Swords, Shields, and Statutes: Common Law Property Rights and Limited Licenses Are Both Necessary to Protect Virtual Property

Swords, Shields, and Statutes: Common Law Property Rights and Limited Licenses Are Both Necessary to Protect Virtual Property

Dustin Lies

Cyberlaw Seminar, Spring Semester, 2006

University of Iowa College of Law

Professor Nicholas Johnson

March 31, 2006

I. Introduction

“Sweet, a Krol Blade just dropped!” exclaimed Valeris as the great dragon fell, defeated by the Legion of Heroes guild. “Need roll, 25 DKP, Rogues have priority.” said Dyrona, the guild leader and most experienced player. “Valeris has rolled a 99” scrolled across the screen followed by a cry of “YES!!!111” as Valeris broke into dance on top of the dragon’s corpse. “It’s all yours,” Dyrona said before Valeris looted the corpse, double checked to see that the weapon was in her inventory, and proudly teleported back to her home village. The other rogues in the guild will have to wait another week for their shot at getting a Krol Blade.

To most people, this opening paragraph is meaningless: cryptic at best, gibberish at worst. But to millions of online gamers, this type of situation is probably extremely familiar and could have more impact on their pocketbook than on their love of online gaming. The worlds of Massive Multi-player On-line Role-Playing Games (MMORPGs) thrive on this type of conquest, whether it be slaying a dragon or destroying a castle. Acquiring new weapons and other useful items within the game is often the goal of gamers. These items can be termed “virtual property” and, for the purposes of this paper, will be the only virtual property extensively discussed. Many times virtual property is worth more to a gamer than the pride or prestige associated with owning a new virtual sword. Real money is increasingly becoming a factor in the virtual gaming world as virtual property is being traded for real assets.

This paper defines, discusses, and proposes solutions for the problems arising out of the creation and exchange of virtual property. Property law theories, intellectual property law theories enforced and protected by EULA contracts, and hybrid solutions will be addressed and a working understanding of how virtual property should be handled will be developed. This paper concludes that the property interests recognized in virtual property should be balanced by restraints on the nature and use of the property.

The value of increasing the ability of gamers to freely transfer virtual property must be weighed against the rights to retain control over intellectual property that gaming companies possess. The efficient use of virtual property will best be realized if gaming companies are given the right to control their intellectual property, while individual pieces of virtual property are controlled by gamers. Essentially, the control over virtual property in the broad, generic sense will stay with gaming companies who are free to add content to virtual worlds, change the relative values of virtual property, and exercise their discretion in using their intellectual property. However, the free exchange and use of virtual property by gamers should be protected.

II. The Growth and Emergence of Virtual Property

What is virtual property? What makes it different from real property or pure intellectual property? As of 2006, the answers to these questions are slowly evolving. Legislatures, courts, and researchers all continue to struggle with how to understand and approach virtual property.

Virtual property is essentially code, hosted on servers that are owned by gaming companies and used by individual gamers within the virtual worlds they inhabit. Virtual property is meant to mimic the attributes of real property and appears to players, in graphical form, as what are normally tangible goods. Because many MMORPGs are based on battles, conquests, and wars, the most common types of virtual property are weapons, armor, and other related items. But virtual property is more than just swords and shields. The avatars, or user-controlled characters within the games, are also virtual property. Virtual currency used within the virtual world is another example of virtual property within MMORPG worlds. Virtual property is, essentially, the bridge between real property and intellectual property because it attempts to act as real property but is, at this point, protected only by intellectual property law.

The main difference between virtual property and real property seems intuitive; one is tangible and one is not. However, this distinction is not entirely accurate. The balance in a bank account is as real to the account holder as the money he keeps in his wallet.[1] The intangible nature of virtual property is not what really separates it from real property. The meaningful difference between real property and virtual property is that virtual property is confined to a virtual world, whereas real property can come to exist in the real world. While virtual property can be traded for real property, it cannot interact with real property. So although the sword an avatar carries may look like a real sword, it is not acting as a representation of a real sword. Rather, it is merely a device for interacting with a virtual world. In this way, virtual property is different from real property because virtual property can only interact with the real world in an extremely limited sense through exchanges of virtual property for real property.

This raises the question: if virtual property is code, and cannot interact with real property, how is it different from an .mp3 file or an image file that is protected under intellectual property laws? Most intellectual property is non-rivalrous, meaning that my use of the intellectual property does not diminish or preclude your use of the intellectual property. This allows intellectual property to be created, because although it is expensive to initially create the intellectual property, it is extremely inexpensive to reproduce.[2] This cost relationship allows intellectual property owners to invest heavily in the creation of a work and then reproduce and distribute it with a marginal cost near zero.[3] Virtual property, unlike intellectual property, is a rivalrous resource. If my avatar is using the Sword of Justice, my use of the virtual property precludes your use of the same sword. Although you may also possess a Sword of Justice, you acquired it independently and it is not merely a reproduction of my property. To put it more concretely, I may drive a 1995 blue Ford Taurus and you may also drive a 1995 blue Ford Taurus, but when I am driving my Taurus, nobody else can drive it, and the same is true of you. However, the design of the Taurus and the other intellectual property associated with it can be used by both of us. The difference between the car and the sword, as the law currently views them, is that transferring ownership of the car is simple and subject only to the restraints placed on a transaction by the owner of the car. Transfer of virtual property, on the other hand, requires the approval of the intellectual property holders who control the virtual worlds in which the virtual property exists.

An obvious problem is that many virtual items are nearly ubiquitous and can often be reproduced through spells or crafting within the game. However, the underlying theory is that the rivalrous nature of virtual property is dependent upon the attributes of the individual piece of property, not the scarcity of the property or its relative value. Although virtual property in this paper will be confined to items inside virtual worlds, the internet is full of other examples of virtual property. For instance, most people are familiar with URL domain names and email addresses and are both examples of virtual property.[4]

Virtual property is not real property and it is not intellectual property, but why is this distinction meaningful? The market in virtual goods is exploding and formulating a legal framework to deal with problems is a necessity. As of January 19^th, 2006, more than 5.5 million users worldwide inhabit the U.S. based virtual world World of Warcraft alone, and that number continues to grow.[5] As early as 2002, another virtual world, the well known Everquest, had a per-capita gross national product of roughly $2,266, greater than that of China and India, and was the 77^th richest “nation” in the world.[6] Not to mention that nearly a third of the adults playing Everquest, around 93,000 people, spent more time in the virtual world of Norrath than they did at work in the real world.[7] These numbers are striking, but globally the impact is even greater. In South Korea for instance, 38 percent of the population plays online games and the MMORPG series Lineage is more popular than television.[8]

It is clear that online gaming is a part of millions of lives and the exchanges taking place in MMORPGs are constantly growing. The rapid growth of online gaming means that more and more people are trading and buying virtual property. But the most fundamental question of all has yet to be answered: who owns virtual property? Until a clear framework for deciding disputes over virtual property is established, the increased search and negotiation costs, lack of notice, and inability to freely transfer virtual property will continue to decrease the ability of gamers to efficiently use and exchange virtual property.

III. Virtual Property Ownership Historically

Very little litigation has taken place over the question of who actually owns virtual property in the United States. Naturally players want to retain ownership over the items they control inside the virtual world and want to be able to use the virtual property as they see fit. Gaming companies, which own and control the virtual worlds, however, would prefer to retain ownership over the virtual property themselves. To this point, no judicial decisions or legislative mandates in the United States have recognized an ownership right in virtual property in the. The initial rights in virtual property vest in the gaming company that created the virtual world because the gaming companies have intellectual property rights in their creation. After intellectual property rights are granted, however, the waters turn muddy. Competing claims of individuals and gaming companies over virtual property begin to overlap.

In order to eliminate this problem, gaming companies have taken numerous steps to retain ownership of the virtual property they have programmed to exist within their virtual world. The first, and most noticeable, step is that gaming companies have required users who install their games to agree to an End User License Agreement (EULA). Typically, a EULA stipulates that the users disclaim all rights in the virtual property they acquire within the virtual world. For example, the World of Warcraft EULA provides that:

A. All title, ownership rights and intellectual property rights in and to the Game and all copies thereof (including, but not limited to, any titles, computer code, themes, objects, characters, character names, stories, dialog, catch phrases, locations, concepts, artwork, character inventories, structural or landscape designs, animations, sounds, musical compositions, audio-visual effects, storylines, character likenesses, methods of operation, moral rights, any related documentation, and "applets" incorporated into the Game) are owned or expressly licensed by Licensor. The Game is protected by the copyright laws of the United States, international copyright treaties and conventions, and other laws. All rights are reserved. The Game may contain certain licensed materials, and the licensors of those materials may enforce their rights in the event of any violation of this License Agreement.[9]

To install the game onto a client computer, users must click a box stating that they agree to the EULA. The result is that gaming companies have successfully used the law of contract to resolve conflicts before they start. Or have they? The broad, sweeping language of the EULAs means that, if litigated over, they could be viewed as unconscionable contracts of adhesion. Gaming companies control their virtual worlds and thus are free, at this point, to ban users violating the EULA from the game. In general, banning has been the way gaming companies have dealt with users violating the EULA. Usually players have little recourse against bannings and have simply accepted that the balance of power under the EULA heavily favors gaming companies. This almost changed in 2002, when a California company named Black Snow Interactive brought a claim against the gaming company Mythic, alleging unfair business practices.[10] Black Snow hired laborers in Tijuana, Mexico to play the games Dark Age of Camelot and Ultima Online.[11] The “workers” were paid meager wages by Black Snow to accumulate massive amounts of virtual items inside the games, items which Black Snow sold through eBay and other websites.[12] Claiming that Black Snow had violated the EULAs of the games their workers were playing, Mythic subsequently banned the accounts used by Black Snow and had eBay remove and ban Black Snow from listing items.[13] Mythic also claimed Black Snow had infringed on its intellectual property rights.[14] Although the case was dropped because of unrelated legal problems, the questions it raises remain.[15]

The sale of virtual items is not limited to Black Snow. Many companies and individuals have attempted to capture a piece of the market for virtual items. While they often technically violate the EULAs of the games they play, violations usually go unpunished because many times proving that a real money exchange took place is difficult. Companies such as Internet Gaming Entertainment (IGE) employ people from poorer countries, like China, and for a set fee, will provide customers with virtual currency, items, or even ready-made avatars.[16] Some gaming companies have been more accepting of these practices than others and the rigor with which they enforce their EULAs is largely dependent upon the size of the company. Companies have explored approaches other than bannings. The World of Warcraft virtual world has items that become soulbound, meaning they are unable to be transferred after being equipped on a character or, in some cases, immediately after being looted from a monster. But while this solves the problem for some items, restricting in-game trade too severely can cause users to lose interest in the game. Balancing the interests of free in-game trade and restricted exchanges for real money is a difficult, if not impossible, goal to achieve through code alone.

Sony Online Entertainment, the company operating the Everquest virtual world, at one point completely banned the sale of all Everquest items, currency, and characters.[17] Companies often do not have to take the hard road and assert rights based on their EULA or intellectual property rights. Many times the gaming companies simply state that they are disallowing the sale of virtual items for safety purposes, such as fraud prevention. The companies claim that fraud and deceit are rampant in the virtual item market and that promoting such a market is tantamount to allowing cheating and the bypassing of game content. The problem is that sales still take place even when the risk of being banned increases, because demand for the virtual items still exists. The increased risk may actually drive prices up on the black market, making the trading of virtual items more lucrative. It may also simply force sellers to move to less traceable websites.

Sony recently released the sequel to Everquest and has now adopted a completely different policy for Everquest II. Sony now promotes the sale of virtual items and provides a means to do so. Through an eBay-like auction scheme, where an initial fee is charged and a percentage is taken from the final sale price, Sony has attempted to profit from the sale of virtual property within the virtual world it maintains.[18] However, Sony still maintains that users are selling a limited license right to use the virtual property and are not transferring ownership or title.[19] It would appear that this system is working. In its first 30 days of operation Station Exchange facilitated the transfers of more than $180,000 worth of virtual property.[20] According to Chris Kramer, a spokesman for Sony, the average user of the Station Exchange spent more than $70 during the first 30 days of operation, showing a potential for significant.[21] Does this mean that the problem is solved and that gaming companies can embrace the secondary market for virtual items or they can ban it, and either way the market will take care of any problems? Unfortunately the answer is not that simple. The response of gaming companies is still a resounding “No!” to the issue of gamer virtual property ownership and although the sanctioned exchange of virtual items may eliminate some problems, the optimal solution is to incorporate limited license rights with a common law property approach. Neither the law of intellectual property, nor the common law of property alone is perfectly equipped to deal with the problem of virtual property. Used together they offer a workable solution that allows for efficient exchanges of virtual property with minimal restrictive effects on the creative control of gaming companies over their virtual worlds.

IV. Intellectual Property Law Alone is Insufficient to Deal with Virtual Property

Intellectual property law generally governs creative works, a category encompassing virtual worlds. Gaming companies that create virtual worlds are entitled to intellectual property rights in every bit of virtual property contained within their world, assuming they meet copyright, trademark, or other intellectual property protection standards. However, the grant of intellectual property rights should not be treated as a blank check that allows the gaming companies hosting virtual worlds to force all gamers to assign any property they obtain back to the gaming company. If this were the case, gaming companies would be gaining valuable virtual property from gamers without compensating them for the time, effort, or skill necessary to obtain the property.

Because gamers must work toward bringing virtual property into existence, they ought to be given some rights over the property they acquire. Intellectual property law preserves value by allowing rights holders to control reproduction and sale. But virtual property is only reproduced and used within the confines of the virtual world. Gaming companies control virtual property by controlling the virtual worlds where the property exists. Granting gaming companies complete control over each individual piece of virtual property, using intellectual property law principles, is inefficient. This approach fails to adequately reward gamers for their effort, it fails to provide incentives for the efficient use of virtual property, and it fails to recognize the distinct nature of virtual property.

A. Virtual property is more like real property than intellectual property

Virtual property attempts to mimic the attributes of real property, disadvantaging the law of intellectual property to deal with virtual property. Intellectual property law is meant to protect non-rivalrous resources from being reproduced and used without the creator’s consent. Virtual property and intellectual property present different problems. Failing to recognize the differences between intellectual property and virtual property leads to regulations having goals that do not adequately address the nature of virtual property.

Virtual property is obtained, held, and controlled by avatars that represent players inside the virtual world. The ability to own virtual property does not require virtual property to be a tangible “thing” it simply requires a right be held over the virtual property.[22] Virtual property has characteristics that separate it from intellectual property, namely that virtual property is rivalrous, persistent, and interconnected.[23] Rivalrous property allows for the owner to exclude others from using the property. Persistent property is property that exists continuously and does not disappear when you log offline. Interconnected property is property that can be experienced by numerous people simultaneously. These three attributes of virtual property are much more like real property than intellectual property.

Intellectual property law attempts to prevent events such as unauthorized use, reproduction, or the creation of derivative works based on copyrighted works.[24] Because intellectual property is non-rivalrous, allowing it to be easily recreated at low cost, intellectual property law is tailored to protecting intellectual property from these infringing activities.[25] The limited monopoly granted to owners of intellectual property rights over the use of their creative works allows them to recoup the costs of their investment in the creative work by funneling to them the benefit associated with additional uses of their work to them. However, this monopoly-like grant of power is tempered by the fair use defense, which protects users of copyrighted material who use it in a way that does not compete with, or harm, the original copyright owner.[26] Contrasting this with the nature of rivalrous virtual property illustrates the deficiencies in using intellectual property law to assign rights in virtual property.

The concerns over costless reproduction, unauthorized use of virtual items within the game, and the use of virtual property to create derivative works are all irrelevant. First, in order to obtain virtual property, gamers must loot a monster, complete a quest, or trade with another user. Consequently, absent a hack, costless reproduction of virtual property is impossible. If hacking took place it would, of course, void the property rights in subsequently created virtual property since it was obtained “illegally”. Second, users cannot exploit virtual property without authorization because the game designers have absolute control over the virtual worlds. Designers create the laws of use, physics, and trade that govern the virtual world. If a game designer wishes to relegate a piece of virtual property to a certain task, he can code the virtual world to allow only one use of the virtual property. Third, the only derivative works that can be created from the virtual property are sanctioned and implemented by the game designers. If I upgrade my armor, I have only changed my virtual property in a way allowed by the game, at a cost to myself.

At the very least, since the game designers are encouraging, and actually relying on, gamers to support them through using and obtaining virtual property, the use of this virtual property should be seen as fair use. The constant fair use of the virtual property by gamers demonstrates that they hold rights in the virtual property and are using the intellectual property associated with it in ways that are permissible. The Lewis Galoob Toys v. Nintendo of America decision lends weight to this argument. In the Galoob case, Nintendo sued under a theory of copyright infringement claiming that the Game Genie created by Galoob created derivative works and infringed on Nintendo’s copyrights.[27] The Game Genie allowed gamers to alter the game they were playing by giving their character more lives, increasing their character’s speed, or allowing their character to float above obstacles.[28] The Ninth Circuit Court of Appeals concluded that the Game Genie did not create derivative works and even if it did, using Nintendo’s copyrights in this way was a fair use.[29] This decision evidences a form of control that individual gamers have over in-game content. According to the Ninth Circuit, as long as gamers do not duplicate or otherwise infringe the copyrights of game designers, they are free to make use of in-game content even in ways not condoned by the game designers. Nintendo could have programmed games to be incompatible with the Game Genie, just as bugs, hacks, and other misuses of in-game content can be programmed around by virtual world designers. The holding in Galoob would seem to imply that courts are generally unwilling to find copyright infringement where the intellectual property owner can easily prevent the misuse claimed to be infringement.

In other words, because the game designers control the virtual world, they neither need, nor deserve, a grant of monopoly-like power over the virtual property within the world. The game designers can still retain intellectual property rights over the parts of virtual items that act outside of the virtual world, such as the weapon designs and armor names that can be infringed. But the actual virtual property itself should not automatically be given to game designers. If I buy a Beatles album, The Beatles still own the intellectual property in their songs, but I own the album as personal property. The same situation arises with virtual property, where the game designer is free to control his intellectual property while individual gamers should be free to individual gamers own the virtual property.

B. Intellectual property law fails to recognize the effort of gamers

The use of intellectual property law fails to recognize that without the input of time and effort by gamers, the virtual property would not come into existence. This theory of ownership was developed hundreds of years ago by John Locke, who proposed that ownership over property should vest in the person who worked to create it.[30] Granted, the game designers had to work to create the concept for the virtual item, the code for it, and the world in which it exists. After creating the virtual world, game designers invite players to obtain virtual property within the virtual world. Gamers then work, contributing time and effort, to obtain virtual property which their avatar controls. The individual pieces of virtual property within virtual worlds are the product of the effort of individual gamers and not the game designers.

Gamers are constantly required to pay in order to access their valuable virtual property, property the game designers claim belongs to them. Essentially gaming companies are hiring workers to accumulate wealth over which they claim ownership. The companies not only force the workers to pay, they also refuse to compensate them. Such an approach is an abuse of power by the gaming companies. The companies counter argue that gamers freely choose to play and they gain enjoyment and satisfaction from playing online games. However, the burgeoning market for virtual property shows that many gamers are not content to treat virtual property like toys: they are buying and selling this valuable commodity for real dollars. Whether or not gaming companies choose to embrace the sale of virtual property, it will continue. Imposing an intellectual property regime on virtual property neglects the time and effort gamers invest to bring the property into existence.

C. Gamers also deserve intellectual property protection

A viable solution may be to grant limited intellectual property power to gamers as well as to game designers. Gamers can develop personas within the virtual world, and they can become widely known so that eventually the name of an avatar may seem more like a trademark than the alias of a virtual gamer. For instance, a gamer may become so widely known that he develops goodwill and respect within the virtual community. The idea of goodwill is tied to trademark law and courts have repeatedly held that “...a trademark is a form of property, which exists in connection with the goodwill or tangible assets of a business.”[31] Many gamers actively seek prestige and acknowledgement within the game. To reward them for doing so by granting trademark status in the name of their avatar allows them to capture the goodwill associated with the prestige.

The situation where a gamer has become so widely known that they can capitalize off uses of their name has already taken place. In the World of Warcraft virtual world, an avatar with the name Leeroy Jenkins gained a massive fan following after releasing a comedy video on the web. The Leeroy Jenkins phenomenon quickly spread and now a site is devoted to all things Leeroy.[32] T-shirts and other merchandise have already been sold using the name, a name which encompasses the goodwill garnered within the World of Warcraft user-base. Leeroy Jenkins is so well known that his name was even used as a hint in a $1,000 question on the Jeopardy game show.[33]

The first interesting question raised is whether or not a virtual gamer can obtain trademark protection for an avatar’s name when the EULA strictly conveys all rights inside the virtual world to the game designers. Assuming that trademark protection is possible even with EULA prohibitions, a second question arises: to what extent can trademark protection, or even right of publicity protection, cross over into the virtual world? Can Leeroy Jenkins bring a defamation cause of action against virtual gamers who ridicule him? A remark is defined as defamatory if it “tends so to harm the reputation of another as to lower him in the estimation of the community or to deter third persons from associating or dealing with him.”[34] Can Leeroy Jenkins claim a right of publicity in his image and persona? The right of publicity signifies “the right of an individual, especially a public figure or a celebrity, to control the commercial value and exploitation of his name and picture or likeness and to prevent others from unfairly appropriating this value for their commercial benefit.”[35]

If these intellectual property rights are granted, how will the interaction between the game designers’ intellectual property rights and gamers’ intellectual property rights play out? Will Leeroy Jekins be permitted to use a graphical representation of his avatar outside of the virtual world? This is likely to infringe on the copyright protection of the game company, Blizzard. But where is the line to be drawn between permissible extensions of intellectual property and impermissible extensions? Technically everything about Leeroy Jenkins took place within a virtual world protected by intellectual property laws owned by Blizzard. While trademark law offers some insight into possible solutions; intellectual property law as a whole is an insufficient means to adequately regulate virtual property.

V. Common Law Property Principles Alone are Insufficient to Deal with Virtual Property

The common law of property, as it has developed in the United States, has often been described by the old adage “Possession is 9/10ths of the law.” The notion of possession illustrates one of the many flaws in using a pure property approach to deal with virtual property. Who actually possess virtual property? Both gamers and game designers can claim possession of virtual property and this leads to overlapping rights.

A. Game designers can claim they possess virtual property

Virtual property, as defined earlier, is simply computer code that must be stored on servers. The servers are tangible property and are owned by the gaming companies. The virtual world is hosted on the servers and every bit of virtual property inside the virtual world is also stored on the servers. Gaming companies can argue that because they own the servers that host the virtual world and the virtual property, they should be given ownership rights in the virtual property based on a common law property approach. A similar argument has been made in cases such as Intel Corp. v. Hamidi, eBay v. Bidder’s Edge, and CompuServe v. Cyber Promotions.[36][37][38] In these cases, claims were brought against individuals who were allegedly harming the servers of companies.[39]

In the eBay case, Bidder’s Edge was compiling auction data from the eBay website and eBay sought an injunction to stop this practice.[40] The theory eBay used to bring the claim for an injunction was one of trespass, alleging that Bidder’s Edge was interfering with eBay’s use of its servers.[41] The court in eBay stated that “Conduct that does not amount to a substantial interference with possession, but which consists of intermeddling with or use of another's personal property, is sufficient to establish a cause of action for trespass to chattel.”[42] The eBay case shows that courts are willing to accept the proposition that, to some extent, property rights may be asserted as to the content hosted on company servers. When the use of company servers damages the servers, courts have upheld trespass to chattels claims.[43] Because gamers are accessing the servers of the gaming companies when entering the virtual worlds, the use of virtual property constitutes a use of the physical property of the gaming companies. As such, gaming companies wish to claim total control over the use of virtual property that takes place through the use of their physical property. Although trespass to chattels requires unauthorized use, and users of virtual worlds are likely authorized to use the servers, the gaming companies could claim that the unauthorized use takes place when a gamer violates the EULA. The point to take away from the eBay case, as it relates to this discussion, is that because courts have been willing to acknowledge some kind of ownership over the material hosted on servers that are physically owned by companies, gamers have at least some interest in protecting their use of virtual property.

The problem with allowing the hosts of virtual property to claim property interests in the virtual property itself is that if this theory can be extended to gaming companies, what would stop it from being extended to all hosts of virtual property? Internet service providers host email servers, web-hosting companies host websites; would these entities be given property interests in the emails I write or the website I created? If the internet becomes subject to property constraints based solely on who hosts what, it may become fractured. Content hosts could theoretically preclude or restrict access to an individual’s work without the creator’s consent. Clearly there is more to the story than looking to a physical server to divide property interests.

Giving property interests to gaming companies that host virtual worlds will, gaming companies argue, allow them to retain creative control over the intellectual property within the virtual world. Gaming companies must be able to change, adapt, modify, expand, and even shutdown the virtual world that they have created and continue to host. If gaming companies are not allowed to alter the virtual world they become nothing more than stewards, caring for the property of others. Gaming companies argue that granting ownership rights in all property created inside their virtual world is necessary to allow them to control the virtual world. Take, for instance, the numerous patches released by Blizzard, host of World of Warcraft, which changed the relevant values of different types of virtual property.[44] Or look at what happened in 2004 when a gamer submitted a winning bid of $3,000 for an account in the MMORPG Earth and Beyond just a day before the gaming company hosting the virtual world shut it down.[45] The Earth and Beyond game had nearly 40,000 accounts, all of which were wiped from the face of the virtual earth.[46] Should gaming companies be held liable to users who have lost valuable assets because of changes to the virtual world or the closure of the virtual world? Gaming companies claim this would be ridiculous, since they are free to change or close the virtual world at any time. It is, after all, their intellectual property hosted by their physical property. However, this claim negates the effort and money gamers expend to bring the individual pieces of virtual property into existence.

Another argument is that since gaming companies require users of the virtual worlds to pay monthly fees, the relationship is that of a landlord and tenant. According to this analogy, the EULA functions as a lease agreement and gamers pay rent in order to access the virtual world. Since the EULAs generally prohibit gamers from conveying away virtual property they control in the virtual world, the analogy can be drawn between the EULA and a prohibition against subletting in a lease. The gamers have a limited interest in maintaining the virtual world and are only concerned with the preservation of the virtual world insofar as they have accumulated assets within the world. The gaming companies, however, rely on the monthly fee payments to finance their operations, giving them a unique incentive to keep the virtual world afloat. The gamers are given the temporary right to use the virtual property inside the virtual world, but are constrained by the EULA and can only transfer control of the property to other tenants under the EULA terms. This, in some ways, mirrors the relationships of many real world landlords and tenants, where tenants maintain temporary rights to use the property conditional upon the agreement in the lease.[47] If the gamer or tenant fails to pay their monthly rent, their access to the property is removed. Also, if a gamer violates the terms of the EULA by trading property in exchange for real money, the gaming company can revoke their access to the virtual world.

The main difference is that tenants do not generally increase the value of the property they lease. Because gamers constantly add value to the virtual world, the analogy begins to look seriously flawed in addressing the relationship between gamers and gaming companies. Another problem with the landlord-tenant theory is that landlords generally have duties to tenants, including the duty to provide a habitable living space.[48] The fact that the EULA gives complete control of the virtual world to gaming companies may actually work against the gaming companies in some ways under this theory. The common use rule requires landlords to provide reasonably safe conditions for areas shared by tenants and reserved to the landlord and if that duty is not met the landlord is liable for damages caused by his negligence.[49] If the analogy is extended to virtual world interactions, questions about hacking inside virtual worlds are raised. The virtual world is shared by many tenants and is an area reserved by the landlord for common use. If, through negligent or faulty coding by game designers, a hack or bug allows individuals to be harmed, would the gaming company be liable to the gamers for that harm? Although the cases that apply the common-use rule have generally been about personal injury torts, in the virtual world a hack is the equivalent of a personal injury. If a character is deleted, is that the same as a virtual wrongful death caused by the negligence of the gaming company? Additionally, virtual worlds are often taken down for maintenance, or even closed completely, preventing gamers’ access to the worlds. Is this a violation of the covenant of quiet enjoyment that allows tenants to recover against landlords who interfere with their use of the property?[50]

B. Gamers can claim they possess virtual property

Gamers can also claim that they possess the virtual property present in the virtual world. A player’s avatar inside the virtual world has possession of the virtual property in its inventory. The player is free to use or dispose of the virtual property however he pleases inside the game. The way virtual property functions in the virtual world is meant to mirror the way real world property functions in the real world. Gamers expect that because they possess and control virtual property, they have an interest in deciding how to use and transfer it. This belief is supported by the way the virtual worlds are structured. During the course of playing, gamers damage and repair weapons and armor, consume food and drink, and exclude others from using the virtual property in their inventory. An avatar inside the virtual world acts as a conduit for the player, functioning under the direction and control of one individual. Because the avatar personifies the gamer inside the virtual world, the property the avatar acquires in the virtual world can therefore be seen as the property of the gamer. The avatar is akin to an agent acting on behalf of a company. The agent functions as an extension of the company and can acquire property that the company owns.

Interesting issues arise from giving players property interests over virtual property possessed by their avatars. At the State of Play Conference in 2003, Jack Balkin, a constitutional law professor at Yale, argued that if assets within a virtual world became large enough a bankruptcy court could step in and prevent the closure of the virtual world.[51] Balkin’s argument was if that players can obtain property rights based on the real world value of their virtual assets, they must be allowed to liquidate those assets within the virtual world. The problem with this scenario is that because virtual property can never interact with the real world, the virtual world must be operational forever to preserve the real world value of virtual assets and provide for liquidation. Liquidation could not occur if a shutdown of the virtual world was imminent because gamers would be unwilling to purchase or exchange virtual property that would soon disappear. The perpetual operation of a virtual world would have to be done by someone who would be willing to take on the responsibility of paying the costs of server maintenance, providing bandwith, and taking other necessary steps to operate the virtual world. Surely the gaming companies should not be forced to continue operating a virtual world that is not profitable; doing so would give game designers no incentive to create virtual worlds in the first place. Possible solutions include establishing a public trust or allowing gamers themselves collectively to run the virtual world. Allowing property interests in virtual assets may only server to magnify the problems associated with virtual world closure instead of solving them.

Property rights in virtual assets may not only give rise to conflicts player and game designer, but may also cause conflicts among players. MMORPGs are often designed to require a great degree of cooperation among players. End-game content, which is more or less what players do once they have reached a sufficiently high level, is often centered around assembling groups of players to complete raids on enemy bosses and castles. The rewards for this cooperation are great; the rarest items and most valuable assets can often only be acquired through raids. To overcome the obstacles presented by end-game content, gamers come together and form organizations called guilds. A guild is a group of gamers who associate with each other through proscribed methods within the game. Many games, such as World of Warcraft, allow guild members to be recognized by displaying the name of their guild under their avatar’s name. Additionally, guild members can communicate easily through the use of guild chat, which displays messages exclusively to other guild members.

Guilds exist almost as quasi-governmental entities within virtual worlds. Many control resources through communal means and require guild members to contribute time and currency to finance guild operations. Most end-game content can only be accessed through joining a reputable guild. Some end-game content in World of Warcraft requires 40 players to work together in an orchestrated effort to defeat boss monsters.[52] These raids are day-long undertakings that require a specific set of character classes, strategies, and execution that are practically impossible without the knowledge and leadership of an advanced guild. World of Warcraft has even gone so far as to start what it calls a Guild Relations Program to allow some of the most famous guilds to interact directly with game designers.[53] Although guilds are necessary to completing many tasks within the virtual world, they also raise many property-right issues. While the incentive to retain good relations with a guild may influence gamers, if a piece of virtual property were worth enough, players may take their chances. For example, if property rights are realized for virtual assets, can a guild bring a class action lawsuit against an individual who defrauds the guild of property? Will guilds have to draft and require legally binding contracts to be signed before they allow an individual to join? How would these contracts interact with the terms of the EULA or the understood community standards of the virtual world?

Recognizing property rights in virtual assets would not solely affect guilds and guild members. Ninja looting, kill stealing, ganking; the list of practices that impair the ability of one or more gamers to access a piece of property goes on and on. Many gamers devote themselves entirely to interfering with other players.[54] Do real claims arise out of these practices and, if so, who is responsible for enforcing any rules of fair play? If a group of gamers gangs up on and kills a weaker player so as to cause a loss of the weaker player’s virtual assets in the form of dropping items, currency, or losing experience, can the gamer bring a cause of action? The most obvious response is that players are put on notice about which game practices are permissible and which ones are not when they install the game. Players know if they can be attacked by other players and lose virtual items from deaths. However, it is not difficult to see the potential for a massive number of lawsuits over virtual world interactions between gamers if property rights are recognized. This could bog down the courts and issues of jurisdiction, remedies, and enforcement will all have to be addressed.

Lawsuits involving virtual worlds will often carry with them jurisdictional problems. For instance, the practice of gambling within virtual worlds may raise jurisdictional issues. Many virtual worlds provide games of chance and if virtual currency can be sold or exchanged for real money, should legislatures be allowed to regulate this form of online gambling? States would like to be able to regulate the gambling of their citizens, but if gambling is taking place within a virtual world with no real base of operations other than the host server, how will the law be applied?[55] In some games, such as Project Entropia, gamers are able to freely exchange real money for virtual money, and vice versa, all with the approval of the game designers.[56] With 236,000 registered accounts as of October 25^th, 2005, Project Entropia is a large virtual world built entirely around financial speculation and the effortless exchange of Project Entropia dollars to real dollars.[57] Considering that a gamer in Project Entropia paid the equivalent of $100,000 real dollars for a virtual space station, it seems clear that the stakes of this speculative virtual activity are increasing rapidly.[58]

Giving property rights to gamers, in their virtual assets, will fundamentally alter the relationship between game designers and game players. The more we treat the virtual world as if it is an extension of the real world, the more we encounter problems with conceptualizing virtual objects in real ways. Also, ironically, much of the allure of virtual gaming may be lost if virtual property protection is taken too far. Many gamers become interested in virtual worlds because they seek to escape from their mundane lives. Virtual worlds offer the opportunity to interact with other people, accomplish goals, and do many of the things we do in real life, but virtual worlds are often lands of magic, mystery, and fantasy. If real-world influences become too commonplace, for example, if people are forced to sign legally binding contracts in order to enjoy end-game content, the immersive quality of virtual games may be lost. Because many gamers are drawn to the fantasy and immersion the virtual worlds offer, real-world influences may cause the virtual building blocks upon which these worlds are built begin to crumble. While some rights in virtual property are needed to allow gamers to efficiently use their virtual property and benefit from the effort they expend to create it, the recognized rights must be balanced with the unique attributes of virtual worlds that draw gamers to them in the first place.

VI. To Compete Globally, the United States Should Recognize Virtual Property

The United States should recognize limited property rights in virtual property. Although virtual worlds are somewhat of an enigma to many legislatures and judiciaries at this point, the increasing number of people devoting large parts of their lives to these worlds, and the potential for conflicts, requires that the law keep pace with this development. Developing a working model of how virtual property should be understood and managed is necessary.

The many problems with applying principles of common law property, or intellectual property, to virtual property can be alleviated by balancing the competing interests of game designers and game players. Some interests of these two groups overlap, such as keeping virtual worlds alive and functioning well, but other interests are in direct conflict. As more freedom is granted to game designers, gamers are less able to distribute virtual property efficiently. Yet if more freedom is granted to game players, game designers are less able to control the content and direction of the virtual world. To balance these interests, gamers should be granted limited property rights in their virtual assets. Gamers should be allowed to efficiently allocate resources within the virtual world, but the ability of game designers to control content within their virtual worlds must not be unduly impaired.

The United States is lagging behind other parts of the world in recognizing and protecting virtual property. In China, the movement to recognize and protect virtual property is gaining momentum and rules governing virtual property are being formulated. In 2003, a gamer named Li Hongchen built up a sizeable collection of virtual property inside the virtual world Hongyue (Red Moon).[59] Unfortunately, a hacker broke into Hongchen’s account and stole the virtual property.[60] Hongchen took Beijing Arctic Ice Technology Development Co. Ltd., the operators of Hongyue, to court to request compensation for his losses.[61] The court granted his request, ordering Beijing Arctic Ice to restore Hongchen’s virtual property.[62] More serious legal issues have also arisen in China. In 2005, Qiu Chengwei stabbed and killed fellow gamer Zhu Caoyuan after discovering that Caoyuan had sold a valuable virtual item Chengwei had loaned to him.[63] In response to the growing number of virtual claims, a group of 19 lawyers in Chengdu submitted a proposal to the Law Committee of the National People’s Congress seeking protection of virtual property.[64]

Taiwan has also begun to seriously examine virtual property. Taiwan has rules in place protecting “electromagnetic records,” treating them as private property.[65] The rules have been interpreted to extend to virtual accounts and virtual property.[66] The maximum sentence for stealing another player’s virtual property is up to three years imprisonment under Taiwan Criminal Code Article 358.[67] Under Article 359 of Taiwan’s Criminal Code, an individual can be imprisoned for up to five years for acquiring, deleting, or altering computer records without authorization.[68] In Article 362, the crime of creating computer programs used to perpetrate virtual crimes is punishable by up to five years’ imprisonment.[69]

South Korea, the “world’s most wired society, [is] a center of the online gaming craze and a main battlefield for disputes over who owns commercial cyberspace.”[70] In 2001, the Korean government sided with game designers by deciding that players did not own the virtual items of their characters, but did not outlaw the trading of virtual property for real cash.[71] Gamers may not legally own virtual property in Korea, but they certainly believe they do. A survey conducted in 2003 of 1,247 gamers revealed that 78 percent of respondents thought they owned the virtual property they acquired in the Lineage virtual world.[72] Another 17 percent thought that their avatar owned the property and only 3 percent believed the game developer owned the property.[73] The trading of virtual items continues in force; a Korean website called ItemBay, mimicking eBay, deals in virtual property and sees hundreds of millions of dollars moving through virtual exchanges.[74] Cybercrime in Korea is increasing at an alarming rate. Police reported that of the 40,000 cybercrimes reported in the first six months of 2003, 22,000 of them had to do with online gaming.[75]

As more and more countries move towards recognizing some rights in virtual property, the United States falls further behind. Although China, Taiwan, and Korea may not be ready to recognize powerful property rights in virtual property, they are at least moving the discussion about virtual property forward and developing theories for dealing with the problem. The United States must develop a coherent theory of virtual property ownership in order to compete for the gains available from regulating the booming markets for virtual property developing around the world. Given that very little litigation has taken place regarding virtual property in the United States, it may be an ideal time for legislatures to begin regulating the industry. As it stands, the trading of virtual property continues to increase but the awareness about this issue is almost exclusively confined to gamers and game designers.

Recognizing limited property interests in virtual assets allows the United States to not only provide U.S. citizens with remedies and notice on how virtual property will be dealt with, it also allows taxes to be levied on virtual exchanges. The idea that virtual property is taxable as income or that barter exchanges in virtual property are taxable has been mentioned by some IRS representatives.[76] Because virtual property is not currently recognized as possessing any kind of real property interest, this proposal seems like a stretch. According to many, taxation on virtual property may not only be very possible; it may be inevitable.[77][78] The fact that real-world money is changing hands for virtual items leads to the conclusion that somebody is gaining income from these exchanges and that income is subject to tax laws. Additionally, exchanges involving only virtual property may also have some residual effects on the real world. Even in the absence of a sale for real money, the possibility of eventual sale of the virtual property still exists. Hence, the virtual property still holds some real-world value. If the IRS wishes to increase its revenue in the future, virtual worlds hold an untapped potential that may eventually be too great to resist. If virtual property is given some recognition in the form of limited rights of ownership, at least any taxes placed on virtual exchanges will have some feeling of legitimacy. Taxation of virtual exchanges may further undermine the sense of immersion gamers feel inside virtual worlds, just as if legally binding contracts began to seep into the worlds. The likely result is that virtual worlds would decline in popularity, decreasing the amount of virtual property and, thus, decreasing the amount of revenue captured by the IRS. A balance is necessary, both to ensure that gamers are treated fairly and to protect the other interests associated with the regulation of virtual worlds. The ability of individuals to benefit from the virtual worlds often requires that the virtual worlds retain the characteristics that draw gamers to them. Striking a balance between the competing interests of multiple entities and groups is crucial if the U.S. is to effectively address this issue.

VII. Virtual Property Should Balance Common Law Property Principles with Intellectual Property Law

Establishing the need for a balanced approach to virtual property still does not answer the ultimate question: what recognition of rights should virtual property be afforded? What legal standard can be applied to a virtual world? Legal scholars Greg Lastowka and Dan Hunter argue that virtual worlds are “jurisdictions separate from our own, with their own distinctive community norms, laws, and rights.”[79] This argument is not new to cyberlaw and has, many times in the past, been made about the internet in general.[80] Although the notion of a separate jurisdiction is not expansive enough to provide an adequate understanding of virtual property as a whole, it has certain elements of truth. In particular, custom within the online community, and especially within the virtual world community in question, should be valid evidence of the intent and understandings of parties to a conflict. Consideration of the intent and understanding of the parties to a conflict allows for a full picture of the events surrounding a dispute and gives the fact finder a relevant baseline for judging the actions of the involved parties. Such an approach may ensure that guilds and gamers do not need to sign on the dotted line each time they want to enter a battle.

Control over copyrighted, and other material protected by intellectual property laws, must exist within and outside of the virtual world. However, fair use should remain a valid defense to infringement, as many times copyrighted images will need to be used to facilitate the exchange of virtual property. Game designers should be able to freely incorporate new content into their virtual worlds without worrying about the impact on the market for other virtual goods or possible harm to individual gamers. Designers should have the unrestricted ability to restructure and revamp the virtual world as they see fit. Because game designers have the incentive to retain customers and do not wish to cause inflation within the virtual world, they should seek to preserve the status quo when it is reasonable to do so. But, if game designers take action with a malicious intent to harm a certain group of gamers, then an injunction should be granted, and damages assessed if actual harm is caused. Malicious intent must be proven, and a standard of proof requiring clear and convincing evidence should be applied. Such a standard should adequately protect game designers while still allowing egregious violations of gamer rights to be punished. The amount of proof required under this standard is not so high as to preclude gamers from recovering against gaming companies and not so low as to allow recovery that would inhibit the natural exercise of discretion by gaming companies. Copyright should also extend to cover creative elements in virtual worlds that are the product of individual gamers. EULAs aside, gamers such as Leeroy Jenkins should be able to profit from the creative works they produce. Also, game designers should not be insulated from liability for infringing player copyrights and trademarks. This approach would enable both gamers and game designers to control and profit from their creative endeavors.

Property rights in virtual property should allow individual gamers to freely exchange virtual property. To enable the efficient use of virtual resources, assets must be allowed to flow to those who value them most highly. This means that courts should not accept or enforce EULA prohibitions on virtual property transfers for real money. Courts should also reject restrictions placed on virtual property usage by individual gamers or game designers. The free use of virtual property, within the confines of the coded virtual world, allows for maximum efficiency and the most desirable outcome for gamers. Any contract that arbitrarily restricts the free use of virtual property by a purchaser should be deemed invalid.

The language used in any statute describing ownership of virtual property must be precise. The right of ownership granted to players over the virtual property they acquire should not be the equivalent of a fee simple absolute. If a gaming company must shut down a virtual world or if it bans a player for violating the rules of the virtual world, the player has forfeited his right to recover for lost assets. However, notice and fair warning must be given before the closing down of a virtual world or before a player is banned for conduct that violates the terms of use for a virtual world. If a player wishes to bring a claim of wrongful banishment, he must prove a minimum level of lost value, and preliminarily present evidence that shows a likelihood of success in a subsequent trial. These requirements will prevent frivolous claims while allowing gamers who have been wrongfully harmed to recover.

Selling virtual property is not an extreme practice or one that gamers generally tend to disagree with. While some gamers feel that buying and selling virtual property is “cheating”, selling virtual property is not the same as selling body parts and it is not morally objectionable to most gamers.[81] Some gamers claim that allowing virtual property to be sold cheapens the virtual world experience for everyone, but the expanding market for virtual goods evidences a widely held belief on the contrary. The virtual property market should be regulated as any other market and the potential for taxation should be recognized. Taxation should only take place, however, when gamers are, or have been, engaging in selling virtual property for real cash. Gamers who wish to stay out of the real market for virtual property should not be forced to pay taxes under a theory of barter because many gamers are not entering the virtual world to gain income or turn a profit.

Essentially, the market for virtual property should be viewed as being much like a virtual stock market. Fluctuations in virtual item prices are much like fluctuations in stock prices. Fluctuations in value caused by game designers, as long as they occur from no exercise of malicious intent, should be permissible. Demand and supply, as well as the success or failure of the virtual world, will dictate the value of virtual property.

Although gamers should be granted ownership rights over virtual property, their rights would have to be importantly limited. When a virtual world closes down the items should be seen as being returned to the game designers. Gamers should “own” the virtual property conditional upon the operation of the virtual world and their compliance with the rules of that world. The possible responsibilities of the game designers can be illustrated by a bailor-bailee analogy.

Game designers act as bailees, keeping the virtual property of gamers safe and accessible. If servers must be taken down for extensive maintenance, if a crash occurs, or if a server rollback is necessary, then the game designer could potentially be held liable for violating this pseudo-bailment. There are three types of bailments in modern U.S. law; bailments for the sole benefit of the bailor, bailments for the sole benefit of the bailee, and bailments for mutual benefit.[82] With virtual property, the bailor-bailee relationship is for mutual benefit, as both parties in the transaction gain from the relationship. Game designers gain by collecting monthly fees and by potentially charging listing fees for virtual auctions. Gamers gain by accumulating valuable virtual property inside the virtual world owned by the game designers. Consequently, the standard of care that the bailor game designer owes the bailee gamer is defined as “ordinary care, or due care, or the degree of care which would be exercised by a person of ordinary care in the protection of his own property.”[83]

Because the relationship is for mutual benefit, the same due-care standard for recovering against a bailee who damages bailed property in a mutually beneficial bailment should be applied. Because of this, when gamers are harmed by a server malfunction, the gaming company should have an obligation to release any information about the cause of server problems to the players. This allows players to see if they have a cause of action against the game designers for violating the due care standard. An exception to this rule would occur if a serious security risk was posed by releasing the reason for a server problem immediately. In such a situation, a reasonableness standard should apply; game designers would have to attempt to remedy the problem within a reasonable amount of time and then release information about the cause of system failure.

Because of the increased duty owed by gaming companies to gamers and the ability of gamers to freely exchange virtual property for real money, gaming companies would benefit from capturing part of the value from the exchanges. This proposed regulatory scheme would, most likely, force game designers to incorporate auction or sale systems like that of Station Exchange or Planet Entropia.[84] To mitigate the burden of this system, gaming companies should be allowed to insert clauses into their EULAs which force any exchanges of virtual property for real cash to be undertaken through a system designed by them. Although such a concession slightly raise transaction costs when compared to eBay, ItemBay, or the other automated auction services online, it allocates a portion of the benefit to the game designers. Many times game designers would be forced to allowed virtual property exchanges against their will. Allowing them a way to benefit from this new restriction serves the goal of providing them with incentives to provide efficient, workable ways for gamers to transfer property.

VIII. Summary and Conclusion

Virtual property is an emerging and important area of cyberlaw. In order to compete with other countries, ensure gamers and game designers alike are given incentives to efficiently use resources, and control this new market, the United States needs to develop a theory of virtual property and establish a comprehensive legal strategy to address conflicts over virtual property rights. This paper has outlined the problems with a purely intellectual property law approach and the problems with a purely common law property approach. A hybrid solution is needed, one that takes into account the specific composition and nature of virtual worlds and virtual property. This paper provides arguments for limited ownership rights in virtual property for gamers and to help move virtual property in the direction of recognition. Limited rights recognition allows for the efficient use of virtual resources while allowing gaming companies to retain control over their intellectual property. The current system of intellectual property rights giving gaming companies complete control over virtual property through extremely restrictive contracts must be altered. The goal of the law in this area should be to promote efficiency while acknowledging and protecting the rights of individuals who expend time, effort, and money to create virtual property. In order to accomplish these goals, more research and inquiries into virtual property are needed. That said, I have a level 54 rogue waiting to acquire some virtual property.