In his second guest post, my friend and colleague Jonny Mayner gives his thoughts on the state of virtual goods and the law. Jonny is a trainee solicitor at Osborne Clarke. 

The emergence of virtual worlds (such as Entropia Universe, Everquest and Second Life among many, many others) was arguably one of the most heralded, hyped and lauded developments of Web 2.0 with users encouraged not only to participate in and inhabit these intangible spaces, but in some cases encouraged to create content for the virtual world (user generated content being another of Web 2.0's Big Ideas). Further still, in the case of Second Life, users were tantalised by the prospect of actually owning virtual goods and property which were bought using real-world currency, created by themselves or obtained in-world through transactions with other users.  Since then, the boom in social games has taken virtual goods/currency to a whole new level.

The aphorism that "property is 9/10 of the law" may be a nonsense, but it doesn't take a genius to figure out that where people were seemingly being offered ownership rights to intangible items (including "land") in intangible worlds in exchange for real-world money when most legal systems in the world had only just started to tackle the legal challenges presented by Web 1.0, that at some point, somewhere, disagreements would arise and confusion would ensue as to what was actually owned by whom and how.

The Big Idea of virtual worlds may not be living up to the hype, but virtual goods remain a key feature of online gaming from World of Warcraft to Farmville so legal questions persist. Legal cases related to issues of virtual goods and property are still comparatively rare however they do seem to be on the rise and courts are hearing them.

Underlying just about every virtual goods dispute is one fundamental question: is ownership of virtual goods to be treated as being akin to ownership of property and goods in the real world, or is it to be treated as a service provided by the operator of an online gaming network or virtual world and therefore governed by the terms and conditions of the End User Licence Agreement (EULA) or Terms of Service (ToS) between the user and the operator (which the user will no doubt have had to agree to wholesale in order to access in the first place). The operators of online gaming networks and virtual worlds tend to take the latter view, even those operators who have made a lot noise about granting their users intellectual property rights and other property rights over user-generated and acquired content.

Why does this even matter?

Two words. Money, and liability. Actually, since the key question regarding any legal liability is "how much?", the one word will do. Money. The ways in which developers, operators and users of online gaming networks and virtual worlds are able to commercialise their activities are crucial to the success or failure of the whole idea subscription-free gaming networks and virtual worlds.

If legal systems ultimately assert that virtual goods and property are and always shall be treated as services provided by the operator to the user and governed by EULAs or ToS then it is business as usual and developers and operators can carry on, provided of course they can continue to attract and retain users who will pay real-world money for access to the virtual world, virtual currency etc.

The downside to this approach is the clear expectation gap between much of the early hype about genuine ownership of virtual property and goods and the ability of users to genuinely own and commercially exploit virtual property that they have purchased and virtual goods that they have created or otherwise acquired. If these expected (and, some might argue, promised) rights are not granted to users, will users drift away, leading to declining revenues for operators and failing business models?

On the other hand, if legal systems around the world were to acknowledge that virtual goods and property are indeed to be accorded a similar status to goods and property in the real world then operators will need to radically overhaul how they currently deal with virtual goods and we may witness a move away from trying to deal with these matters via a simple EULA or ToS, towards dealing with leases and the law of landlords and tenants.

And if virtual goods and property are to be considered as comparable to real-world counterparts how are they to be treated for tax? Should there be VAT on clothes you buy for your avatar? Should there be Stamp Duty Land Tax payable on purchases of virtual property? Or Income Tax on the profits of in-world businesses? Or Capital Gains Tax payable on profits generated from virtual property which has been developed and sold on? How is this to be regulated? Which country's tax law even applies? Where the operator or the user is based? Both?

Also, crucially, the issue of access to virtual property and goods which are deemed to be owned outright by users will cause headaches among operators of virtual worlds. At present an operator can hide behind the terms of their EULA or ToS whenever they need to deny users access to their virtual world. Reasons for a denial of access might range from the temporary or permanent expulsion of a user for abusive behaviour towards other users or because of necessary maintenance downtime at the operator's facilities. If an operator risks being sued every time a user cannot access their virtual goods or property then the continued operation of the virtual world becomes a huge legal liability with potentially catastrophic commercial consequences. In that context a finding by a court in an influential jurisdiction which asserts that virtual goods and property cannot be governed by an EULA or ToS may contribute to virtual worlds everywhere either shutting up shop or having to radically change their business models and the way they do things by virtue of the Pandora's Box of legal and commercial complexities that will ensue.

In short this legal question matters because it may well determine the commercial viability of subscription-free virtual worlds in general.

Given that we don’t have any legislation which spells out the answer to this question we are left to look to the courts to interpret what laws we do have and to apply them to these issues. It is worth mentioning that when it comes to this sort of court-made law we are only really interested in reported decisions – anecdotally cases involving virtual property are on the rise globally but there seems to be little in the way of hard case law coming out of that activity. Basically the Holy Grail is a final decision of a reasonably senior court which sets some sort of precedent on these issues and that would be binding on other courts. So what have the courts actually said about the legal status of virtual goods?


Virtual currency crime

So far as I'm aware there have been no major virtual property disputes heard in the UK courts, although related issues around virtual currency recently arose in a criminal prosecution (this was covered by Jas here). In brief the defendant hacked into the computer system of social games behemoth Zynga and transferred a cool 400 billion virtual poker chips into his account (street value estimated at around £184,000 according to court submissions). He is in prison now.

So it seems that the UK courts at least are clear that virtual currency is pretty much analogous to real-world currency and that fraud is fraud, whether you are dealing with sterling, dollars or zynga chips. But what about cases which have raised questions about the status of virtual goods? Well, in the absence of any UK cases we must look across the Atlantic, where Linden Labs (operators of Second Life) have attracted at least two high-profile law suits which have claimed that users’ ownership rights in virtual goods and property have been breached or eroded in some way by Linden: the Bragg case, and the Evans case.

Marc Bragg v Linden Research Inc and Philip Rosedale (2007)

The Bragg case was brought in the US State of Pennsylvania by Marc Bragg (a user of Second Life) against Linden (the operator of Second Life) and Philip Rosedale, Linden's founder. In brief the background to the law suit was that Linden barred Bragg from his Second Life account alleging that Bragg had cheated in obtaining certain virtual property in Second Life at a lower that market price. Bragg then sued for the effective confiscation of the virtual goods and property which he had bought, created or otherwise acquired during his time in-world in Second Life, and which could only be accessed and exploited through access to the Second Life world. While the court did make some interesting remarks about the potential unconscionability of the Second Life ToS (particularly in relation to its dispute resolution provisions), the case ultimately settled out of court and so the fundamental question of whether virtual property and goods are to be governed by rules of property law or contract law was not directly addressed in a court judgement and no legal precedent was set.

Evans et. al. v Linden Research Inc and Philip Rosedale (2010)

And so all was quiet for couple of years, until another virtual property case came along in April 2010, again in Pennsylvania and again directed against Linden in relation to Second Life, but this time by a disgruntled group of users led by Carl Evans.

In brief Evans and his co-claimants allege that by unilaterally altering the ToS (specifically terms relating to user's rights in relation to access to the virtual world and the rights users enjoy in relation to property and goods acquired in-world) Linden has eroded users' ownership rights to the goods and property which they have acquired in-world. Users will have been presented with a choice of accepting the non-negotiable revised ToS or not having access to Second Life so in situations where a user will not agree to the revised ToS they have effectively been denied access to their virtual goods and property.

The claimants also claim among other things that Linden and Philip Rosedale have breached advertising codes and have committed fraud by offering genuine property ownership rights in virtual goods and property but failing to deliver. The claimants allege that they were induced into accepting the original ToS and investing in the Second Life in-world economy with real-world cash by the false promise of property rights which Linden have subsequently claimed do not exist. As in the Bragg case, the claimants also make claims about the unfairness of the dispute resolution provisions of the ToS which stipulate that disputes be heard in California in a specified arbitration process.

So what has happened since the claimants filed the claim in April 2010? The short answer is "not a lot, but wait…" As with most US litigation this is a slow-moving process. The defendants filed a motion to dismiss the case in August 2010, which was only answered by the court in February 2011 and the net result of the to and fro to date has been simply a change in venue from Pennsylvania to California, where the case will now be heard. This is due to some legal wrangling not related to questions of virtual property, the short of which is that while the court in Pennsylvania previously held that the dispute resolution provisions of the Second Life ToS were unconscionable and unenforceable in the Bragg case, those provisions had since changed (making them a little fairer) and the same judge this time determined that the provisions of the ToS which required that disputes be heard in California were valid and accordingly he transferred the case to California.

It remains to be seen whether the court in California will refer the case to arbitration in accordance with the ToS provisions or rule on the case itself. And even if the court does make a ruling it may seek to decide the case without doing so making a substantive ruling on the fundamental question of the legal status of virtual goods and property. It is conceivable for example that the judge could rule that Linden is guilty of false advertising and / or fraud without asserting that genuine ownership of virtual property is or is not legally possible (i.e. dodge the issue and let someone else decide these matters another day, in another case).

So where does that leave us?

The most interesting thing is that courts are listening to these disputes whereas many operators of virtual worlds (and their lawyers) no doubt expected (or perhaps hoped in vain) that the EULA and ToS approach would go unquestioned and unchallenged.

Stories have trickled through from the Far East over the last few years of more and more legal cases involving virtual worlds being heard by courts in places such as South Korea, where MMORPGs and other virtual worlds have been hugely popular, but the issue of the precise legal status of virtual goods and property seems to have gone unresolved, although last year's review on the online gaming world by the government in Vietnam indicated that it considered that virtual goods and property are not real assets comparable to real-world goods and property (you can read Gamer/Law's report on that here). 

Throw into the mix criminal prosecutions relating to fraud involving virtual currencies and theft of virtual goods (as well as the Zynga case above you can read a heads-up about another Dutch theft case here) and it seems clear that the legal problems which are surfacing at the interface of virtual worlds and the real world are not going to go away. That said, for the time being at least users and operators of virtual worlds and social games must carry on in uncertainty as to whether users actually own their virtual goods and property or whether they are just paying for a service provided by the operator subject to a take-it-or-leave-it EULA. As always, watch this space...