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  • DECEMBER 2007

RP Article

 

The Legal Reality of Virtual Real Property

By Nancy Grekin

Virtual real property took on actual life in the case of Bragg v. Linden Research, Inc., No. CIV.AO6 4925 (E.D.P.A., May 30, 2007). The plaintiff, a lawyer, sued Linden Research, Inc. (the “Company”) the creator of a virtual reality Web site called “Second Life”, alleging that it had improperly confiscated his virtual property and denied him access to its virtual community. He also joined the President and CEO of the Company for having made personal representations which led him to participate in Second Life. The case covered a variety of procedural issues which resulted in the determination that a Federal District Court in the State of the plaintiff’s residence had personal jurisdiction over the CEO, and that its on-line terms of service (“TOS”) contract was unconscionable. Because the contract between the user and the Web site was unconscionable, the arbitration clause which users were required to accept in order to participate would not be enforced. The case provides lessons on how to prepare a TOS for acceptance on the Internet, and a warning that the operator of a Web site and its principals may be sued virtually anywhere.

Plaintiff signed up and paid defendant to participate in the Second Life virtual world. Participants use the site by creating “avatars”, which are virtual depictions of themselves, and which interact with other participants in the Second Life virtual communities. Second Life agreed to recognize the intellectual property rights of the digital content created by participants, permitting them to buy, own and sell virtual goods and property, including land. The owners of virtual land could exclude others, improve it, and rent it and sell it to other avatars for a profit. Plaintiff purchased numerous parcels of virtual land, paid defendant real money as property tax, and created a digital business of selling fireworks for a profit to other avatars. He also acquired other virtual items from other avatars. In order to participate, the plaintiff was required to agree to defendant’s on-line TOS. The TOS required, among other provisions, that any dispute between the company and the user be decided by arbitration in California where the Company is located.

The dispute arose because the plaintiff acquired a parcel of virtual land for $300 but the defendant informed him that he had improperly purchased the land through an “exploit.” The defendant then froze the plaintiff’s account, and confiscated all of the virtual property and currency that he maintained at Second Life. The Plaintiff sued the Company and its President and CEO, Philip Rosedale. Rosedale moved to dismiss for lack of personal jurisdiction, and the Company moved to compel arbitration.

Motion (of Rosedale) to Dismiss for Lack of Personal Jurisdiction

Personal jurisdiction can be established either by “specific jurisdiction” when the basis of the plaintiff’s claim is related to or arises out of the defendant’s contacts with the forum, or by “general jurisdiction” which need not relate to the defendant’s contacts with the forum in connection with the underlying cause of action, but will be established if the contacts were “continuous and systematic.” The plaintiff maintained that Rosedale’s representations made in national media supported personal jurisdiction.

To establish personal jurisdiction it must be shown that the defendant had sufficient contacts with the forum to have anticipated that he could be sued there. The plaintiff alleged that Rosedale personally made statements in the media to a national audience regarding Second Life, and that those representations induced the plaintiff to participate. Further Rosedale hosted “town meetings” at Second Life at which he made various statements about the purchase of virtual land. The Court held that these personal representations made to induce participation in Second Life and the purchase of virtual land, were sufficient contacts to support personal jurisdiction.

Further, the Court ruled that the exercise of personal jurisdiction would not offend due process because there was no undue burden on Rosedale to defend in Pennsylvania, and because Pennsylvania has a substantial interest in protecting its citizens from misleading representations that would induce them to purchase virtual property.

Rosedale argued that because he made the representations in his capacity as chief executive officer of Linden Research, Inc. that he could not be subject to personal jurisdiction in his individual capacity, the so-called “fiduciary shield” doctrine. Although the Court was uncertain as to the law of Pennsylvania and the Third Circuit on this doctrine, it held that it did not apply because if a defendant had (1) a major role in the corporate structure, (2) the quality of his contacts with the State were significant, and (3) his participation in tortious contact was extensive, the doctrine would not apply. Because of his title as President and CEO and his participation in Company management, and because his statements were made on national media and he personally participated in the dissemination of the representations, he met the tests for determining that the doctrine did not apply and therefore did not preclude personal jurisdiction.

Motion to Compel Arbitration

Participants in Second Life are required to accept the on-line TOS by clicking an acceptance box. The Second Life TOS included a California choice of laws provision and an arbitration provision requiring disposition of disputes in San Francisco. The plaintiff alleged that the arbitration provision was procedurally and substantively unconscionable.

Procedural Unconscionability

The Court held that the TOS was a contract of adhesion because the other party had no opportunity for meaningful negotiation, and it was therefore procedurally unconscionable. Further the Court held that the Company clearly had superior bargaining strength which also established unconscionability. Apparently Second Life was the first virtual community on the Internet to offer its participants the right to purchase virtual land, so the Court held that there were no other reasonable market alternatives, further supporting that the TOS was a contract of adhesion. Finally, the Court noted that there was an element of “surprise” in the arbitration provision, another element of procedural unconscionability, because the provision was particularly inconspicuous and was buried in a paragraph with the heading “GENERAL PROVISIONS.”

Substantive Unconscionability

Even if a contract is procedurally unconscionable it will be enforced if the substantive terms are reasonable. A substantively unconscionable contract is one which is “one-sided.”

The Court held that the TOS was substantively unconscionable because it was entirely one-sided. It permitted the Company to suspend or terminate a user’s account and to refuse use of Second Life without notice, the Company had the sole discretion to determine if the participant had breached, and it had the right to retain any equity the participant had acquired based on a mere “suspicion” of fraud. In addition, the Company could amend the agreement at any time in its sole discretion by posting the amendment to its Web site. Thus the Company had a variety of remedies for breach, while the users had only one: they were required to arbitrate.

The Court analyzed various other provisions of the TOS and concluded that the lack of mutuality, the forum selection clause, and a confidentiality provision unilaterally imposed by the Company demonstrated that the arbitration clause was not designed to provide users with an effective means of resolving disputes. Therefore it was substantively unconscionable. Because the TOS was held to be substantively unconscionable, the Court held that the arbitration clause would not be enforced.

Lessons of the Case

All Web sites are made available nationally (and internationally) so a provider such as the Company can probably be sued virtually anywhere in the county. A CEO or other corporate representative who personally participates in hyping the company’s products nationally is at risk of personal liability for false or misleading statements.

The on-line TOS that Web sites require users to accept may not always be contracts of adhesion, but they certainly offer no opportunity to negotiate, are always one-sided, and are presented to users as “take it or leave it” – if a user doesn’t accept it, the user cannot participate. Many TOS contracts may be substantively, if not procedurally, unconscionable based upon the theories of this case. A company seeking to enforce a provision such as an arbitration clause included in a TOS should be very careful to make the provision obvious, and not to include other onerous one-sided provisions.

In the new world of virtual reality a company which advertises nationally and which promotes its business on the Internet must be prepared to operate in the real world of the law of contracts or risk serious legal sanctions!

 


 

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