With their beginnings in multi-player online computer games, the rapid adoption and huge popularity of these virtual worlds are explained at least in part by their heritage. Many are indeed still game-based environments. Others have evolved into social and commercial networking spaces in which users interact and socialise, participate in collective activities and endeavours and engage in commercial transactions. Currently, much of this trade involves the sale and supply of digital assets ‘in-world’. This does not mean, however, that such trades are effectively valueless. Far from it. Because virtual world currencies are typically exchangeable for real world cash, even ‘pure’ in-world trades have value. MindArk, the operators of Entropia Universe, for example, recently sold five in-world banking licences for more than $400,000 (£202,000). In November 2006, Ailin Graef, a digital real estate entrepreneur operating in Linden Lab’s virtual world, Second Life, infamously announced that she had made $1m (£506,000) in-world from an initial investment of less than $10 (£5).
But virtual world transactions are not confined to virtual worlds. The boundaries between virtual and real world trade were blurred from the outset: a movie screening in Second Life looks the same as a movie delivered from a ‘traditional’ website. Visiting an in-world casino could make you just as poor or rich as any other form of internet-based gambling. At the same time, real-world businesses such as Dell are increasingly establishing in-world presences as sales channels for delivering physical goods and services into the real world. Virtual assets (from cash to digital real estate and turn-key businesses) are being traded all the time on internet auction sites.
With a rapidly growing user headcount already approaching seven million, Second Life is one of the most popular of these social networking environments. Its success has been driven by Linden Lab’s decision to enable users to create and trade effectively any form of digital asset or service (and the underlying software code) that they are able to create. This approach has acted as a catalyst for innovation and commerce, with increasing numbers of users setting up businesses to exploit the economic opportunities available in this new and expanding virtual world.
Unsurprisingly, in this frontier-like environment, not everyone is commercially scrupulous. In the rush to carve out a sales niche, capture traffic and build revenues, many virtual businesses are paying scant regard to real world intellectual property (IP) rights. The creative freedom made possible by Second Life’s technology makes it as easy for users to create infringing content and assets as it is to create original, non-infringing items, and the economics of infringing and piracy-related activities are proving too compelling for some.
As a result, Second Life residents can purchase unauthorised digital replicas of most major real world branded products, often in virtual outlets that have been branded and built to have the look and feel of the real world retail premises of their real world business owners. So, with a few mouse clicks, a short teleport to a virtual store and for the price of a few virtual dollars, a Second Life resident can equip themselves with virtual Rayban shades, a virtual Rolex watch and, if they have a passion for high speed in world travel, a virtual Ferrari sports car. In many cases, the vendor is not associated with and does not have the permission of the trademark or copyright owner in the real world. Luxury brands, haute couture houses, consumer goods manufacturers, retailers, entertainment and publishing companies, designers, artists, building owners and architects — the list is near endless and none is exempt from the attentions of in-world pirates.
The virtual world has also introduced critical problems for content and rights owners. For example, it is almost impossible to purchase an in-world media player that does not come pre-loaded with infringing copies of music videos, TV programmes and movies. And, if you just want to ‘catch a show’, it is just as easy to visit an in-world cinema with similar infringing content. All this material can be viewed just like any other internet movie download, though generally without any kind of digital rights management ‘wrapper’. And, on the subjects of movies and wrappers, movie stars and other celebrities are also frequently treated in-world like any other popular brand — if Second Life residents want to freshen up their image, they can visit any one of a number of shops specialising in celebrity lookalike avatar skins: it has never been easier to look like Brad Pitt or Angelina Jolie.
Major international businesses are already developing in-world presences. As more decide to follow suit, or find that their brands and content are already being infringed before they have even managed to move in, IP infringement and dealing with it will inevitably become a key priority. Indeed, given the increasing amounts at stake, many would say that the real questions are not whether we will see IP infringement-related actions brought in connection with virtual world activities but when, and how, will they play out?
In theory at least, the pirates themselves should be the primary targets for IP rights owners. However, the anonymity offered by virtual worlds creates major identification problems, potentially requiring rights owners to bring legal proceedings for disclosure of the pirates’ real world identities against virtual world operators located abroad. And, even if a claimant can successfully identify a defendant, defendants can fairly easily reappear using a different avatar and contact details, only to start infringing all over again. In addition, the infringers may not have substantial resources themselves, making the prospect of recovering substantial meaningful damages fairly unlikely.
As a result, as the amounts at stake increase, virtual world operators and those providing in-world premises and facilities which the infringers use for trading are likely to come under increasing scrutiny. Practically speaking, they are likely to present at least as attractive a litigation target as the pirates and, in many cases, since they will often be identifiable and have greater resources, they are likely to present bigger and more attractive targets.
From a legal perspective, the recent rounds of bitter and costly litigation between the major movie studios and file-sharing and social networking companies such as Napster, Grokster and YouTube have really all been about contributory infringement and — in the first two cases at least — the content industry won. In short, in some circumstances, technology businesses may be found liable because of their users’ downstream infringing activities. Some of them may be able to shelter within ‘safe harbours’ (such as those offered by the US Digital Millennium Copyright Act and the Electronic Commerce Directive in Europe), or seek to agree commercial licence terms with the relevant rights owners, however, the safe harbours do not offer protection in all circumstances or against all types of liability, and they may simply be determined to be unavailable to some businesses. Similarly, content owners may not always be willing to agree deals just because it happens to suit the operator of a virtual world in which other businesses have invested millions of dollars to set up.
If there is only one — virtual — certainty in all of this, protection of IP rights and infringement liability avoidance will become key priorities for almost all businesses with a stake in any virtual world — and by all accounts, within the next three years, that is highly likely to mean all of us.
David Naylor is a partner in the technology group at Field Fisher Waterhouse.