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.

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.

A 43-year-old Japanese woman’s sudden divorce from her online husband in the virtual world “Maple Story” led to her logging-on to his account and killing off his Avatar. According to reports, in mid-May the woman used the identification and password of her ex-“Maple Story” husband to access his account and commit virtual murder. The aggrieved man contacted the police after logging in to his account and discovering that his avatar was dead.

The woman was arrested Wednesday and taken 620 miles across Japan from her home in Miyazaki to be detained in Sappporo. A police official in northern Sapporo City anonymously stated that the woman admitted the allegations and told investigators “I was suddenly divorced, without a word of warning. That made me so angry”. Reports indicate that she was charged with illegal access onto a computer and manipulating electronic data. If convicted, she could face a prison term of up to five years or a fine up to $5,000.

Tokyo police are not “n00bs” when it comes to virtual world crime. Recently a 16-year-old was arrested for allegedly swindling virtual currency worth $360,000 using a stolen ID and password.

Similarly, the rest of the world is not immune from virtual world problems bleeding into the real world. In August, it was reported that a woman was charged in Delaware with plotting the real-life abduction of a boyfriend she met through “Second Life.”

Likewise, in a report out of Amsterdam, a Dutch court has recently convicted two youths of theft for stealing virtual items. The Leeuwarden District Court found that the 15 and 14 year old culprits had coerced a 13-year-old boy into transferring a “virtual amulet and a virtual mask” from the online adventure game RuneScape to their game accounts. The court ruled that “[t]hese virtual goods are goods (under Dutch law), so this is theft”.

While the identities of the minors were not released, the 15-year-old was sentenced to 200 hours service, and the 14-year-old to 160 hours. The severity of the sentences seems to relate to the nature of the real world violence which has been reported as part of the crime. The two culprits lured the 13-year-old boy into a real world meeting and beat him up while threatening him with a knife.

In what is being touted as a Virtual World first, IBM and Linden Lab announced today that a team of avatars comprising researchers from both companies successfully teleported from the Second Life Preview Grid into a virtual world running on an OpenSim server. This is an interesting first salvo toward the concept of Virtual World interoperability that IBM, Linden Labs, Cisco and others have been working toward since last year. According to the information released by Linden Lab, this

“marks the first time an avatar has moved from one virtual world to another, an event with implications for the entire virtual world industry.”

Linden Lab’s Open Grid Protocol, used in the project, is intended to set an open standard for interoperability allowing users to freely move from one Virtual World to another. Ultimately, the concept is to allow Avatars to move as freely between worlds as one may freely move between websites. In the current experiment only the avatar itself was subject to the transfer. The Avatar appeared in a default setting without any Second Life-specific clothing, features or virtual property. While IBM and Linden Lab have not announced any available technology allowing for virtual assets to be transported along with the avatar it is likely that this may be forthcoming. With this development heralds the potential of virtual property being copied from one world into another. Linden Labs seems aware of this eventuality and has stated that

“We want to stress that when it does become possible to move avatars between worlds, we will take the utmost care to protect the rights of Second Life property owners and creators. Linden Lab will not design a system that lets people openly violate the permissions of SL goods and take them to other worlds. We recognize that intellectual property is the engine that drives Second Life, and we are completely committed to preserving the qualities that make Second Life the unique, innovative and dynamic place that it is today.”

As of right now the above referenced technology is experimental and not being made available to all Second Life. While Linden Lab announced that IBM and it were working towards this goal, Linden Lab provided no potential roll-out date for this enhancement. Given the inventiveness of Second Life and other Virtual World residents regardless of Linden Lab’s commitment to protecting users Intellectual Property rights it is likely that violations will occur. It is currently quite difficult to attempt to stem the infringement of Intellectual Property rights in Second Life. While transporting of avatars and virtual assets is a necessary step to bringing Virtual Worlds to the mainstream consumer, it will make protecting the differing levels of Intellectual Property rights in the various worlds even more complex.

I would like to welcome you all to Virtual Judgment. The intent of this site is to discuss the legal and business issues that are quickly arising from the convergence of videogames, virtual worlds and the real world. The current market for the video game and virtual world interactive media industry is 8 billion dollars and is expected to grow to over 30 billion in the next few years. The largest one day opening in entertainment history was the sale of “Grant Theft Auto IV” ($310 million in its first day) and not any blockbuster movie release (Spiderman 2, made only $52 million its first day and $114 million its first weekend). The more this industry expands the more legal issues are being raised. The industry is advancing technology that is on the bleeding edge and the current legal system is poised to be left behind. At this point there is a dearth of legal voices dealing with video game and virtual world law, which is an area of law that it set to explode in the coming years.

The area of law dealing with video games has been referred to as part of entertainment, IP, technology or even interactive media. Regardless of what you refer to it as there are numerous challenges and a myriad of potential issues. From traditional IP and contract rights to character and music licensing this area deals with various areas of law. Moreover, video game issues are frequently in the news dealing with a panoply of issues. Various states have enacted legislation attempting to outlaw violence or obscenity in video games. Many of the various laws that have been passed have been overturned as unconstitutional, but the states keep attempting to pass different iterations. The storytelling elements of video games have led to its categorization as protected under the first amendment speech doctrine in the same manner as books and movies.

In addition to the market for console, P.C. based and online video games there is an expanding industry surrounding virtual worlds – sometimes also called digital or synthetic. Virtual worlds are online games that have evolved from text-based role playing games such as Dungeons and Dragons. The predecessors of the “Massively Multiplayer Online Role-playing Games” (”MMOs”) of today began for the most part in the late 70s and early 80s when various individuals first engaged in the role-playing game behavior online. In the 90s the current state of online MMOs began offering a real-time socially interactive (i.e. social networking) component which was not available on traditional offline console gamming. While the physical space and landscape is simulated in the virtual environment the social interactions are real since virtual characters or “Avatars” in the digital world are controlled and operated by a real person and not just by strict computer code. While these games were originally used mostly as an avenue for play and social interaction, many are starting to be more focused on commerce, research and work related activities. In the last few years MMOs have exploded in usership with some reports stating that 100 million people worldwide are logging on to play in one of the various digital worlds.

Many individuals do not play the game strictly for its virtual entertainment opportunities, but as a way to make money in the real world. Individuals and virtual businesspeople are able to convert their digital earning into real cash through by using existing virtual currency arbitrage trading, converting digital currency to United States cash at the prevailing rate in the same manner that an international currency exchange would. Multinational companies like IBM, Toyota, Starwood Hotels, Reuters, Viacom and others have created virtual world presences to conduct real world business and advertise virtual and real world products.

Every virtual game world comes with an End User License Agreement (”EULA”) which the players must agree to if they wish to play the game. By accepting the terms of the EULA players may waive significant individual rights. The EULA acts like a system of laws for the virtual world creating a “closed world”. This “closed world” is intended to differentiate the virtual world as a game not subject to the real world laws and other requirements. Under the general terms of these EULA there is no sense of private property since the virtual world is wholly owned by the designers and builders. Most EULAs insist that any intangible property or artifacts that exist in the game world are the property of the designers and not owned by the players. The players may accumulate them in the course of the game but merely use them by license of the game designer. Under this argument, if we cede legal control to virtual world property to the game designers and EULA we essentially negate the need to look to laws and governmental interference to protect players’ rights. The protections the EULA claim to grant to the game designers is currently under attack.

On the other hand “open worlds” like the game Second Life have been designed where the barrier between the real world and the virtual world is much more porous. The creation of these “open worlds” is making the questions of rights and obligations much more difficult to resolve in favor of EULA control. In the “open world” of Second Life individual players retain ownership of all the real world rights to their creations in the virtual world. They are considered the owners of all the IP involved and created by them and can do with it what they will, so to speak. If the “open world” trend continues and is adopted by more and more game designers then there will be a significant need to regulate and protect the IP ownership. Moreover, as stated major corporations like IBM, GM and others have created their own virtual world presence. They are using the virtual world as a place to advertise, market and sell their products, as well as, a meeting place for employees to perform real world work. As this trend continues the legal issues inherent therein will also need to be addressed.

Since intangible intellectual property of all kinds has real world value and can be relatively easily converted, the question arises as to what legal standard should be applied to the virtual world. The growing commercialization of the virtual world will inevitably subject it to real world laws and regulations as players seek protections for their valuable IP. If virtual world currency and goods being traded have a real world value won’t the courts and government eventually step in to protect, regulate and tax these digital assets? Congress is currently looking into the taxing question. The answer will potentially depend on whether a player is allowed ownership of an item they obtained or created in the virtual world. Likewise, if virtual property has real world value, could a game designer be held liable for destruction of property if they pulled the plug on a game due to business or monetary issues without proper compensation to the gamers? Additionally, how would the virtual economy suffer if virtual real estate or monetary assets were taxed by the city, state or federal government? For that matter which jurisdiction would have claim over the assets since they exist in the ether that is the digital world? The US has not dealt with this issue yet, but it has been decided in other countries which may shed light on what the US may find. Moreover, prior decisions (like the Supreme Courts Grokster opinion) and current Acts (like the Digital Millennium Copyright Act) may play a significant role in the outcome of these issues. All of these questions will eventually need to be determined as the virtual systems grow in size, number and membership.

In summary, given the expansive and interconnected nature of the industry Virtual Judgment will include discussions on various areas of law, including Intellectual property, interactive media, contract law, intangible property; communications, technology, licensing, obscenity, employment, defamation, piracy, constitutional rights, tort liability, and more. If there are specific topics that you would like to be addressed by this site please contact me to let me know. I envisioned this site as a useful tool for developers, businesspeople, lawyers, players or other enthusiasts. It can only become such a useful tool if the readers challenge me and let me know what is of interest and importance to them. Therefore, I look forward to our continuing virtual dialogue.

Sean F. Kane