All types of businesses are leveraging new and emerging business models around virtual currencies and virtual goods. Check out our video where we discuss the various legal issues that need to be addressed to safely and profitable capitalize on these significant business opportunities:
Many creative business models enable users to acquire virtual goods or virtual currency and then use those virtual items to participate in an activity that may give them a chance to win something or acquire virtual items through some element of chance. James G. Gatto, a Partner at Pillsbury Law, discusses the legal issues presented by virtual goods and the secondary market, which by its very nature implies that virtual items are far from valueless.
Since the early days of online games, ‘virtual goods’ have been used to enhance game play and to provide revenue to game developers. These are earned by accomplishing tasks or bought from the developer, typically for use in the game in which acquired, but exceptions may exist. Secondary markets, online markets where players can sell virtual goods or currency to another player, have sprung up. In most cases, the secondary markets are not authorised by the game publisher and the sale of virtual goods or accounts is precluded by the games’ terms of service. As with real goods, scarcity is one factor that drives the perceived ‘value’ of virtual goods.
The US market for virtual goods and currency is estimated to be over $3.5 billion annually. While virtual goods-based business models are flourishing, a number of legal issues have arisen with their use, particularly with secondary markets. The law in this area is still evolving and some important issues have yet to be addressed. For some industries, the resolution of these issues could have a significant impact. One such industry may be social gaming.
Social gaming is a rapidly growing field featuring ‘gambling-like’ games, but not for real money. So most social gaming activities do not run afoul of the gambling laws and are not subject to gambling regulation. One example is Zynga poker: users pay real money to buy virtual chips which are wagered in online games. The chips can only be accumulated, not cashed in for anything of value. In contrast, some other social gaming activities involving virtual goods, if not done properly,may cross the line. In other popular business models, users acquire virtual goods and/or currency and use them to enter ‘contests’ or sweepstakes or have a chance to win virtual goods or currency.
Secondary markets can be a turn off for some gamers: when certain virtual items can only be acquired through skillful game play, it is a badge of honour to possess those virtual goods. However, if the same item can be bought, it devalues that honour. For players who are not skillful enough or lack time to earn certain virtual goods, secondary markets enable them to buy these items.
One legal issue is whether the user actually owns virtual goods. Most terms of service make clear that users only have a licence to the virtual goods and the licence is terminated if they breach those terms. Thus, if a user sells a virtual good on the secondary market, the licence terminates and the good becomes worthless. Additionally, if a user’s violation of the terms of service is severe enough, their account may be terminated. By having a licence provision, the game operator need not reimburse the user for any virtual good in the terminated account.
A number of companies have taken action against secondary market operators. On 8 April 2010 Zynga sued Playerauctions.com for operating a website that provides an unauthorised secondary market for enabling Zynga game users to post and sell virtual currency and virtual goods allegedly in violation of Zynga’s Terms of Service. According to Zynga, its Terms of Service prohibits users from selling virtual currency or virtual goods for real-world money or anything of value outside of its games. No decision has yet been rendered.
Please check out the full article here.
As the online gaming market slowly evolves, many companies are preparing to capitalize on it once the legislative process moves forward. In one of the latest announcements, Zynga has applied to get licensed in Nevada. According to a recent statement from Zynga:
Zynga has filed its Application for a Preliminary Finding of Suitability from the Nevada Gaming Control Board. This filing continues our strategic effort to enter regulated RMG markets in a prudent way. We anticipate that the process will take approximately 12 to 18 months to complete. As we’ve said previously, the broader U.S. market is an opportunity that’s further out on the horizon based on legislative developments, but we are preparing for a regulated market. We’ve also recently partnered with bwin.party to bring the highest quality real money gaming experiences to our UK players in the first half of 2013.
Social gaming has been an active field in 2012 and from what we are seeing 2013 will likely see even more activity.The legal issues and regulatory enforcements will continue to increase.
While many companies are focusing on real money gambling, many other companies are focusing on various forms of gamblification – the use of gambling mechanics for non-real money gambling purposes. The use of virtual goods and virtual currency in gamblification models, though prevalent, further complicates the legal issues. Our team has advised numerous companies on the legal issues with gamblification, including the use of virtual goods and virtual currency. If you would like more information on thees issues please contact us.
Or come to the G Summit to hear Jim Gatto speak on legal issues with Gamblification.
As the multi-billion market for virtual goods continues to grow, so too does the regulatory scrutiny. One area where many companies in this space may want to review is their SEC disclosure practices.
At a recent conference of the American Institute of Certified Public Accountants, a Securities and Exchange Commission representative stated:
“The sale of a virtual good represents a service, not the sale of an actual good” and that the SEC is seeking “enhanced disclosure” about virtual goods accounting policies, including how the goods were purchased (e.g., with virtual currency, stored value or real time money purchase) and the time period over which they are recognizing revenue from the sale of a good. Brad Skinner, senior assistant chief accountant at the SEC’s Division of Corporation Finance added that virtual goods sellers should be disclosing whether the company is being charged processing fees by the platform it uses to sell the goods, and whether it faces any legal or regulatory requirements to refund consumer purchases.
As the use of virtual goods and virtual currency continues to grow, these and other legal and regulatory issues will continue to emerge. For more information on legal issues with virtual currency, see our guide to legal issues with virtual currencies.
Social Casino Games Market Now Worth $1.6 Billion
The social gaming market is moving fast, as more companies take advantage of the growing online phenomenon. According to a new study by internet games research firm SuperData, the global social casino games market will reach $1.6bn in 2012 and grow to $2.4bn by 2015.
Nintendo’s Wii, 3DS Targeted in Texas Patent Suit
Nintendo Co. Ltd. was sued Friday by a Texas company that claims the Japanese-gaming giant’s Wii and 3DS gaming systems infringe one of its patents.
USPTO Head Defends Software Patents Amid Smartphone Wars
Patents on software are vital to the American economy and calls to abolish them are wrong, U.S. Patent and Trademark Office Director David Kappos said in a speech Tuesday that also belittled claims that the smartphone wars show the patent system is broken.
Buy Virtual Goods in Zynga Games, Give Non-Virtual Money to Charity
Buying a $1 virtual horse for your virtual farm in FarmVille or a $15 tower for your castle in CastleVille might go farther than you think for the next couple of weeks. Those virtual goods are being turned into tangible cash — cash that Zynga will be donating to Toys for Tots.
Gametek has filed a complaint for patent infringement against a large number of game and game-related companies over a virtual goods payment patent.
The patent issued based on an application originally filed September 29, 2000, and claims priority to a provisional application filed June 20, 2000. The patent issued July 11, 2006. We are happy to provide you a copy of the extensive prosecution history, but it is too large to provide a link here.
One of the independent claims recites as follows:
15. A method of managing the operation of a game which includes a game environment, and is programmed to control a gaming action of at least one of a plurality of users, said managing method using a programmed computer to effect the following steps: a) tracking the activity of the at least one user in the course of the gaming action; b) creating an account for the at least one user for maintaining a balance of the at least one user; c) enabling the at least one user to select at least one of a plurality of game objects; d) setting the purchase price of the at least one game object; e) comparing the account balance with the set price of the at least one game object and, determining if the user’s account balance is not less than the set price, then the at least one user is eligible to purchase the one selected game object; f) presenting to the at least one user an offer to purchase the game object dependent upon a group of game parameters comprising the tracked activity of the at least one user, and an indication of whether the at least one user has made a commitment of consideration to purchase the one selected game object; g) ordering the at least one selected game object without interrupting the gaming action of the at least one user; and h) supplying the selected one game object to the at least one user without interruption of the gaming action of the at least one user and incorporating the game object into the game.
The basis for the patent being granted is set forth in the Examiner’s reasons for allowance [Click here for a copy]. In part, the examiner refers to console-based games but noted that none of these “disclose offering a game object to a user for a price and allowing the user to access and incorporate said object in a game without interrupting the game.” The examiner also referred to other prior art and said “the instant invention is distinguished from the prior art…as the system tracks a user’s gaming actions…determines where a user is eligible to purchase a game object based on the user’s account balance…presents and offer to the user to purchase the game object based on …[the] tracked gaming action, [where] the user purchases and is supplied with the game object without interrupting the gaming action, and the object is incorporated into the game.”
Does anyone think that the use of player accounts to enable in-game purchases was new in 2000?
We have collected prior art that may impact the validity of this patent. We have been in touch with some companies and are reaching out to others regarding a potential joint defense group. Even companies who have not yet been sued may be interested in monitoring this case and/or helping to invalidate the patent.
We will provide additional postings here. Please check back.
If you have information to share or have additional questions, please contact us at: Virtual Goods Payment Team
A weekly wrap up of interesting news about virtual worlds, virtual goods and other social media.
Scientists are developing ever more sophisticated versions of “virtual patients” with the aim of testing medical devices and procedures that can’t readily be assessed in real people.
Zynga Inc., creator of the FarmVille and CityVille phenomena as well as other games that piggyback on Facebook Inc.’s tidal wave of popularity, became a publicly traded company Friday when it made a $1 billion initial public offering of its stock.
From supply chain management to PR crisis management, the role of public social data in the enterprise is no longer framed around the question of “why does this data matter?” That said, we are still in the very early stages of corporate adoption and there are plenty of unanswered questions for most companies. Once enterprises get past asking why this data is important, the next obvious question to address is: which public social data is best for performing business analysis and decision-making? Facebook? Twitter? Google+?, WordPress?
Video game preservation, educational robot dragons and Department of Homeland Security Sno Cones are just some of the “outlandish”
federally funded projects called out in U.S. Senator Tom Coburn’s annual big book of wasteful government spending this week.
A new study conducted by SponsorPay, the leading international cross-platform social advertising solution, found that consumers welcome the opportunity to watch sponsored videos in online games and not only recall these brands but also harbor positive sentiment towards them.
As gamers age, so does their propensity to buy mobile virtual goods, according to a new study by MocoSpace, the largest mobile gaming community in North America. The results of the new study focusing on virtual goods consumption and engagement by age found younger gamers (25-35) spend the most time playing social games,
but gamers over 45 buy exponentially more virtual goods than their younger counterparts.
A weekly wrap up of interesting news about virtual worlds, virtual goods and other social media.
Rutgers University law professor Greg Lastowka looks at whether players can and should be granted legal ownership of virtual items, whether or not there’s any existing legal precedent and how the virtual item landscape may change in the near future.
Online commentators Wednesday welcomed a ruling by Italy’s highest court that the editors of online publications cannot be held legally responsible for defamatory comments posted by their readers. In a ruling handed down at the end of October, the Court of Cassation acquitted a former online editor of L’Espresso news magazine of the crime of failing to prevent defamation committed by one of her readers.
International Trade Commission
should review a recent finding in a video game patent infringement case and clarify how to determine if a domestic industry is in the process of being established in Section 337 cases, the ITC’s Office of Unfair Import Investigations said in a petition publicized Tuesday.
Germany’s Merck KGaA has threatened legal action after it said it lost its Facebook page apparently to rival Merck & Co. in the U.S., though it has yet to identify defendants in the case.
The developers behind the next evolution of the Internet — linked,
immersive, 3D environments — are trying to think of ways to minimize the adverse impact of software patents on their industry.
Social media sites and cellphones will prove to be fertile grounds for cyber criminals to exploit globally important events in 2012 to steal personal information and data and make financial gains, cyber security firm Websense has said. The Websense document, ” 2012 Cyber Security Threats,” has said identity information posted by users of sites such as Facebook, Twitter or LinkedIn may prove more valuable to cybercriminals than even credit cards.
A weekly wrap up of interesting news about virtual worlds, virtual goods and other social media.
PBS KIDS Sets New Bar in Educational Gaming Space
PBS KIDS today launched over 40 new cross-platform games designed to help children ages 2-8 build critical math skills. They include PBS KIDS’
largest offering of interactive math content for preschoolers to date. The games comprise several suites, each of which is centered around a PBS KIDS media property – from CURIOUS GEORGE to THE CAT IN THE HAT KNOWS A LOT ABOUT THAT!. Available for free on the new PBS KIDS Lab website (PBSKIDS.org/lab), each suite links a set of games across platforms – accessible through computers, mobile devices and interactive whiteboards – so that kids engage with the same characters as they move from device to device. The content is also linked by a curricular framework,
leveraging games on a variety of platforms to support key math skills.
From its sparkling new headquarters here, the company announced a major new gaming platform, code-named Project Z,
that will let its millions of customers seamlessly play games on Facebook and Zynga.com; a lineup of 10 new titles, including Zynga Bingo, Hidden Chronicles and the mobile-only Dream Zoo; and, perhaps, its most ambitious game yet, CastleVille.
Despite the tarnished history of videogame adaptations, studios are moving forward with more than dozen big-screen gaming movies. What’s amazing, though, is it’s possible — just possible — that some of these films might not stink.
So popular was Inside Retail’s story about the Adidas in-store ‘virtual wall’ which took an innovation honour at the recent World Retail Awards, we’re revisiting the concept with an interview with designer David Judge from Stuart MacGill.
Oracle Social Network enables users to communicate and collaborate with other people inside or outside of their organization using a variety of tools,
such as personal profiles, groups, activity feeds, status updates, discussion forums, document sharing, co-browsing and editing, instant messaging, e-mail,
and Web conferencing. Oracle Social Network also provides native applications for iPhones, iPads, and Android devices, along with Web browser support, so mobile users can work and interact from anywhere.
The Supreme Court has validated the ability of software developers to prevent customers from owning the copy of software they acquire. Because software developers can limit the customers rights to a mere license, they can impose restrictions that can prevent the customer from reselling the software. This is a huge win for software companies as it limits the resale market, which cuts into sales of new software. This ruling may also benefit the virtual goods industry which also commonly uses a licensing vs. sale model. However, it is important to note that in order to get the benefits of this decision, the software distributor must carefully craft their End User License Agreement.
On October 3, 2011, the U.S. Supreme Court declined the petition for certiorari regarding the Ninth Circuit Court of Appeals decision in Vernor v. Autodesk,
Inc. As we outlined in a previous post, the Vernor decision held that software developers can grant mere licenses and that doing so does not violate the First Sale Doctrine,” which states:
“[T]he owner of a particular copy…lawfully made under this title…is entitled,
without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy…”
This doctrine applies if the initial distribution is a sale. As the Ninth Circuit held in Vernor, software developers can legally prevent customers from owning (and distributing) the copies of software that they purchase. This is accomplished by drafting software purchase agreements (e.g., End User License Agreements) in a way to avoid the first-sale doctrine, such as by structuring the agreement as a license or placing valid restrictions on the customer’s use of the software. Under such an agreement, software developers can retain ownership in the copies they distribute and customers merely have a license to use the software.
Extending the Vernor holding to virtual goods and currency, this ruling seems to provide additional ammunition for the validity of merely licensing virtual items to users instead of selling the items. This approach is commonly used with virtual item models. In light of Vernor, it is clear that the “license” which is included in the terms of service must be carefully drafted. But if done properly,
this can help prevent unauthorized resale of virtual items via secondary markets or otherwise.
For more information on the legal issues with virtual goods, click here.