The Second Life Herald recently reported that the IRS issued a ruling that the Electric Sheep Company’s Second Life greeters for its CSI:NY promotion were “employees” rather than contractors, implicating greater tax withholding and reporting requirements and raising questions for other virtual world businesses.

Giff Constable, Electric Sheep Company’s VP of Operations and Strategy, commented for the SLH article:

The greeters whom ESC employed in Second Life have indeed been ruled as part-time employees by the IRS, so we will take appropriate steps. I actually think that this is an interesting precedent - that part-time workers in a virtual world, and using their own equipment, schedule, and judgment to perform tasks, have been ruled as employees.

In terms of scheduling, greeters were able to submit the times they wanted to work, and we worked out coverage accordingly.

And yes, appropriate steps will be taken regarding paperwork and payments. We’re fine with this clarification from the IRS; this is a really murky area in US law, and we just want to do the right thing. The economic consequences should not be significant.

Virtually Blind interviewed attorney Dave Elchoness regarding the ruling. Elchoness is an employment lawyer, the founder of VRWorkplace, and the Executive Director the Association of Virtual Worlds.

Virtually Blind: What does the IRS ruling mean in layman’s terms?

Dave Elchoness: Right now, all we have are the comments of Electric Sheep on the IRS’s decision. There is no published ruling, to my knowledge.

Based on the company’s comments, it appears that The Electric Sheep Company retained the services of some greeters in Second Life as part of its CSI event last year and treated the greeters as independent contractors rather than as part-time employees. The IRS has apparently ruled that the independent contractor classification was improper.

IRS rules require companies to withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The same requirements do not apply to independent contractor relationships. The IRS can impose fines, penalties, and back taxes for misclassifying an employee as an independent contractor.

Whether someone is an independent contractor or an employee depends on a number of factors, generally having to do with the degree of control the company has over the individual’s work and its relationship with the individual. If the degree of control is high, the relationship is generally considered employment. Here, Electric Sheep indicates that the greeters used their own equipment, set their own schedules and exercised a degree of judgment in performing their roles. These facts suggest a contractor relationship. That said, we do not know the IRS’ entire rationale in deciding that the workers were actually part-time employees.

VB: Does that mean that U.S. business owners need to start keeping real life data, like proof of employability and identity on all dancers, bouncers, greeters, receptionists, and other employees in Second Life?

DE: Not in all cases, but generally, if an avatar is providing a service, yes, this does make good sense. Business owners need to understand that real life laws apply to virtual world activities. Think of it this way: if an activity taking place inside a virtual world looks like real life work e.g. greeting avatars to a sim, or building a facility for someone, courts and agencies may apply real life wage laws, tax laws, and other rules and regulations related to work. Seek legal counsel familiar with virtual worlds to help you through this potential maze.

VB: What do you think this means for virtual world businesses and economies in the long run?

DE: It means that the human resources function in companies and the practice of employment law will be more complex. Consider that in the past most workforces were local and one set of laws applied. Over the past twenty years, managing workplaces has become somewhat more complex due to global companies, but still, workers in different places did not work as closely together as workers in the same physical location. However, with virtual worlds, this will all change. We can work ‘together’ as if in person, regardless of where in the world we are. Fifty employees in a virtual workplace could physically be at their desks in 50 different countries. But 50 or more different wage laws, 50 different tax laws, etc. will apply to people working ‘in the same environment.’ Think of the management difficulties along with the conflicts that could arise when a US employee making $40 per hour works on the same project, in the same space, as someone elsewhere making a fraction of that.

VB: Although the Electric Sheep Company is a significant, mainstream content-creation presence in the virtual world and regularly partners with major brands, the ruling could have broader implications for “microemployment” in virtual worlds, where users typically are paid by in-world businesses in the local currency (Linden Dollars in Second Life), and are often paid at rates far below federal minimum wage. For example, Bacchus, a Second Life club, is currently advertising a “Security” position paying 50 Linden Dollars — roughly $0.18 — per hour, plus tips. Is there any good legal argument for the protection of this kind of employment, where the payment almost by definition is secondary to the experience?

DE: A few comments: First, whether the activity is ‘work’ or ‘employment’ will most likely be determined by the jurisdiction where the user is physically located. Second, any applicable minimum wage will also be determined by that jurisdiction. So available arguments will depend on the jurisdiction. That said, I think the business’ argument is probably that what is being referred to as ‘work’ is really game play or simulation. Although, to my knowledge this is an entirely new issue, I suspect that this argument would be most viable when (1) the business is contained entirely within the virtual world, as opposed to a virtual world extension of a real life business, (2) the business appears to be designed for fun or the game rather than for profit, (3) the ‘work’ activities are unlike or dissimilar from real life work or more like game play or simulation than work, and (4) the individual performing the activities is doing so on his own time, can come and go as he pleases, and is not subject to control by the business. You can see that this is a highly fact dependent analysis. So, seeking the advice of legal counsel does make sense.

VB: Anything else you can add to this?

DE: Virtual world enthusiasts from businesses to individuals love virtual worlds for their immersive quality. In virtual worlds, you tend to feel like you’re ‘with’ others in a ‘place’ rather than communicating over a network with a tool. That’s what’s magical about them and why they will, over time, largely eliminate the challenges of physical distance. That said, we cannot fool ourselves into thinking that real life laws do not apply to virtual worlds. We would never question whether working over the telephone counts as work. The same applies to virtual worlds technology.

Photo credit: The generic “employee” picture at the top of this article was taken at ThA OFFiCe SToRe in Second Life.

VB is pleased to bring readers a new, notable paper in virtual law, Alan Turing and the Matrix: Intelligent Systems for Law Enforcement in Virtual Worlds (.pdf) by Bart Schermer, a partner at consultancy firm Considerati and an assistent professor at the University of Leiden (Faculty of Law) in the Netherlands.

Schermer has written his PhD. thesis on the legal aspects of intelligent software agents. This paper emphasizes virtual, intelligent law enforcement agents in 3D networked environments. Scary? Maybe. Interesting reading? Definitely. From the paper:

We have established that crime in virtual worlds is a possibility, and that the societal impact of virtual crime might become more significant over time. As such, surveillance and law enforcement in virtual worlds might become necessary. This will put additional strain on the capacity of current law enforcement. It is therefore worthwhile to examine whether intelligent systems can take over some of the surveillance tasks normally executed by law enforcement officers.

That’s right — Agent Smith. Schermer also touches on “artificial judges” and a number of other themes that should resonate with VB readers.

Schermer’s paper originally appeared in Liber Amicorum.

VB’s Reading Room periodically features new, notable papers in virtual law.  If you have written or are writing a related paper that you would like to have hosted at VB, email the editor for more information.

New World Notes is running an item expanding on CNN iReports coverage of an ongoing investigation by Playboy into trademark infringement in Second Life. The original report isn’t sourced, outside from identifying a couple of Playboy representatives visiting a potentially infringing display in the virtual world, but New World Notes tracked down Playboy Island manager MSGiro Grosso, who noted that the investigation is in the early stages, and that he’s trying to work with infringers who might be up for a partnership.

My take? I love the way Playboy is approaching the problem. They originally built a very pretty island that was sparsely visited. They then started doing in-world partnerships with content creators, and have apparently turned things around. More praise? It now looks like they’re taking a smart, long-term view of their presence in virtual worlds, and are joining Aeron chair maker Herman Miller in trying to find creative ways to police their trademarks without instantly defaulting to lawsuits, or even DMCA notices.

Where they hit resistance, they’ll have to consider a suit eventually, but it’s good to see companies handling these issues with some sensitivity to the fact that they arrived well after their brand was already being represented by fans. Turning to licensing and revenue sharing first is the right approach.

Court minutes (.pdf) from May 5 indicate that Brock Pierce has now paid Alan Debonneville whatever amount of money they agreed he’d pay in order to settle their bitter, often personal, lawsuit.

Though they parties had reached a confidential agreement over a month ago, problems with the settlement (which appeared to boil down to Pierce not paying Debonneville what he’d promised) along with a ridiculous level of apparent animosity between both the litigants and the lawyers involved kept the case alive. This step, however, likely does really end the dispute.

From the court’s minutes:

The Court takes judicial notice of the fact that defendant has now made the payment required by the settlement agreement and the Order to Show Cause is taken off calendar as moot. IT IS FURTHER ORDERED that the previously issued Temporary Restraining Order and Writs of Attachment are dissolved and vacated.

There is still a motion for sanctions (.pdf) against Brock Pierce pending for allegedly not showing up for a scheduled deposition, and the judge could, theoretically, still rule on that — though there’s a reasonable chance it will be withdrawn now that Pierce has paid. There’s also a response to the motion (.pdf), of course. The motion and response are fairly standard posturing, but for people who would like a glimpse into the ugly world of high-stakes litigation, the exhibits to the motion (.pdf) and exhibits to the response (.pdf) include a bunch of emails back and forth between the lawyers for both sides of this case that are fairly hostile (particularly as demonstrated in the exhibits to the response) and that shed some minimal light on the settlement, though the emails were redacted before filing.

The motion for sanctions is sort of a fitting end to the whole mess. As entertaining as it’s been at times, this suit consumed more posts here than it had any business consuming given its tangential relationship to any issues that actually matter in a big picture sense. The sliver of a possibility that we’d get a ruling that accidentally said something meaningful about virtual property kept me interested, but I can’t say I’m unhappy to see this in the rear view mirror.

Three Chinese men have been jailed for operating pirate servers of Giant Interactive’s MMORPG ZT Online, according to Pacific Epoch. The men are ordered to pay a total of RMB 60,000 (USD $8,586) in compensation to Giant for the servers that are said to have cost Giant a minimum of RMB 59,000 (USD $8,443…the cost must be tied to lost subscriber fees). Chen Jian was sentenced to one year in prison for building the servers while his accomplices, Shi Zunkai and Sun Jun, were sentenced to 10 months and nine months, respectively.

Pirate servers (actually, server emulators) are unauthorized game servers run by a third-party. The game experience will be similar but not identical to that of official servers but lacks all official technical support. This typically leads to laggy or inconsistent game performance. Pirate servers are usually created by writing or using custom emulation software which mimics the behavior of the official server. Operators of pirate servers are even able to offer incentives to play on their pirate servers rather than the official servers, such as custom or new items, accelerated XP gain, or even the ability to go to war with your own faction.

Wikipedia provides a nice summary of some of the legal issues surrounding pirate servers:

Copyright and Reverse engineering: The first issue is a possible infringement of the game creators copyright. As the case of Lotus v. Borland demonstrates, recreating “methods of operation” is not a copyright infingement. Thus, emulating copyrighted material is not a breach. However, this demands that the complete emulator is a work of its own. Sometimes the original server software leaks out of the company that created the game, for example AEGIS (Ragnarok Online). Use or distribution of this is definitely a copyright infringement. Modified versions of such original server software are not considered to be server emulators. The protocol that is used for communiciation between server and client is not subject to copyright, in contrast it could theoretically be patented, whereas software patents is a disputed field also. There are cases where a game creator effectively shut down popular private game servers by threatening lawsuits due to obvious copyright violations such as offering the client for download, or offering downloads of modified files from the original game package.

End User License Agreement and the Digital Millennium Copyright Act: Another legal issue is the EULA. Today most commercial MMORPGs require the user to sign a clause not to create or use server emulators when installing the client he bought. As shown in the case of Bnetd Vivendi Universal v. Jung, the DMCA can be relied on as well if the lawsuit is in the United States — the DMCA is a US specific law, although there are similar laws in some other countries. They argued that server emulation requires the circumvention of copy protection. The server emulator company lost the suit and the bnetd.org domain was transferred to Blizzard.

Giant Interactive says the recent arrests prove the company’s commitment to the fight against pirate servers, a fight Giant by no means is taking on alone. Everyone’s favorite (ok, at least mine…for now) MMO operator, Blizzard, is no stranger to pirate servers. In fact, it’s pretty simple to find a reliable WoW pirate server…one quick Google search found over 200 of them.

As Playnoevil mentions in their coverage of the arrests, this type of arrest may only prompt pirate server operators to move their servers off-shore to countries that have weaker intellectual property protections, much like the online gambling business has already done in the US. But whereas the government is cracking down on gambling, it’s the game companies who must do the heavy lifting against pirate servers. Especially so in China, where it’s estimated that 90 percent of lawsuits against Chinese copyright and trademark violators are filed by infringed companies.

Obviously game companies should keep an eye on pirate servers, but to what extent? How much of a threat do they really pose? World of Warcraft has topped 10 million paying subscribers despite the proliferating pirates. Isn’t it just as likely that consumers will take the bait and sample the pirate server, enjoy what they’re doing (if you’re a game company with a game that people don’t enjoy, you’ve got bigger problems than a few pirate servers) but tire of the often unstable and buggy experience and therefore decide to become a paying subscriber? That’s free advertising and can only help business. After all, every person playing WoW (even pirated WoW) is a person not playing your competitor’s game and, more importantly, falling in love with yours.

On the other hand, there may be some trademark/counterfeit-like concerns…let’s say a consumer wants to play World of Warcraft but somehow stumbles upon a pirate server. Looks like WoW, plays like WoW, even has WoW trademarks and copyrighted material all over the place? But it’s not WoW?? Alot of that sort of activity and Blizzard’s marks start to lose their source-identifying properties…we’ve seen where that road leads. Blizzard doesn’t want an inferior knockoff on the market, and so that’s why we see Blizzard and other companies taking upon themselves a duty of quality control and enforcement on behalf of their consumer base.

Question for the comment section: Would there be any advantage to doing a similar thing with worlds such as Second Life? Would a pirate server make sense? Probably less if at all, since the experience is defined by being a part of “the grid.”

I’m pleased to announce that I’ll be discussing virtual law (and Virtual Law) with the always-engaged and always-engaging crowd at Sophrosyne’s Salon this Saturday, May 10 from 1:00-3:00 Second Life time (Pacific). This is usually a fairly free-form event, and I am looking forward to an active discussion covering many aspects of virtual law from both a practical and philosophical perspective. Hope to see you there!

Pacific Epoch reports that two Chinese virtual item and currency traders were recently arrested.  The pair had been plying their trade within Blizzard’s World of Warcraft, operated in China by The9 Limited. Chinese police arrested them after one partner reported the other for unfair revenue distribution. In business since last August, the gold farming operation had 20 employees and generated nearly RMB 1.6 million (US $228,915) in only nine months of dealing.

What happens next is up to the Chinese authorities, but we can bet the pair are hoping for just a game ban. Hopefully their penalty is less severe than some of the recommendations for gold farmers that I’ve heard shouted in Ironforge.

I’d say the moral of this story is that crime doesn’t pay, but is gold farming even a crime? Maybe in China. And it also seems to have paid pretty well for this pair. Real moral…don’t forget to share with your partners! Sharing means caring.

Digital rights advocacy group Public Knowledge (”PK”) recently filed an Amicus Curiae (”friend of the court”) brief regarding Blizzard’s copyright claim (.pdf) against MDY Industries, maker of the popular World of Warcarft bot “WoW Glider” (now “MMO Glider”). Although the brief ostensibly supports neither side and is filed “in the interests of preserving the balance between buyer and seller; reader and author,” the core of PK’s argument is that Blizzard’s copyright counterclaim is not justified.

Public Knowledge argues that while Blizzard may have a contract law claim (PK offers no opinion on that), “Blizzard’s attempt to use contract to alter and displace those aspects of copyright law it does not like, while using copyright penalties to construe and enforce the terms of that alteration, is untenable, and the Court should not endorse it.” The brief goes on:

Blizzard has options for addressing cheaters, including disabling their accounts and bringing actions for breach of contract. It may also have remedies against MDY based on tortious interference with contract or other non-copyright causes of action. However, in seeking to curb MDY’s allegedly perfidious behavior, Blizzard may not undo Congress’ work in establishing statutory rights for the rest of the WoW users or for digital consumers more generally.

For the background of this case, see VB’s complete coverage of MDY v. Blizzard. Very briefly, Glider is a program that users run along with World of Warcraft. It automates key tasks in World of Warcraft, making it possible to play the game essentially unattended. Glider users can thus both harvest resources and generate high level characters without actually playing. Blizzard claims that Glider violates Blizzard’s copyright in World of Warcraft when it copies the game into the computer’s memory as part of its loading sequence.

The Electronic Frontier Foundation weighed in this morning as well, with a blog post praising Public Knowledge’s move. From the EFF post:

Blizzard’s theory is wrong, because it confuses a copyright holder’s intellectual property rights in the software it develops with a buyer’s rights in the actual copy of the software. An owner of software has a right to copy it if that copy is essential to the customer’s use of the software. (See Section 117 of the Copyright Act.) This rule is a crucial part of the balance Congress crafted between the rights of the copyright holder to manage and benefit from its expressive work, and the rights of the public to innovate, recreate and otherwise use and build on that work.

Blizzard argues that players aren’t owners but merely software licensees, so section 117 doesn’t apply. But court after court has held that the question of whether a user is an owner for purposes of Section 117 depends the substance of the transaction, not just how one party wants to describe it. For example, if you buy the software, keep it on your own computer and don’t have to return it when you are done, you probably own it.

Public Knowledge is represented on the brief by Sherwin Siy and Jef Pearlman, as well as by Connie Mableson of Phoenix law firm Dodge Anderson.

Kristan J. Wheaton, an assistant professor of intelligence studies at Mercyhurst College, recently published a note regarding original research into potential Jihadist use of virtual worlds at Sources and Methods. The findings are far less hyperbolic than the usual coverage of this subject, and seem sound. From Wheaton’s post:

A group of five students in my winter Strategic Intelligence class were asked to take a look at “the nature, volume, and likely current use of YouTube, other hosted video sites and Second Life by jihadist networks and individuals, and what will the likely future use of these mediums be over the next 12-24 months?”

Interesting stuff here. From the key findings regarding Second Life:

• “Jihadists are likely currently very minimally using Second Life.”

• “…over the next 12-24 months jihadists will likely begin to explore the ability and utility of the virtual world’s applications for money laundering, communication, and recruitment through propaganda…Use will likely be limited to merely exploring due to currently existing alternatives…”
  

• “The most effective countermeasures will likely rely on a close, working relationship with Linden [Lab] due to the systems in place to monitor financial transactions, avatar activity, and communication.”

The students’ original research and analysis is available via a course wiki.

VB has obtained the Temporary Restraining Order against Brock Pierce (.pdf) granted to Alan Debonneville earlier this week.

The TRO prevents Pierce from “failing to comply with the terms of the settlement” of his bitter legal dispute with Debonneville (one of the co-founders of his virtual property company “Internet Gaming Entertainment”) over certain business deals associated with IGE. For the complete background of this at time highly personal suit, see VB’s complete coverage of Debonneville v. Pierce.

Specifically, the TRO states that the court, after reviewing the record, restrains Pierce from “contacting any bank for Debonneville or his attorneys for purposes of reversing any payment Pierce made to Debonneville under the terms of the parties’ settlement agreement in this lawsuit […], attempting to reverse any payment made to Debonneville or his attorneys […], taking any action to sell, assign, [or] transfer […] any asset owned directly or indirectly by Pierce, unless such action is performed solely to raise funds to be paid to Debonneville, [or] filing any suit relating to the settlement, Debonneville or his attorneys, other than a personal bankruptcy suit.”

The court found that “unless Pierce … is immediately restrained from [these] acts, Pierce will commit these acts, thus causing immediate and irreparable injury to Debonneville.” The harm would be irreparable, the court said, because the acts “would be part of a wrongful scheme by Pierce, already commenced, to attempt to illegally recover settlement payments already paid to Debonneville or to avoid paying Pierce’s settlement obligations.”

A hearing as to whether the restraining order should be made permanent is scheduled for May 5 at 10:30 AM.