Virtual Worlds: It’s a Legal Jungle in There

About eight months ago, the owners of a sporting goods company contacted their attorney, Doug Wolf, a partner at Wolf Greenfield. It seemed a company was using the firm’s logo and trademark without proper authorization. Setting the matter right should have been a straightforward task for Wolf — except for the fact that the intellectual property theft was happening online, specifically in Second Life.

The client didn’t even know who was controlling the avatar who had set up shop using its trademarks. Wolf contacted the person in Second Life and explained who he was. The avatar came clean; as it turned out, he was a legitimate distributor for the sporting goods company in real life. He didn’t think he was doing anything wrong.

Eventually, the parties agreed that the distributor could use the firm’s marks and logos in Second Life — as long as he got them from the firm and didn’t create them himself.

“My client didn’t want him to use poor images that might degrade the brand,” Wolf told the E-Commerce Times.

Litigation Cost/Benefit

Wolf believes his client would have won handily if the matter had gone to court, although getting to that point would have required more legwork than usual. For starters, there would have been the question of jurisdiction.

“We believe we could have sued in the city where the distributor is located or where the client is located,” the attorney said.

Indeed, there is a short list of case law that Wolf could have referred to in crafting a complaint. While an untold number of Second Life incidents violate its culture and terms of use — last year, for example, an avatar shot several people in a college university — these “crimes” rarely make their way into the real world’s legal system.

Lawyers believe it is just a matter of time before they do. And when these cases do move forward — either in civil or criminal courts — there are bound to be special challenges due to the nature of a virtual world.

Second Life did not respond to the E-Commerce Times’ request for comment.

There have been some virtual world copyright disputes already, but they have proven very unsatisfactory for plaintiffs, John Hayward, senior lecturer of law at Bentley University, told the E-Commerce Times.

Just identifying who is behind the avatar is expensive, he said. “You have to subpoena Linden Lab, PayPal and the [Internet service provider], and that can be very expensive.”

Those costs are difficult to recoup, because the money at stake is far lower in a virtual world. “You may spend (US)$10,000 identifying who is behind a copyright theft to receive $500 in compensation,” Hayward said.

Pump-and-Dump, Insider Trading

Eventually, though, legal skirmishes will expand to address more unsavory activities — like fraud, for instance.

“New technology means new methods for people trying to game the system or defraud others. In that sense, virtual worlds such as Second Life are no different from the first days of the Internet, e-mail, instant messaging and the like,” Steven D. Feldman, white collar criminal defense attorney and securities litigator at Herrick, told the E-Commerce Times. The general concept, though, remains the same: using relationships in a virtual world to make people think they’re getting an inside scoop, while they are instead being exploited and defrauded.

Virtual worlds can create platforms for users to defraud each other, Feldman noted. “You could use your avatar to convince someone to wire you money in some remote location, when you met them on — and have a relationship only via — Second Life. When you deal with someone far away and get ripped off, it’s hard to figure out who committed the crime. It’s also much harder to recover the money in a civil action.”

It will also be tempting for fraudsters to take on the government, added Feldman. “I can easily envision these virtual worlds giving rise to insider trading cases, garden-variety fraud, and pump-and-dump cases,” continued Feldman, a former federal prosecutor who specialized in securities fraud and now defends such cases.

“Pump-and-dump cases involve a person who artificially and illegally inflates the price of thinly traded stocks by touting the stocks to others and then selling his own shares, which drops the value of the shares that other people bought,” he explained. “In Second Life, for instance, you could use your avatar to promote a thinly traded stock, hope the price spikes temporarily, and when it does, sell your real-world shares for a real-world — albeit illegal — profit.”

If he were defending such a charge, he would look at forcing the government to prove that his client not only owned the avatar, but also had control of the avatar and its actions, Feldman said. “Who’s to say someone didn’t hack into the system and gain control of your avatar or somehow did the pumping?”

Insider trading presents another possibility for future legal action. “Avatars speak to each other, not unlike instant messaging,” said Feldman. “So, if avatars are passing along inside information that is supposed to be kept confidential, and the owners of the avatars are then buying stock based on that inside information, there could be a criminal layer there.”

Again, he would consider a defense that would cast doubt on who actually controlled the avatar and, therefore, the content of the conversations.

Prosecutors, meanwhile, are going to be looking for logs or other traces of the conversations in an attempt to build criminal cases, Feldman continued. “Insider trading is often about the relationships between the people who are swapping information, which is why people often use throwaway phones so they can’t be traced. Second Life and virtual worlds are the throwaway phones of the 21st century.”

Both prosecutors and defense attorneys will be focusing on who had control of the avatar or might have had control of it, he said. That involves finding Internet protocol addresses, figuring out who logged in when, and who might have had access to an avatar when an act occurred.

The Tax Man Cometh

It is also possible that Second Lifers will find themselves in a dispute with the government, even if fraud was not their intent.

“One question we are struggling with right now is taxes in Second Life,” Wolf said.

Specifically, when should a tax be levied? When the income is made online, or when it is converted into regular dollars? It couldn’t be based on the value of the Linden Index, which fluctuates.

“I wouldn’t be surprised to see this kind of dispute make it into tax court,” said Wolf, “if the dollar value was big enough.”

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