Canada: What Your Business Must Know About Virtual Worlds

Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Information Technology, May 2008

What Virtual Worlds Are

A new form of video game, called a massively multi-player online role playing game (MMORPG or MMOG), has experienced a meteoric rise in popularity. There are three categories of MMOGs. The first comprises electronic versions of traditional board games, called casual games. These are traditional games, like chess, which participants play online. The second comprises scripted games. These involve large numbers of players interacting with each other in a virtual world within the limits of the creators' pre-existing scripts. These games have a purpose, such as attaining the most points. Participants may play individually or in groups.

The third category comprises unscripted games, called real world games. Real world games, involving virtual worlds or metaverses, are online digital environments in which large numbers of users socialize, participate in events and, in some cases, create and trade virtual goods, services and other property, including virtual real estate. Several real world games create an alternative online virtual world which mimics many facets of real life through interactive computer simulation. In contrast to scripted games, real world games have no pre-scripted story line or purpose. Participants interact with each other in different venues and do what they desire. The only limitations are the computer code and the rules of the game.

Examples of real world games include ACTIVE WORLDS, EVERQUEST, THERE, THE SIMS ONLINE and the mature-themed RED LIGHT CENTER. The largest and best-known virtual world is SECOND LIFE, which was created, and is operated by, Linden Research Inc. or Linden Lab. It also operates TEEN SECOND LIFE. A participant launches Second Life's software on a personal computer, logs in to the site, and then is free to roam endless virtual landscapes, create goods, meet others, and conduct business.

A Second Life user is referred to as a resident and is represented by an avatar. An avatar is an icon or human, humanoid, animal or object representation of a resident in a shared virtual world. Avatars are made by tools provided by the virtual world provider and are defined by their appearance, capabilities, behaviour and communication. An avatar may be completely fictitious or may be made to resemble the resident it represents. Another resident can obtain certain limited information regarding the resident represented by a particular avatar, such as his or her real age. At least one person has sought a trade-mark registration for a personal avatar.

One of the distinguishing characteristics of Second Life is that residents, not Linden Lab, create most of the content. A three dimensional modelling tool allows residents to build virtual landscapes, buildings, vehicles, machines and other objects to use, trade and sell. A resident can mark such a creation as:

(i) "no copy", meaning that no copies may be made by others;

(ii) "no mod", meaning that no characteristics of the object may be modified; or

(iii) "no trans", meaning that the current owner may not transfer the object to another person.

The impetus for many participants' involvement lies in Second Life's thriving virtual market economy. Second Life advertises and promotes the ability of residents to retain ownership of their virtual creations and to own virtual real estate.

In Second Life, Linden Lab does not provide hard currency. However, Second Life participants use a virtual currency known as Linden Dollars, which are freely convertible to real world currency, to effect transactions. Residents use a currency exchange called Lindex, and even a stock exchange has been set up. Linden Dollars may be held as a credit in a resident's account to be applied to account fees, may be used to purchase land, goods or services, or may be withdrawn in real currency.

By late 2007, almost 10 million people were participating in Second Life and effecting transactions which cumulatively involve more than US$1-million daily. Participation is growing by more than 25 per cent each month. At least one person is known to have accumulated a net worth exceeding US$1-million from profits entirely earned in Second Life.

Many major companies, including Adidas, Amazon, American Apparel, American Express, Armani, BMW, Calvin Klein, Circuit City, Coca-Cola, Daimler, Dell, Fiat, General Motors, Herman Miller, IBM, Intel, Kraft Foods, Leo Burnett, Mazda, Microsoft, NBC, Nike, Nissan, Playboy, Reebok, Reuters, Sears, Sky News, Sony, Sprint, Sun, Telstra, Toyota, Wal-Mart and Warner Music, have presences on Second Life, and so do Canadian businesses like Canada Post and Telus. Even financial institutions, among the most staid businesses, are participants, and participating major banks include ABN Amro and ING.

Many well-known organizations and institutions also participate, including the American Bar Association, the American Cancer Society, the Federal Bureau of Investigation, the National Aeronautics and Space Agency, National Public Radio and Save the Children. Participating universities include Harvard, Laval and Princeton. Countries, such as Estonia, Sweden and the Maldives, have opened embassies on Second Life. A private entity has even established a Second Life Patent and Trademark Office.

Businesses have joined for various reasons, for example to:

(i) effect transactions by selling real or virtual goods;

(ii) perform real or virtual services;

(iii) test new product offerings;

(iv) advertise real world goods or services;

(v) build brand awareness; or

(vi) showcase innovation.

Participants are experimenting with various business approaches. By way of example, IBM offered streaming video of the Wimbledon tennis tournament through Second Life in 2007 and enabled avatars to participate. Harvard University offers classes. Artists like Jay-Z have performed concerts.

Legal Issues Generally

Second Life users are required to agree to terms of service (TOS) by way of a click-through agreement in order to access the site. The TOS serve as the "law of the land" and provide that Linden Lab retains ownership of the account and related data, regardless of the intellectual property rights a user may have in content the user creates or otherwise owns. The user's intellectual property rights do not confer any rights of access to Linden Lab's services or any rights to data stored by, or on behalf of, Linden Lab. All content, currency, objects, items, scripts, equipment or other value or status indicators may be deleted, altered, moved or transferred at any time for any reason at Linden Lab's sole discretion.

The TOS prohibit users from taking any action or uploading any content that infringes or otherwise violates any third party rights or from impersonating any individual or any other person or entity without consent. Second Life bars gambling and has rules against offensive behaviour in public, such as racial slurs or overtly sexual behaviour. However, consenting adults may engage in sexual role-playing. While the TOS set out substantive law, they do not provide a forum or mechanism for justice. Some authors have suggested procedural models, but none has yet been implemented.

Virtual environments and the resulting commercial and other activities which occur within them raise numerous new, interesting and challenging issues. These include issues relating to contracts, e-commerce, consumer protection, supply of goods and services, property, privacy, publicity, defamation, employment, tax, intellectual property, and even family law, as well as the resulting jurisdictional questions that inevitably result. For example, there may be an issue as to whether revenues received in Second Life should be reported for taxation purposes.

Like any community, Second Life has been subject to criminal activity, including theft, fraud, virtual escort activity, sexual harassment, assault, gambling, money laundering and even terrorism and murder. Offenders, referred to as griefers, often victimize new players. Virtual crimes are becoming such a significant problem that Second Life features a community police blotter bulletin board. As real world value is at stake, and many participants have made significant economic and social investments, deviant activity by residents has real consequences. A resident who has invested the equivalent of real world money to acquire virtual world assets that are destroyed or swindled, suffers real economic loss.

Eliminating crime and other improper activity, which may not have been foreseen by the creators of these games, has proved to be one of the most difficult challenges for Second Life. In Second Life, a three-strikes policy enables Linden Lab to permanently terminate a player's account after three violations of its Community Standards, which govern intolerance, harassment, assault, privacy, indecency and disturbing the peace.

The resolution of disputes on Second Life is in its infancy but there are complicated and unresolved issues. In 2006, the COPYBOT debugging and back-up software tool was edited and recompiled into a new application which could clone avatars and objects created in Second Life without the creator's authorization. This significantly reduced the value of virtual assets by making them readily available even if the creator had identified them as "no copy" objects. Linden Lab responded by announcing that COPYBOT or any similar tool violates Second Life's TOS, which state that users must use Second Life as provided, without unauthorized software or other means of access or use and must not make unauthorized works from, or conduct unauthorized distribution of, Linden Lab's software.

In the first lawsuit between a resident and Linden Lab, the court considered virtual personal jurisdiction and the enforceability of the TOS. In that case, a resident acquired a parcel of virtual land at an unpublished and unauthorized auction through an unauthorized software exploit. Linden Lab considered this to be a fraudulent scheme and, pursuant to the TOS, froze the resident's account and confiscated all of his virtual property and currency. The resident sued Linden Lab and its chief executive officer, alleging unfair trade practices, conversion, interference with contractual relations and breach of contract. The defendants lost a motion to compel arbitration of the case pursuant to Second Life's TOS. The court held that the arbitration clause was unenforceable because it was unreasonable as a contract of adhesion. The case subsequently settled.

Before dealing with the merits, the court concluded that, although Linden Lab is a Delaware corporation headquartered in California, Linden Lab's national advertising campaign and virtual town halls, hosted within the system by an executive of Linden Lab, created sufficient minimum contacts to satisfy the requirements for personal jurisdiction in a Pennsylvania court. The decision suggested that actions in a virtual world may be enough to confer personal jurisdiction on an operator and, potentially, even users, at least insofar as they interact with others in the virtual world. The potential consequence is that a user in a virtual environment may have no way of knowing where other users are physically located in the real world, and thus may have no way of controlling the jurisdictions within which they interact.

Intellectual Property Issues

Virtual worlds are ripe for intellectual property disputes. The freedom that users have to create virtual assets makes it as easy for them to create and sell infringing items as it is to create original non-infringing items. It is equally simple for users to create and sell unauthorized digital replicas of most major real world content frequently branded with real world trade-marks. Content and brand owners have become prime targets. The misappropriation of well-known trade-marks has become ubiquitous in Second Life.

An issue arises as to how virtual objects and intellectual property should be considered. For example, it is unknown whether someone who makes, sells or uses a virtual copy of a widget patented in the real world commits patent infringement and, if so, in which jurisidiction. Similarly, it is not yet determined whether someone who develops a trade-mark used only to identify goods or services in a virtual world generates enforceable trade-mark rights in the real world. To establish a violation of trade-mark rights, a person must be found to have used a confusing trade-mark, so an issue also arises as to whether virtual use of a trade-mark which is the same as, or confusing with, a real world trade-mark constitutes trade-mark use in the real world. For participants to resolve disputes in a real world court system, virtual property must be used as real world intangible property.

Linden Labs has taken the position that it has the right, but no obligation, to adjudicate disputes between users. Linden Labs states that its staff generally removes content that includes trade-marks without apparent authorization. Any resident may file an abuse report if it sees any other resident making unauthorized use of trade-marks in Second Life. This is one reason why trade-mark owners are increasingly arranging for a representative to become a resident.

There have already been trade-mark and copyright issues and disputes involving Second Life activity between real world businesses. Businesses have addressed Second Life activities which violated real world intellectual property rights in different ways. For example, Apple caused the removal of an unauthorized chain of Second Life stores that replicated Apple's real world stores in minute detail. Furniture manufacturer Herman Miller offered replacement authentic virtual chairs free to those who had purchased unauthorized virtual replicas.

Parties have also resorted to real world courts. The liability of a virtual world operator for the infringing conduct of its users is uncertain. In a United States case, the owner of rights to comic book superheroes sued the operator of an MMORPG for trade-mark and copyright infringement on the basis that the operator facilitated infringement because gamers could create avatars that resembled the plaintiff's superhero trade-marks. The operator's EULA prohibited gamers from assuming a name or likeness similar to those of certain superheroes and actively deleted users that violated the EULA. Before the case settled, the plaintiff's trade-mark claims were dismissed on the basis that any activity with such marks by gamers was purely recreational and was not in a commercial context.

There has also been litigation relating to Second Life. In one case, a group of merchants on Second Life joined to sue a person who is alleged to have copied virtual products of the plaintiffs and represented his products as authentic. The plaintiffs made claims of copyright infringement, trade-mark infringement and unfair competition.

In another case, Eros created adult entertainment products in the form of its virtual beds, which it sells to Second Life users to enable them to have virtual sex. Another person made unauthorized replicas of the beds which it sold on Second Life at a lower price. Eros was successful in ex parte motions for permission to issue subpoenas to Linden Lab to discover information about the identity of the anonymous defendant avatar and to issue subpoenas to Internet service providers to seek information about IP addresses used by the defendant, who has since been identified.

As these lawsuits and others are settled or decided, the rights of intellectual property rights owners in virtual worlds will be clarified.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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