IP and Business: Second Life - Brand Promotion and Unauthorized Trademark Use in Virtual Worlds

November 2007

The strong identification of users with their online avatars has captured the attention of big brand owners.  (Image: Second Life)
The strong identification of users with their online avatars has captured the attention of big brand owners. (Image: Second Life)

Intellectual property (IP) is the basis for the creation and protection of rights in online gaming. But the creators of virtual worlds, such as Second Life, also recognize the new IP developed by the players who interact and evolve in the worlds they have created. This has become the basis for buying and selling creations in such worlds, and has made millionaires in the real world. This article* discusses the use of trademark rights in Second Life, where IP is a cornerstone for in-world trade. The article was adapted with permission from the INTA Bulletin, (Copyright © 2007 the International Trademark Association).

An entirely new world is emerging as a hotbed for brand promotion as well as possible trademark infringement – the world of virtual reality. The popular press reports with increasing frequency about business activities taking place in virtual worlds. Gartner, Inc., an information technology research and advisory company, predicted in a recent report that by the end of 2011, 80 percent of active Internet users will have some sort of presence in a virtual world. One of the most popular virtual worlds at present is Second Life®, an online economy that is growing at a rate of more than 25 percent per month. Second Life is often described as a massive multiplayer online role-playing game (MMORPG, pronounced mor’ peg), but it is certainly not a traditional computer game.

Linden Lab, the San Francisco, California–based company that owns and operates Second Life, describes it as a “3D online world with a rapidly growing population from more than 100 countries around the globe, in which the residents themselves create and build the world, which includes homes, vehicles, nightclubs, stores, landscapes, clothing and games.” These residents are online personas, called avatars, created by their users. The strong identification of users with their avatars, together with the ability to create and build virtual businesses that participate in a very real economy, is beginning to capture the attention of major brand owners. This environment offers a new means of brand promotion as well as a new platform for creating and using intellectual property rights and, consequently, for possible infringements of intellectual property rights, including trademark infringements.

“You retain copyright and other IP rights with respect to content you create in Second Life.” – Second Life, Terms of Service, 3.2

Opportunities and challenges

Linden Lab responds to allegations of copyright infringement in accordance with the process and procedures of the U.S. Digital Millennium Copyright Act. The stated Second Life policy on trademarked material states that “Linden staff generally removes content that uses trademarks without apparent authorization, with or without giving notice to the object’s owner…. Any resident may file an abuse report if they see any other resident making unauthorized use of trademarked material in Second Life.” Since there is no case law on point, it is unsettled whether use of a real world trademark by an avatar in a virtual world constitutes trademark use, which is a necessary element of trademark infringement.

Trademark owners should be aware of the opportunities and challenges to their brand in virtual worlds like Second Life. Some brand owners have established an online presence by building retail stores in Second Life to sell products in the real world. All of the attendant concerns of brand reputation and disparagement are present in this new medium, just as they are in the real world. There have been instances of counterfeiting and allegations of copyright infringement for misappropriation of others’ property created and used in virtual worlds. With over 11.5 million transactions reported in recent months, if only one percent of the transactions involves unlicensed trademarks, that translates to 115,000 actionable cases of infringement in only one month and more than 1.4 million infringements per year.

Assessing the potential of Second Life as a marketing tool is of fundamental importance to brand owners. Because the average age of the virtual world participants is 32 and the ratio of men to women is roughly 1:1, it has become an ideal place for companies to consider marketing their goods to an older and wealthier demographic. This is especially so considering the site’s incredible growth rate. It’s no wonder that companies like Toyota, Dell and Reebok have decided to expand into the “digital marketplace” by opening their own online stores and choosing to make use of the site for advertising purposes.

The average user is online between 20 to 40 hours a week. (Image Second Life)

Created in 2003, Second Life is reported to have more than 9 million registered persons (persons can create more than one avatar) and an active community of 600,000 residents who participate regularly. More than half of Second Life users live in Europe; another third are from the United States. The average user is online between 20 and 40 hours a week. As a testament to the rapid growth in popularity of Second Life, Time magazine included Second Life creator Phillip Rosendale in this year’s list of the world’s 100 most influential people, and media organizations such as Reuters have stationed reporters in Second Life.

The German state of Baden Württemberg has a representation in Second Life and has been joined by embassies from the Maldives and Sweden. Second Life is home to a virtual business incubator, known as Nonprofit Commons, for 30 nonprofits, and the Linden Bar Association, with, at last count, 30 real-life attorneys. The American Cancer Society established a virtual Relay for Life fundraiser that raised $82,000 in the months prior to the virtual event.

“You will comply with the processes of the Digital Millennium Copyright Act regarding copyright infringement claims covered under such Act.” – Second Life, Terms of Service, 4.3

Trading virtual IP

Second Life is different from other MMORPGs in two important ways. First, the Terms of Service of Second Life permit the creators of virtual property to own property they create. Specifically, the Terms of Service state: “you retain copyright and other IP rights with respect to content you create in Second Life, to the extent that you have such rights under applicable law.” Because Second Life allows residents to retain the rights in their online creations, they are increasingly creating digital objects and inventory to sell to other users for use by their avatars.

Second, the economy of Second Life is driven by an in-world currency, the Linden Dollar, which is exchangeable on the Linden Currency Exchange (known as the LindeX) at the current rate of approximately 270 Linden Dollars per U.S. dollar. There are at least three other currency exchanges that exchange Linden Dollars for real-world currency. Residents collect Linden Dollars by selling digital creations or virtual real estate to other residents and then convert the Linden Dollars to currency.

Rosendale stated at the August 1, 2007, AlwaysOn technology conference that 830 residents make more than US $1,000 a month in Second Life. Some residents’ Second Life business activities have been successful enough to replace their real-life income. The virtual real estate market in Second Life and other MMPORGs has created a market with a collective value estimated to be in the hundreds of millions of U.S. dollars, and the economy in Second Life is 100 percent larger than it was six months ago. Time magazine reported that $6.8 million changed hands in June 2007 on LindeX and that U.S. Congress is looking into whether to tax this commerce. Companies whose entire business is building virtual property in virtual worlds have been created.

Dell Computers has established a factory and virtual store in Second Life. (Images Dell Computers)

“Any resident may file an abuse report if they see any other resident making unauthorized use of trademarked material in Second Life.”

Policing infringement

Second Life’s creation ownership policy and its in-world currency exchangeable for real-world money have stimulated a real consumer economy in the virtual world; however, that economy has predictably given rise to many instances of IP infringement. Avatars can, for example, purchase from “enterprising” residents virtual NIKE shoes bearing the distinctive Swoosh Design or virtual iPOD music players loaded with the latest hits, notwithstanding that Nike, Apple and the recording artists may not have consented to the creation and sale of the virtual property exploiting their trademarks, copyright, designs and other valuable intellectual property. This activity is prohibited by Second Life’s Terms of Service; however, as in the real world, policing infringement most often falls to the right holder.

Although many IP owners appear to be taking a wait and see approach in these early days of Second Life’s popularity, brand owners should be aware of both the marketing potential and the possibilities of infringement that Second Life presents. And at least one real-world lawsuit has been initiated: Eros, LLC alleges copyright infringement, trademark infringement and misrepresentation for unauthorized reproduction and sale of a virtual adult-themed bed.

* This article was adapted by the WIPO Magazine from an article which first appeared in the INTA Bulletin, Vol. 62, No. 17 – September 15, 2007, written by: Susan D. Rector, Schottenstein Zox & Dunn Co., Columbus, Ohio, USA; Peter Giddens, Lang Michener LLP, Toronto, Ontario, Canada; Ron Klagsbald, Price-Klagsbald Law Offices, Ramat-Gan, Israel; Dinisa Hardley Folmar, The Coca-Cola Company, Atlanta, Georgia, USA, Thomas LaPerle, Apple Inc., Cupertino, California, USA, Ellen Shankman, Ellen Shankman & Associates, Rehovot, Israel



The Virtual Economy

Ailin Graef’s avatar, Anshe Chung, cost her an initial investment of just US$9.95 to set up her Second Life account, but has made her a real life millionaire. Anshe bought Second Life real estate, which she subdivided, developed and landscaped with panache, and put up for rent and resale. Other avatars bought into the lifestyle Anshe created. Two and half years later, Anshe is a virtual real estate mogul with projects that vie with large scale real world models.

Anshe Chung is not the only virtual resident earning a comfortable living for her owner. More and more subscribers are making Second Life their place of business. As of April 2007, economic activity on Second Life averaged over US$1.5 million per day. Items available for sale include clothing, avatar hair and skin texture, vehicles, furniture and, of course, homes – most sold using in-world brands. As financial and physical barriers to entry are non-existent, the only parameters for success are design quality and brand reputation. Anyone can compete with the biggest, most successful and luxurious real world brands that have in-world presence.

But there are threats to the virtual market place. At the end of 2006, CopyBot, a program put up for sale by the avatar Prim Revolution, caused an uproar among Second Life residents. CopyBot can clone any virtual good without paying for it – threatening the in-world economy and real world revenues. Linden Labs has banned the program and residents can file an Abuse Report and a complaint for infringement under the DMCA, but it is a difficult process.

Ailin Graef’s revenues, however, may be safe. She created a real-life spin off corporation, based in China, called Anshe Chung Studios. The company develops immersive 3D environments for applications ranging from education to business conferencing and product prototyping.

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