Legal Issues in Game App Management Regarding the Funds Settlement Act and the Act against Unjustifiable Premiums

The domestic market size for online games in Japan is estimated to be around 1.5 trillion yen in 2020. Among them, smartphone game apps are showing remarkable growth (“Japanese Fiscal Year 2020 Industrial Economic Research Commissioned Business (Market Research on E-commerce)”jn).

Online games is an industry with high growth potential, and as such, legal measures against consumer troubles have been progressing.

In this article, we will explain three legal issues under the “Japanese Funds Settlement Act” and the “Japanese Premiums and Representations Act” that operators running game apps should be particularly aware of.

Three Regulations You Should Know About Online Games

In the online gaming industry, it is common to issue in-game currency to encourage users to purchase items or rare personalities that can give them an advantage in the game.

While this is an effective way to monetize an online gaming business, there are legal issues to be aware of when issuing in-game currency:

• Regulations on in-game currency and items (Japanese Funds Settlement Act)
• Regulations on the price of in-game prizes (Japanese Premiums and Representations Act)
• Regulations on how things are represented in the game (Japanese Premiums and Representations Act)

Users generally purchase in-game currency in advance to buy items in the game. Whether this in-game currency is applicable to the “prepaid payment method” in the Japanese Funds Settlement Act is a crucial issue for game operators (Article 3 of the Japanese Funds Settlement Act).

Furthermore, in-game offerings such as “you get a rare character if you purchase this item”, for example, the value of the gift provided in conjunction with the transaction must comply with the upper limit regulation of the Japanese Premiums and Representations Act.

The regulations of the Japanese Premiums and Representations Act also apply to exaggerated representations to users in the game. Exaggerated representations that could mislead consumers could result in orders from the Consumer Affairs Agency to prevent recurrence, and in some cases, orders to pay fines (Articles 7 and 8 of the Japanese Premiums and Representations Act).

Regulations on In-Game Currency and Items

In online games, there are often systems in place where users can purchase coins or points that can be used as currency within the game in advance. This system is an effective way for game operators to generate revenue. However, whether or not in-game currency is subject to regulations under the Japanese Funds Settlement Act is a significant issue for operators.

Does In-Game Currency and Items Fall Under ‘Prepaid Payment Instruments’?

If the in-game currency used by users falls under ‘prepaid payment instruments’, it will be subject to regulations under the Japanese Funds Settlement Act.

‘Prepaid payment instruments’ are marketable securities that are issued based on the amount prepaid by the user and are used in place of currency, like merchandise certificates or beer coupons.

In-game currency in a virtual space like a game would be applicable to prepaid payment instrument, once it meets the following three conditions:

• Value Preservation: The monetary value or equivalent is recorded and preserved.
• Issued for Consideration: It is issued in exchange for consideration.
• Exercise of Rights: It is used for payment of fees, etc.

For example, if something is recorded of an amount or quantity like ‘100 coins’ or ’50 points’, and is obtained as a consideration for the user paying cash in advance, and has the function of being exchangeable for items within the game, then the ‘in-game currency’ can be said to be a prepaid payment instrument.

Regulations on Prepaid Payment Instruments

In case in-game currency falls under prepaid payment instruments under the Japanese Funds Settlement Act, the following three obligations arise:

• Display Obligation
• Deposit Obligation
• Periodic submission of reports to the administrative agency

If it is applicable to as a prepaid payment instrument, you are obligated to display certain information specified by Cabinet Order on your site, etc., and to submit periodic reports to the administrative agency, and you will be subject to its supervision.

The most important issue for operators is the deposit obligation. Under Article 14 of the Japanese Funds Settlement Act, if the unused balance of prepaid payment instruments exceeds 10 million yen as of the base date, you are obligated to deposit half of the unused balance as ‘issuance security money’ at the nearest Legal Affairs Bureau.

Problems with Regulations by Prepaid Payment Instruments and Ways to Avoid Them

The ‘deposit obligation’ borne when in-game currency is applicable to as a prepaid payment instrument is a system to protect users. If the company goes bankrupt and the service suddenly ends, there will be no place or opportunity to use the purchased game coins, etc. In that case, consumers will not be able to get the goods for the cash they converted into in-game currency in advance.

To protect users from such risks, the issuer of prepaid payment instruments is obligated to pay a deposit. In case of emergency, this deposit will be returned to consumers. However, this deposit obligation is a significant burden for game operators. The situation where cash is frozen as issuance security money can be a matter of life and death for a company.

Article 4, Paragraph 2 of the Japanese Funds Settlement Act excludes from the application of regulations on prepaid payment instruments those that can be used ‘only within a certain period specified by Cabinet Order from the date of issuance’. According to Article 4, Paragraph 2 of the Enforcement Order of the Japanese Funds Settlement Act, that period is six months. In other words, if you set the expiration date of in-game currency or points within six months, you can avoid funds being frozen caused by the depositing of issuance security money.

Do In-Game Secondary Contents Fall Under ‘Prepaid Payment Instruments’?

So-called ‘secondary contents’ may also fall under ‘prepaid payment instruments’ under the Japanese Funds Settlement Act.

Secondary contents are items or secondary currencies that can be purchased using in-game currency. If these meet the requirements of ‘prepaid payment instruments’, the same deposit obligation may arise as with in-game currency.

In 2016, there was a case where the Kanto Finance Bureau judged that the ‘treasure chest key’, a secondary content of a puzzle game within a free communication app, fell under prepaid payment instruments under the Japanese Funds Settlement Act. The ‘treasure chest key’ was an item that could open ‘treasure chests’ that appears in the game, and the chests contained various items that could help players take advantages in the game. Although the ‘treasure chest key’ was a secondary content purchased with the ‘ruby’, the in-app currency of the app, in this case, the ‘treasure chest key’ was deemed to be a prepaid payment instrument, and the operator was obligated to make a deposit.

However, despite the heavy burden of the deposit obligation imposed on companies, no clear criteria have been shown for the applicability of secondary contents to prepaid payment instruments.

Regulation on the Value of Prizes within Games

In games, there may be instances where promotional events are held for users, such as giveaways. If these giveaways fall under the category of “prizes” as defined by the Japanese Act against Unjustifiable Premiums and Misleading Representations, a price cap regulation will be applied to the prizes.

When do In-Game Giveaways Qualify as “Prizes”?

In-game giveaways would be applicable to “prizes”, once it meets the following three criteria:

• They are provided as a means to attract customers
• They are provided in conjunction with the transaction of goods or services
• They are goods, money, or other economic benefits

For example, if you run a giveaway campaign saying, “Buy this item on this date and get a rare character as a gift,” it is considered that you are providing another economic benefit, “a gift of a rare character,” in exchange for the transaction of “buying an item,” and this falls under the category of “prizes.”

Regulations Applied When Qualifying as “Prizes”

Prizes that are provided in conjunction with a transaction without any element of chance are called “total attachment prizes,” and the aforementioned “rare character” falls under this category.

Total attachment prizes are subject to the following price cap regulations:

• If the transaction amount is less than 1,000 yen, the maximum amount of the prize is 200 yen
• If the transaction amount is 1,000 yen or more, the maximum amount of the prize is the transaction price

According to this price cap standard, the rare character provided to a user who purchases an item for 2,000 yen in the game must be worth 400 yen or less.

However, the so-called “complete gacha,” a mechanism where you can obtain another item by completing a specific item, is prohibited from being provided regardless of the amount.

Reference: About the regulation of prizes in the “complete gacha” of online games and the Japanese Act against Unjustifiable Premiums and Misleading Representations | Consumer Affairs Agency

Regulations on Game Display Methods

The Japanese Premiums and Representations Act also imposes regulations on the display methods within games.

Exaggerated expressions that make things appear better than they actually are, or statements that stir up users’ desire to purchase, such as “Buy now or lose out,” are subject to the regulations of the Japanese Premiums and Representations Act as follows:

“Superior Misrepresentation” and “Advantageous Misrepresentation” that make things look better than they are

Expressions within games that may lead users to misunderstand that something is superior or advantageous than it actually is, known as “Superior Misrepresentation” and “Advantageous Misrepresentation,” are regulated by the Japanese Premiums and Representations Act.

In 2018 (Heisei 30), despite the appearance rate of rare personalities being only 0.333%, the Consumer Affairs Agency issued a cease and desist order to the app distributor for misrepresenting it as 3%, which was deemed as “Advantageous Misrepresentation.”

Instead of simply stating “Free,” it is necessary to clarify the scope of free services and the items subject to charges, such as “Free Download” or “In-app purchases available.”

“Dual Pricing” as a Special Price

Also be aware of “Dual Pricing,” which is displayed as a limited-time special price.

Dual Pricing is a display method where, for example, an item usually sold for 1,000 yen is reduced to 100 yen for a limited time, and the original price of 1,000 yen is crossed out and replaced with 100 yen to emphasize the special price. This is a very effective pricing method and is often used outside of games as well.

However, if there is no record of the item actually being sold for 1,000 yen, this display is considered a violation of the Japanese Premiums and Representations Act. Even if there is a sales record, depending on the duration and timing of the original price, it may still be considered a violation.

The Japan Fair Trade Commission has provided the following criteria for when the dual display of the original price is permissible in its “Views on Unfair Price Indications under the Premiums and Representations Act“:

• The original price was in effect for more than half of the past eight weeks from the time of sale
• No more than two weeks have passed since the last day the item was sold at the original price

Conclusion: Legal Advice is Recommended in Game App Management to Consider Funds Settlement Act and the Act against Unjustifiable Premiums

Online games must be released with a full understanding of potential issues under the Japanese Funds Settlement Act or the Japanese Act against Unjustifiable Premiums and Misleading Representations.

Violations of either law could result in administrative penalties or orders to pay fines. In particular, if the in-game currency qualifies as a prepaid payment method under the Japanese Funds Settlement Act, a substantial deposit for issuance guarantee may be required.

Furthermore, there are still areas where clear standards have not been established for legal regulations on online games. When releasing a game app, we recommend proceeding with the advice of a lawyer who has expertise in administrative guidelines and practical cases.

Introduction to Our Firm’s Measures

Monolith Law Firm is a legal office with high expertise in both IT, particularly the internet, and law. Recently, the smartphone game market has rapidly expanded, and the need for legal checks is increasingly growing. Our firm analyzes the legal risks associated with businesses that have already started or are about to start, based on various legal regulations. We aim to legalize the business as much as possible without stopping it.