For those of us who are not immersed in the world of science fiction, a virtual reality (commonly referred to as "VR") is a simulated environment that aims to have some resemblance to reality. Users exist in a VR in the form of an "avatar", a simulated person they control.

Second Life, created by Linden Labs ("LL"), is the most successful VR to date, currently having over 11 million residents or registered users. At first glance it is easy to dismiss Second Life as a computer game whose commercial relevance is only to software developers and other similar business models.

However, with such a significant number of users who are increasingly creating and trading goods and services for US dollars - $1.4M is currently in circulation – multinationals have been quick on the uptake. Nike, IBM and Toyota are examples of corporations all using Second Life for product sales, advertising, meetings and/or testing reaction to new products. The Starwood hotel chain has taken advantage of the opportunity to reach a broad marketplace at a low cost, using a Second Life prototype to test consumer reaction to its new hotel concept. Even the Swedish Foreign Ministry has opened an in-world Swedish embassy.

Such a nascent, fast growing marketplace has unsurprisingly brought with it a range of intellectual property ("IP") issues. The most significant issue to date has been trade mark infringement, with trade marks created outside the confines of Second Life ("real-world") being applied to products created in-world without authorisation. Given the ease of copying in-world creations even those products legitimately created by users can be copied and sold by unscrupulous traders. The fundamental issue here is determining the owner of IP created in-world, and in this respect Second Life takes a different approach to the majority of its contemporaries. Traditionally, IP is assigned to the hosting company, however with Second Life, the user retains IP in the works they upload. This is subject to the caveat that ownership of IP rights in such creations does not give owners the right to access the data stored by LL. LL also have a licence to use the IP and reserve the right to delete or alter any Second Life data, which includes items created by users – clearly a significant caveat which undermines the rights of users, however this right is not commonly exercised other than in the case of IP infringement.

If in-world creations can be copied, how is IP infringement dealt with? The Terms of Service for Second Life are governed by California Law, and residents may resolve minor disputes by in-world legal proceedings. LL also has the power to "evict" residents who infringe others' IP and remove infringing articles. While these may be useful to users, "real-world" IP owners face a number of difficulties where their IP is infringed in-world.

The fundamental, and for the time being problematic, issue in raising actions for IP infringement in-world is identification of the infringer. Second Life is essentially an anonymous service, as the first litigant is finding out to its detriment, having to raise proceedings against "John Doe". The litigant has been required to first raise an action against LL to disclose the infringer's real identity. Another issue is that as users are logging on from all over the world, their local jurisdiction may govern the IP that they create.

To take trade mark law as an example, another difficulty of enforcement is that in-world goods are not identical to the trade mark owner's goods with one being tangible and the other not. Actions based on principles of passing off (where applicable in the relevant jurisdiction) may be easier to progress, although proving actual damage may be difficult as real-world sales are unlikely to be effected. The grounds for passing off in these instances would primarily be based on consumer confusion resulting in a likelihood of association and damage to reputation. Yet, as outlined above, such actions will vary between jurisdictions, a further issue which must be considered but falls outwith the scope of this article.

Finally, LL has allowed users to use specialised software to restrict the ability to copy in-world creations although as with conventional products where there is software protecting IPR there are those trying to circumvent that software. LL's approach is understandably to try to encourage IP issues to be dealt which in-world although this is unlikely to be met with enthusiasm from IP owners affected outwith the system. Another problem for real-world enforcement of IP rights infringed in-world would be the enforcement of any judgement that is obtained. Even the judgement can be enforced, will the infringer be able to pay damages?

Real world brand owners need to consider their approach both to infringement in VRs but also whether they can profit from exploiting their brands through VRs like Second Life. A word of warning, while there may be money to be made from Second Life, money can also be lost as in the case of Ginko Financial a virtual bank which collapsed in August 2007 with approximately US $740,000 in liabilities.