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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Get a second life

Nir Kossovsky - Tuesday, September 22, 2009
From IP 360, the legal newswire, we share the following: "Two makers of virtual clothing, sex toys and erotic animations for sale in the online alternative reality game Second Life have slapped the game's maker with putative class action allegations of trademark and copyright infringement, saying the company allows piracy of their products to run rampant in Second Life and even profits from it."

The Intangible Asset Finance Society takes interest in this IP issue. We are intrigued because virtual sex toys and erotic animations are unambiguous examples of intangible assets and because the alleged millions of dollars at stake comprise a material level of finance.

We quote from the legal blog, Above the Law: "We’re intimately familiar with neither Second Life nor sex toys, but our understanding is that the two go hand in hand. Eros LLC, a virtual sex toy maker, has apparently made a pretty penny selling sex goods in Second Life. But now other Second Life vendors are ripping off its designs and selling knock-offs. Eros’s CEO Kevin Alderman — who goes by Stroker Serpentine in Second Life and built the first in-world sex bed, a digital bed with built-in sex position animations — is filing a class-action suit against Second Life’s creators for enabling this virtual counterfeiting. Alderman, who has been called “the ‘Hugh Heffner’ of the digital millennium,” wants Second Life to shut down its virtual version of Canal Street (counterfeit central in New York). "

The working elements of the Society are its standing committees that address areas of intangible asset finance practice. We asked Darren Cohen, Chair of our Quality & Integrity Asset Management Commitee, and partner in the Intellectual Property Practice Group at Reed Smith, to give us the "inside baseball" view of this case. We also asked David Ruder, Chair of our Trademark Asset Management Committee; VP, Business Development, at RPX; and a founder of Terrier IP Investments, LLC, a private investment firm focused on intellectual property-based investments in firms backed by hedge funds and private equity, for his perspective on asset monetization.

First, Darren's perspective:

At first glance, this case challenges accepted notions of intellectual property infringement. For example, under established trademark law, infringement arises when there is a likelihood of consumer confusion among the relevant purchasing public. On this basis, a plaintiff in a trademark case may likely claim damages based on lost or diverted sales, which seem on its face to be anathematic to the use of trademarks, copyrights or other intellectual property on Second Life.

However, it is undeniable that the Second Life population and the "real" life population overlap, and behavior in one medium can surely have an effect, adverse perhaps in this case, on the other. Indeed, reputation and risk management is just as vital in these nontraditional venues as they are in the ordinary course of trade (the standard for bona fide trademark use in commerce). This type of activity may further prevent one from being able to fully exploit IP rights and build IP equity, in particular brand equity, by weakening, diluting and tarnishing trademark rights or serving as a barrier to potential licensing opportunities and avenues. It should not be lost on any holder of IP rights that real profits are being made in forums like Second Life, and whether or not a rights holder wishes to enter these untraditional and "secondary" markets, they should have the same enforcement and exploitation rights, as well as brand and reputation control, as in any other channel of commerce. 

Second, David's perspective:

When I look at trademark rights, the perspective I usually take is a financial one: whether I can acquire the relevant trademark and create licenses across territories and different classes of goods and services and make money. To put this in relief, consider a hypothetical brand licensing campaign by Eros LLC that wants to license out its “SexGen” brand of virtual sex toys to the “real world” in multiple countries or even to a company that wants to sell SexGen sex toys in the Second Life world. If I were a potential licensee one of the questions I would pose to Eros is what trademark rights Eros actually possesses.

To defend its assertion that it owns trademark rights, Eros would point to its US Federal trademark registration 3,483,253 which covers “providing temporary use of non-downloadable software for animating three-dimensional characters.” What is interesting is that in the goods and services there is no mention of “sex toys” at all. In fact, this is in fact a broad description of software. Interestingly, given some recent caselaw this registration may be considered overbroad and thus cancelled if it the statement of use should have been limited to just sex toy software downloads. I have not done research to see if Eros has made non-US trademark applications and in the United States, but Eros did include a specimen of use including a Second Life screenshot to obtain its trademark registration and trademark registrations are presumed to be valid.

From a territorial standpoint one would ask whether Eros has any rights to its trademarks beyond the United States. Again, I don’t know if Eros has secured any non-US trademark registrations. I don’t know if SexGen’s use on servers outside the United States satisfies use requirements to establish rights in other countries. I also don’t know if use is satisfied by consumers on their US computers accessing non-US servers or non-US computers accessing US servers. As a potential licensee, all I have to go on thus far is the US trademark registration and the use on the Second Life game. Based on trademark law as I know it, if the registration is valid, I would think that Eros has the rights for SexGen not only in Second Life, but also any other virtual world that might be created by any software company. I might consider licensing the SexGen trademark for other virtual worlds, but thus far I think I would only have US protection.

From a goods and services standpoint, it seems at first blush that Eros has established no trademark rights at all to any actual real world sex toys as everything so far has been limited to just software as described in the registration. I would not be comfortable as a potential licensee that I should invest resources to create a real world SexGen sexy toy line via license unless there was some concrete evidence that the SexGen brand is used on real life sex toys or that there is actual confusion among consumers of real life sex toys and virtual sex toys as to source. Again I think this trademark really only would cover software.

If I were to challenge the rights of Eros, I would address the question of how “commerce” is established by Eros in the Second Life world and whether it meets the threshold of use in commerce under trademark law. I don’t know if Eros has made any kind of concessions via license agreement or otherwise to Second Life in its ability to log into the Second Life servers and create its virtual sex toys using Second Life software and servers without giving its rights away. What kind of “commerce” is occurring here and how exactly is Eros paid for offering its software services (and who actually pays Eros)? These are very fact-specific determinations that go to the heart of why trademark rights are granted for any kind of product or service.

Assuming Eros can prove that it has direct relationships with end users that knowingly pay Eros money for use of the virtual sex toys or that Second Life knowingly agreed to a mechanism whereby Eros is paid for its virtual sex toys, then I think Eros has a strong case that it has established trademark rights and these likely have value. It would be especially valuable for Eros to prove users have knowledge of the SexGen brand outside of the Second Life world. For instance perhaps rights can be purchased through eBay.

So far I’m leaning in favor of Eros having valid trademark rights but I would not be comfortable licensing the SexGen brand for anything at this point because I think the rights are in flux and a court needs to make a ruling about what rights actually exist at this point, if any. Even if a court affirms that Eros has rights in the Second Life realm, if I were Eros I wouldn’t be hoping for much compensation unless it can somehow enjoin Second Life from selling virtual sex toys (or if it has broader coverage, the Second Life software altogether). Second Life could simply respond by programming away sex in its world altogether (opening a new branch of virtual anti-trust law, I’m sure). 

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