On October 4, 2016, a federal court dismissed a putative class action against Valve Corporation (“Valve”) regarding its popular eSports game, Counter Strike Global Offensive (“CS:GO”). Specifically, the class claimed Valve violated a host of state laws and the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”).

In their complaint, the plaintiffs alleged that Valve’s online marketplace (“Steam”) fostered an environment for unlawful gambling directed towards teenaged children. Steam users can purchase and sell virtual items for use in CS:GO, including “Skins”. Skins, as the court described, are “textures” that alter the appearance of virtual weapons used during CS:GO gameplay. Skins are also reportedly used as gambling chips on third-party websites that allow users to link their Steam accounts and wager Skins based on the outcome of certain CS:GO matches. Skins are treated as virtual currency, and according to the complaint, can be converted to cash.

In a narrow decision, the court dismissed the plaintiffs’ RICO claim—the only federal cause of action asserted—because it concluded the plaintiffs lacked standing (i.e., dismissal was procedural). As a result, the court also dismissed the plaintiffs’ remaining state law-based claims because the court lacked jurisdiction. This dismissal, however, did not rule out the possibility of the plaintiffs filing in state court. Indeed, early reports suggest a new complaint may be filed in the coming days.

The likelihood of Valve defending itself against these allegations in state court became clearer when, just one day after the federal court’s decision was handed down, the Washington State Gambling Commission issued a press release, where it claimed to have directed “Valve to stop facilitating the use of “skins” for gambling activities through its Steam Platform.” Steam’s Subscriber Agreement prohibits the conduct at issue, but the Gambling Commission is concerned that Valve does not enforce its policy and, thus, permitted unlawful gambling to persist in connection with its online marketplace. In its September letter to Valve counsel, the Gambling Commission accused Valve of violating Washington State gambling law. For Valve to avoid civil or potentially criminal action, Valve must respond to the Commission’s directive and exhibit full compliance by October 14, 2016.

This two-pronged attack on Valve regarding perceived state gambling law violations is not unfamiliar territory for popular gaming companies. This time last year, Daily Fantasy Sports (“DFS”) companies DraftKings and Fanduel began their prolonged legal battles to maintain operations despite claims they were running illegal lotteries.

The issue presented here differs from the DFS litigation, however. In the DFS litigation, state regulators and private individuals attacked the core business model of DFS and litigated whether such model is a game of skill or chance. Here the focus appears to be on whether an element of the game, not the entire game itself, constitutes an illegal lottery.

This case may have far-reaching consequences for game publishers who setup online marketplaces for players to buy and sell items for in-game use. Several questions come to mind: If the Steam Subscriber Agreement is not enough to disclaim liability for third-party conduct, what is? Will Valve need to establish a robust monitoring system policing how Steam users behave on non-Valve websites? Will other state regulators follow? Class actions in state court?

For now, all we know is that Valve escaped litigating its conduct in federal court, but now must counter-strike (see what I did there?) state regulators to stave off civil and criminal penalties.

Stay tuned for additional Adlawbyrequest follow up on this important story.