Virtual property issues have made the cover of Business Week.
Virtual property issues have made the cover of Business Week.

NOV. 5, 2007 • As an attorney in New York, I work with game companies frequently and have for several years.  In addition, I am often asked to speak and write about subjects that affect the game industry.  One of the most popular subjects in the last two years is the development of virtual property in the game industry. The industry stands at an exciting and interesting junction with virtual property that can be traded for real money, and this “real-money trade” (“RMT”) has the potential to be a substantial source of income for publishers, developers, and perhaps even unaffiliated third-parties.

Arguably, the industry has been moving in this direction for some time. The concept of economic value in digital items, at least anecdotally, goes as far back as the 1970’s and the first text based multi-player games including Oubliette and MUD1.  Even my personal experience with RMT certainly goes back to the early 1990’s when I wired $400 (more than my monthly rent at the time) to a text-based MUD in Finland.  Yet, it has not been until this century that the world has had enough internet connectivity and a player base substantial enough to support robust markets trading in virtual property.

By way of definition, virtual property, can have wide meaning in the literature, but in this article it is meant to include items, characters, real estate and currency in a game.  This growth of markets in virtual property is, like many new business opportunities, a mixed blessing and comes with a myriad of unanswered or partially answered legal questions, a few of which are examined here.

A Primer on RMT
RMT fundamentally comes in two types: “approved” or “unapproved.”  Approved RMT is encouraged, sometimes even facilitated, by game companies.  This type of trade is common in Asia and growing in frequency in the United States.  However, historically, in the United States, RMT has not been approved by game companies.  This resistance, coupled with consumer demand for RMT created a black market, sometimes called a “gray market” or “secondary market” in virtual property.  This black market has continued to grow despite efforts, of varying sincerity, of game companies to stomp out the trade.  Companies have banned accounts of those involved in RMT and posted press releases about opposition to “farming” or buying gold.  Companies have also flirted with settling these issues in court, most notably with the Black Snow and Peon4Hire cases.  So far, these collective efforts cannot really claim success in stopping RMT, and there are still no definitive judicial rulings on the subject in United States.

Illicit gold sellers went so far as exploiting a bug in World of Warcraft to use dead gnome models as an advertisement.
Illicit gold sellers went so far as exploiting a bug in World of Warcraft to use dead gnome models as an advertisement.

This growing market for RMT coupled with what many have called a near futile struggle against unapproved RMT has brought about a substantial shift in the game industry’s thinking about virtual property.  In the past eighteen months, a growing number of games have either started development or shifted development to include some form of RMT as an approved revenue source.   In addition, the RMT issue is being contemplated during development to a much greater extent than was previously done.

The battle to create and keep “pure worlds” without RMT has subtly shifted, into a different battle – the battle to internalize the RMT market and harvest that revenue for the game companies themselves.  In the United States some would say that the losing battle against black market virtual property is proving the successfulness of this business model because it appears profitable in spite of the costs associated with the potential for game company sanctions, litigation, and cancelled accounts.  We know from industry reports that approved RMT allows for higher per user revenue than subscription models alone.  The key for user enjoyment lies in the game design where the “velvet-rope” or “pay-for-perks” models that rely on virtual property are viewed as bonus material, not requirements for gameplay, especially early in the game.

Approved RMT and Signs of Developing Virtual Property Business Plans
One could argue that “approved” markets for virtual property are already here.  The game industry has seen that Korea is successfully using the micro-transaction model.    Other more familiar “approved” models for virtual property arguably include the Xbox Live points system.  Importantly, the money in this business model only goes into the system, is translated into points, and then allows users to buy items.  This one-way flow of real-world dollar may offer some insulation for Microsoft from some of the potential legal issues discussed in this article.  Secondlife Logo-SElectronic Arts also uses a point system on allowing games to be played for points, which turn into sweepstakes entries for real-world prizes.  So, there are already some forms of approved virtual property markets providing revenue streams and more on the way.  The current developments in virtual property for online games are arguably a second wave.  Even so, there are signs that this second wave will be much larger than the first.

Beyond the obvious press releases, announced games, and recent launches, patents tend to follow areas where companies anticipate there is money to be made.  Currently, there are less than five issued patents concerning virtual property, but we can also measure the strength of the patent “pipeline” in an area by looking at published patent applications.  A patent normally takes between two and four years to wind through the United States Patent and Trademark Office before it is allowed to issue (if it is allowed to issue at all).  Knowing that, we can look at published patent application volume and have some preliminary sense of business interest for a subject.  Even though there are currently less than five issued patents discussing virtual property, a search of the USPTO yields more than 65 pending patent application discussing virtual property with about forty five of these (two-thirds) filed in just the last two years.

It is clear that the game industry is waking up to the idea of making money using virtual property, but what types of legal issues may follow from exploiting these avenues?  For certain, these issues will be almost entirely new in this context.  The courts are just now having some interaction with virtual worlds.  The idea of in-game economies connected to outside economies is going to appear foreign, if not surreal to our judiciary as more litigation is brought to court.

Exploring the Legal Aspects and Responsibilities
The concept of virtual property can extend beyond the linking of monetary value to content.  Consider what Linden Lab is doing with its virtual world Second Life.  As a start, this world has a currency and items that have acknowledged monetary value.  Furthermore, users have rights in their intellectual property created in the game.  Finally, users are also actively building the world, filling it with user generated content.  This extreme example of a developed virtual property system is so different than traditional game models that new rules will have to apply.

Actress Mia Farrow used Second Life to discuss tragic conditions in Darfur.
Actress Mia Farrow used Second Life to discuss tragic conditions in Darfur.

The recently settled Linden Lab-Marc Bragg case highlighted this tension.  The Bragg case involved a Pennsylvanian attorney that had “cheated” to purchase virtual property in the game.  Linden Lab took a dim view of this type of opportunism and cancelled Bragg’s account containing about $8,000 of virtual property.

Traditionally, property in online games has not held an acknowledged value. Unlike Linden Lab, no game company would dream of granting user’s IP rights or acknowledging value in virtual property.  Those relatively simple systems had tremendous advantages in their simplicity.  The advantages were especially evident for customer service departments.  “Old School” customer service for people that cheated or otherwise violated the rules of the game, terms of service, or EULA was simple.  For minor infractions, people were warned or temporarily banned.  For repeated or major infractions, people were banned permanently, their accounts cancelled, and any virtual property they had including items, characters, and currency was destroyed in the process.  This worked well under old models of virtual property, where the property had no acknowledged value.

The Bragg case, however, eventually made its way to federal court where certain clauses of the EULA were found unenforceable, prompting review and editing of these documents by Linden Lab and other online game publishers across the industry.  Specifically, the judge in the Bragg case found that the Terms of Service represented a “contract of adhesion” and was “unconscionable,” at least as it concerned the mandatory arbitration provision.  The judge noted that the arbitration section was relatively hidden in the agreement and many of the terms were so one-sided and onerous as to be fundamentally unfair.  Furthermore, the substantial costs to Bragg of filing the arbitration and forcing his appearance for the arbitration in San Francisco also factored into the judge’s findings. Where this type of anti-cheating customer service account cancellation outlined above was easily the standard response for most games without a virtual property component, in the Bragg case it was found wanting and eventually the lawsuit was settled in October of this year with Bragg’s account reinstated. The Bragg case demonstrated that these traditional rule sets and customer service models may not be sufficient in some games with virtual property systems.

Additional responsibilities will almost certainly come with this new revenue stream.  The idea that virtual property has a monetary value, especially when these items can be explicitly purchased with money, and when that money can also be removed from the game system certainly generates some legal questions about regulation and responsibility.  Acknowledging the monetary value of virtual property will also come with regulatory and legal responsibility.  Gavel-SFor instance, we know that Linden Lab shut down gambling in Second Life following an FBI investigation.  Previously, games were selling “fun” and those database entries were just that.  This is especially true when that value can be extracted from the world by consumers.  Some of these regulatory issues include sweepstakes, gambling, securities, banking, and money laundering regulation.  Consider these currently unanswered questions:  If a customer pays to play a game with random drops worth real money, will that be judged as the same as putting coins in a slot machine?  Does selling plots of virtual land to groups of people for development and profit constitute selling securities?  Do game companies holding thousands of dollars of virtual property assets need to meet the standards for banking regulation?  To what extent can criminal entities use games to safely and quickly move money across borders and currencies?

In the next several years, these questions and others will surely be encountered by companies moving into the virtual property space.  At least some of them must be handled on the regulatory or judicial level.  For now, the questions remain largely unanswered, but loom as potential pitfalls for companies seeking out that virtual pot-of-gold attached to RMT.  Currently, spotting the issues and making efforts to skillfully plan for and negotiate them based on our closest possible precedents is the best we can do.

– Greg Boyd is an attorney with Paul, Weiss, Rifkind, Wharton & Garrison LLP in New York. He has represented some of the most prominent game companies in the world. His work includes IP counseling and transactional work for both publishers and developers. He is co-editor of the popular reference book Business and Legal Primer for Game Development. Dr. Boyd has spoken at several national conferences including AIPLA, GDC, Austin, and State of Play. He has been an invited lecturer at HarvardBusinessSchool, ColumbiaLawSchool, and other academic institutions. His commentary on business and law in the game industry has appeared in publications including Fortune, Forbes, Game Developer Magazine, and Gamasutra. He sits on the Board of Advisors for Mobygames. Dr. Boyd obtained MD and JD degrees from the University of North Carolina at Chapel Hill and is currently enrolled in the NYU-Stern MBA program.