The End of the (Virtual) World
Washington and Lee University - School of Law
West Virginia Law Review, Vol. 112, No. 1, p. 53, 2009
Washington & Lee Legal Studies Paper No. 2010-7
Virtual worlds have been the next big thing for some time now. In 2008, more than 100 public virtual worlds received venture capital funding - a significant increase over previous years. Yet virtual worlds have been going bankrupt faster than ever, including several high-profile firms and worlds. Every technology goes through a shakedown phase, and for virtual worlds the current recession has served as a catalyst for a downturn that, although not unexpected, is nevertheless startling in both numbers and rapidity.
This article examines the intimate relationship between how a virtual world begins life and how it ends. The amount of money available to creditors at the end of a company’s life, based on the bankruptcy system, helps to determine the terms of loans that creditors are willing to make. If creditors are able to get money out of a bankrupt virtual world, then virtual world creators may be able to borrow money at lower interest rates in order to start new projects. This Article asks whether permitting virtual world creators to borrow against new kinds of valuable intangible assets will decrease borrowing costs. It therefore argues that how virtual worlds die will impact how they are born.
The piece first addresses the lessons learned in the early-millennium dot-com bubble burst and applies them to the shakedown currently underway in virtual worlds. It shows that during the dot-com burst, creditors learned ways to get money out of intangible assets because thinly-capitalized dot-coms had no other assets of value. The Article extends this trend to virtual worlds. Certain new intangible assets (called “virtual property”) could and should be available to businesses as collateral for secured lending. Virtual property is often treated by the markets as personal property - for example, digital objects are bought and sold for real dollars and could serve as valuable collateral if law were clarified.
The law of security interests in intangibles is clearer in some places than others. Although complex, the rules for perfecting, enforcing, and valuing security interests in patents, copyrights, and trademarks are now established. U.C.C. Article 9 has expanded the ability of secured parties to secure interests in software that is physically embedded in goods or that is delivered via a tangible medium such as a CD-ROM (under the definitions of “goods” and “software” respectively). Thus, when intellectual property is embedded in a good or delivered in tangible form, courts have little difficulty differentiating the chattel property right from the intellectual property right.
But neither bankruptcy law nor Article 9 deals well with security interests in copies (not in copyrights) of software that are solely in electronic form. In the area of intangible or electronic assets, courts often do not distinguish rights in a specific copy (a personal property right) from copyrights (an intellectual property right). Many virtual world creators and businesses hold assets such as digital inventory, virtual currency, or prime virtual real estate. In order for those businesses to be able to borrow against this virtual property, the law must be significantly clarified. This article therefore advocates a theoretical overhaul of how courts value and understand digital assets in the bankruptcy context. Courts can, it suggests, apply established principles of law to permit game designers to borrow against virtual assets, and creditors to maximize their recoveries in bankruptcy.
The article will proceed in three parts. Part II will discuss the background of intangibles in bankruptcy and the burgeoning technologies of virtual worlds. Part III will analyze the legal impact of digital objects and intellectual property licenses in virtual world bankruptcies, with an eye toward determining whether increased protection for creditors might result in reduced borrowing costs for virtual world creators. Finally, Part IV will offer some recommendations for how courts can redefine the way they understand digital assets in the bankruptcy context so as to resolve the ambiguities clouding the use of these important emerging property rights as collateral.
Number of Pages in PDF File: 44
Keywords: Virtual Worlds, Bankruptcy, Intellectual Properties, Property Rights
JEL Classification: K10, K19
Date posted: May 19, 2010