put on them.
Now those are of limited effectiveness in myopinion.
You state what year you were born.
There's no other verification methods, but therule itself does allow for having something

(21:20):
with an age gate that doesn't collectinformation from people that say that they are
under the age of 13 to otherwise not be treatedas something directed at children.
So you might see more of those age gates as avirtue of this settlement and complaint
document.
Then they assert that Genshin Impact isdirected to children under age of 13,
particularly because of these animatedcharacters and influencers who appeal to

(21:44):
children.
Genshin Impact includes visual content thatappeals to children such as anime style cartoon
graphics and colorful animation.
Now this is a reasonable minds can differ kindof supposition but I'm not sure that anime
cartoon graphics specifically appeal tochildren over and above anyone else.
Again, I think this is an aspect of the UnitedStates government and most other governments,

(22:05):
if we're being honest, not really growing withthe times, not having legislatures that are
fully aware that video games and anime andcartoons are very much appreciated by people
that used to be kids, admittedly, but are nowmuch older in the environment.
And further, I think Genshin Impact, here wesee a picture of one of their new heroes, a
shareholder of the Isa bathhouse, is a clinicalpsychologist dedicated to the dispersal of

(22:30):
nightmares and to bringing people peace ofmind, does not to me look like a character
aimed at children.
Reasonable minds can differ.
She is a cartoon, but she seems to be aimed atan entirely different audience than people
under the age of 13.
But again, that's just me.
Genshin Impact includes visual content thatappeals to children such as that anime style

(22:52):
cartoon graphics and colorful animation, andthen they use the Genshin Impact mascot,
Paimon, here to indicate that this is a childand a childlike voice that is also very
approachable for children.
Genshin Impact Paimon icon is used in the AppleApp Store.
You see here the cute force, which may or maynot be appealing to children specifically.

(23:14):
Many of the paid influencers used by Hoyoverseappeal to and are popular among children.
For example, some of these paid influencers wonor were finalists for categories relating to
gaming and online media at the NickelodeonKids' Choice Awards.
Some influencers hired by Hoyoverse to promoteGinkrin Impact became prominent by making
content associated with games and activitiesthat are popular among children, such as the

(23:35):
video games Minecraft and Roblox.
Interestingly, that particular argument isessentially guilt by association.
So you hired influencers that were known forplaying Minecraft, were known for playing
Roblox.
We are at least by supposition here indicatingthat Minecraft and Roblox are things directed
at children.
And so if you use those influencers, we'regonna have you be guilty of this particular

(24:00):
claim because you used influencers of thatparticular ilk.
At times, Hoyoverse has encouraged theseinfluencers to engage in child oriented
activities within the Genshin Impact gameitself, such as a hide and seek event within
the game.
Again, you can see how this set of evidence isat least subject to interpretation.

(24:21):
Right?
Yes, it has cartoon characters.
Yes, it has, in my opinion, a rather annoyingmascot type character that is your tutorial
advisor.
I think this is the same way it's annoying inthe Zelda games where you have a little fairy
do that for you.
But Zelda isn't trying to sell gotcha lootboxes and so they don't find themselves in this
particular quandary here.
Playing hide and seek can get an impact as apicture.

(24:44):
Hoyoverse is knowing they collect, use, anddisclose children's personal information.
In many instances, HoYoVerse has become awarethat HoYo Lab users are children.
Some users have stated or indicated incommunications reviewed by HoYoVerse that they
were under 13 years old, for example, in socialmedia postings on HoYo Lab, or in posted
photographs, videos, or audio files containingthe child's voice from which it was apparent

(25:08):
that the user was a child.
HoYoVerse has, in some instances, taken limitedand insufficient corrective steps when it has
discovered a post by a child, such as removingthe posting question and muting the user from
posting on the HoYo Lab social network, butwithout deleting or seeking verifiable parental
consent for the use or disclosure of otherpersonal information of the child already

(25:29):
collected.
And this paragraph rubs me again the wrong way,if only because it seems to indicate that if
you take any steps to prevent these underageusers of your system or service, from
interacting on your system or service, thenthat's gonna be used against you in a court of
law.
And so you're better off just ignoringeverything, not moderating this particular

(25:51):
system at all because any kind of half stepmeasures, any moderation that you do will be
used as essentially indicating actual knowledgeof people under the age of 13.
Now I don't know if the FTC is familiar withthis, but there are a lot of people that are
over the age of 12 that act a fool in socialsettings, and there are a lot of people with

(26:11):
voice changers that you can't tell just fromthe voice that is being broadcast to you on a
microphone what age they actually are.
Now I am sure that the FTC would not include aparagraph like this unless it had some kind of
silver bullet proof somebody says they're under13, they have a audio confirmation of it, all
the analysis indicates they are under 13, andHoyoverse ignored it.

(26:32):
But as even assuming that that is in fact thecase, I think it sets the wrong precedent for
these game makers to say, alright, we shoulddefinitely not do this.
We should not discover a post by child, removethe post, mute the user.
That's not gonna be deemed enough.
We should just let them go, let them ridebecause anything other than that is going to be
imputed actual knowledge that they are under 13on our behalf and get us into a $20,000,000

(26:57):
jam.
In December of 2022, after becoming aware ofthe FTC's investigation in this matter,
HoYoVerse added a children's notice as thesecond to last section of its privacy policy.
That little detail is included to indicate thatit wasn't good enough, but they included this
paragraph towards the end of a privacy policythat they know everybody's going to scroll
through.
But from a lawyer's perspective, I look at thisparticular paragraph and say, yes, this is what

(27:20):
I would expect one of these services to have init.
This is the kind of language I would draft forterms of use of a website or service like
Genshin Impact.
It says, our services are not marketed to orintended for children.
Children for the purposes of our services are,a, under the age of 13 years old or, if older,
between 13 18 years old, but under the age atwhich they can give valid digital consent to

(27:43):
processing of their personal information underapplicable data privacy laws.
Right?
Outside the United States, we don't know whatyour data privacy laws say.
We're really only concerned about teenagers andkids.
That's what the FTC has told us on this score.
So we're gonna include this paragraph.
It says, look.
We're trying to comply with laws.
We strive to follow the different minimum ageguidelines set by the laws of individual
regions when determining the age that childrencan access certain features of our services.

(28:05):
And the FTC says, this is essentially anindicia of guilt.
Right?
We started investigating you and you includedthis paragraph.
Obviously, the lawyer in here should have said,we intend to comply with all data processing
and have language like this at the very startof the service as applied in the United States
and any other jurisdiction.
That it didn't is maybe its own indicia ofproblems at the company.

(28:26):
I'm not gonna sit here and tell you that's notthe case.
But to use its inclusion here in a legaldocument as evidence of guilt, again, seems to
have the same problems as using their minimalmoderation as evidence of guilt to indicate to
the entire field of free to play gamedevelopers and designers in the United States
that you shouldn't try to do anything becauseanything that you do to try to correct issues

(28:49):
now, especially if you've been operating forsome time, is gonna be used as evidence against
you.
Now we have to talk about their businesspractices regarding currency and loot boxes.
So that's COPPA.
Right?
They say this is directed to children.
They collected information from children.
They didn't stop collecting information fromchildren, and so they're in trouble with the

(29:10):
COPPA rule and the COPPA law.
Honestly, looking at this particular complaint,I think that that's the strongest thing that
we're going to see in this document.
It does appear that as long as you allow forthe Federal Trade Commission's interpretation
of what a service directed to children is, thenit appears that at least as alleged in this
particular complaint document that Hoyoverseand Genshin Impact was violating the spirit, if

(29:35):
not the letter, of the COPPA rule and COPPAlaw.
So that one seems to be the clearest, but italso seems to be the Trojan horse in this
particular complaint document.
We're not so interested in COPPA violationsbecause we've seen those before.
We've seen YouTube have to settle it.
We've seen other services have to settle COPPAissues.
We see that they were not including the properlanguage in their services when they started

(29:57):
offering it in the United States.
They include it now, but that's not good enoughfor the Federal Trade Commission.
It probably shouldn't be.
But here is what they really wanna talk about.
They had a conference on loot boxes.
They know that loot boxes probably aren'tgambling in the United States or in the various
states of the United States.
They know that that's an issue for them becausethey know a lot of people dislike them, and you

(30:18):
are welcome to dislike them here in thecomments or otherwise on this channel.
On a policy prescription kind of standpoint,I'm generally in favor of allowing different
business models in video gaming and other mediabecause I think it does bring more people into
this particular hobby, and I think it allowsfor folks that maybe don't have enough money to
spend as a front end cost for a $70 video gameor what have you to still engage with these

(30:43):
particular pieces of content.
I find that, in my opinion, to be competitive,to broaden the market and allow different
people to pay in different forms or fashionsfor the games that they wanna play.
And certainly, as you've heard me talk about onthe bit cast, my daughter and I have thoroughly
enjoyed playing Infinity Nikki, which is one ofthese gotcha based games, in this case about

(31:05):
fashion, in a world much like Genshin Impactwhere you explore and solve mysteries for
people while otherwise engage gauging infashion type activities at the same time.
That that's a good thing, that that's amazingwhat kind of production values you can get in
gaming without an entry cost because of thesevarious business models, but I'm equally

(31:25):
understanding of the opposite tact that saysthey're taking advantage of people that maybe
have more addictive personalities, that maybehave a bigger susceptibility to gambling with
respect to these business models, and somethingshould be done.
In my opinion, what should be done if that's anissue and that you can convince enough of your
legislature members that that is an issue is toactually write a law about it and not to try to

(31:47):
kind of backfill in an almost ancient law inthe Federal Trade Commission Act and say that
now we're going to declare this to be unfair,but reasonable lines can differ on that.
So let's talk about what the Federal TradeCommission has an issue with.
Heroes have different abilities and roles, forexample, as defenders who shield the player's
team or as attackers who rapidly damageenemies.
Additionally, Genshin Impact makes use of voiceacting, visual elements, and gameplay to depict

(32:11):
the heroes as having distinct identities andpersonalities with which players can relate.
This motivates some players to try to collectspecific heroes with whom they personally
identify or relate.
So this paragraph is designed to try to startshowing you how the makers of Genshin Impact
manipulate its users into wanting to buy lootboxes.
But this paragraph to me reads as they make acompelling product.

(32:32):
Right?
They've put out these heroes.
These heroes have different personalities.
They invested in the art and the voice and thescript for these particular heroes, and many of
the heroes have their own quest lines, and thatmotivates players to buy them.
I'm not hearing anything just yet that causesme to have concern about that as something that
the Hoyover's people are putting out there.

(32:52):
In fact, it strikes me as pro competitive,again, from the business lawyer's point of view
because this is a distinguishing characteristicbetween Hoyoverse, Genshin Impact, and what
others are selling in their loot boxes.
Right?
Overwatch, when we talk about it, is primarily,I think, almost entirely cosmetics, and not
different heroes, which are otherwise offeredto the players.
I believe at this point in time, they changetheir model all the time.

(33:14):
Within the game and in marketing materials,Hoyoverse classifies heroes as having rarities
of either 4 stars or 5 stars, with 5 starheroes being far more powerful and desirable
for players to collect.
Hoyoverse does not make these heroes availabledirectly for purchase, and so the only way that
players can obtain them is by opening lootboxes.
HoYoVerse requires consumers to engage in acomplicated and confusing series of in game

(33:37):
transactions to open loot boxes involvingmultiple types of in game virtual currency with
different exchange rates.
The purchasing process obscures the realitythat consumers commonly must spend large
amounts of real money to obtain 5 star heroes.
Hoya verse provides Genshin Impact players withlimited amounts of free Wish tokens and
primogems exchangeable for Wish tokens.

(33:58):
This introduces players to the experience ofopening loot boxes in the game and provides an
incentive to continue to play the gameregularly.
However, players can easily spend all of thefree tokens and primogems they've accumulated
over the course of many hours withoutsuccessfully acquiring a single 5 star prize.
And like earlier in this particular complaintdocument, earlier in the press release, like I
said, this starts to sound like the FTC isunhappy with the actual rates at which the 5

(34:23):
stars are in the loot boxes, which isdefinitely outside the ambit of their
authority, unless there's some kind ofthreshold percentage that everything in a loot
box should be in order to be deemed not unfairor deceptive.
And that is the exact kind of thing that thelegislature should be solving.
That's a policy prescription.
It's not something that we would ordinarilydelegate to administrative folks in a rule to

(34:46):
say, well, if it's not at least 1%, itshouldn't be advertisable.
Then we have how you top up these things.
So you've got primogems, you've got wishes,you've got genesis crystals.
If you are a player of gen of Genshin Impact,you probably know this already, but suffice it
to say, there's multiple tiers of currency thatall convert into one another in order to

(35:07):
finally get you to purchasing a Wish or lootbox in this particular game.
Considered as a whole, Genshin Impact'sconfusing series of real and virtual currency
rates from dollars to genesis crystals toprimogems to wish tokens to loot boxes in
mismatched and unintuitive denominations servesto mislead consumers, especially children and

(35:29):
teenagers, which again are not a specificallyprotected class under the law, so that's in its
own kind of discussion point, about the amountof money that players spend on loot boxes on an
ongoing basis and the amount of money thatplayers would likely need to spend to obtain
certain prizes.
So it's very complicated, it's confusing, it'sparticularly confusing for children and

(35:49):
teenagers, and so it should be illegal.
Then we have Hoyoverse makes events that createurgency for players to spend tokens in virtual
currency by saying that these 5 star heroeswill only be available while this particular
event is running.
So they make 5 star heroes attractive, Theymake the way to get them confusing, and then

(36:11):
they make the period of availability of theseheroes short to add a sense of urgency for
players to spend money that they wouldn'tordinarily spend.
All of this should be illegal says the FTC.
Then they wanna talk a little bit about the waythat they advertise for this.

(36:31):
So I wanted to raise this story because Ithought it was interesting.
For example, in or about May of 2021, Hoyoversepaid popular influencer, Alia Shalesh, known as
SS Sniperwolf, more than $100,000 to record 2short videos promoting Genshin Impact.
For for the record, the rates at VirtualReality and the Hogla YouTube channel, much

(36:52):
lower than that.
But suffice to say, this person was paid a lotof money, and that's not in and of itself a bad
thing, but they do point out that Hoyoverseprovided SS Sniper Wolf with written
instructions directing her to open loot boxesthe chance to obtain characters featured on the
event banner for whatever was happening thatmonth and to convey that pulling for new
characters is exciting and fun.

(37:14):
That's the kind of thing that you do get whenyou enter into an advertising relationship with
one of these companies.
Hoyoverse also instructed SS Sniper Wolf totout a boosted rate to obtain a 5 star hero,
Zhongli, featured on the event banner.
In May 2021, the SS Sniper Wolf promotionalvideo was released.
It featured a segment in which the influenceropened 12 loot boxes in a row, conveying

(37:37):
enthusiasm and excitement as she had beeninstructed, and won the featured 5 star hero.
She remarked, we are getting way too luckytonight.
I thought we were gonna be here all night, butthe RNG, bussin', I assume there's a verb in
there somewhere, b bustin', indicating herunexpected luck that Genshin Impact had
purportedly dispensed the rare prize to her byrandom chance.

(37:57):
I love this in the actual legal documentbecause that's a crazy quote to include.
The RNG be bustin', and then I like thetranslation here from the FTC indicating her
unexpected luck that Genshin Impact had, andthen eyebrow raise, purportedly dispense the
rare prize to her by random chance.
So I look at this paragraph and say, okay, sois this an accusation of fraud?

(38:18):
Because that's not otherwise included at thetop level of the press release or this
complaint.
In reality, the SS sniperwolf promotional videowas misleadingly edited to depict a fake loot
box prize win in a way that would have beenimpossible in the Genshin Impact game.
For instance, when a Genshin Impact playeropens a loot box containing a 5 star prize, the

(38:38):
game displays a golden shooting star animation.
But in the SS sniperwolf video, the supposed 5star prize win was preceded by a purple
shooting star animation, presumably for a lowerlevel of rarity.
The video also depicted an uninterrupteduninterrupted succession of 12 loot box opening
animations when the game allows no more than 10loot boxes to be opened at a time.

(39:01):
Thus the message conveyed by this video wasthat consumers could obtain rare loot box
prizes more easily and at a lesser expense thanthey likely could in reality, and the video
furthered this message with a deceptivedemonstration of unachievable gameplay.
So this accusation is a lot closer to fraud ordeceptive advertising than anything else that
we see in this complaint, and SS Sniperwolf iscertainly taking strays in this particular

(39:22):
document, but that is the heart of what the FTCis generally allowed to do.
We've talked about that as well in this spaceabout influencers and social media
collaborators, not including when things areadvertisements as much as they should, not
otherwise being as transparent as they need tobe with whatever it is that they are promoting.
And that's what the FTC is known for.
That's the thing that I think they are best atright now in 2025.

(39:45):
Hoyoverse overstates and misleadingly disclosesloot box odds.
This is the one that really surprised mebecause I really do think that their charts are
generally pretty readable.
For example, social media ads have touted ahuge drop rate boost, and Hoyoverse has
instructed influencer promoters to highlightboosted rates or odds if players open loot
boxes during the event banner promotion.

(40:06):
In reality, the purported boost in odds refersto the featured prize being available to obtain
at all during the promotional period, while theunderlying odds of obtaining the featured prize
remains the same.
Now that's kind of confusing sentence in ofitself, and here's an area where I think the
FTC could improve its complaint writing in sofar as when we're talking about what's
misleading and deceptive, it's probablybehooving them or would behoove them to be as

(40:30):
clear and transparent as possible with whatthey mean here.
Obviously, if something doesn't exist before anevent period and then does exist, that in and
of itself from a logical and legal perspectiveis a boost in odds from 0 to whatever the odds
are, but the FTC objects to the fact that thereis an underlying rate of some kind.
The Gatchit Impact game represents thatconsumers can view complete information about

(40:50):
the game's loot box odds by engaging with thedetails menu navigation below the event banner
and navigating through several sub menus.
And this is another area where the FTC hasissues here and with other tech companies about
how many clicks it takes to get to theinformation that you really want and whether or
not that's a dark pattern and in and of itselfshould be deemed illegal, unfair, or deceptive.
The consumer is presented with a promotionalitem subsection which depicts the featured 5

(41:13):
star hero with the phrase increased drop rates,and a statement that this hero's percentage of
5 star item drops is 50% without adequateadditional context.
A second detail sub menu within this interfacestates that the base probability of winning 5
star character is 0.6%, consolidatedprobability including guarantee being 1.6% with

(41:34):
a guaranteed 5 star character at least once per90 drops indicates that the featured hero has a
huge drop rate boost.
A third list of items sub menu similarly statesthe odds of obtaining the featured hero are up
exclamation point, but does not disclose actualor relative rates at which Hoyoverse awards
loot box prizes.
So, obviously, that paragraph sounds likecomplete gobbledygook to any judge or jury that

(41:58):
would look at any of these issues, and Iunderstand why.
But I think if you actually play the game, thatthose percentages do make sense in context to
what you're seeing.
It says that out of 5 star item drops, half ofthem will be the hero that's advertised.
That's the 50% percentage of 5 star item drops.
But that the base chance of any loot box havinga 5 star anything in it is 0.6% with it

(42:21):
becoming 1.6% when they guarantee a 5 star outof every 90 attempts.
So I think it is discernible.
I can certainly understand anybody saying,well, that's awfully complicated, Rick, and
you're a lawyer, and you're a little bit olderthan the people that we're talking about at
issue in this particular case.
I can understand that perspective, but I alwayscaution folks about rulemaking and lawmaking

(42:42):
that is aimed at for the children because ittends to capture practices and things and make
them illegal that really shouldn't be for thebulk of the society that is operating in this
space.
And so that's the direction I come at theseparticular issues from.
You can definitely disagree.
Please feel free to do so in the comments.
But I look at that and say that's pretty clearto me.
In reality, Hoyoverse offers consumers only a0.3%, 3 in 1,000 chance of obtaining the

(43:08):
specific featured hero.
That's what we just talked about.
Right?
It's a 50% drop rate out of a 0.6% chance thatgets you to 0.3%.
That's how I read it.
To put these low odds into perspective, thismeans that even if a consumer opens 50 loot
boxes in a row, the consumer has odds of lessthan 15% to obtain the 5 star prize featured on
the banner.
And maybe you think that's deceptive, maybe youthink that should be illegal, but we're talking

(43:32):
about a situation where you've got this bannerand then you've got that specific information
that they just highlighted that you canactually access directly in the program.
And at least to me, that looks to me liketransparency.
Maybe you disagree.
Maybe there should be more rules or more lawsabout this particular issue because we are far
afield from the years in which the Sherman andClayton Antitrust Act was written, and

(43:53):
certainly far afield from when the FederalTrade Commission Act was written.
And we need to adjust laws to cover digitaltransactions like this one.
But at least with the laws on the books, I lookat this and say that seems pretty clear to me
what's happening.
Consumers are also misled by Hoyoverse'sguarantee to win a 5 star character at least
once per 90 attempts because they are led tobelieve that it applies to the 5 star character

(44:15):
prominently featured in the event banner.
Unless you're watching this video, you won'tthink that anymore.
As shown in figures 9 and 10 above, a pictureand name of a character is featured next to
language touting the opportunity to open lootboxes for the chance to win an event exclusive
5 star character.
In reality, if a player opens 90 loot boxes,Hoyoverse frequently does not provide the
player with the featured 5 star character.

(44:35):
Half of the time, HoYoVerse will instead awardthe player an unrelated and typically less
desirable.
I don't know what the criteria are for thatFTC.
Five star prize not featured on the eventbanner.
And I would look at this and say, what do youthink this 50% is doing?
How are you applying this to your mathematicsif you don't think that's what's happening?
If you get a 5 star, the boosted rate is youget half of those to be this guy on this

(44:56):
banner.
Half of those are gonna be not that guy byvirtue of elimination.
So, again, I don't know exactly what they'retalking about here, but they're definitely
upset about the complication of this entiremethod of business model.
Hoyo versus unfair practices.
Under section 5 of the FTC act, an act orpractice is deemed unfair where the act or

(45:17):
practice causes or is likely to causesubstantial injury to consumers, which is not
reasonably avoidable by consumers themselvesand is not outweighed by countervailing
benefits to consumers or competition.
And they cite the the law that we read earlierin this video as well as a particular case on
that law in the 9th circuit.
But I want folks to pay attention here becausethis is actually not a fair statement of the

(45:38):
actual authority given to the Federal TradeCommission.
The sentence here says under section 5 of theFTC Act, an act of practice is deemed unfair
where it hits these criteria.
That's not what the law does.
Right?
As we looked at, what the law does is it saysthat thou shalt not make illegal the things
that don't make meet these criteria.

(45:59):
If we look at this from a logic perspective ora Venn diagram perspective, things that don't
meet this criteria can't be held illegal, butthings that do meet this criteria are not
automatically unfair.
And what the FTC is saying in their complaintdocument is the reverse.
They're saying that if you meet this criteria,causes substantial injuries to consumers, which
is not reasonably avoidable by consumers andnot outweighed by countervailing benefits to

(46:20):
consumers or to competition, it shall beunfair.
Right?
A practice is deemed unfair when it hits thosethings.
That is not the same as you shall have noauthority under this section to declare
unlawful anything that doesn't meet thesecriteria.
And that might seem like angels on the head ofa pin, but this is what lawyers do, and I find
this particular paragraph in this complaint tobe an affront because they are talking about
deception.

(46:41):
They're talking about unfair practices.
They're talking about transparency and the needto be clear.
And to reverse that kind of thinking in a legaldocument like this one offends my conscience.
I can't promise it would offend the conscienceof the court, but I find this to be a problem
for when you're writing these types ofdocuments.
Paragraph 83.
Hoyoverse makes use of 2 types of unfair actsor practices to generate revenue from or

(47:03):
monetize the Genshin Impact game.
1, obscuring players' expenditures and thelikely costs of rare prizes through the game's
multi tier virtual currency system, and 2,promoting and offering to children and
teenagers rare prizes that can be obtained onlyby opening loot boxes which can be purchased
using paid virtual currency.
Those seem to be the same thing as I read them,but they're trying to establish this entire

(47:23):
kind of complex process as inherently unfair.
And it's the reason I wanted to make this videobecause if it is, then InfinitiNikki has
issues.
If it is, then Zenlist Zone 0 and everythingelse from Hoyoverse has issues.
If it is, then a whole host of gaming businessmodels have issues with the Federal Trade
Commission, the United States government in itsentirety, and potentially other jurisdictions

(47:44):
around the world.
So they continue here talking about whatthey've already been talking about, nor does
the design of Genshin Impact's multi tiervirtual currencies generate any offsetting
benefits to consumers or competition.
To the contrary, Holoverse could havetransparently priced virtual goods within the
game to make clear to players the true amountsthey spend within the game and the true cost of
loot box prizes.
And here is where we talk about thoserequirements about unfair practices.

(48:07):
Right?
It says, if a consumer cannot otherwise preventitself from being harmed and it's not
outweighed by countervailing benefits toconsumers, then as the FTC says in their
complaint document, but which the law doesn'tquite say, they can deem that particular
practice unfair.
The issue here is multifaceted.
1, do people, even kids and teenagers, not havethe ability to avoid spending this money on

(48:31):
loot boxes?
Again, you're getting into questions ofpsychology and addictiveness and things that
are more related to gambling, than are probablyotherwise covered in the Federal Trade
Commission Act here.
But more prominently to me is this question ofwhether it's outweighed by countervailing
benefits to consumers.
There is a benefit to consumers, and that isthat nobody has to pay a dollar to get into

(48:52):
Genshin Impact.
Nobody has to pay a dollar to get into InfinityNikki.
Nobody has to pay a dollar to get into thiswhole host of other games.
And I find it personally to be more thanreasonable to avoid spending money on
additional heroes or on additional cosmetics orfashion pieces or whatever it is that we're
talking about in one of these specific games.
So the the FTC knows this.
The FTC knows that Hogue is out there saying,I'm not gonna spend money on infinity Nicki

(49:16):
dresses, because I think, like, we can gothrough this process, and we'll get them when
we get them.
So it aims this particular complaint at peoplethat aren't Hogue.
Right?
It talks about kids.
It talks about teenagers.
That's what the copper rule inclusion in thiscomplaint is about, but I find that to be
telling.
I find that to evidence a certain weakness inthis particular complaint.
And again, we're talking about this complaintbecause the makers of Genshin Impact have

(49:38):
already settled this, and it's really just upto a federal court to approve that settlement
at this point.
So this is an effective method that the FederalTrade Commission has used against this company,
and that is its own story here.
Right?
Is this a kind of shakedown?
Is this something that the makers of GenshinImpact should have agreed to?
Is the rest of the industry going to be, no punintended, impacted by what Hoyoverse has agreed

(50:01):
to here?
And is that just?
Is that a good thing?
And I know a number of you in the comments aregoing to say that it is because you hate loot
boxes.
I don't blame you for that.
I do think that it does afford a certaincompetitive advantage to have a free to play
game, but you still need to to feed yourdevelopers, you still need to keep the lights
on at the office, and you have to find a way tomonetize it, and this seems to be an effective

(50:21):
way to monetize it.
Genshin Impact is wildly successful.
Is it only wildly successful because it's takenadvantage of and exploited 12 year olds?
I don't think that's the case.
Indeed, as the FTC says here, the GenshinImpact game interface allows users of all ages
to easily and frictionlessly buy and spend 100of dollars worth of virtual currency within
moments, which is an interesting thing to bringup here.

(50:41):
Right?
Because they're saying that it's complex, it'scomplicated, and you can have spent 1,000 of
dollars without even noticing it.
And that's true, but it's also part andpartially this complex thing that is so complex
that it's inherently unfair and deceptive.
And so, yes, kids might hit the credit cardbutton a little bit too much.
We've got the issue with the credit cards beingin the platforms as it stands, but it being

(51:04):
frictionless and easy to use is probably acompetitive reason for Genshin Impact's success
more than exploitation, in my view.
Scrolling a little bit further down here, Ithink we can get the actual counts.
The copper rule violation does seem to be theclearest, even though I think it has its own
holes.
Then we get into the violations of the FTC Act,and this is again the issue with using section

(51:28):
5 of the FTC Act is that it's entirely unclearthat the FTC actually has the ability, the
authority, the ambit, to make substantive rulesunder this unfair or deceptive acts kind of
concept.
And we'll see in just a minute.
That's an area of dispute for congress andpolitical leaders in the United States.
And again, reason why it's can differ on thatscore.

(51:49):
This is not a political channel.
You can raise whatever comments or concerns youhave in the comments to this video, of course,
but I would ask people to discuss thosepolitical concepts to not engage in ad hominem
attacks, to combat the idea and not the person.
And I do understand that there are passions onthese particular issues.
Defendants have represented directly orindirectly, expressly, or by implication

(52:12):
certain odds that loot boxes known as wisheswould contain particular prizes.
So the FTC has compiled this kind of list ofevent banners, and various percentages in that
detail screen to say by implication, they havesaid that you have a better chance of getting
the particular guy on this banner than youreally do, and the math is too complicated for
a reasonable person to look at and understand.

(52:33):
But a reasonable person probably can understandit, so they focus this complaint specifically
on kids and teens.
Misrepresentation of cost, unfair selling andoffering of a merch multi tier virtual currency
system to children and teenagers, defendant'sacts or practices have caused or are likely to
cause substantial injury to consumers thatthose consumers could not themselves reasonably

(52:53):
avoid.
And I I have an issue there.
How could they not reasonably avoid it?
They have the price of the currency right infront of them.
They have to hit the button to buy thecurrency.
It's not outweighed by countervailing benefitsto consumers or competition.
I think the very success of Genshin Impact andthe existence of a free to play marketplace
suggests that there is a competitive reason toorganize your business model in this way.

(53:14):
Maybe that isn't good enough.
Maybe that business model should nonetheless beoutlawed and illegal in the United States and
other jurisdictions.
But I would see an actual law written to thateffect rather than have an agency of the
executive branch like the FTC promulgate rulesor interpret their own rules in such a broad
facing way.
They say the same thing about the promotionsale of the loot boxes themselves to the

(53:35):
children teenagers.
That doesn't appear to add much to theirparticular complaint.
They ask for penalties.
They ask for preemptory relief.
They ask for injunctions.
They ask for anything else that the court woulddeem sufficient to give them on this particular
complaint score.
And this was filed as part of a process ofgetting a settlement, negotiating a settlement

(53:58):
with Genshin Impact, which is where we startedall of this.
And then we see that for all of these reasonsunder the copper rule, the makers of Genshin
Impact will be this is what they've agreed toby settlements.
This is not what the law requires.
You can agree to anything by contract andsettlement here.
They will be prohibited from allowing childrenunder 16, not an age that appears in the copper

(54:18):
rule, to purchase loot boxes in their videogames without a parent's affirmative express
consent.
It's a little bit unclear what that would meanin this context.
It will be hopefully be defined in thesettlement agreement, which we won't see.
Prohibited from selling loot boxes usingvirtual currency without providing an option
for consumers to purchase them directly withreal money.
So they have to offer their loot boxes inGenshin Impact for a specific real money amount

(54:41):
and not through this kind of multi tieredcurrency conversion process.
They're prohibiting from misrepresenting lootbox odds, prices, and features.
They were already prohibited from doing that.
It's unclear what changes, if any, will berequired on their details screen to affect
this.
They're required to disclose loot box odds andexchange rates for multi tiered virtual
currency, and that's fine.

(55:01):
They have to add in exchange rate terms.
They're required to delete any personalinformation previously collected from children
under 13 unless they obtain parental consent toretain it.
That's the COPPA rule as it stands.
They're required to obey that rule, and they'rerequired to comply with COPPA including notice
and consent requirements.
So the big ticket items here is they'rerequired to pay $20,000,000, and they're

(55:22):
required to not sell loot boxes to childrenunder the age of 16.
So you can expect an age gate in Genshin Impactand an age gate mechanism that'll have one
effect for kids that say they're under 13,which is that we can't collect anything.
You probably can't participate in our game.
And one effect for kids under 16 that says theentire loot box mechanism is not gonna be
available to you.
So that's good luck to you playing it if you'reunder 16 and you wanna engage in Genshin

(55:46):
Impact.
That's probably not gonna work out for you.
But that's what happened right now.
I think it is broadly applicable to hugeportions of the video game industry.
And I do think that there is a question aboutwhether the Federal Trade Commission can even
engage in this kind of adjudication or forcedsettlement.
It certainly can't make rules on these kinds ofthings, obviously, or clearly under the

(56:07):
authority of section 5 of the Federal TradeCommission Act, which is one of the reasons why
I have brought up on your screen right now areport from the Congressional Research Service
that is called a legal sidebar that talks aboutwhether the federal Federal Trade Commission
can make rules on its authority under section5.
And in particular, in this case, it's aboutwhether it could make the rule to ban non

(56:29):
competition agreements, which we talked aboutearlier in virtual legality, and the issues
that it has justifying that particular step.
So such efforts by the Federal Trade Commissionas reported here implicate 3 unsettled
questions.
1st, does the FTC Act provide the FTC withsubstantive UMC rulemaking authority?
That's unfair methods of competition rulemakingauthority.

(56:49):
2nd, if the statute does so, what is the scopeof that authority?
How broad is it?
How narrow is it?
3rd, is rulemaking an appropriate vehicle forimplementing antitrust policy?
So the noncompetition agreement ban was issuedby the FTC under its unfair methods of
competition provision.
Essentially, it's antitrust protection rules.
And this particular analysis says, well,antitrust enforcement has traditionally

(57:12):
proceeded via adjudication lawsuits rather thanrulemaking.
But in recent years, commenters have argued forthe expansion of the enforcement toolkit at the
FTC, including my chair, Lina Khan.
The existence of this authority is unsettled.
While there is case law holding that the FTCpossesses this rulemaking authority, analysts
have debated whether courts would reach thesame conclusion and presented on that issue
today.
For the foundation of its rulemaking power, theFTC has pointed to the broad language of

(57:36):
section 6 g of the FTC act, which empowers theagency to issue rules for the purposes of
carrying out the statute.
Now that might seem clear enough, but if weactually go look at where this rule sits, if I
can find it, if I actually have it in my tabshere, we see that it is under when the
commission can engage in investigations,reports, and analyses of the corporations that

(57:59):
are otherwise under its ambit.
So if we go to this particular portion of therule, it says from time to time, the commission
can classify corporations and make rules andregulations for the purpose of carrying out the
provisions of this subchapter.
So one reading of this could be that the FTChas the ability to make rules that will govern
the way it conducts investigations.

(58:20):
It will make rules to govern the way that itwill collect information from people.
This is normal for agencies to do in the UnitedStates, and that might be the sole ability that
is granted to the Federal Trade Commissionunder this particular subsection.
But others could argue, hey.
Make rules and regulations for the purpose ofcarrying out the provisions of this whole
statute means everything.
And if you're gonna tell us that we can go andmake unfair methods of competition and

(58:45):
deceptive practices illegal, then we have theability to make rules that say what is an
unfair method of competition, what is an unfairpractice, what is a deceptive piece of
marketing, and we can put that in writing inblack and white, and that's a good thing.
So that's a dispute that happens right now inthe law.
And if you're not familiar with the way all ofthese things happen in the in the United States

(59:07):
system, this is not nonstandard.
Right?
This is not something that doesn't happen a lotwhen we talk about agency powers.
We could have talked last year about thesupreme court's overturning of what we call
Chevron deference in the United States thatsaid that the courts have to defer to agency
decision making and all sorts of things.
But right this second, the fight is whether ornot the Federal Trade Commission can go and

(59:30):
make a rule that says this is an unfair methodof competition.
This is an unfair practice because that isordinarily thought of to be a lawmaking power
that would be held in the legislative branch atthe Congress and not in the executive branch at
agencies like the Federal Trade Commission.
There are various cases here that arereferenced in this particular document.

(59:51):
First, some observers contend that the DCCircuit's decision in those decisions employed
an interpretive approach that would have littletraction today, so the precedent probably
doesn't hold.
2nd, skeptics of the rulemaking authority haveemphasized another principle under which courts
presume that Congress does not alter thefundamental details of a regulatory scheme in
the so called elephants in mouse holes canon.

(01:00:11):
Are courts not always great at describingcanons?
Elephants in mouse holes just comes from alittle bit of language that's in one of these
cases.
But it says, hey.
Look.
If we're gonna give a regulatory structure toan agency, this is what you were gonna do.
You can't go and try to figure out various waysto broaden that structure because you can read
language in a 100 different ways in thesevarious statutes.

(01:00:33):
I'm not saying that's what the FTC is doinghere.
In fact, I don't think this one is as good afit as the next paragraph that we're about to
see, but that's the notion.
It's to say, if we give you a regulatorystructure, you can't just use various
provisions of that structure to go outside thebounds of what was anticipated by congress.
Next, they say the interpretation may derivefurther support from the fact the FTC Act does
not provide any penalties for violations ofrules under section 6 g, so there isn't an

(01:00:57):
obvious way that the Federal Trade Commissioncan go and do something about a violation of
what they might otherwise propose under a rule.
3rd, some commentators have highlighted themajor questions doctrine as another possible
impediment to sub substantive competitionrules.
Under that doctrine, the Supreme Court hasrejected claims of regulatory authority
involving issues of vast economic and politicalsignificance when an agency has been unable to

(01:01:19):
establish clear congressional authorization forthe relevant power.
So backing this down a step, first, this entirediscussion is about competition rules and not
specifically unfair practices that we'retalking about with respect to Genshin Impact.
But second, it's also important to understandwhen we talk about major questions and things
of the like, that the Federal Trade Commissionis, as I've said before, an executive branch

(01:01:43):
agency.
They aren't in the substantive lawmakingbusiness.
And so the United States government isseparated into these three equal branches.
The executive branch executes the laws.
The legislative writes the laws.
The judicial interprets the laws.
And because those branches are important to theway the United States government is set up,
there is what is called an anti delegationdoctrine that says Congress can't otherwise

(01:02:05):
give its lawmaking power to another branchbecause to do so might be politically
expedient.
It might help congresspeople avoid difficultquestions and conversations in their home
jurisdictions, but it's not the purpose of ourgovernment, and it wasn't the way that the
founders set up our constitution.
So they can't just go and say, FTC, everythingbad.
You regulate that.

(01:02:26):
You figure out what's bad.
You make the laws about it.
We're not gonna otherwise do it.
Now you might say, Rick, seems to me like theUnited States Congress often does that, often
delegates its responsibilities and obligationsto make these rules to the IRS or the SEC or
who have you.
And I would say, yes, that's right.
There are probably a number of areas in the USgovernment right now that could be challenged
on the delegation's doctrine, but that's theway it's supposed to be set up.

(01:02:47):
And so that's the reason why there is a majorquestions doctrine that if Congress intended to
cover something that would impact a lot ofpeople, that it's going to be assumed that an
agency can't suddenly come up with the power toimpact that huge number of people that Congress
didn't intend for them to do.
And that's where we see this particular ban,the the one on non competition agreements run
into a bit of trouble, is on that particularscore.

(01:03:11):
But there is a counterargument that says, look.
This is a more effective way of handling theissues the Federal Trade Commission is supposed
to be handling, that adjudication is adifficult and slow process that only relates to
the cases before it.
And rulemaking would be helpful, not just tothe FTC, but to the parties in the industry, in
this case, video games, that could know betterwhat is happening to their particular companies

(01:03:35):
and be better able to comply with the law.
There's a whole host of arguments for thatpurpose, and reasonable minds can differ on
that.
But I wanted to highlight for you at least thatthe FTC, particularly under Chair Lina Khan,
had been trying to expand its rulemakingauthority, expand the use of section 5 of the
Federal Trade Commission Act for purposes likethe one we are seeing in video gaming and loot

(01:03:58):
boxes, even though there isn't a particularpoint in the legislative record that points
directly at loot boxes being gambling illegalor otherwise unfair, and that there are
countervailing considerations that I think areprobably not addressed properly by the Federal
Trade Commission for a business model thatcompetes directly with full freight paid video
games and other media in the year 2025.

(01:04:21):
That is all a bit, angels on the head of a pen,because the Federal Trade Commission is
changing anyway.
The Trump administration likely to end FTCefforts to ban noncompetes.
We didn't talk about it a lot last year becauseI wasn't making a lot of videos, last year.
But even when we talked about the ban onnoncompetes originally, I said it was unlikely
to hold up in court.

(01:04:42):
And now after being stopped in court a coupleof times, it looks even more likely, that it's
not going to hold up as a ban because the Trumpadministration is not expected to proceed with
the ban pursuit.
And you can take a look at this article.
I will link this in the description to thevideo, to see a little bit more on that, but

(01:05:02):
suffice it to say, there were concerns aboutthe major questions doctrine that we just
talked about.
There were concerns under the AdministrativeProcedure Act, whether or not the rule was
promulgated properly, and there were issues inthese various courts that issued injunctions of
various sizes.
And so the Federal Trade Commission would beforced now to appeal those rulings and move
forward to actually pursue that ban.
That is unlikely to happen out of the new Trumpadministration.

(01:05:24):
And also that chair Lena Khan is stepping downfrom the Federal Trade Commission.
She was a star of our Activision Blizzardversus Microsoft series, and a lot of people
had a lot of thoughts on her.
But president-elect Donald Trump has said inthis article, has stated that the current
federal trade commissioner, Andrew Ferguson,will be the next chair of the commission.
And that name is important for our conversationtoday because he wrote a concurring letter with

(01:05:50):
respect to this Genshin Impact issue.
Today, he says, the commission approves acomplaint and settlement with Cognisphere LLC,
the developer and operator of the popularGenshin Impact video game.
The complaint accuses Cognosphere of violatingthe Children's Online Privacy Protection Act
rule, deceiving consumers as to the odds andpricing of Genshin Impact's loot box system and
unfair conduct regarding the marketing of ingame virtual currency and loot boxes to

(01:06:11):
children and teenagers.
I concur in the allegations that Cognizantierviolated the copper rule and deceived customers
as to the odds of winning prizes in loot boxes,but I dissent as to the rest of the complaint.
Count 1 talks about the copper rule.
He thinks those alleged violations are severeenough to justify my voting for the complaint.
The the complaint was voted up 5 o by thecommissioners, and so this is essentially a

(01:06:32):
concurrence type document if you're familiarwith supreme court decisions that says, I agree
with this part.
I voted for this complaint to go forth becauseI agree with this part, but the rest I don't
agree with.
Complaint 2, count 2 of the complaint accusesCognos here of misrepresenting players' odds of
receiving prizes from in game loot boxes.
Although O'Genshin in fact is free to play,players can use real money to buy virtual

(01:06:54):
currency and spend that virtual currency to buyloot boxes, randomized packs of in game prices
that have a low probability of including highvalue prizes, and a much higher probability of
including low value prizes.
Think of a loot box as the digital cousin of apack of baseball cards.
Each pack of baseball cards bears the sameprice, and each pack is unlikely to contain any
cards of great value.
But every once in a while, a fortunatepurchaser might buy a pack that happens to

(01:07:16):
contain an incredibly valuable card.
Kids will thus buy lots of packs of baseballcards to improve their low odds of stumbling
upon that Mike Trout rookie card.
Loot boxes operate similarly.
Loot box prizes include in game weapons andplayable characters, with the most desirable of
each being described as a 5 star, although therelative desirability of 5 stars varies as
well.
To market the loot boxes, Kinda stay ranlimited time promotions called event banners,

(01:07:40):
each featuring an equally desirable 5 starhero.
In a typical event banner, each loot box gaveplayers a 0.3% chance of receiving the featured
hero, as well as a 0.3% chance of winning adifferent 5 star hero instead.
Featured heroes were only ever availablethrough the event banners in which they
featured, never as part of the basket of other5 star heroes in another event banner.
The complaint accuses Cognisphere ofmisrepresenting the odds that the player can

(01:08:02):
win the featured hero through various confusingand contradictory claims.
The complaint alleges that even though featuredheroes were only ever available at 0.3% odds
under their respective event banners, andotherwise not at all, Cognizant here
prominently advertised the player's odds ofwinning the featured hero were up and subject
to increased their up rates and a massive droprate boost.
Upon hitting a details button onto theadvertisement, players were then shown a

(01:08:24):
picture of the featured character along withthe text percentage of 5 star item drops 50%,
presumably referring to the fact that thechance of winning the featured hero was equal
to the chance of winning a different 5 starhero.
But a reasonable consumer could easilyinterpret that text to mean that each loot box
gave the user a 50% chance of winning thefeatured hero, especially because the actual
odds were not disclosed until players hit asecond detail button.

(01:08:45):
Now interestingly even on that assumption,that's a pretty quick one to disclaim.
Right?
If you buy 2 loot boxes and neither one of themwere the 5 star hero on the butt banner, you
know that that's not the right way to read the50%.
At that point, Cognos here disclosed that baseprobability of winning 5 star characters equals
0.6%.
Even this text as it is ambiguous as to whetherplayers have a 0.6% chance of winning the 5

(01:09:07):
star character or merely a 5 star character.
To resolve this ambiguity, players would haveto look at the next paragraph, not visible
without scrolling down.
In some cases where Cognosier finally disclosedthe odds of winning the featured character.
The first time you win a 5 star item in thisevent wish, there's a 50% chance it will be the
promotional character.
So all the language is there, but theobjections here, even from this commissioner
that has some issues with the complaint, arethat it's not clear enough, it's not obvious

(01:09:32):
enough to the average consumer.
And note that he talks about the reasonableconsumer in this context.
Count 3 accuses Cognosphere of misrepresentingthe real money cost of loot box prizes through
its virtual currency system.
Players could buy 1 loot box for 1 Wish token.
A token wish costs 160 primogems.
1 primogem costs 1 Genesis crystal, and a 160Genesis crystals cost between 242 and267

(01:09:56):
depending on the quantities of Genesis Crystalspurchased at a time.
The complaint describes the system as a complexand confusing multi tier virtual currency
exchange system, but only 2 of the tiers hadexchange rates other than 1 to 1.
More importantly, this system required no moreof consumers than the simple math operations
they perform on a regular basis when theycompare prices for different sized jars of
peanut butter, when they determine the trueprice of a 1 of a buy 1 get 1 half off deal,

(01:10:21):
and so forth.
The law protects more than just the savvy andstrong will cut consumer.
The law is not just about what Hogue thinks inthe corner, but count 3 infantilizes the
American consumer beyond recognition.
I therefore dissent from it.
So he's got his issues with the way they talkabout these things, but he does not have an
issue with the multi tier concerns, currencysystem.

(01:10:42):
Count 4 alleges that offering such a multi tiervirtual currency system to children and
teenagers is an unfair act of practice inviolation of section 5.
Section 5 n says that an act of practice is notunfair unless the various things we talked
about.
The complaint alleges that the substantialinjury is the amount of money that children and
teenagers sometimes spend in the game.
Examples of parents being shocked at chargesfor 1,000 of dollars.
It then says that consumers cannot reasonablyavoid the injury because teenagers and children

(01:11:06):
have no choice but to use the game's multitiered currency system.
Even assuming for purposes of argument thatAmerican children and teenagers playing Genshin
Impact cannot perform the math required todetermine the price of a loot box, an
assumption I do not share, the only way to rackup a large bill is to make repeated purchases
with prominently displayed prices.
Assuming again for the sake of argument thatthis racking up of charges constitutes

(01:11:27):
substantial injury, parents could easily avoidthe injury by simply declining to give children
access to a credit card or by using theparental control systems widely available on
mobile platforms like iOS and Android.
Indeed, the Commission's own COPPA rule, whichwe looked at earlier in this video, treats the
ability to charge a credit card or to use apayment system like Apple Pay or Google Pay as
evidence that the user is an adult.

(01:11:47):
The copper rule reflects the entirelyreasonable judgment of the commission that
children are not expected to be able to makepayments without the kind of parental
supervision that would prevent them fromspending too much money on loot boxes.
Because the alleged injury is reasonablyavoidable and therefore does not satisfy the
requirements of section 5 n, I dissent fromcount 4.
Finally, count 5 accuses Cognizier of furtherunfairness for marketing a loot box system to

(01:12:08):
children and teenagers.
I cannot tell whether the commission here restsits theory on the overly enticing nature of
loot boxes as a marketing scheme for childrenand teenagers, or merely the further unfairness
of targeting children and teenagers with thesort of deception alleged in counts 23.
Either way, I dissent.
If this count simply mirrors the allegations ofdeceptive conduct in counts 23, then it adds
nothing.

(01:12:29):
And none of our precedents hold that marketingviolates the FTC act when it is too enticing.
As I said in November, I will not support noveltheories of liability advanced in the final
hours of the Biden Harris administration.
So obviously a political stance here, and as wementioned as before we even looked at this
letter, this is the new federal before we evenlooked at this letter, this is the new Federal
Trade Commissioner.
This is gonna be the new chair of the FederalTrade Commission.

(01:12:49):
That principle applies to count 5.
None of this should be taken to mean I favorthe loot box scheme.
I do not.
But the FTC act does not authorize authorize usto prohibit unsavory or unseemly business
practices.
It forbids only unfair or deceptive acts inpractices.
I do not foreclose the possibility thattargeting certain kinds of addictive activities

(01:13:09):
children and teenagers such as virtual slotmachines in the form of loot boxes could
violate section 5's prohibition of unfair actsand practices, but demonstrating such a
violation would require us to assemble strongevidence of substantial injury, unavoidability,
and the absence of countervailing benefits toconsumers or competition as we saw in that
particular paragraph.
We have not done that here.
I therefore dissent from count 5 both becausethe Biden Harris FTC should not be advancing

(01:13:32):
holding novel theories as the sun sets on theadministration, and because we do not have the
evidence required to demonstrate that marketingloot boxes to children and teenagers
categorically violates section 5.
So he says this adjudication is essentiallymaking a new rule.
He thinks it's inapplicable in all cases, andthey didn't go far enough with their evidence.
You can 100% disagree with this letter.
And I also should tell you that there isanother letter from a different commissioner

(01:13:56):
that basically agrees with the complaint on thewhole, talks about the way the FTC has looked
at loot boxes and says essentially that theyshould go further in make taking steps to
police loot boxes and the damage they are doingto teenagers and children within the video game
industry.
I don't think it had additional information forus to reflect upon for purposes of this video,
but it does exist, and I wanna mention it to beentirely fair to the opposite side of this

(01:14:19):
particular argument.
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(01:15:04):
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(01:15:26):
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