What Is The Legal Status Of Virtual Goods?

December 4, 2012

By Oliver Herzfeld, Forbes IP Counsel

Virtual goods are intangible objects in online games and communities. Examples include everything from weapons and potions in multiplayer online role-playing games to seeds and cows in online social farming games. Virtual items have value, and are purchased and sold by game players for real money in the real world. Although the current annual U.S. market for trade in virtual goods is estimated in the billions of dollars, and sales are expected to continue to grow at a rapid pace, the legal status of such goods remains completely uncertain. Four possibilities of the status of virtual goods include no legal significance, personal property, services and intellectual property. I will consider each in turn.

No Legal Significance

The end user license agreements (EULAs) of many online games state that the relevant game operators have exclusive control and ownership of the games, and virtual items therein have no legal significance or status. The EULAs are form agreements that are non-negotiable, and users must accept their terms in order to play the games. This approach is the cleanest from the game operators’ perspective, as it protects them from exposure to liability arising from disputes involving ownership of virtual goods. However, it is the most divorced from users’ real world experiences and expectations. For example, in 2010 a virtual resort was sold for $635,000 and a virtual space station for $330,000. Clearly, players would not expend such large sums, and billions of dollars annually in the aggregate, without an expectation of ownership. And virtual goods being devoid of legal status would provide no framework, and indeed a complete legal vacuum, in handling the most basic commercial disputes involving the purchase, sale or theft of such items.

Personal Property

Treating virtual goods as personal property could solve many problems from a player’s perspective. For example, it could clarify that purchases and sales of virtual items are legitimate transactions; contracts for such sales are legal, valid and binding; players have a right to legal redress in the event such items are stolen, converted or otherwise misappropriated; and virtual goods may be legally gifted, loaned, used as security or collateral for a loan, donated to charity, and bequeathed by players and inherited by their heirs. Such legal treatment could also benefit game operators insofar as it would provide an economic incentive for users to continue playing the operators’ games, thus increasing the overall market value of such games. Unfortunately, treating virtual goods as personal property would not address the problems of diminution or elimination of the value of virtual goods due to (i) alteration of the difficulty of acquisition through modifications in the game play or duplication of virtual items by game operators; (ii) modification or deletion of virtual items by game operators; (iii) illegitimate duplication of virtual items by means of third party exploitations of errors or weaknesses in the games’ source code; (iv) the third party use of computer programs that automatically play online games to acquire virtual items with practically no investment of time or money; and (v) game operators shutting down or otherwise ceasing to support games due to declining player participation and/or revenues, insolvency or sale of the operators, or any other reason.

Services

It has been suggested that virtual goods may be regarded as a service provided by game operators to players. I am skeptical of such an approach since virtual goods do not share many key characteristics of services. It is true that virtual goods and services are both intangible. However, services are usually time bound, inseparably delivered by the vendor and received by the purchaser, simultaneously rendered and consumed, irreversibly consumed by the purchaser, and unique in terms of time, location and other surrounding circumstances. Virtual goods do not share any of those features of services.

Intellectual Property

In many respects, virtual goods are more similar to intellectual property than personal property. In particular, personal property is usually tangible, scarce, subtractable (i.e., consumption by one prevents simultaneous consumption by others) and not easily transformable, whereas, like other forms of intellectual property, virtual goods are intangible, may be copied an infinite number of times without any additional cost or material expenditure of time, effort or resources, and may be combined with other virtual items to create derivative works. Treatment of virtual goods as intellectual property would not help decide the issue of ownership since game operators would continue to claim ownership based on their ownership of the games, while players would claim ownership based on their time, energy and diligence in procuring items within the games, or money paid for items purchased in the real world. Nonetheless, if treated as intellectual property, notwithstanding EULAs that state such items are solely and exclusively owned by the games’ operators and users are only granted a limited license to use the goods within the games, players may acquire ownership rights under intellectual property law principles if they make a significant contribution sufficient to constitute a transformative use.

The Law Struggles To Catch Up

To date, there have been very few lawsuits in the U.S. involving virtual goods. One case against the operator of Second Life settled out of court and another seeking to define the rights of purchasers of virtual property in Second Life is ongoing. As is frequently the case, technology far outpaces the law and the law struggles to catch up. Given the large amounts of money at stake, hopefully the uncertainty of the legal status of virtual goods will be resolved sooner rather than later.