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).

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.

The old adage that tough cases make bad law was proven true once again last week when Lori Drew, a 49-year-old Missouri mother, was found guilty by a jury of her peers of three counts of misdemeanor “unauthorized access” under the Computer Fraud and Abuse Act (CFAA), a federal law enacted to prevent computer hacking. Drew was indicted on allegations that she accessed MySpace.com and provided false information to set up a profile for a nonexistent 16-year-old boy named “Josh Evans.” Drew then allegedly used the “Josh Evans” MySpace profile to cyber-bully Megan Meier, a former friend of Drew’s daughter. Meier ultimately took her own life in the fall of 2006.

Since there was no applicable statute under which Drew could be indicted for cyber-bullying, federal prosecutors brought Drew up on a number of misdemeanor and felony “hacking” charges under the CFAA, which prohibits persons from intentionally accessing and obtaining information from a computer without authorization. According to the prosecutor, the MySpace Terms of Service only authorizes users to access MySpace.com and create a profile if they “provide truthful and accurate registration information” and refrain from “using any information attained from MySpace services to harass, abuse, or harm other people.” By this logic, the prosecutor argued that any user which provides false information in creating a profile or uses information they receive through MySpace to harass others is de facto unauthorized in accessing MySpace.com. Adopting the prosecutor’s interpretation of the CFAA, the jury found that Drew’s alleged provision of untrue information and harassment of other users in contravention of the MySpace Terms of Service made Drew’s access of MySpace.com unauthorized, which in turn made Drew’s use of the “Josh Evans” profile to access Myspace’s servers and obtain profile information of Megan Meier illegal.

Not to lose sight of the events that precipitated this trial, the online or offline bullying of a child is a horrible act not to be taken lightly. Here such behavior may have contributed to the death of a barely teenage girl, an immeasurable tragedy. To be clear however, Drew was not convicted of “cyber-bullying” or any type of bullying or harassment whatsoever. Drew is being convicted of a federal crime (albeit a misdemeanor) because she accessed a website after having violated its Terms of Service. No matter how you cut or dress the issue, Drew is now subject to up to a year in jail and significant fines for each of the three counts for which she has been convicted.

This is a scary notion. If a violation of a website’s Terms of Service can be tantamount to a violation of federal law, the operators of websites and online games have effectively been given the ability to enforce their Terms of Service with the threat of requesting federal criminal prosecution of violators. If using a false name to set up a MySpace profile can be a violation of the CFAA, whose to say that “Griefing” other players during online game play or the selling of online goods for real world money can’t also violate the CFAA if those acts violate the particular game or website’s Terms of Service. While in this case an appeal to the U.S. Circuit Court for the 9th Circuit is almost certain, in the time between then and now feel free to be frightened by the possible far-reaching implications of criminalizing Terms of Service violations under federal law.

A number of filings in U.S. v. Drew as well as further information on the case is available courtesy of the Citizen Media Law Project.
18 USC 1030(2)(a), the section of the Computer Fraud and Abuse Act under which Drew has been convicted is available courtesy of the Cornell University Law School Legal Information Institute.

While Kung-Fu Election, an online game which pits members of the Obama and McCain camps against one another alla Mortal Kombat, has garnered much attention this debate season, an entirely different in-game appearance by a certain political candidate has been the subject of much discussion this past week. First reported only a few days ago and confirmed just yesterday, the campaign to elect Barack Obama for president has purchased in-game advertising space promoting the candidate within several video games currently available for home consoles. For those of you not familiar with modern in-game advertising, it is a form of dynamic placement which positions advertisements within the environments of video games being played on home consoles or computers, using internet connectivity to update ads as old campaigns end and new ones begin. Because such advertisements might be particularly intrusive within games set in fantasy realms or outer space, they are usually limited to banners or billboards within games that simulate real world environments where advertising is not unexpected, sports arenas being the best example.

In-game ads featuring Senator Obama are presently appearing in only eight games, all of which are from Electronic Arts, including the most recent releases in the immensely popular Madden and NBA Live sports franchises, and racing games like Burnout: Paradise. At present, the advertisements are limited to those versions of the games for Microsoft’s XBox 360 console as the campaign is being organized by Microsoft’s wholly owned in-game advertising arm, Massive Incorporated. The advertisements are also limited in their geographic scope, appearing only within the gameplay environments of those gamers located in “battleground states” like Florida and Ohio.

Read further:
GamePoltics.com – Report: Obama Ads in Burnout Paradise
GameSpot – Obama campaigns in Paradise City
AP via MSNBC – Ads for Obama Campaign: ‘It’s in the game’

In what may be heralded in the video game community as poetic justice, lawyer and anti-video game advocate, Jack Thompson may face permanent disbarment as a result of his ongoing Florida disciplinary hearing. While the decision is quire lengthy (169 pages) the conclusion to Judge Tunis’ report sums things up very nicely.

“The Florida Bar has recommended disbarment for a period of ten (10) years. This Court respectfully declines to follow the Bar’s recommendation… This case involves factual findings of cumulative misconduct, a repeated pattern of behavior relentlessly forced upon numerous unconnected individuals, a total lack of remorse or even slight acknowledgement of inappropriate conduct…

Additionally, the Court is taking into consideration a review of the Respondent’s conduct not only as proven by the evidence, but by what this Court has witnessed of the Respondent’s behavior throughout the eighteen (18) months of litigation. The undersigned finds no evidence whatsoever to indicate that the Respondent is amenable to rehabilitation, or even remotely appreciates the basis upon which a need or purpose for such rehabilitation is warranted…

Over a very extended period of time involving a number of totally unrelated cases and individuals, the Respondent has demonstrated a pattern of conduct to strike out harshly, extensively, repeatedly and willfully to simply try to bring as much difficulty, distraction and anguish to those he considers in opposition to his causes. He does not proceed within the guidelines of appropriate professional behavior, but rather uses other means available to intimidate, harass, or bring public disrepute to those whom he perceives oppose him.

Thus, after careful consideration of the underlying facts in the instant cases, together with the Florida Standards for Imposing Lawyer Sanctions, the applicable aggravating and mitigating factors and the precedent case law, this Court makes the following recommendations for John Bruce Thompson:

A. Permanent disbarment, with no leave to reapply for admission.
B. Disciplinary costs currently totaling $43,675.35.”

As a member of the bar I can state that not many of us will shed a tear for Mr. Thompson if he is removed from our ranks.

In a 60-to-1 vote, the New York State Assembly recently passed a bill mandating that beginning in 2010 ESRB ratings must be displayed on the packaging for all video games sold in the state of New York. Additionally, the bill requires new consoles to include parental controls suitable to restrict playability of indecent/violent video games. Finally, the bill calls for the formation of an advisory council to examine issues such as the potential impact of violent media. This Bill mirrors the bill previously passed by the New York State Senate. The bill’s description is as follows:

“Creates an advisory council on interactive media and youth violence and requires video game consoles to be equipped with a device or control to permit owners to prevent the display of violent or indecent video games; defines “video game”; addresses sale and rental of video games.”

Before the bill becomes law it must be signed into affect by New York Governor David Paterson. As with similar laws pasted previously in various jurisdictions, a lawsuit by the industry is likely. Given that nine states’ laws have already been successfully challenged and demonstrated to be unconstitutional, a lawsuit may vary well be successful.

That being said, does the passing of this bill really mean anything to the video game industry? ESRB ratings have been displayed on video game packaging for more than a decade. The Wii, Xbox 360 and PlayStation 3 currently do contain parental control options so would seem to be in compliance with the bill. And finally of the 16 seats on the “advisory” panel one goes to the Entertainment Software Association and another to the Entertainment Merchants Association. Moreover, it is unclear what power this “advisory panel” would even have to set any future policy.

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