The rapid growth of online “virtual worlds,” or computer-based interactive electronic environments, such as Second Life® and There.com, has created new opportunities for creating custom, virtual content, and for advertising and selling “real world” and virtual products and services. Along with those opportunities come a number of unique and potentially complex legal issues that arise in establishing and enforcing intellectual property rights – including trademark, trade dress, copyright, rights of publicity and other rights – in the context of “virtual realities.” Conversely, owners of such rights need to be cautious in deciding whether to create their own presence in such virtual worlds, especially if the virtual world’s Terms of Use contain restrictions on how IP rights must be allocated or licensed, or how IP disputes must be resolved. Some companies may elect to create a presence in virtual worlds, but others may be “dragged in” to virtual environments by the need to monitor usage and enforce IP rights, since IP usage in these virtual environments can have significant real-world impacts.

Virtual worlds, such as Second Life and There.com, allow users to operate online characters, commonly called “avatars,” who may shop for real goods and build, buy and sell virtual items and locations. (See, e.g., www.secondlife.com and www.there.com.)

The capability of computer users, who are often anonymous or pseudonymous, to create and sell virtual items has led to concerns regarding unauthorized use of trademarks, copyrighted material and unauthorized content. At the same time, there are a number of additional legal issues concerning the governance of these online communities, the extent of the service providers’ responsibilities, jurisdictional boundaries, and the applicability and enforceability of real-world laws within virtual worlds.

Companies should secure legal guidance as they consider whether and how to monitor and quickly respond to reported IP violations within virtual worlds, especially threats to trademarks, copyrights and other important IP rights. Also, companies approached with virtual-world advertising or merchandising opportunities should be mindful of the potential risks and benefits. For example, licensors of virtual products should consider taking steps to restrict the use of, and where appropriate, ensure obsolescence of, any “virtual property” bearing their marks.

Background and Illustrative Example

Computer users who frequent virtual worlds typically assume the identities of online avatars who engage in ordinary human activities such as shopping, chatting with other avatars, dating, entertaining themselves with concerts, lectures and movies, and even working in virtual professions. Certain professions, such as developing virtual real estate and customized “designer” items for avatars (such as fashion and accessories), can be surprisingly lucrative. Many online worlds are focused on “real world” simulations and business (e.g., Second Life and There.com), whereas others (e.g., Worlds of Warcraft) offer a more fantasy-oriented gaming experience.

Business-oriented virtual worlds, in particular, tend to exhibit a convergence of characteristics that can lead to serious IP enforcement challenges:

  • Prevalence of user anonymity: Avatars typically mask their identities through assumed names, and this anonymity can create obstacles in identifying and punishing bad actors.
  • Proliferation of user-generated content: Participants in virtual worlds can introduce new content, such as simulated stores, products and events, into the virtual worlds, for which virtual world site operators claim no liability. As in real-world activities, these virtual activities can give rise to a full range of potential IP violations and defenses, including First Amendment and fair use defenses.
  • Real-world economic transactions: Virtual currencies often have real-world analogues and may even be exchangeable for U.S. currency. In addition, a number of companies use virtual worlds to advertise real-world goods and services and to present sponsored virtual events, such as concerts, conferences and training.
  • Enforcement authority: Currently, the governance of virtual worlds is chiefly controlled by end-user licensing agreements, website-specific terms of use and privacy policies, and “real world” law. However, the anonymity of virtual-world participants and the novel technological context of virtual-world operation and events can pose unusual challenges in identifying wrongdoers and securing remedies for IP violations.

A case in point is Second Life, which was launched by Linden Research, Inc. (Linden) of San Francisco in June 2003 and now dominates the virtual-world market, accounting for millions of dollars in transactions per year and registering more than 15 million avatar “residents.” According to the owners of the Second Life site, an average of about 40,000 anonymous or pseudonymous avatars are logged in at any given time. Second Life’s economy is sustained by “Linden dollars,” which are convertible to U.S. currency through in-world “LindeX Exchanges.” Companies such as Dell, Circuit City and Sony-BMG have official presences within Second Life, as do the embassies of certain countries. In addition, scholars, celebrities and entertainers, such as the rock group Duran Duran, have used the Second Life platform to create content directed specifically to virtual-world participants.

The Terms of Use of Second Life attempt to bind computer users who enter the virtual world. In addition, in an attempt to shield the company from liability for copyright infringement by users of the Second Life site, the Terms prominently claim “service provider” status for Linden under the Digital Millennium Copyright Act (DMCA). The terms also attempt to control dispute resolution and keep IP enforcement actions within the dispute resolution mechanisms specified by the Terms of Use. (The Second Life world even features its own Trademark Office where users are invited to register exclusive marks.) The Terms of Use also promise that users will hold copyright in their own creations within Second Life. As a result, most content within Second Life is user-created, and can be bought and sold with Linden dollars. Linden’s website encourages users to “make part or all of their real-life income” within Second Life. In 2006, Second Life reported its first millionaire, an online property developer whose real estate holdings within the virtual world had made her a millionaire – in real U.S. dollars – after she had invested just $9.95 for a registration fee two and a half years earlier.

Developing Virtual World IP Strategies

As avatars strive to design and sell popular items and locations within virtual worlds, the most frequent legal disputes have involved online infringement of copyrights and trademarks. (There have also been reports of burgeoning illicit virtual sex and gambling, avatar “infidelity” and even homicide, via unauthorized deletion of a user’s avatar, but those issues are beyond the scope of this alert.) IP offenses are noteworthy in that even companies that shun involvement with virtual economies have been forced into imaginary environments to defend real world interests.

A typical scenario occurs when an avatar creates designer goods or when a virtual store imitates trademarked products or real-life locations, potentially creating confusion as to the source of the merchandise or sponsorship of activities. Also, copyrighted material and/or unauthorized derivative works can be distributed or sold by avatars without the knowledge of the rights holders. Common challenges involve detecting and identifying bad actors, selecting methods of response and crafting a response that sets effective precedents for continued rights enforcement in the future.

Since the legal framework for regulating online worlds is still developing or is, in certain situations, untested, seemingly straightforward and routine tasks can pose unanticipated risks and challenges. For instance, a company employee who creates an avatar and enters a virtual world to monitor suspected infringement or to communicate with an offending avatar could, arguably, inadvertently bind the company to the virtual world’s Terms of Use, which typically take the form of relatively complex web postings or “click-through” contracts. Companies that establish an “official presence” in a virtual world can also find that their generation and enforcement of IP rights in that world are arguably governed by potentially unfavorable or restrictive provisions in the Terms of Use, or other terms that govern “business uses” and advertising in the virtual context. Therefore, it is important to consider the potential effects of the Terms of Use and other applicable terms before commencing activities in a virtual world. Also, there are a variety of strategies that rights holders can employ to avoid unintended consequences of agreeing to Terms of Use or terms that govern business uses of virtual-world properties.

Among the IP enforcement challenges in virtual worlds is determining the appropriate strategies and responsibilities for monitoring and responding to violations of IP rights. For example, the extent to which a site operator is protected from liability for site users’ activities or required to take remedial actions for infringements and other violations will be tested in a case-by-case basis and may lead to different approaches in different jurisdictions. Also, due to (at least initially) the anonymity of many virtual-world users, IP enforcement actions may require, if appropriate, pursuit of simultaneous claims against both the site operator and the owner of the infringing avatar or virtual business. The extent of the site operator’s participation in or encouragement of the infringing activity can also affect the determination of whether the site operator qualifies for immunity under the DMCA.

A particularly important concern is that the governing documents within virtual worlds, such as the Terms of Use, set forth policies and mechanisms for addressing IP violations by avatars. However, such mechanisms are only one avenue of response and have the potential drawback of entangling rights holders in the Terms of Use. Other avenues of protest and requests for removal of infringing content can, and in some cases should, be pursued.

Unauthorized use of IP in virtual worlds is a growing problem. Since virtual-world economies are rapidly expanding, and the applicable law and available enforcement strategies can be complex, Drinker Biddle has offered its clients counseling in generating and enforcing IP rights in virtual contexts, as well as in determining how and under what terms to establish a presence in virtual worlds.

Entering Virtual Markets: Know the IP Risks and Potential Benefits

The establishment of a virtual business presence can reach important demographic sectors and also provide a sort of “techno-cache” that can appeal to certain consumers.

Therefore, a number of companies have purchased virtual property and established a retail presence within online worlds, whereas others have contracted for the sale of virtual items emblazoned with their logos. For instance, the Coca-Cola Company has sponsored the creation of “Coca-Cola Island” in There.com, where avatars can buy virtual soda drinks and even virtual vending machines. In such cases, the trademark owner may receive royalties based on revenues from the virtual items sold. However, while participation in virtual worlds can provide beneficial opportunities to advertise and market products and services, virtual worlds should not be viewed as passive advertising channels or fanciful novelty sites that can be treated casually. The presence of a number of technical and legal complexities, especially the potential applicability of Terms of Use, require careful, fully informed consideration.

In addition to IP ownership, licensing, jurisdiction and enforcement issues, there are a number of virtual-world issues that might not be readily apparent, since the excitement or fantasy nature of the virtual world can mask a number of serious underlying concerns. An example of potentially unanticipated or unnoticed issues is that some Terms of Use contracts may define virtual items as “property” that is “sold” rather than as the subject of a temporary, non-exclusive license to control the display and use of a visual image. The distinction can have legal consequences; an approach conceiving of the virtual goods as property may result in the absence of any limitations on sublicensing of trademarked or copyrighted virtual items. In some situations it may be prudent for licensors to protect their IP interests by ensuring obsolescence of, or placing clear restrictions on, any virtual items sold for use in a virtual context. For example, a pair of branded sneakers bought in the real world will eventually wear out, but a pair of virtual sneakers bought and worn by an avatar may exist forever, unless the licensor insists that the virtual item (just like the physical item) become unusable after a certain period of time. Limitation of the virtual items within a single virtual world may also be advisable, since there is a potential for the items to be displayed and sold through external websites, or transferred to foreign virtual worlds where avatars can travel (and subject themselves and their virtual possessions to separate Terms of Use).

Overall, there are growing opportunities for advertising and sales within online virtual worlds, but these opportunities can give rise to complex and unanticipated risks to IP assets. Clients are advised to keep these issues in mind when offered contracts involving virtual worlds or considering how best to generate and protect IP in virtual contexts.