Friday, November 30, 2012

Unusual 230 defense against virtual ownership claims

Evans v. Linden Research, Inc., 2012 WL 5877579 (N.D. Cal.)

The court partially granted a motion for class certification in this case about “property” in Second Life.  People buy and sell virtual items, including virtual land, in-game, using money (lindens) that can be bought for and exchanged into dollars.  Virtual land incurs monthly tier fees, similar to property taxes, paying for maintenance of the servers.  (Linden also takes a commission on participants’ sales of virtual items in-game.)  Linden does not run out of virtual land; “once Linden sells land to a participant, it continues to exist in Second Life and is not deleted or removed from the game.”  Plaintiffs were people who’d participated in Second Life, bought virtual items/land, had their accounts terminated or suspended by Linden, and weren’t compensated for the value of what they had. 

The question was what “ownership” meant.  Plaintiffs argued that Linden and defendant Rosedale (founder, former CEO, current board member) represented that Second Life participants would have an actual ownership interest in virtual land and other items.  Defendants argued that they meant that participants would have copyright in items they created.  Plaintiffs alleged that, to attract participants, Linden “made a calculated business decision to depart from the industry standard of denying that participants had any rights to virtual items, land and/or goods” and “globally represented to participants ... that their ownership rights and intellectual property rights to the virtual items, land and goods held in the participants' accounts would be preserved and recognized.”  Thus, for several years, the following statement appeared prominently on the Second Life homepage: “SECOND LIFE IS AN ONLINE, 3D VIRTUAL WORLD, IMAGINED, CREATED AND OWNED BY ITS RESIDENTS.”

However, sometime after 2007, following a dispute with an individual user regarding Linden's alleged confiscation of virtual property, Linden changed that statement to “SECOND LIFE IS AN ONLINE, 3D VIRTUAL WORLD, IMAGINED AND CREATED BY ITS RESIDENTS” and began to strip ownership rights from users.  In 2010, Linden modified its terms of service, for the first time stating that “[v]irtual land is in-world space that we license.”  Participants were not allowed to opt out of the new terms; if they didn’t accept, they couldn’t access their virtual land or items.

The court contrasted “actual ownership rights” in “a piece of the Second Life world” (what plaintiffs claimed to have) with “copyrights” (what defendants said they had).  Plaintiffs didn’t claim to own the physical servers, but did claim to own the “things” and “land” created by the code that ran on the servers, in the same way that one can own a domain name.  Thus, beyond IP rights, users owned their accounts and could treat them like property, including selling them and licensing them, whether in the game or through independent third parties such as eBay.  Defendants argued that the only real thing or property capable of being owned was the copyright, and users had a license to use Second Life computing resources.  If an account was closed, users still owned copyrights in whatever they created, and that provided the value proposition distinguishing Second Life from other games.  However, the bits making up a given copy on Linden’s servers were not themselves a user’s property.

Plaintiffs argued for certification of a main class of purchasers and sellers of virtual land/items and a subclass of people whose assets had been taken, frozen, or otherwise rendered unusable by Linden’s affirmative action (not just by having to agree to the amended ToS).  So the main class claims were predicated on the idea that defendants lured people into participating in Second Life by making ownership promises, and then later reneged, while the subclass claimed that defendants unlawfully converted members’ valuable property by closing their accounts without reimbursement.  For the main class, plaintiffs alleged violations of the CLRA, FAL, UCL, and California Auction Law, along with fraud in the inducement.  For the subclass, plaintiffs alleged conversion, intentional interference with contract/prospective economic advantage, and unjust enrichment.

Defendants argued that plaintiffs failed to show injury in fact sufficient to create constitutional standing for the main class.  For these claims, that meant they needed to show lost money or property due to the alleged misrepresentations that participants would own their virtual items/land.  But they didn’t describe any economic harm they suffered as the result of these misrepresentations.  At the end, they argued that they wouldn’t have bought the items at all or would have paid less for them if they’d known the truth.  Although the difference between the price a consumer would have paid had she known the truth and the price she actually did pay may constitute “injury in fact,” here plaintiffs failed to offer “a shred of evidence” that this was true in their case.  The only record testimony was from Donald Spencer, who testified:

[W]hen I started the game that—everything [Defendants] promoted was it was owned by the residents. If you created it it was yours. You owned it. It wasn't there for [anybody] else to take away from you ... [t]hat was one of the big draws for me and my friends to go there ... we could go in there and create as a group, you know, or even individually belonged to each one of us.

This wasn’t enough to show that he wouldn’t have bought or spent as much money for virtual land/items but for the misrepresentation.  Other possible evidence that plaintiffs didn’t present might have been about Second Life’s market share relative to its competitors before and after the “ownership” marketing campaign.  In addition, plaintiffs’ “inability to articulate a coherent remedial theory highlighted the absence of a concrete and non-conjectural injury.”  They asked for return of the entire price paid for land and tier fees paid to Linden, along with return of the transaction fees for item transfers.  But that’s not the proper measure if the harm was the extra price they paid because of the promise.

The court also found that plaintiffs failed to do more than recite the elements of a violation of the California Auction Law, and they didn’t show injury sufficient to confer standing under that law, which requires auctioneers to maintain various safeguards.

The court additionally found the main class definition overbroad and ascertainable—anyone who ever purchased or sold virtual land/items in Second Life.  Not everyone might have been subject to and injured by the alleged ownership misrepresentations.

The court then turned to the subclass, as to which defendants didn’t challenge standing.  On numerosity, the court looked at a random sample of 500 terminated accounts, in which 2 held virtual land at the time of termination (adding cases in which the terminated accounts had virtual items, lindens, or dollars would presumably increase the numbers).  From this sample, plaintiffs estimated that, of the 57,000 accounts Linden terminated, at least 228 held confiscated virtual land.  Defendants argued that plaintiffs only identified one person who bought virtual land under the pre-March 2010 ToS and then had it “confiscated” after, and that she was properly terminated for violating Second Life’s anti-fraud provisions.  But the problem wasn’t mandatory acceptance of the ToS, but rather account closures or suspensions, and the class could also include users whose items other than land (including lindens and dollars) were taken without compensation.  No matter what the reasons for termination were, plaintiffs alleged, Linden wrongfully confiscated the land, items, and currency in the accounts.  The sampling evidence therefore satisfied the numerosity requirement, “based on a common sense extrapolation of the numbers and considering the geographical dispersion of class members.”

As for commonality, the court identified several common questions: (1) whether the new TOS was unconscionable or otherwise unenforceable against Second Life users whose accounts Linden suspended or terminated; (2) whether subclass members have an “ownership” right in virtual land and virtual items; (3) and whether Linden has an obligation to reimburse them for virtual land, virtual items, or currency (either lindens or dollars) in a Linden-closed account.  The court rejected defendants’ alternate characterization that the primary issue was whether Linden wrongfully terminated any individual account.  The claims didn’t depend on whether an account was terminated for good cause.

Defendants made the intriguing argument that §230 provided them, essentially, a sword as well as a shield: that is, that if they confiscated valuable items in a user’s account because they terminated that user for violating Second Life conduct rules, then they were acting as an ISP to filter offensive conduct and were absolutely immune to non-IP claims.  Tentatively, I’d say that this doesn’t work, since the grant of ownership (if that’s what it was, on which I express no opinion) would operate as a separate source of rights—the claim isn’t based on the account closure (for which defendants should be immune under §230 for claims of consequential damages, harm to reputation, etc.) but rather on the stuff left in the account that Linden should have “returned.”  This seems to me not much different from an ISP contract for $10/month payable as $120 at the beginning of the contract; if the contract provides for early termination for bad behavior, but does not provide that the ISP gets to keep the whole $120 in case of such early termination, it doesn’t seem to me that §230 would bar a claim by the user to get the balance of her payment back.  It is the background law and the parties’ agreement, not the termination, that provides the basis of the claim/source of the wrong.  But perhaps Eric Goldman will disagree.

Anyway, the court didn’t get into the §230 weeds, but simply rejected defendants’ argument that the subclass claims would inherently devolve into individual adjudications. Whether §230 applied would itself likely present common questions of law, and such determinations could be made as to categories of reasons for account closure.  Thus, commonality was still present.

The putative class representatives who had their accounts suspended with valuables still in them also could satisfy the typicality requirement, though the putative class representatives who refused to log in and accept the new ToS couldn’t do so; the latter hadn’t lost valuables through Linden’s acts of account closure/termination/freezing.  Relatedly, defendants argued that named plaintiff Evans was inadequate as a representative because he had a demonstrated history of “abusive and obscene communications with other Second Life users and Linden personnel…. [H]is lewd, profane, violent, and threatening language toward other users has drawn over 100 abuse reports.”  Given this record of abusive and hostile conduct toward potential class members, the court was persuaded that there was a conflict of interest.  However, the adequacy of named plaintiff Hemingway was established, even though she loaned her computer to a friend, who then committed credit card fraud on Second Life.

The court then turned to the remaining certification requirements.  The court declined to allow certification under Rule 23(b)(1)(A) or (b)(2), despite plaintiffs’ claims for injunctive relief against enforcement of the ToS, since their primary goal was damages.  Nor was certification appropriate under Rule 23(b)(1)(B), since adjudication of their claims wouldn’t as a practical matter be dispositive of the interests of nonmembers—victory wouldn’t exhaust Linden’s resources.

But Rule 23(b)(3) was satisfied.  The court again rejected defendants’ claims that individualized inquiries into the reasons for account closure would be required.  “[A] predominant legal and factual inquiry is whether the TOS, which allows Linden to confiscate class members' virtual land and property, is unconscionable or otherwise unenforceable against Second Life users whose accounts Linden suspended or terminated,” and this was subject to classwide proof.  Also, classwide liability determinations should be possible using the dollar value of lindens and dollars, along with the price paid for virtual items and land; this would involve only ministerial review of transaction records.  The court didn’t accept this damage calculation method as a final ruling; it retained the possibility of modifying or decertifying the class as appropriate.

Defendants didn’t contest superiority, but they did contest ascertainability.  Given the clarification of the definition of the subclass, it should be easily ascertainable using Linden’s records.  If plaintiffs are correct that, even if subclass members’ accounts were validly terminated, Linden still owed them the value therein, then it should be possible to determine what was in those accounts.

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