Monday, June 23, 2008

Duranske on Virtual Law

Ben Duranske, the man behind the excellent site Virtually Blind, recently published a book on the state of the law in virtual worlds, titled, appropriately enough, Virtual Law. The book is a valuable contribution and I commend it to anyone with an interest in the topic.

The book is a timely addition to the literature, as most legal questions confronting virtual worlds remain largely unresolved. Ben does an admirable job of surveying the legal landscape and distilling the applicable statutes, case law, and legal doctrines into the most relevant principles for each area of law he covers. That he does so without resorting to too much legalese makes Virtual Law highly accessible, even to a non-lawyer like myself. Although published by the ABA, Ben is clearly writing for a wider audience than just fellow members of the bar.

With Ben’s gracious permission, I have selected a few passages from his book which tackle particularly important issues in virtual law today.

Property Law

Property rights are perhaps the thorniest legal question facing virtual worlds and the subject of the longest chapter in the book. Duranske does a superlative job at setting up the issue and reaching reasonable conclusions. His outline of the arguments for and against virtual property rights is extremely well assembled and easy to follow, incorporating the research of such scholars as Joshua Fairfield and Richard Bartle. His identification of misconceptions and faulty logic is well written, too. Take, for instance, this passage in which Duranske neatly debunks users’ intuitive first take on virtual property:

We have an instinct that because the item has obvious value, it must be an item that can be owned. The reality, however, is that the ability to sell something to someone else for money, while intuitively implying “ownership,” doesn’t establish anything at all from a legal perspective. (p. 87)

Duranske’s overall assessment of the virtual property rights issue is that such rights will come in to being sooner or later, and that an important legal distinction should be maintained between play worlds (e.g., Blizzard Entertainment’s World of Warcraft) and non-play worlds (e.g., Linden Lab’s Second Life):

This chapter will argue that the law needs to acknowledge and provide protection for virtual property, but that it must do so in a way that preserves virtual worlds and games as play spaces, at least to the extent that the developers desire their worlds to remain pure play spaces. On one hand, many game and virtual world providers seek to avoid real-life implications in their social and play spaces. Where providers take reasonable steps to draw a line between the real and the virtual, the world or game should be protected by the “magic circle” that protects other play spaces (from theme parks to family Monopoly games) from taking on inadvertent real-world implications. On the other hand, it is both inevitable and desirable that some game and virtual world designers will seek to include real money trade (RMT) and offer a real cash economy (RCE) in their platforms. Users of these platforms need the protection of virtual property law. (p. 81)

A sticking point for me is Duranske’s provision that “providers take reasonable steps” to qualify as a play space. The question of what is “reasonable” is left unanswered.

Duranske also examines the important issue of the End User License Agreement (EULA) and the Terms of Serve (TOS) agreement. Duranske recognizes that the central problem looming over these ubiquitous contracts is the absence of actual case law to back them up. Lacking litigated judgments, it is hard to know the power of such agreements. Duranske, however, believes that the courts will eventually uphold EULAs and TOS.

From a property law perspective, there is no good reason to believe that these provisions will not generally be found to be enforceable… (p. 89; emphasis in original)

Regarding legislation, Duranske believes that virtual property will come to exist, but warns against outside efforts to impose virtual property rights onto game spaces:

Any effort to legislate the existence of virtual property will – and should – be met by fierce resistance from the game design and user communities …. Forced commodification would ruin much of what is good about play spaces. (p. 97; emphasis in original)

Tax Law

Duranske’s chapter on tax law is a good starting point for analyzing the issue. He leads off with an excellent summary of the problem:

It seems intuitive that when a player is enriched entirely within a game world, the increase in character strength and accumulation of gold and valuable weaponry should not be taxable, even though it does represent an investment of time, and time clearly has a certain amount of “value” to the player. The wealth, so long as it remains within the magic circle of the game world, is pretend wealth. It is not any different than the accumulation of pretend wealth while playing Monopoly in one’s home with one’s friends.

However, unlike Monopoly dollars, currency, virtual goods, and skill increases in game worlds do have value outside the game world, precisely because they do represent an investment of time, or, from another perspective, an option not to invest a certain amount of time. (p. 227-228; emphasis in original)

While Duranske’s comparison is valid, I have to take issue with his underlying economic analysis. Value is not a question of “an investment of time.” After all, one could arguably “invest” an equal amount of time in playing Monopoly. The real difference, that which makes virtual assets valuable, is the simple fact that people are willing to pay money for them. The most basic way to value something is not what it costs to produce, but what another person will give you in exchange. And when it comes to World of Warcraft gold vs. Monopoly money, the unavoidable fact is that people can and do pay significant sums of U.S. dollars for the Warcraft gold, but rarely will anyone fork over their cash for Monopoly money. Of course, the main point – that virtual items have real value – remains unaltered, as are conclusions based on this point.

Duranske expands on the point he makes in the previous passage with a look at the issue of real-money trading (RMT). In particular, he points out that the only real barrier are the ineffective “click-through” contracts that players routinely agree to without reading.

The only thing prohibiting the sale of virtual goods from games and virtual worlds is a click-through agreement between the player and the game company – the practice is, of course, not prohibited by law. And however much game companies may express a desire to prohibit RMT, prohibitions in End User License Agreements and Terms of Service are simply not effective. (p. 228)

Duranske moves on to the heart of the tax question. He starts by setting up the legal framework for conducting such an analysis, succinctly laying out the core elements necessary for examining the virtual world tax question:

All tax analysis starts with Comm’r v. Glenshaw Glass Co. Under Glenshaw Glass, income is “any undeniable accession to wealth, which is clearly realized by the taxpayer, over which the taxpayer has complete dominion.” The key terms from the decision are “accession to wealth,” “clearly realized,” and “complete dominion.” In addition, the concept of “basis” must be understood. (p. 232)

With this framework established, Duranske considers each of the four key terms he identified, providing the appropriate legal interpretation and significance. Duranske then follows this legal analysis with the hypothetical “Wendy,” a participant of WoW and SL. By running Wendy through a series of plausible scenarios, Duranske is able to draw out the legal analysis based on Glenshaw Glass and apply it to virtual worlds. This approach is helpful in moving from abstract legal principles to meaningful application.

Duranske does a good job hitting the legal pressure points on taxation, but I personally found his analysis somewhat unsatisfying. Whether motivated by space considerations or a desire to avoid over-analyzing the question, Duranske appears to fall into the same trap as many commentators, namely only investigating the two extremes of Second Life and World of Warcraft. While these two ends of the virtual world spectrum are certainly important, it is equally important, I believe, to consider the worlds that don’t neatly fit into these two categories, as well as the dynamic reaction that worlds will have in response to tax laws. (See my earlier, related post “Apples & Oranges, or Shades of Grey?”) In the discrete WoW/SL dichotomy that Duranske lays out, it is easy to see how WoW falls inside the magic circle while Second Life lies outside. But what about, say, SOE's Everquest II, a seemingly pure game world in the model of WoW, but one that permits players to sell their characters via Live Gamer. Similarly, MindArk’s Entropia and even NCsoft’s Exteel exhibit characteristics of both WoW and SL. And how will publishers react once the tax rules are determined? Will developers respond by altering facets of their worlds so as to avoid taxes? What if developers want elements of both play and RMT spaces – is there any middle ground? I don’t necessarily have the answers to these questions myself, and I can hardly fault Duranske for not delving into every possibility. Still, it would make for a good next step of the analysis.

Criminal Law

One aspect of Virtual Law that generally serves the reader well is that Duranske does not easily get sidetracked into the minutia of the issues. He drills down to the heart of the issue at hand and discards extraneous or unnecessary aspects of the large issue. This focus is most evident in his chapter on criminal law.

Virtual crimes encompass a broad range of unsavory and/or unwanted activities. Examples include virtual prostitution, gambling, money laundering, fraud, terrorist training simulations, and virtual child pornography. Duranske addresses each of these generally and specifically (if only briefly), reaching the following rather simple overall assessment:

The application of criminal law to virtual worlds is the most headline-friendly aspect of virtual law.… These issues do not, however, raise many novel questions in virtual worlds. Most actual crimes that occur in virtual worlds are financial crimes, and they can be addressed through simple application of existing criminal codes. The laws regarding financial fraud, money laundering, data theft, and gambling have been updated to take into account Internet-based activity, so they already cover virtual worlds and games as written. (p. 197)


Virtual Law is an undeniably valuable contribution to the literature and worth reading for those seeking an understanding of the legal issues facing virtual worlds. Nothing I’ve read has done a better job at addressing all the myriad legal questions. Indeed, because Duranske’s analysis comes in book form, he has the ability to address a far wider breadth of issues than law review articles and other studies. As it is, I’ve only touched on a few of the many topics covered in Virtual Law. That’s a shame, because Duranske’s take on securities law, contract law, and privacy issues, to name a few, are worthy of discussion as well. That being said, you’ll just have to get the book and read it yourself to get the full treatment.