New England Biz Law Update
Virtual intellectual property owners are facing increasing licensing and infringement issues – the same issues, in fact, that are faced by intellectual property owners in the real world.
The virtual world has recently become a popular place for business transactions. But before companies prepare to reap the benefits of participating in this world, they must first understand the differences – and similarities – regarding licensing and infringement issues in the virtual world versus the physical world.
Originators of these virtual worlds have provided a platform on which users can create characters and objects for interaction with other users.
Linden Lab is the creator of Second Life which, like most of the others, is free to join. It claims nearly 10 million “residents” with as many as 35,000 online at any given time. It also includes active businesses that are both reality-based and virtual-only.
In these virtual worlds, residents create and sell images (objects) for “virtual currency” which can be converted into real-life currency. Millions of dollars are spent on a daily basis in these worlds. The currency used in Second Life is called “Linden dollars.” The ability to convert Linden dollars into real money is the linchpin to this economy for residents.
Linden Lab requires that all copyrights and trademarks in the images created by its users remain with the users. Linden Lab permits transfer and copying of those objects only with permission of the creator.
This becomes one of the important drivers to the Second Life economy. The residents can create objects and be certain they are not copied while they are transferred. Buying and selling become commonplace.
In Second Life, there are many real world companies sell or promote goods and services. These range from several official apparel stores, (Nike, American Apparel, etc.) to promotional television and movies clips that are available from the studios. It includes law firms as well, which have virtual offices providing real life advice.
Toyota made headlines when it launched its Scion model in Second Life first. Live online meetings also take place. The anonymity of Second Life allows prospects to ask questions without concern of identity. Chat, instant messaging, and voice are all available. Teleporting from office to office (or store to store) takes seconds, and finding someone to answer a question is relatively easy.
Trademark concerns
Even though Second Life has been around for a few years and has seen tremendous growth and recognition recently, usage of real-life trademarks by residents who are not the real-life owners is becoming a problem.
There is a “black market” in Second Life where graphics are sold with little or no advertising, but rather through word-of-mouth among the residents. While this may seem like the early days of virtual worlds, establishing boundaries is critical to avoid a future problem trying to rein in infringers.
For some companies not yet ready to build their own stores and devote the resources to this other media, licensing intellectual property has real benefits. Not only could there be some revenue generation, but if the right organization is licensed, their intellectual property can be protected in-world and preserved for when they are ready to enter the field.
Companies should start with the standard license arrangement since the intellectual property rights and concepts overlap whether it is real world or virtual world. However, some of the agreement will need to be modified or considered more carefully due to the medium.
Know your licensee
As more companies create an online presence, control of the brand and image becomes more important. Getting to know your licensee (as you would any other licensee of your intellectual property) is critical.
You need to trust that person or organization and be sure he/she is committed to the brand. Remember they are delivering product information to potential customers, and their interaction could be the first impression made on that customer.
Supply graphics
Be sure to provide the quality and type of graphics you want the licensee to have. This will allow you to spot infringements more readily, but you can also ensure a quality image is being used. Moreover, if your real-world products are subject to other licenses, such as from third-party graphic artists, controlling what is used by the licensee protects the rights of these other parties.
Exclusivity
The question of exclusivity is always dependent on the negotiations. While you may have a desire to license the whole project out, there are many ways to divide up Second Life. Do not assume that a resident/licensee is all things for your whole line. There are different channels of trade even within a virtual world
Jurisdiction
Pick a favorable and reasonable jurisdiction. It is important, particularly for U.S. property owners, that your licensee has some ties to the U.S. so it is an effective method to enforce rights.
Tarnished brand
Consider the environment in which the products are sold. There are large tracts of areas within Second Life, so it is important the licensee not sell your product in a location with unsuitable material. You may not want your product sold in a store where the store next door (in easy viewing) is selling objectionable material. Certain areas are also hot spots for counterfeit images. That must be balanced with the potential goal of being in a high traffic neighborhood.
Enforcement
The licensee should have a responsibility to the property owner to make the licensor aware of any infringement. An additional obligation of periodic, proactive searching should also be considered as a requirement. Active residents are far better than real-life property owners periodically searching for infringements.
Marking product
While the product for sale probably has the brand already on it, additional marking of the object’s Second Life profile may be worthwhile. Since names are unique in Second Life, it is possible to label something as “Genuine” or “Real” in combination with the name of the authorized dealer.
Similarly, the reporting of the licensee may be checked to confirm that all sales are being reported. In addition to marking, the images sold should not be available for resale.
Royalty rates
Unauthorized residents often argue that use of the graphics is merely advertising for the company and royalty rates should not be charged. Whether this is true depends on strategy, as well as money earned by the retailer using your brands.
There is no question that many companies consider virtual worlds as great alternative advertising media, but that does not mean someone else should get a revenue stream. It’s critical to an intellectual property owner to get a termination clause enabling it to start requiring a royalty payment if circumstances and attitude change. A detailed conversation with your future licensee can establish an appropriate royalty rate.
Minimum pricing should also be a consideration, as well as the number of units the licensee may create and/or sell. Particularly if the license is non-exclusive, setting pricing is important to avoid complaints from other licensees.
Payment reports
If payment is part of the license arrangement, detailed reports should be provided and include information about any purchase, the name of the purchasing resident, the date and time of the purchase, and pricing. This will enable review of surreptitious purchases as a check on the licensee.
While all transactions are in Linden dollars, there is consideration of the conversion rates, conversion process, and transfer of money in Second Life. On top of these logistics and economic issues, the question of real-life tax implications is also present. If the licensor is paid in Linden dollars and Linden dollars have a value, taxes become relevant. As a practical matter, all royalty payments must be in a real life currency and conversion should be the full responsibility of the licensee.
Conclusion
Keeping up with the number of issues in virtual worlds is mind-boggling. Resources are available. There are law libraries, lawyers, bar associations, and business groups online all the time. There are blogs and sites discussing these issues. Among the particular sites of interest are virtuallyblind.com and virtualworldnews.com.
In the end, addressing these virtual world issues is best done sooner rather than later. As these worlds continue to grow, infringements and other intellectual property matters are also moving at a rapid pace. Getting protection under control at the earlier stages will help prevent cleaning up problems later on.
Douglas Wolf is a shareholder and co-chair of the trademark group at the Boston intellectual property law firm of Wolf, Greenfield (www.wolfgreenfield.com), specialists in patents, trademarks, copyrights, trade secrets, licensing, and IP-related litigation. Doug assists clients in the development, acquisition, and protection of patent, trademark, and copyright portfolios, and his technology and consumer goods clients include Internet companies ranging from those supplying infrastructure hardware and software to those providing investment and services to various e-commerce companies. He can be reached at 617.646.8260 or [email protected].
