Articles Posted in Terms of Service

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In a very significant decision, the 9th circuit Court of Appeals ruled that software developers can legally prevent customers from owning the copies of software that they pay for. Instead, if the software license agreement is properly drafted, the software developer retains ownership in the copies they distribute and the customers merely have a license to use the software.

This is significant for many reasons. The first is that this means the “first sale doctrine” does not apply. Under this doctrine a copyright owners rights are extinguished in a particular copy of the software after an authorized first sale. As a result, the customer can rightfully sell the software if they no longer need/want it. In contrast, with a license that restricts transfer this is not permissible.

This ruling by analogy may be applicable to virtual goods as well. Many terms of service specify that virtual goods are merely licensed and not owned by customers.

Vernor 

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In the real world (at least in the US), the 5th Amendment to the Constitution states, “No person shall … be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” A host of jurisprudence has determined what the government is, and is not, allowed to do affecting property owned by private citizens. With an announcement from Linden Labs that the Teen Grid in Second Life will be shutting down on Dec. 31, a number of users are discovering that there’s no such protection in a privately owned virtual world.

According to this article, those who have invested in developing content and educational tools for use in Second Life Teen are faced with the question of whether to transfer to another platform or give up using the tools they’ve developed. The situation illustrates the catch-22 facing those who want to invest significant time, energy and resources into developing virtual world real estate when the owner of the platform has the right to take away that real estate without compensating the members of the community for “taking” their property rights in the virtual world away.

As discussed further in this post, Linden Research Inc. and its CEO Philip Rosedale have already been named as defendants in a class action lawsuit relating to the ownership status of virtual property in Second Life. Interestingly, the home page for Teen Second Life still includes, “Click here for a FREE Lifetime Basic account.” It isn’t clear what Linden plans to do with all of its teen members, since Second Life includes more adult interactions and content and currently requires users to be over 18. The Teen Second Life page also still advertises the monthly rental pricing for virtual land on the Teen Second Life grid.

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Thumbnail image for blizzard.pngA California Court ruled last week in favor of Blizzard, finding that Scapegaming (a.k.a. Alyson Reeves) ran an unauthorized secondary market that handled microtransactions in violation of the World of Warcraft terms of service. Blizzard sued Scapegaming last October for copyright infringement. The court awarded about $88 million dollars, including about $64,000 in attorney’s fees and over $85 million in statutory damages.

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We recently reported on the Facebook v. Power Ventures case, in which Facebook alleged, among other things, that Power.com using automated tools to populate a portal that aggregates a user’s social networking profiles violates its terms of service and the Computer Fraud and Abuse Act and an analogous provision of the California Penal Code. On July 20, 2010, the court said it was unclear whether Power.com was a “user” for purposes of the terms of service, but even if it was, feared that finding all user violations of a terms of service as access “without permission,” would create
constitutional problems with the statute. The Court added that terms of service are not well equipped to inform users of what activities might subject them to criminal penalties. The court, in part, relied on the fact that site operators can unilaterally change the terms of service at anytime.

The court did find that Facebook has a potential claim under the California law based on Power.com accessing Facebook’s site by circumventing technical or code-based measures. That claim will go forward.

The court rejected Power.com’s argument that Facebook did not even have standing to bring the suit because it did not incur any damage or loss. The court found that because Facebook took steps to prevent access, even “a few clicks of a mouse” was sufficient to satisfy the requisite damage or loss for it to have standing, noting that the statute authorizes claims if there is “any amount of damage or loss.”

This decision could have significant ramifications for social media platform providers. It highlights the need for a comprehensive strategy, including both legal and technical measures to prevent unwanted activity on their sites.

Here is a copy of the Facebook Decision

 

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Many people routinely click on the Agree button without reading the terms of service. Doing so can be perilous for many reasons. A pending case highlights another potential reason to read and abide by the terms of service – potential criminal liability. Granted, there are some unique facts here as discussed below, but it is to everyone’s benefits to read and understand terms of service. For example, for users of a social media site, it is crazy to not understand what personal data is being collected and how it is being used and make an informed decision whether to use that site. For businesses (and investors in businesses) that interact with social media sites, it is critical that you understand and abide by the terms of service to assess whether your business model is “legal” and in compliance with the relevant terms of service. If not, your business (or investment) may be in peril, and in a worst case scenario you may face personal liability. Such was the case for the CEO of MDY when it created a tool that engaged in unauthorized access to Blizzard’s World of Warcraft client software in violation of the relevant terms of service and EULA. In addition to the company being found to infringe, the CEO was held personally liable for $6 million in damages.

In a pending case, Facebook v. Power Ventures dba/Power.com, Facebook is relying on its terms of service and the Computer Fraud and Abuse Act and an analogous provision of the California Penal Code to prevent Power.com from using automated tools to populate a portal that aggregates a user’s social networking profiles. This is deemed beneficial by many users, but not by Facebook. In its complaint, Facebook alleges that it grants a limited license to create applications that interact with Facebook’s proprietary network subject to various terms of use agreements which prohibit, among other things, requesting, soliciting, or otherwise obtaining access to user names, passwords or other authentication credentials.

Facebook alleges that Power.com induces visitors to surrender their Facebook user names and passwords in order to “integrate” their Facebook account into the Power.com website, in violation of the Facebook’s terms of service.

After notification from Facebook. Power.com allegedly initially agreed to cease the activity and purge the “ill-gotten data,” but apparently later changed its mind and continued its practices. In response, Facebook claims to have implemented technical measures to block access to the site by Power.com but Power.com then allegedly circumvented the technological security measures without authorization in violation of the Computer Fraud and Abuse Act. Facebook also alleged violation of CALIFORNIA PENAL CODE 502(c), the “COMPREHENSIVE COMPUTER DATA ACCESS AND FRAUD ACT” (including Sections 1-4 and 7) and the anti-circumvention provisions of the DMCA, among other claims.

Additionally, Facebook alleges that Power.com used the names to send unsolicited email messages to Facebook users that contained false header information in violation of the CAN-SPAM (CONTROLLING THE ASSAULT OF NON-SOLICITED PORNOGRAPHY AND MARKETING) Act.

Even though this is a civil action the penalties that can flow from a finding of violation of the Computer Fraud and Abuse Act include: (A) a fine or imprisonment for not more than ten years, or both (for a first conviction) and (B) a fine under or imprisonment for not more than twenty years, or both, in the case of a repeat offender. Violation of the relevant sections of the California Penal Code can result in fines and imprisonment up to three years.

The Electronic Frontier Foundation filed an amicus brief in support of Power Ventures; arguing:

Facebook argues that by offering these enhanced services to users, Power violated California’s computer crime law. It grounds its claim in the fact that Facebook’s terms of service prohibit a user from having automated access to a user’s own information and that Power continued to offer the service to Facebook users even after Facebook sent Power a cease and desist letter demanding that it stop. Yet merely providing a technology to assist a user in accessing his or her own data in a novel manner cannot and should not form the basis for criminal liability.

Many commenters have pointed out that taken to an extreme, any online service provider can create ridiculous terms of service and allege that there is a violation. While this may theoretically be true, in reality a court could strike down a frivolous clause if that were the case. However, when a company has a legitimate business interest to protect, and the terms of service relate to that business interest, an argument can be made that such terms should be upheld. Here Facebook appears to be alleging that it has a legitimate right to prevent third party application developers from requesting, soliciting, or otherwise obtaining access to user names, passwords or other authentication credentials. Perhaps this case will shed some light on this issue. Check back as we will provide updates on this case as it progresses.

Facebook Complaint

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Linden Research Inc. and its CE Philip Rosedale have been named as defendants in a class action lawsuit relating to the ownership status of virtual property in Second Life, the popular virtual world in which users can realize significant gains from buying and selling virtual real estate (land and buildings), virtual clothing, and other virtual goods. In Second Life, transactions are implemented using virtual currency provided by Linden called Linden Dollars. These dollars can be earned and bought and sold, including via the LindeX, the official Second Life Linden Dollar exchange.

A significant issue in this case is the status of ownership of virtual goods and virtual currency and the conditions, if any, upon which a user may be denied access to them for violations of the terms of service agreement.

The class members allege that Linden and Rosedale duped users into spending vast sums of money to acquire virtual real estate and other goods, by representing that they would own all rights in the virtual items that they acquired, alleging that users could make real money and that the virtual items would have real value. The complaint alleges that Linden has modified its statements over time and at some point terminated the class members accounts, taking virtual items and currency (both virtual and real) in their accounts without compensation to the members and denying them access thereto.

The complaint goes beyond just alleging property rights violations. It alleges the members were falsely induced into investing in virtual items by defendants. And it alleges that these actions were part of a “continuing and systematic plan and scheme using the national wires and mail intended to, and in fact causing to, defraud Plaintiffs… out of thousands of dollars…”

Of course, one significant issue here will be the Terms of Service (TOS) to which the complaint acknowledges users must click “I Agree” to use Second Life. The Complaint recognizes the TOS, which Defendants will likely fall back on, but alleges that it is “nothing more than a contract of adhesion” that is not read by consumers and that Linden can change the terms at will, even after a user has invested thousands of dollars.

A recent version of the Second Life TOS includes the following non-exhaustive list of provisions, at least some of which may come into play here:

You agree that Linden Lab has and may exercise the right in its sole discretion to pre-screen, refuse, or delete any Content or services from the Service or disable any user’s access to the Service without notice or liability to you or any other party, including upon our belief that such user’s conduct, Content, services, or use of the Service is potentially illegal, threatening, or otherwise harmful to any user or other person or in violation of our Terms of Service, Community Standards, or other policies.

The Service includes a component of virtual tokens (“Linden dollars” or “L$”), each of which constitutes a limited license permission to use features of our Service as set forth below.

When you acquire a Linden dollar, Linden Lab hereby grants you a limited license (“Linden Dollar License”) to use the Linden dollar as a virtual token to be held, bartered, traded and/or transferred in Second Life with other users (and/or Linden Lab), in exchange for permission to access and use Content, applications, services, and various user-created features, in accordance with these Terms of Service. The Linden Dollar License is transferable by the holder to any other user, provided that both users comply with these Terms of Service, maintain their Accounts in good standing, and are not delinquent on any Account payment requirements.

Linden Lab may revoke the Linden Dollar License at any time without notice, refund or compensation in the event that: (i) the Linden dollar program is suspended or discontinued; (ii) Linden Lab determines that fraud or other illegal conduct is associated with the holder’s Account; (iii) Linden Lab imposes an expiration date on usage of Linden dollars in compliance with applicable laws and regulations; (iv) the holder’s Account is terminated for violation of these Terms of Service; or (v) the holder becomes delinquent on any of that user’s Account payment requirements, ceases to maintain an active Account or terminates this Agreement.

You acknowledge that Linden dollars are not real currency or any type of financial instrument and are not redeemable for any sum of money from Linden Lab at any time. You agree that Linden Lab has the right to manage, regulate, control, and/or modify the license rights underlying such Linden dollars as it sees fit and that Linden Lab will have no liability to you based on its exercise of this right. Linden Lab makes no guarantee as to the nature, quality or value of the features of the Service that will be accessible through the use of Linden dollars, or the availability or supply of Linden dollars.

The complaint makes numerous references to a prior suit by Marc Bragg against Linden, over termination of his account for allegedly using an exploit to acquire land more cheaply in violation of the TOS.

If this case does not settle, it could provide some legal guidance on numerous issues relating to the scope and enforceability of Terms and Service and ownership of virtual goods and property.

A copy of the complaint can be found here Evans v Linden Research.pdf

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On April 8, 2010, Zynga sued Playerauctions.com for operating a website that provides an unauthorized “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.

A recent version of the Zynga Terms of Service states:

The Service may include a virtual, in-game currency (“Virtual Currency”) including, but not limited to coins, cash, or points, that may be purchased from Zynga for “real world” money if you are a legal adult in your country of residence. The Service may also include virtual, in-game digital items (“Virtual Goods”) that may be purchased from Zynga for “real world” money or for Virtual Currency. Regardless of the terminology used, Virtual Currency and Virtual Goods may never be redeemed for “real world” money, goods or other items of monetary value from Zynga or any other party.

It further states:

Transfers of Virtual Currencies and Virtual Goods are strictly prohibited except where explicitly authorized within the Service. Outside of the game, you may not buy or sell any Virtual Currency or Virtual Goods for “real world” money or otherwise exchange items for value. Any attempt to do so is in violation of these Terms and may result in a lifetime ban from Zynga Service and possible legal action.

Zynga alleges that the Playerauctions.com has committed copyright and trademark infringement (along with false designation of origin, unfair competition and other claims) by displaying and/reproducing images and code from the games and using various Zynga trademarks with authorization.

The Complaint identifies unlawful sales in connection with Zynga’s Poker, Mafia Wars and FarmVille games. A recent review of the Playerauctions.com site showed over 750 Mafia Wars related items alone available for sale ranging in unit price from 25 cents to $900 and 84 entire “accounts” for sale ranging in asking price from $30 to $5,000 with one listed at a whopping $492,000!

Interestingly, Zynga does not specifically allege impropriety with or seek to prevent the outright sale of accounts.

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In what turned out to be an April Fool’s prank, Gamestation modified its Terms of Service to include a provision that required users to sell their soul to Gamestation before they could make any online purchase. Pretty amazing prank! What’s more amazing is that nearly 90% of the users agreed! One can only speculate as to whether these user’s didn’t care about their souls or didn’t read the Terms of Service. But it is likely a safe bet that many didn’t bother to read the terms.

Gamestation of course announced the prank and stated that it does not intend to enforce the so called “immortal soul” provision. So these users got off easy. But such may not be the case if there was a real dispute. As Blizzard demonstrated when it successfully sued MDY (for use of a bot that helped users level up in World of Warcraft without actually playing, the Terms of Service can be outcome determinative in the event of a real legal dispute.

All pranks aside, it is critical for Virtual World and Online game companies to protect themselves and users through effective Terms of Service. It is also important for users, and businesses operating in these online spaces to understand the terms.