Last month RockYou was hit by a breach of user security flowing from a hack which exposed more than 30 million RockYou account user passwords and other information. Now this month a class action lawsuit has been filed by one of RockYou’s subscribers over the security breach. The suit, filed in federal district court, accuses the company of “failing to use hashing, salting or any other common and reasonable method of data protection and therefore drastically exacerbated the consequences of a hacker bypassing its outer layer of web security.”

The Supreme Court of South Korea made a landmark ruling last week to allow the “virtual currency” or “cyber money” used in online games to be exchanged for real world cash. This appears to be the first such ruling in South Korea and will likely open new areas for the booming Korean online game industry.

The two accused individuals had originally been indicted in 2008 and fined by a provincial court citing a law banning the exchange of cyber money for hard currency. The provincial court decision was later overturned by a South Korean appellate court.

In the current Supreme Court decision the court rejected the prosecution’s argument that the appellate court was incorrect in overturning the provincial court decision acquitting two individuals who had been indicted for illegally selling 234 million won worth of cyber money and making nearly 20 million won profit (approximately $18,000 USD). The virtual currency had been earned in the wildly popular online game Lineage.

Justice Min Il-young said that trading game money for cash should be punished only in cases in which it is obtained by online gambling games such as poker or other card games and not games like Lineage.

All in all, it looks like South Korea is attempting to embrace instead of wipe out real world trading in “cyber money”. In fact, a court ruled in September of last year that profits from the trading of “cyber money” should be subject to 10 percent value added tax (VAT).

MindArk, the creators of Entropia Universe, recently announced that the Planet Calypso Crystal Palace virtual space station sold at auction for approximately $330,000. The winning bidder was a player who goes by the name Buzz Eric Lightyear. In the two week auction, Lightyear narrowly outbid other players willing to pay over $300,000 for the Crystal Palace. According to the World Records Academy, the Crystal Palace sale set a new record for the most expensive virtual item.

Since there is the ability for the real-world conversion of Entropia Universe currency into US dollars, Lightyear may likely use the virtual space station as a source of real income. As the space station’s owner, Lightyear will have the right to tax players who use the station. The virtual currency obtained from through taxing of other players can easily be converted into real world profits through Entropia Universe’s official bank.

On April 17, 2009 Taser International Inc. (“Taser”) filed a lawsuit against Linden Research Inc. and others containing various claims including trademark-infringement, trade dress infringement, trademark dilution, design patent infringement, unfair competition and RICO violations involving unauthorized sales of virtual versions of Taser’s electric stun guns in Second Life. The suit is entitled Taser International Inc. v. Linden Research Inc., 2:09-cv-00811, and is venued in the U.S. District Court, District of Arizona (Phoenix).

In the complaint, which is more than 100 pages including exhibits, Taser claims Linden Research Inc. and a host of individuals and entities related to Linden Lab including its founder and Chairman Philip Rosedale, as well as its CEO, Mark Kingdon, and CFO, John Zdanowski, are engaging in conduct which is damaging to Taser’s reputation and hurting its sales.

The complaint alleges that Linden and others such as Virtualtrade LLC, are “selling virtual weaponry in a fully fledged copy of plaintiff’s real ones for use in the Second Life computer simulation,”. Taser says the alleged infringement is especially harmful because the online stores selling the virtual versions also sell pornographic and drug related content.

This is an interesting suit since it is the first time a major company has sued Linden Lab for infringement which occurred in Second Life. I have been expecting a suit if this type to be filed for some time now so it will be worth watching. Moreover, because the claims raised by Taser are not based in copyright law, Linden Lab will most likely not be able to base its defense on compliance with the safe harbor provisions of the Digital Millennium Copyright Act.

Worlds.com CEO Thom Kidrin has recently made it know that, depending on the success of his current suit against NCsoft, his company intends to sue other companies who refuse to enter into licensing negotiations. The current NCsoft suit is venued in East Texas which is notorious for plaintiff-friendly rulings in patent cases.

Moreover, Mr. Kidrin is looking to strengthen his position with the recent grant of U.S. Patent No. 7,493,558, an extension and continuation of Patent No. 7,181,690. Both patents are titled “System and Method for Enabling Users to Interact in a Virtual Space” and arguably covers architectures for virtual worlds and MMOGs.

According to Paul Lerner, General Patent Corporation’s Sr. Vice President and General Counsel, “This Patent is a continuation of U.S. Patent No. 7,181,690 issued to Worlds.com in 2007 and bearing the same title.” Moreover, he stated that “This new patent significantly strengthens patent protection for the technology developed by Worlds.com.”

Worlds.com also has a third Patent No 6,219,045 titled “Scalable Virtual World Chat Client-Server System.” According to General Patent Corporation, Worlds.com has another patent continuation in process for the ‘690 Patent and plans to prosecute two more continuations of the patent as well.

Mr. Kidrin has made it known that he is not looking to knock off his competition; he is merely looking to be paid licensing fees for his patent rights. Regardless of what any legal scholar may think about the merit of Worlds.com’s case, as an attorney that has litigated numerous cases around the country, I can tell you that whenever judges and juries are involved the outcome is always unpredictable. That being said, Worlds.com may have a tough time in court based on a wealth of “prior art” available to any patent defense. NCsoft seems to be taking the threat seriously and has retained the well-known law firm, Ropes and Gray to defend it in the action.

Mr. Kidrin has not denied notion that he may seek to update the Worlds.com patents with further continuations as virtual world and MMO technology evolves. In fact, it has been reported that he stated that “The issue really is that the more layers we can create through additional patents the better off we are,” and “If you don’t want to lose the patents you have to file more. It protects us from someone saying, ‘We don’t do it that way. We do it this way.’”

Virtual Judgment will be keeping an eye on this matter as it progresses.

Midway Games Inc. announced last week that the company and its U.S. subsidiaries filed voluntary petitions in U.S. Bankruptcy Court for the District of Delaware for reorganization under Chapter 11 of the U.S. Bankruptcy Code.

Only two months ago, Mark Thomas is reported to have spent $100,000 in cash and $70 million in debt to buy Sumner Redstone’s 87% stake in Midway. Of the $70 million in debt that Thomas reportedly took over from Redstone, $30 million is a secured claim that arguably puts him ahead of all unsecured creditors. The company cited to the November 28, 2008, change in ownership, which triggered accelerated repurchase obligations of certain of the company’s debt, as a motivating factor for this filing.

According to Midway’s Chairman, President and CEO Matt Booty “[t]his was a difficult but necessary decision” but the “filing will relieve the immediate pressure from our creditors and provide us time for an orderly exploration of our strategic alternatives. This Chapter 11 filing is the next logical step in an ongoing process to address our capital structure.”

In its filing, Midway listed its liabilities as totaling between $100 million and $500 million, with assets worth at least $10 million but no more than $50 million. Midway has stated that it expects to continue normal operations during the proceedings.

In response to the recent announcement by Worlds.com of their intention to enforce their patent for a “system and method for enabling users to interact in a virtual space” and the subsequent suit brought by Worlds.com alleging that games published by NCsoft infringe on that patent, Article One Partners has called upon their entire worldwide community of researchers (dubbed “advisors”) to review the Worlds.com patent in order to find prior art evidence to invalidate it.

To ensure that researcher compensation is proportional to its contribution to Article One’s mission of invalidating bad patents, successful researchers will be awarded up to $50,000 for submitting prior art which will invalidate the Worlds.com patent. In a discussion with PR Newswire over the new study focusing on the Worlds.com patent, Article One Partners elaborated on their goals with regard to crowd-sourcing prior art discovery:

“Patent disputes are moving to the courtroom in record numbers, with the cost of litigation typically passed along to the public - in this case impacting those who participate in virtual worlds and online gaming…By presenting the patented information to our community for peer review, we focus a global effort upon the core issue of validity for the patents at issue. If a comprehensive search does not uncover prior art evidence, the patent is intrinsically strengthened. If evidence is discovered and presented, the market can take action to reduce unfair monopolies and overly broad patents. In both cases, resolution can be expedited.”

To learn more about Article One Partners or register to become an Advisor eligible to participate in the new study focusing on the Worlds.com patent, go to articleonepartners.com.

The possibility of the U.S. government taxing virtual property amassed by users in online worlds like Second Life and World of Warcraft is by no means new. That having been said, Congress may be taking another look at the subject of taxing in-world gains based on the recent recommendation of the United States Taxpayer Advocate Nina Olson (FYI: the U.S. Taxpayer Advocate is the only employee of the IRS authorized to make legislative proposals directly to Congress).

While the 2008 Annual Report to Congress from Olsen’s office suggests taxing virtual property as one viable means by which Congress can deal with the issue, the Advocate’s recommendations would be better described as pointing out the varied reasons for confusion among taxpayers as to whether virtual property is taxable and urging Congress to take steps to clarify the government’s position on the matter. As for whether the report favors including or exempting in-world transactions for tax purposes, the neutrality of the Taxpayer Advocate is evidenced by positive statements that “promulgating guidance would likely promote voluntary compliance even if it exempts in-world transactions from tax.”

Regardless of whether the report leads to congressional action on the subject of taxing virtual property, the portions of the National Taxpayer Advocate’s 2008 Annual Report to Congress dealing with virtual property make for an interesting read based on its even-handed and comprehensive treatment of points both for and against the taxation of virtual property and in-world transactions. The discussion of taxing virtual property begins at page 214 in Volume I, Section I of the National Taxpayer Advocate’s 2008 Annual Report to Congress, made available courtesy of the United States Internal Revenue Service.

On December 24, 2008, Worlds.com filed a complaint in the Eastern District of Texas, Tyler Division, entitled Worlds.com Inc. v. NCsoft Corp, Civil Action No. 6:08-cv-508. In the four page bare bones complaint filed against NCsoft, Worlds.com alleges that the games City of Heroes, City of Villains, Dungeon Runners, Exteel, Guild Wars, Lineage, Lineage II, and Tablula Rasa infringe on its patent 7,181,690, “System and Method for Enabling Users to Interact in a Virtual Space”. This filing follows quickly from Worlds.com’s earlier statement this month that it had selected an intellectual property firm to defend its virtual world patents. The complaint seeks a permanent injunction against any further acts of infringement by NCsoft and a recovery of damages. While not commenting on the likely outcome of this suit, I doubt it will be the last one filed.

Earlier today General Patent Corporation, a Suffern, New York based Intellectual Property licensing and enforcement firm, announced that it has retained the Westfield, New Jersey law firm of Lerner David Littenberg Krumholz & Mentlik LLP to work on behalf of Worlds.com, Inc. in regards to enforcing Worlds.com’s patent portfolio.

According to statements by Alexander Poltorak, General Patent Corporation’s Chairman and CEO, “[t]he Worlds patents represent exceptionally valuable intellectual property,” and “[w]e welcome licensing inquiries from the on-line game industry. Non-exclusive licenses are available on favorable and non-discriminatory terms.”

Worlds.com holds U.S. Patent Nos. 6,219,045 entitled “Scalable Virtual World Chat Client-Server System” and 7,181,690 titled “System and Method for Enabling Users to Interact in a Virtual Space”. Thom Kidrin, the CEO of Worlds.com, stated that “[w]e are pleased to have the expertise and IP experience of General Patent and Lerner David to enforce Worlds’ patent portfolio,” and that “[a]s the number of virtual worlds and MMORG’s continues to grow, Worlds has seen the space we pioneered in 1995 validated in techniques and methodologies we believe are defined in our patents.”

Therefore, it would seem that General Patent Corporation and Worlds.com are taking the position that the above-referenced patents cover the idea of the computer architecture for a three-dimensional graphical multi-user interactive virtual world systems. If so, this announcement is arguably a very thinly veiled notice to the virtual world industry that infringement suits are forthcoming for those companies who do not enter into a licensing deal with General Patent Corporation and Worlds.com.

Virtual Judgment will not comment on the enforceability of World.com’s patents. That being said, the potential impact of this announcement will definitely be worth watching for.