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:
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.
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
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.
Many people invest significant time, effort and in some cases real money to acquire virtual goods. There is great perceived value in these virtual goods. But there are a growing number of cases, where users have been the subject of hacking and other situations where they have had their virtual property stolen. See for example our prior blog entry on a massive theft of 400 billion poker chips from Zynga users.
Most game and virtual world operators try to shield themselves from claims of loss by their users through effective legal strategies embodied in their terms of service. In most cases, users are only granted a license to use the virtual goods, but they do not own them and the terms often make clear that there is no independent value to goods. Additional disclaimers and liability avoidance language may also be included. Yet, this has not stopped some users from suing for the loss of the perceived value of their virtual goods.
Given these potential claims, what else can companies do to protect themselves from such risks? Apparently, this risk may now be insurable – at least in China – thanks to a collaboration between Sunshine Insurance Group and Gamebar. According to a report, by China Daily a Sunshine Insurance spokesperson said “The insurance will help to reduce operating risks for online games
companies as the companies which purchase the insurance will be covered
to compensate customers in the event of lost or stolen property.”
It will be interesting to see if that catches on in the US and elsewhere, and if so, what will be covered and what will not. Check back for updates.
Congressman Edward J. Markey (D-Mass.), a senior member and former chairman of the Energy and Commerce Committee’s Communications, Technology and the Internet Subcommittee, sent a letter dated February 8, 2011 to the Federal Trade Commission (FTC) requesting more information about possible consumer protection issues related to “in-app” purchases, particularly relating to kids.
The following is an excerpt from the letter:
“I am disturbed by news that in-app purchases may be taking advantage of children’s lack of understanding when it comes to money and what it means to ‘buy’ an imaginary game piece on the Web. Companies shouldn’t be able to use Smurfs and snowflakes and zoos as online ATMs pulling money from the pockets of unsuspecting parents. The use of mobile apps will continue to escalate, which is why it is critical that more is done now to examine these practices. I will continue to closely monitor this issue and look forward to the FTC’s response.”
Click here for a copy of the letter
It is important for companies to understand the potential legal issues with innovative business models and to ensure clarity so that consumers understand
A UK court entered a guilty plea against Ashley Mitchell, an IT guy who hacked into Zynga’s servers last year and stole 400 billion virtual poker chips. His efforts to resell them, which is against Zynga’s terms of service, netted him $86,000 and a yet to be determined jail sentence.
To avoid issues with the gambling laws, Zynga sells poker chips to users for real money (and in some cases to reward user actions), but prohibits any cash out or resale of the chips.
Zynga’s Terms of Service states:
“Zynga owns, has licensed,
or otherwise has rights to use all of the content that appears in the Service or the Zynga games. Notwithstanding any provision to the contrary herein, you agree that you have no right or title in or to any content that appears in the Service, including without limitation the virtual goods or currency appearing or originating in any Zynga game, whether earned in a game or purchased from Zynga, or any other attributes associated with an Account or stored on the Service.
Zynga prohibits and does not recognize any purported transfers of virtual property effectuated outside of the Service, or the purported sale, gift or trade in the “real world” of anything that appears or originates in the Service, unless otherwise expressly authorized by Zynga in writing. Accordingly, you may not trade, sell or attempt to sell in-game items or currency for “real”
money, or exchange those items or currency for value of any kind outside of a game, without Zynga’s written permission. Any such transfer or attempted transfer is prohibited and void, and will subject your Account to termination.”
With respect to chip “purchases”, Zynga states:
“The purchase of Zynga Poker
chips from a third party seller is a violation of Zynga’s Terms of Service. We are not responsible for any losses incurred and will not restore chips.
The only safe method of purchasing our chips is directly through the application, via the Buy Chips tab.”
As virtual currencies proliferate, it is important for companies to ensure that they think through their business models, develop and enforce effective terms of service and consider up front how they can use technological measures to deal with people who inevitably will try to beat the system. This requires a careful integration of business, legal and technical strategy.
For more information on legal issues with virtual currency, see Pillsbury’s Virtual Currencies Overview.
American Express has partnered with Zynga to allow American Express
Membership Rewards members to use their points to purchase goods in Zynga’s
Membership Reward points are earned by using an American Express card for
purchases, as well as through various promotions such double points for
groceries or hotel stays.
Members will be able to use their points not only for
game cards and virtual currency, but also for exclusive virtual goods. For
example, a member can convert points to FarmVille cash or purchase an exclusive
FarmVille virtual good.