The use of creative business models and strategies involving contests, sweepstakes and gambling-like activities in social games and other online media has increased dramatically. These “gamblification” strategies aim for a balance between capitalizing on users’ excitement and passion for the mechanics inherent in gambling while not crossing the line into illegal activity. In some cases, the use of virtual currencies and goods causes greater confusion and misconceptions regarding legality.

Social game and mobile app developers and others in the social media industry are seeking to cash in on these powerful business opportunities. Companies in the gambling industry are focused on these opportunities as well. In January 2012, gambling equipment maker IGT bought Facebook casino games developer Double-Down for $500 million. As this trend continues, the $25 billion online gambling and social media worlds are colliding.

Gamblification: We have adopted this term to describe the intersection of social media and gambling, playing on the similar terminology and concept behind “gamification.” Much as gamification involves the use of game mechanics for nongame purposes, gamblification is using gambling mechanics for non-gambling purposes.

The slowly evolving legal jurisprudence in this area is lagging behind the rapidly advancing use of gamblification. However, a recent decision by the U.S. Department of Justice (DOJ) has paved the way for states to craft legislation to permit most forms of online gaming. This catalyst has led to a frenzy of state legislative activity, with some states seeking to permit and some states expressly trying to prohibit various forms of online gambling.

Companies need to be aware of the complex legal issues and significant risks involved when gamblification techniques are not crafted and implemented properly. Criminal penalties exist for unlawful online gambling activities, as evidenced by the 2011 federal indictments against illegal online poker sites operating in the U.S. Even if a particular activity is legal, various licensing and compliance obligations may apply.

In December 2011, the DOJ reversed its position on the scope of the 1961 Wire Act. Previously, the DOJ maintained that the Wire Act prohibited most forms of online gambling. Now it interprets the Wire Act to primarily prohibit online sports betting. As a result, states are now free to legalize online gaming and many are seeking to do so. Other states, such as Utah, are expressly prohibiting it.

While land-based casinos and online gambling companies are familiar with these licensing and compliance issues, many social game and media companies are not.

The following overview covers some of the many legal issues involved with contests, sweepstakes and gambling in social games and other social media applications. Sheppard Mullin’s Social Media and Games Team has assisted many companies in assessing business models, legal strategies and compliance programs in these areas. Please contact us if you have any questions.

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