Effective January 1, 2025, a new California consumer protection law will require sellers of digital goods to more clearly communicate whether consumers are purchasing unrestricted ownership to that digital good or merely buying a revocable license.
This new law, AB 2426, applies to sellers of “digital goods,” broadly defined to include digital audiovisual works, audio works, books, codes, and applications or games. When advertising or offering a digital good that can be revoked, a seller may not use terms that a reasonable person would understand to confer an unrestricted ownership interest (e.g., “buy” or “purchase”) unless the seller also either:
The law provides exceptions for digital goods being offered for no monetary consideration, digital goods that the seller cannot revoke after the transaction, and subscription-based services that offer access to digital goods only for the duration of the subscription. In these exceptions, the use of words like “buy” or “purchase” do not trigger the acknowledgment or disclosure requirements.
The law plainly applies to digital storefronts that sell video games—but it may also apply to the in-game transactions themselves. AB 2426 defines “digital application or game” to include “any add-ons or additional content,” meaning in-game content is likely covered by the statute.
While the statute does not define “seller,” it can be reasonably interpreted to include in-game shops and in-game transactions. It is unclear whether courts interpreting the new statute will treat in-game transactions for fiat currency any differently than they do exchanges of in-game currency for other kinds of in-game content (such as skins or emotes). This means that any developer using words like “buy” or “purchase” must consider how this new law applies to the specifics of their game.
To comply with the new law, game companies should provide clear and conspicuous disclosures, receive affirmative acknowledgment from users, and avoid the use of words understood to confer unrestricted ownership. The best strategy will depend on each seller’s unique circumstances, such as how the item is “bought,” with what currency, or how the in-game marketplace is designed.
For example, adding disclosures or requiring affirmative acknowledgment from users for each transaction could prove disruptive to the user interface, and could negatively impact user experience. This is especially true for mobile games, where such disclosures or acknowledgements can dominate a smaller screen. It may be easier for companies going forward to simply change the language of their offerings or advertisements, avoiding terms that could be interpreted as conferring an unrestricted ownership interest in the digital good being acquired.
However, even then because the law restricts terms similar to “buy” or “purchase” (based on a reasonable consumer’s understanding of the term), sellers who choose this path need to have an understanding of how their items are marketed to and understood by consumers. Some sellers may instead decide to change their revenue model so that a consumer’s acquisition of in-game content is restricted to a purely subscription-based model, which would allow the seller to take advantage of one of the exceptions to the statute.
It is unclear whether or to what extent the law might apply to the sale of non-fungible tokens (NFTs). Neither the text nor the legislative history of AB 2426 specifically addresses NFTs.
One argument is that the law does not apply to NFTs at all because when an NFT is purchased the ownership rights to that token are undisputably transferred to the buyer. However, the full IP rights to the underlying digital collectible associated with some NFTs are generally not transferred with the token. The buyer owns the code on the blockchain, but the seller or the creator of the digital collectible may withhold certain rights, such that the purchaser has only a limited license to the digital collectible. If courts interpret AB 2426 to apply to both the token and the associated content, it is possible that some NFTs will be covered by AB 2426.
AB 2426 is most likely to apply to NFTs connected to a video because audiovisual works are “digital goods” within the meaning of the statute. Courts could interpret such NFTs as a digital good because some aspects of the NFT meet the definition of a digital good. On the other hand, NFTs connected to a physical asset or a still image do not meet this definition. Sellers of these NFTs can proceed with more confidence that AB 2426 does not apply.
But even where some NFTs are digital goods, they still may not be subject to AB 2426’s requirements. The law outlines certain exceptions, including one for digital goods that cannot be unilaterally revoked by the seller after the transaction. Although it may be possible for the seller or even the creator of the underlying digital asset to restrict certain uses of the underlying art, the NFT itself cannot be revoked—blockchain transactions are immutably saved and stored on the blockchain. Where the NFT is the digital good being purchased rather than the underlying art, the fact that the NFT cannot be revoked places these transactions within this exception. Under this interpretation, NFTs, even those which are digital goods, would be free from the restrictions set forth in AB 2426.
It is likely that the full scope of whether and to what extent this new law applies to NFTs will only become clear following litigation on the issue. Therefore, sellers of NFTs should still consider this law when publishing their NFTs for sale.
Before AB 2426 takes effect in 2025, online sellers should check if their digital goods are covered by this legislation and whether any exceptions apply.
Those sellers who plainly fall within the scope of the law should review the language they use about what the consumer is buying and make the necessary adjustments. This likely means implementing changes at checkout and in marketing assets. The specific adjustments will depend on the seller's strategy for complying with the law.
*Camilla Beldham contributed to this alert.