Addressing legal issues with the latest technological developments and social media trends.
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Venture Beat recently reported on the results of a virtual goods study that showed about 75% of online games users have bought virtual goods and that many users surveyed plan to spend more in the next 12 months.

This survey is one more confirmation of the rapid growth of virtual goods. There are a number of conferences this fall that will focus on the virtual goods industry. Members of our team will be speaking at Virtual Goods World Europe 2010 in London and the Virtual Goods Conference ’10 in Santa Clara.

We hope to see you at one or more of these conferences.

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Augmented Planet Ltd. indicates that as of the end of June 2010, a search of the App Store revealed nearly 400 applications found by searching “augmented reality” and nearly 100 more that were augmented reality apps but didn’t use those words. In comparison, prior to September 2009, there were less than 100.

This is one more indicator of rapid growth of augmented reality.

This data confirms the the sense of optimism that our team members experienced while we attended the Augmented Reality Event conference in early June this year.

Of course with the rapidly expanding business opportunities in this space come legal issues of which companies should be aware. Our team has prepared a Legal Issues with Augmented Reality fact sheet which highlights some of the common issues faced in this space.

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A German data protection official has initiated action against Facebook for its use and storage of information about people who are not members. The actions result in part from the ability for registered users to use a tool provided by Facebook that scans a user’s existing email contacts and retrieves and stores that contact information, including information about non-user contacts.
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Facebook faces potential fines for storing personal information of people who don’t use the site and have not granted Facebook permission to access or store their details.

Facebook has until Aug. 11 to respond to the legal complaint.

This is another example of how certain technology, which may be useful to users of a social media site may adversely affect the rights of non-users.

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gucci.jpgIn Gucci America, Inc. v. Frontline Processing Corp., No. 09 Civ. 6925 (HB) (S.D.N.Y. June 23, 2010), a New York court denied a motion to dismiss contributory trademark infringement claims brought against the defendant credit card processing companies by Gucci. The court held that credit card processing companies may be held liable for contributory trademark infringement under the relevant Supreme Court test. See Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U. S. 844 (1982).

The court held that defendants (and others) who provide service to websites that sell counterfeit goods can be liable if the plaintiff can show that they:

(1) intentionally induced the website to infringe through the sale of counterfeit goods; or (2) knowingly supplied services to websites and had sufficient control over infringing activity to merit liability.

The court’s decision relied on the “willful blindness” standard set forth in Tiffany v. eBay, 600 F.3d 93 (2d Cir. 2010) and distinguished the Ninth Circuit’s decision in Perfect 10, Inc. v. Visa Int’l Serv. Ass’n, 494 F.3d 788 (9th Cir. 2007) due to the fact that in this case, unlike in Perfect 10, the infringement relied on credit card services because the infringement was based on the sale of tangible counterfeit products.

This and other recent cases highlights the need for credit card companies and other payment providers to carefully assess the steps they can and should take to limit liability for trademark infringement and other liabilities.

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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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We are proud to welcome two high profile lateral hires to our rapidly growing Virtual Worlds and Video Game team. On July 1, Sean Kane joined our New York Office. This follows on the heels of Mark Litvack joining our LA office in June of this year.

Sean has a broad range of IP experience advising on copyrights, trademarks, digital rights, trade dress, trade secrets, unfair competition and publicity/privacy rights. He joins from Kane & Associates LLC, where he provided comprehensive legal and business solutions for start-up ventures, mid-cap companies, multinationals and individuals involved in various interactive entertainment and IP-related enterprises. Sean has also been active in various industry and legal organizations. For example, he is a member of the American Bar Association Section of Intellectual Property Law (Co-Chair of the Computer Games and Virtual Worlds Committee), a member of the Section of Science & Technology Law (Co-Chair of the Virtual Worlds and Multiuser Online Games Committee), a member of the Board of Editors of the LJN publication, Internet Law & Strategy and frequently writes and lectures on these subjects.

Mark has extensive experience in a wide range of IP litigation matters, including copyright and trademark infringement, Internet piracy and prosecution, and entertainment law and previously served as Vice President at the Motion Picture Association of America, where he focused on Internet piracy issues. He also advises video games and virtual world companies.

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The Federal Trade Commission has extended until July 12, 2010, the deadline for public comments on its review of the Children’s Online Privacy Protection Act (COPPA) Rule. The request for comments was originally published in the Federal Register on April 5, 2010.

As stated on the FTC website:

The primary goal of the Children’s Online Privacy Protection Act (COPPA) Rule is to give parents control over what information is collected from their children online and how such information may be used.

The Rule applies to:

* Operators of commercial Web sites and online services directed to children under 13 that collect personal information from them;

* Operators of general audience sites that knowingly collect personal information from children under 13; and
* Operators of general audience sites that have a separate children’s area and that collect personal information from children under 13.

The Rule requires operators to:

* Post a privacy policy on the homepage of the Web site and link to the privacy policy on every page where personal information is collected.

* Provide notice about the site’s information collection practices to parents and obtain verifiable parental consent before collecting personal information from children.

* Give parents a choice as to whether their child’s personal information will be disclosed to third parties.

* Provide parents access to their child’s personal information and the opportunity to delete the child’s personal information and opt-out of future collection or use of the information.

* Not condition a child’s participation in a game, contest or other activity on the child’s disclosing more personal information than is reasonably necessary to participate in that activity.

* Maintain the confidentiality, security and integrity of personal information collected from children.

Many in the industry have complained that the FTC has not provided clear enough guidance on how to comply with COPPA.

However, in order to encourage active industry self-regulation, COPPA also includes a safe harbor provision allowing industry groups and others to request Commission approval of self-regulatory guidelines to govern participating Web sites’ compliance with the Rule.

One of the few companies to have received Safe Harbor status is Pillsbury client Privo, Inc.

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Often names can be misleading. So it is potentially the case with the federal CARD Act that will come into effect in August 2010. Although the name implies that it applies to cards such as stored value cards and gift cards, this Federal law will apply more broadly and has provisions that impact virtual currency models. In particular, this act mandates minimum levels of consumer protection for fees, forfeiture and other issues that can arise in connection with virtual currency accounts.

With regard to the minimum protection imposed by this federal law, states are free to adopt their own regulations to provide even greater protection. Now more than ever it is important to ensure that if you are offering virtual currency as part of your business model, that you ensure that you are in compliance with federal, state and international laws.

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Th US Supreme Court issued a ruling today that overruled a relatively narrow test adopted by the Court of Appeals for the Federal Circuit, known as the machine-or-transformation test. The Supreme Court found:
i) The machine-or-transformation test is not the sole test for patent eligibility under §101. The Court’s precedents establish that although that test may be a useful and important clue or investigative tool, it is not the sole test for deciding whether an invention is a patent-eligible “process” under §101;
ii) Section 101 similarly precludes a reading of the term “process” that would categorically exclude business methods. The term “method” within §100(b)’s “process” definition, at least as a textual matter and before other consulting other Patent Act limitations and this Court’s precedents, may include at least some methods of doing business; and
iii) because petitioners’ patent application can be rejected under the Court’s precedents on the unpatentability of abstract ideas, the Court need not define further what constitutes a patentable “process,” beyond pointing to the definition of that term provided in §100(b) and looking to the guideposts in Benson, Flook, and Diehr. Nothing in today’s opinion should be read as endorsing the Federal Circuit’s past interpretations of §101. See, e.g., State Street, 49 F. 3d, at 1373. The appeals court may have thought it needed to make the machine-or-transformation test exclusive precisely because its case law had not adequately identified less extreme means of restricting business method patents. In disapproving an exclusive machine-or-transformation test, this Court by no means desires to preclude the Federal Circuit’s development of other limiting criteria that further the Patent Act’s purposes and are not inconsistent with its text.

This is relevant to virtual worlds in that it expands the scope of patentable subject matter that can be protected for software based processes and the many novel business models that are emerging in virtual worlds, mirror worlds, augmented reality and other social media applications.

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According to a report from Global Times, the Ministry of Culture (MOC) issued an explanation on new rules which prevent gaming-related virtual currencies such as Tencent’s Q-bucks from entering into circulation as real money. According to the report, the rules were released on June 3, 2010 and will go into effect in August. The regulations are intended to protect kids from fraud or other issues that might arise with virtual currencies. Additionally, anyone who issues or trades virtual currency must apply for a license.

This is not the first time China has been on the leading edge of virtual currency related issues. For example, in November 2008, we reported that China was one of the first countries issuing guidance on the taxation of virtual transactions.

The requirement to have a license to issue or trade virtual currencies is not unique to China. Similar laws apply in the US. But as the use and dollar volume of virtual currency transactions increases, so too will the regulation and the enforcement of existing regulations.

If you are issuing or trading virtual currencies, it is important to understand the legal ramifications and requirements.