Second Life Sued: Intellectual Property and Virtual Economies

In September 2009, Second Life was sued for allowing individuals to sell fake virtual goods. The case has recently moved forward with the filing of a case management statement. While this lawsuit deals explicitly with intellectual property, these issues are also significant for virtual economies in terms of who makes money and which residents are willing to keep their businesses in Second Life.

The case, filed by in-world business owners, alleges that Second Life has both allowed and enabled the sale of content that was stolen by other residents. While content theft is an intellectual property issue, it is also one that is closely associated with virtual economics. It is through the development and execution of their ideas that many Second Life residents make their profits. As such, the sale of copied goods is likely to reduce the profits made by the creator, since they can be sourced from other sellers. However, it can also effect the in-world economy by reducing prices for virtual good. In order to compete with originals, imposter goods need to be sold at a discount, effectively limiting how much money is generated through their sale.

The effect of the sale of fake goods on profits is certainly a concern; however, it also has potential wider ranging effects, including the willingness of vendors who help drive the economy to remain in-world. If the threat to their goods, businesses, and income is significant enough, Second Life residents could simply remove their businesses from the virtual world.

This issue is somewhat reminiscent of an older Second Life debate. In November, 2006 Linden Lab faced controversy around the use of a program called “CopyBot”. Intended as a debugging took, CopyBot had the ability to copy and replicate code, reproducing any item it could see within the world. With no material costs associated with goods, unscrupulous users could easily copy, replicate, and sell any virtual good that they could see in the world. Although the issue was resolved quickly, many resident threatened to withdraw their businesses from Second Life unless CopyBot was removed and banned. Even on principle, the issue was significant enough to drive residents to fairly extreme measures to protect both their property and their businesses.

This is not to say that the current case will result in these particular reactions. With the lawsuit, the situation has already moved in a different direction and, arguably, gone farther than the CopyBot issue was taken by concerned residents. Furthermore, current resident opinions on the case and its merits are, at best, divided. However, if the case carries on this trajectory, it is possible that it could have a significant effect on the Second Life economy, especially if residents decide to remove themselves or their enterprises from the world because they feel their goods and businesses are not being adequately protected.

Virtual Goods and Regulatory Insights from the European Perspective

Guest article by Petteri Günther on EU regulatory issues in connection with real-money trade on digital items in virtual worlds.

Introduction

Virtual worlds, for example various massively multiplayer online role playing games (MMORPGs) are becoming increasingly real to many people around the world. This emerging field of digital economy within virtual worlds has made us to face the interdependence of those and “real” offline worlds. This occurs e.g. in form of real-money trade (RMT) on digital items, while the question on property rights over digital items remains basically unresolved in Europe, although the US and the rest of the world are pretty much in the same situation.

In this blog post I concentrate particularly on issues that have risen from economic activity in connection with virtual worlds as well as online gaming frauds, in which other players often target other MMORPG end-users. The purpose is to provoke discussion on whether these developments should cause legislators to become more interested in what happens in cyberspace as RMT in virtual worlds is a wide-spread phenomenon and generates considerable economic values on a global scale. Many virtual world service providers are rather unwilling to recognize players’ rights to in-game assets, as they probably worry about liability issues, e.g. when it comes to online-world frauds that, nevertheless, are reality. Also European courts have addressed this matter quite recently.

Virtual Worlds and the EU regulatory Framework

The European Network and Information Security Agency (ENISA), which is an EU agency created to advance the functioning of the internal market, has estimated that the worldwide annual RMT of virtual goods amount to nearly 1,5 Billion Euro. [1] ENISA has reported in its 2008 report, Virtual Worlds – Real Money [2], that “the failure to recognize the importance of protecting real-money value locked up in this grey-zone of the economy has lead to a ‘year of online-world fraud’.” A survey, which is included in the ENISA report, indicated that 30% of users have lost some form of virtual property through online gaming frauds targeting virtual world end-users. [3]

McInnes et al. divide regulation of virtual worlds regulation of the world itself and transactions of digital items. [4] A digital item can be defined as ”an image created by a service provider and tracked through a database that can be transformed and exchanged among users. Its value is decided through rarity, utility, and resulting demand.” [5] From a legal point of view the virtual world service providers purport to “legally link” the online and the real-life world by means of contract law through their end-user license agreements (“EULA”) and thus create private rules to compensate the somewhat absent regulation, and thus enable the potential development of “self-regulatory structures on the net.” [6] In practice, this could mean industry self-regulation with respect to virtual worlds.

For the purposes of analogy to a property-style regime, we can take the International Corporation for Assigned Names and Numbers (”ICANN”) [7] as an example. It is an organization that acts as a global coordinator for internet addresses, domain names. With the aid of adopting this system, there are clearly defined property forms associated with domain names, which can also be termed as virtual property in the sense that they also are intangible assets but mimic certain characteristics of real-world assets, like exclusive ownership, persistence of rights and transfer of rights by agreement. Some online resources, such as digital items and powerful characters in massively-multiplayer online games, as well as domain names – just to point out a few, are almost identical to some physical goods in that sense that only one person at a time can control that particular resource.

There is a recent case [8] from the Netherlands where the defendants had used physical violence and thus forced the victim to hand over virtual goods in a MMO game RuneScape. The virtual goods, a mask and an amulet, were transferred from the victim’s account to the other defendant’s account in RuneScape. The court confirmed in its verdict that the said virtual goods qualify as goods under Dutch law. This was a prerequisite for the actions by the defendants, forced transfer of the virtual goods by using physical violence on the victim, to qualify as robbery (diefstal met geweld) under Article 312 of the Dutch Criminal Code.

In Finland a player had sold his World of Warcraft account to another player and, after two years used a master password to regain control of the account. The perpetrator was accused of criminal damage [9] and unauthorised use [10]. The parties settled the case later and the charges were thus dropped, so there was no final verdict on the merits of the case.

Conclusions

The concept of virtual worlds and virtual property is novel: there are precedents, neither in law nor in practice, to provide guidance. The real-money trade of virtual property is an example which shows that the real and virtual worlds are interdependent. And, while that interdependence is recognized, at the same time property rights over digital items have not yet been determined in Europe. Hence, currently it is possible to assume that there is inefficiency in allocation of rights in virtual property.

How should law treat intangible code that has been coded to resemble tangible? There are many ways to approach this question and different views are presented depending on whom you ask this question. According to Lastowka and Hunter a property system is central to the functioning of most contemporary virtual worlds. [11] But on one hand virtual world service providers assume contractual freedom by default to confirm their control over the MMORPGs and make certain their protection later on. Terms for entry to virtual worlds is regulated by EULAs, which specify the Terms of Service to declare the company’s claims regarding ownership and intellectual property rights over both game content – such as characters or items – and activity by players – the end-users. On the other hand economically efficient use of online resources would, based on Lastowka’s and Hunter’s assertions above, call for exclusive ownership, persistence of rights, transfer of rights by agreement, as well as a currency system to facilitate transactions on virtual property. [12]

Nevertheless, the volume and monetary value of RMT makes it a public policy issue of a broad impact. One solution to this situation in European context would be to apply the European mixed mode of regulation comprising industry self-regulation, such as codes of conduct for virtual worlds and establishing harmonizing regulatory instruments at the Union level to protect the rights of those within the virtual worlds as well as to support the development of virtual worlds.

A good approach, as envisioned in the Virtual Worlds – Real Money report, would be to address certain policy issues e.g. by setting up a forum for virtual world service providers to establish best practices [13]. But, if industry self-regulation finally proves inefficient to provide sufficient level of protection for users, many of whom have recently lost some form of virtual property through fraud, and where the service provider has been reluctant to address the matter and referred to their ToS banning RMT on digital items, the need for regulatory actions should be considered to clarify the issues in order to protect users.

Author’s bio


Petteri Günther, LL.M, LL.M. (Law and IT), graduated from the University of Helsinki in 2006 and from the Stockholm University in 2007. In his master thesis (LL.M. in Law and IT) at the Stockholm University, upon which this article is based, he delved into real-money trade of virtual goods from the European perspective. The author is currently working as an associate lawyer at Lexia Ltd, a Finnish, Helsinki-based law firm, and focuses on IT and intellectual property law.

References

1 ENISA, Press Release (20.11.2008), Virtual Worlds – Real Money, http://www.enisa.europa.eu/media/press-releases/2008-prs/virtual-worlds-real-money (accessed 15.1.2010).

2 The report, Virtual Worlds – Real Money, available at http://www.enisa.europa.eu/act/it/oar/massively-multiplayer-online-games-and-social-and-corporate-virtual-worlds/security-and-privacy-in-virtual-worlds-and-gaming (accessed 15.1.2010).

3 ENISA, Press Release (20.11.2008), Virtual Worlds – Real Money, http://www.enisa.europa.eu/media/press-releases/2008-prs/virtual-worlds-real-money (accessed 15.1.2010).

4 MacInnes, Ian, Park, Y.J. and Whang, Leo Sang-Min (2004). Virtual World Governance: Digital Item Trade and its Consequences in Korea. Presented at Telecommunications Policy Research Conference, Arlington, VA. Available online at: http://web.si.umich.edu/tprc/archive-search-abstract.cfm?PaperID=382, p. 2. (accessed 15.1.2010).

5 MacInnes, Ian, Park, Y.J. and Whang, Leo Sang-Min (2004). Virtual World Governance: Digital Item Trade and its Consequences in Korea. Presented at Telecommunications Policy Research Conference, Arlington, VA. Available online at: http://web.si.umich.edu/tprc/archive-search-abstract.cfm?PaperID=382, at 5.

6 See: David R. Johnson & David Post, Law and Borders – The Rise of Law in Cyberspace, 48 Stan. L. Rev. 1367, at 1370-76 (1996) (where the authors discuss the difficulties in real world jurisdictions).

7 Internet Corporation for Assigned Names and Numbers (ICANN): http://www.icann.org/ (accessed 15.1.2010).

8 RuneScape, LJN: BG0939, Rechtbank Leeuwarden , 17/676123-07 VEV: http://zoeken.rechtspraak.nl/resultpage.aspx?snelzoeken=true&searchtype=ljn&ljn=BG0939&u_ljn=BG0939 (accessed 14.1.2010).

9 Criminal Code (Act 39/1889) Chapter 35 – Section 1 – Criminal damage (vahingonteko).

10 Criminal Code (Act 39/1889) Chapter 28 – Section 7 – Unauthorised use (luvaton käyttö).

11 Lastowka, F. Gregory and Hunter, Dan (2004). The Laws of the Virtual Worlds. 92 California Law Review 1, at 37.

12 Lastowka, F. Gregory and Hunter, Dan (2004). The Laws of the Virtual Worlds. 92 California Law Review 1, at 37.

13 Cf. Safer Social Networking Principles for the EU: the Commission convened various stake holders with respect to Europe’s major social networks, and as a result, guidelines for the use of social networking sites by children developed voluntarily by the European industry. http://ec.europa.eu/information_society/activities/social_networking/eu_action/selfreg/index_en.htm (accessed 17.1.2010).

Walled gardens are opening their gates: Linden acquires Avatars United, Habbo on Facebook

In December, the world’s biggest teenager virtual world Habbo plugged into Facebook Connect. This week Linden, the operator of Second Life, announced the acquisition of Avatars United. Avatars United can be described as a sort of “Facebook for avatars”, complete with a third-party applications ecosystem.

What does this mean? It’s a sign of walled gardens opening up. Virtual worlds and MMOs are traditionally silos where users and data are locked in. Through Avatars United, Second Life users will be better able to link their SL profiles with the outside world: the whole universe of existing social media services, feeds and applications. It will also enable new kinds of third-party innovation in the way SL integrates with other services. All this will increase the value of having an SL account to a user. This is assuming that SL opens up some interfaces to Avatars United: as of yet there is next to no data flowing.

On the other hand, by opening up their walls, operators also take the risk of users escaping to greener pastures. As teenagers start to access Habbo through Facebook as opposed to navigating directly to the Habbo home page, they are exposed to a huge variety of competing offerings. Suddenly Habbo is just one among hundreds of avatar-based hangouts. Competition for users becomes much more intense. Fortunately for Sulake, Habbo’s production values are above anything I have seen among native Facebook apps.

Perhaps the silo operators don’t have much choice. Sulake was downsizing its staff last year, while Second Life’s growth is not what it used to be. Neither platform has anything like the user base of the leading social gaming apps. But given an opportunity to compete head-on against the likes of Zynga and Playfish, both probably believe they could do well. The silo operators are traditionally much better at monetising their user base, so it’s worth a try.

Scholars and commentators have been speculating about interoperability between virtual environments for a long time. It is usually thought that this will be achieved through virtual environments adopting some sort of common standards when it comes to representing objects and avatars. In light of these news, I think the future looks different: what integration there will be between major online hangouts will take place through open but proprietary interfaces coming together at nodes such as Facebook and Avatars United. One could imagine, for example, an achievements metagame spanning multiple MMOs. This could be implemented today in Avatars United.

Full disclosure: I consulted for the Avatars United team on monetisation strategy and was a minor shareholder in the company when the purchase took place. At the time of writing this post I no longer have any financial motive to talk them up.