State of Play VI Governance, legitimacy, and the rule of law

I've just given a 15 minute version of my rule of law argument at the State of Play VI conference in New York. The basic point was that we are still stuck in a false dichotomy between regulation and liberty for virtual communities. I argue that we need to take a closer look at the way in which governance takes place and the tensions that exist in virtual communities. I propose an evaluatory framework based upon the various ideals of the rule of law. It is the legitimacy that is most threatened by private governance, and it should be legitimacy that we seek to encourage and safeguard in the legal regimes that constrain governance.

You can grab the slides here in PDF or PPT.

Article: On the (partially-)inalienable rights of participants in virtual communities

My most recent article has now been published. Unfortunately, MIA's policy is set to change to allow online access as of the next issue. For now, here's the post-print:

Nicolas Suzor, "On the (partially-)inalienable rights of participants in virtual communities" (2009) 130 Media International Australia.


As virtual communities become more central to the everyday activities of connected individuals, we face increasingly pressing questions about the proper allocation of power, rights, and responsibilities. This paper argues that our current legal discourse is ill-equipped to provide answers that will safeguard the legitimate interests of participants and simultaneously refrain from limiting the future innovative development of these spaces. From social networking sites like Facebook to virtual worlds like World of Warcraft and Second Life, participants who are banned from these communities stand to lose their virtual property, their connections to their friends and family, and their personal expression.

Because our legal system views the proprietor's interests as absolute private property rights, however, participants who are arbitrarily, capriciously, or maliciously ejected have little recourse under law. This paper argues that rather than assuming that a private property and freedom of contract model will provide the most desirable outcomes, a more critical approach is warranted. By rejecting the false dichotomy between 'public' and 'private' spaces and recognising some of the absolutist and necessitarian trends in the current property debate, we may be able to craft legal rules that respect the social bonds between participants whilst simultaneously protecting the interests of developers.

Many thanks to Sal Humphreys for putting together this special edition of MIA. I highly recommend the other articles in this issue.

Digital constitutionalism: the governance of virtual communities, part 1

I am finally beginning to write up my thesis. What follows is the first half of the argument I plan to present. This will hopefully provide the structure for identifying the problem and the context of the argument.

Comments welcome – what have I missed so far?

The internet provides the medium for a wealth of virtual communities, each with its distinct set of norms and values. Individuals all around the world participate in these networks to play, to socialise, to learn and teach, to express themselves, to do business, to communicate with friends and loved ones, to engage in political discourse and political process, and for innumerable other activities. These communities provide not only a 'space' for people to interact but also the promise that each individual will be able to find a community whose norms and values align with her own. Since the internet became popular in the 1990s, this libertarian idealism has proved extremely powerful. It argues that freed from physical scarcity and spatial barriers, individuals will finally be able to choose to associate with other, like-minded, individuals, and these communities will be able to determine the rules which best fit their society, rather than the clumsy approximations that often result from national democracies.

The main problem with the governance of virtual communities is that our legal system operates in such a way as to vest overwhelming power in the hands of those who create and maintain the platforms. These people, whom we call 'proprietors', for they own the code that defines the platform and servers upon which the code runs, exercise almost complete discretion as to who may access and who may continue to access 'their' community. The law, by giving primacy to these property rights, marginalises the interests of participants in these communities. Further, by casting any disputes or tensions which arise as belonging wholly in the 'private' sphere, we deligitimise any change to the current allocation of entitlements.

The result so far has been that the technologically deterministic claims of the cyber-libertarians have not held up, at least not in the largest virtual communities. The suggestion that individuals will vote with their feet (or their wallets) and choose to leave communities that do not reflect their own values breaks down as individual communities become more important. Network effects act to restrict both entry of competitors and exit of participants. As the value of many communities is proportional to the number of participants, new communities have trouble reaching a critical, sustaining, mass. Participants are less likely to leave an established community for a fledgling community, even if that smaller community has more appropriate norms or values. This means that proprietors do not have to be very responsive to the demands of participants in order to retain their custom.

There are, no doubt, limits on the behaviour of proprietors. A proprietor who is not responsive enough to the demands of the community will, eventually, begin to lose participants. In the various commercial models, this usually means a drop in subscriber revenue or in revenue derived from advertising. The relationship between participants and proprietors is accordingly seen to be market-based, and proprietors have an incentive to be just responsive enough not to lose too many participants. This model, in practice, is far removed from the idealism of the cyber-libertarians. Governance is essentially reduced to business decisions about the most profitable way to manage the virtual community.

There is a significant problem when the interests of participants are reduced to a market rhetoric. The activities of participants in virtual communities cannot be understood as the activities of mere consumers of entertainment product, and treating them as such leads to substantial injustices. For participants, there is much more at stake than access to a service – that access underpins their ability to communicate with friends and family, to express themselves, to carry out trade and commerce, and to participate in political discourse. Thus, for example, when a participant is threatened with expulsion from the strongly heteronormative World of Warcraft for advertising for a guild that is friendly to those with alternate gender or sexual identities, she risks losing not only access to a recreational pastime, but access to her rich social networks, her personal identification with her avatar, her virtual possessions, and the rest of the benefits that attach to participation in the community.1)

Similarly, when an individual is banned from a social networking site, she loses a significant ability to connect with her friends, family, and distant associates. The more effective the social networking platform is at changing the way that groups organise events and remain in contact, the more acutely she will feel this disconnection. The same disconnect occurs when an individual is denied access to cloud computing platforms and is no longer able to access her email contacts or stored documents.

In the corporeal world, these concerns are often seen as public concerns, and constitutional and administrative law principles have developed to restrain states from arbitrarily or capriciously taking away the ability of individuals to be secure in their property, their ability to communicate, and their freedom of association. In the privatised environment of the internet, however, there are very few guarantees. The limits of a proprietor's power are established by the bounds beyond which certain actions will become unprofitable. At its worst, this model approaches the worst failures of majoritarian or populist rule, where individuals and minority groups are often subject to harsh treatment and discrimination.

It follows that as the internet becomes more vital to the ways in which we communicate, do business, express ourselves, live, love, and learn, then the risk posed to individuals and groups dramatically increases. The law does not currently have the adequate vocabulary to deal with these risks. Constitutional action, particularly in Australia, provides limits on governmental action, but provides no individually assertable rights against private actors. This negative model assumes that, in the absence of governmental action, citizens will be free. To the extent that this model was ever accurate, it is certainly flawed in a context where access to crucial social networks and forums for self-expression requires access to another's 'property'.

In this context, the distinction between positive and negative restrictions becomes confusing. In the absence of particular government interference, we are left with the base rules of property and contract, which are nonetheless public constructs. A proprietor's right to exclude may come from the fact that they are in control of the software code which runs the platform, but that power is reinforced through the rules we choose to apply to protect that code and the servers upon which it runs and the interpretation we give to the contracts which condition access to the platform. At each of these stages we are embedding certain values in the legal system, and it is wrong to suggest that they form part of a natural state of affairs in which the government ought not interfere. There are clearly choices to be made.

Fundamentally, our legal system should develop to arrive at just results. This means that we must be careful to consider the interests of participants and refrain from marginalising those against the interests of the proprietors. This is a balancing exercise, however, because we must be careful not to destroy the vibrant and diverse nature of these spaces through over-regulation, and equally careful not to undermine the commercial viability of platforms which are provided through private sector investment.

This balancing process is the essence of digital constitutionalism. The rest of this thesis will consider how public values can be applied to the laws which govern virtual communities.

On Cyberproperty

Proprietors of virtual communities sometimes make absolutist claims to sovereignty over the platform and the community. These proprietors tend to resist any public regulation, as they see the platform as 'their' 'property'. Unlike public utilities, most platforms do not receive Government funding or enjoy legislated monopolies, and therefore, the proprietors assert, they ought not be under any special duties imposed by the state. On this view, participants are granted access to the proprietor's private property on certain conditions, and are not entitled to expect any non-contractual obligations from the proprietor.

This argument builds on a simple analogy from tangible property – that, in fact, a platform for a virtual community is no different to a private parcel of land, and, therefore, the proprietor may exercise absolute discretion as to who may enter and remain on (access) the property (system). The natural right to own and control property needs little or no justification, and it follows that the State ought not interfere with the operation of a virtual community.

Carrier and Lastowka forcefully remind us that the property analogy poses an inherent risk of driving us towards absolutist conceptions of access rights, for which no such justification can be found even within property theory.1) Private property rights are indeed granted over the servers which form the platform for a virtual community, and these servers will be protected from appropriation or trespass. Similarly, a property right is granted over the software which runs the virtual community in the form of copyright, which protects and rewards the investment required to create the platform. It does not necessarily follow, however, that the proprietor is granted a property interest in the entire community, such that he or she has a “whole and despotic dominion” over it. Clearly a proprietor has some form of control in determining whether and when to provide access to the service, and, ultimately, in flicking off the switch and disconnecting the service completely.2) To call this a property right over the community, however, serves only to confuse the issue.

Property is one of the keystone concepts in our legal system. Deeply ingrained within our liberal tradition is the notion that government interference with private property rights should be severely limited. Some proponents of cyberproperty draw upon this natural argument for property rights to avoid the much more difficult tasks of justifying the entitlements they argue should be granted to platform owners and service operators. To call something private property is to make a strong normative claim that it ought not be regulated, but it tells us nothing about why we ought to allocate entitlements in this particular manner. The property label serves merely to obfuscate the underlying policy arguments for allocating certain powers to certain persons. The intellectual move is elegant in its own way – services on the 'net are 'property', and it therefore follows, that the entitlements that apply to owners of real property ought to be extended to the owners of cyberproperty. This is an expansionist move which implies a natural deterministic solution – exactly the type of argument that Bentham called “nonsense upon stilts”.

Carrier and Lastowka attempt to unravel the claims made by cyberproperty advocates by examining the traditional justifications for property. They conclude that cyberproperty is not supported by either the Lockean labour / desert theory,3) Hegelian personality theory,4) or utilitarian arguments.5) More importantly, however, they note that even if property rhetoric were appropriate for networked platforms and services, its use tends towards absolutist protection – a 'perfect' limitless 'caricature' of property.6) Inbuilt within our existing property system are numerous checks and balances, limits on the property owner's exercise of his or her rights.7) These limits provide safeguards for the interests of those who would use the property against the wishes of the proprietor. In cyberproperty, though, these limits are ignored as judges tend to grant absolute power to the proprietor, and the result is a grossly over-reaching rights regime which has pulled itself up from its own bootstraps – by calling virtual communities 'property', we effectively and without introspection grant more control over them to their proprietors than we would ever grant over physical property.

The use of property rhetoric is dangerous. If we, as a society, intend to grant certain rights to platform owners, we should do so as a result of rational reason, rather than as a response to perceived necessity.8) The deeply ingrained liberal ideals which surround conceptions of property in our society do nothing to help us determine whether it is appropriate that we impose limits on the ability of proprietors to exclude participants at will. It may provide an answer to that question, but it arrives at that answer from the circuitous and self-affirming route of false analogy.

Estoppel by failing to enforce the rules

Where the proprietor of a virtual community generally fails to enforce the rules, could it be estopped from doing so in any particular instance?

Despite a clear contractual right to terminate, a provider may be estopped from terminating in circumstances where it would be unconscionable to do so.1) In order to prevent the provider from terminating, a participant would have to show that the provider had represented that it would not terminate, that the participant relied on that representation to his or her detriment, and that it would be unjust or inequitable for the provider to terminate in those circumstances.

The representation that the provider would not rely on the right to terminate does not need to be explicit, but it must be unequivocal.2) The representation does not need to be made to a particular person, but can be made to a class of people.3) Where breaches of a particular rule are widespread, a long-standing failure to enforce the rule could conceivably be construed as a representation that the provider will not enforce the rule in future. However, such non-enforcement could also be construed as not making any representation as to the future.4) The requirement that the representation be unambiguous does not mean that “it cannot possibly be open to different constructions, but that it must be such as will be reasonably understood in a particular sense by the person to whom it is addressed.”5) Whether a representation has been made is a question of fact, and its existence “must be decided on ordinary common law principles of construction and of what is reasonable, without fine distinctions or technicalities.”6) In practice, while possible, it may be quite difficult for a participant to establish that the provider represented that it would not enforce a rule in future or against any particular person.

If a representation can be shown, the participant must also be able to show that he or she reasonably relied on that representation. While showing reliance may be straightforward – in that the participant would not have engaged in conduct that technically broke the rules if he or she did not believe that the rule would not be enforced – showing that the reliance was reasonable may be more difficult. In Galaxidis v Galaxidis, Tobias JA (with whom the other members of the NSW Court of Appeal agreed) held that

the representation is sufficiently clear and unambiguous if it is reasonable for the representee to have interpreted the representation in a particular way being a meaning which it is clearly capable of bearing and upon which it is reasonable for the representee to rely.7)

Brennan J, in Walton Stores v Maher, held that it was “essential to the existence of an equity created by estoppel that the party who induces the adoption of the assumption or expectation knows or intends that the party who adopts it will act or abstain from acting in reliance on the assumption or expectation”.8) Again, whether it is reasonable for a participant to rely on a representation that the provider will not enforce a strict contractual right will depend on the circumstances.

It may be difficult to establish in many cases, but it would certainly be open for a judge to find that a platform owner is estopped from terminating a particular participant's access to the virtual community where it takes no action against others who have habitually broken the same rule. If an estoppel can be established, it is important to consider that estoppel does require that that the representation or promise be fulfilled, but instead only provides a remedy for the detriment suffered as a result of reliance upon the representation.9) For this reason, an estoppel, unlike an election, is not permanent – if the detriment to the relying party can be cured, the provider will once again be entitled to exercise its rights. For practical purposes, this means that given sufficient warning, a provider may be able to begin to enforce rules which it had largely ignored in the past.

There is a lot of flexibility in the doctrine of estoppel, and a significant normative question arises as to whether it ought to apply in any given case.10) In the most extreme cases, it will almost certainly be effective as a brake on the ability of platform owners to rely on strict contractual rights which it has encouraged participants to believe would not be enforced. Its application in other circumstances, however, will depend in a large part on the discretion of the court as to how the alleged representation is interpreted and how reasonable the court believes the reliance on that representation to be. Like the other ways in which strict contractual rights can be read down, I believe that these considerations will depend particularly on the importance which the court attaches to the interests of the participant at issue.

See cases:Commonwealth v Verwayen (1990) 170 CLR 394; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.
See Legione v Hateley (1982) 152 CLR 406, 438-40 (Mason J and Deane J); 453-455 (Brennan J), 422 (Gibbs CJ and Murphy J, dissenting).
See Commonwealth v Clark [1994] 2 VR 333, 362.
See, for example, Olga Investments Pty Ltd v Citipower Ltd [1998] 3 VR 485, 499 , where the Victorian Supreme Court of Appeal (Charles JA, Ormiston JA and Callaway JA agreeing) held that the failure to issue a bill for electricity supplied for a twelve year period did not give rise to a representation that no bills would be issued.
Low v Bouverie [1891] 3 Ch 82, 106.
Canada & Dominion Sugar Co Ltd v Canadian National (West Indies) Steamships Ltd [1947] AC 46, 55.
Galaxidis v Galaxidis [2004] NSWCA 111, [55] (Tobias JA, Giles JA and Hodgson JA agreeing).
Walton Stores (Interstate) Ltd v Maher (1987) 164 CLR 387, 423.
Commonwealth v Verwayen (1990) 170 CLR 394.
Robertson A, “Reasonable Reliance in Estoppel by Conduct” (2000) 23 UNSWLJ 87; see also M Pratt, “Defeating Reasonable Reliance” (2000) 18 University of Tasmania Law Review 181.

Judge Ung-gi Yoon on RMT as goodwill trading

I recently had the good fortune to review a paper by Judge Ung-gi Yoon on RMT.

You can find the paper at SSRN: Real Money Trading in MMORPG items from a Legal and Policy Perspective.

I really enjoyed this paper, and recommend that you take a look if you’re interested in the topic. The analogy to goodwill is really interesting, and there are some great critical insights about the choices that game developers make, which inevitably encourage RMT, and the benefits they receive from RMT. These recognitions set the stage for an interesting debate about the extent to which developers and publishers can then purport to rely on contractual terms which prohibit RMT.

In this article, Judge Ung-gi Yoon considers the legal status of Real Money Trading (RMT) in Massively Multiplayer Online Role-Playing Games (MMORPGs). Judge Yoon notes that in-game items are virtually treated as personal property, but are only legally recognised as information goods. The right of ownership of these goods belongs to the developers, and players have a right to use, as conferred by the terms of service. In contrast, players own the rights in content they create themselves within the game. Transfers of in-game items, as a manifestation of real human will, can accordingly be seen to be transfers intended to have real legal effect in the form of a transfer of a portion of the right to use over the game service held by a user in the real world.

Judge Yoon argues that declarations of intent by players within a game environment cannot be unilaterally ignored by the legal system, and must instead be individually judged to determine whether they were intended to be legally binding. In this conception, internal rules which are consistent with game play should be given precedence over external real-world rules. However, real-world rules should be applied in cases where the intent is unrelated to the game’s proper context, for example in cases of in-game defamation.

Through this framework, Judge Yoon considers RMT, noting that most discussions of RMT in South Korea and elsewhere characterise the objects of real-world transactions as the in-game items. This characterisation, however, is flawed because in-game items are not capable of being treated as personal property. An alternate suggestion is that the transaction is characterised as a sale of a right to use, but this characterisation fails to adequately explain the disparity in values of right to use versus the fees charged by the MMORPG operators, and presents a large liability problem for the operators with regards to the valuable rights to use of their users.

Judge Yoon argues that neither of these models are satisfactory – the object of RMT is neither the item itself nor the right to use the item, but rather something entirely distinct. Instead, the objects of RMT are better recognised as ‘play values’, and the monetary compensation is a ‘gwonri-geum’ (lease goodwill) payment. This analysis makes an analogy between the transfer of goodwill and RMT, where the transfer is not a purchase of an item or the right to use, but rather a payment for the effort the other party has invested in obtaining the item. On this analysis, RMT does not concern the operator any more than sales of goodwill concern the lessor of a business property.

It follows that if RMT is not the transfer of an item or the right to use an item, but rather a transfer of goodwill, then it must fall within the domain of private autonomy of players, and developers and publishers have no legal standing to interfere with the transfer. However, because the value in RMT transactions is the goodwill associated with the item and not the item itself, RMT does not impose liability on the publishers for protection of the items. A publisher’s liability will be limited to the original value of the item (related to the subscription fee), and not for the amounts in which associated goodwill is traded.

Judge Yoon argues that developers and publishers need to face the reality that market pressures have transformed play into real economic activity, a transformation which resulted from the game design choices made by the developers.

The fact that goodwill transfers are outside the scope of regulation by the publisher does not mean that the publisher has no right to regulate related activities. For example, prohibiting in-game advertising of RMT may be prohibited because it interferes with gameplay. Judge Yoon suggests that publishers ought to disclaim any involvement and liability with regard to monetary transactions between players, but reserve the right to regulate the in-game behaviour of players. Judge Yoon argues further that there is no real legal basis for justifying the imposition of restrictions on RMT transactions, and such bans are unfair insofar as they heavily infringe upon players’ rights to the intangible value they have created.

Judge Yoon points out that many publishers and operators do not care to correct structural issues in their games which lead to RMT, as RMT indirectly increases their revenue. However, by including an unenforceable ban on RMT in their terms of service which is of questionable validity, publishers are hypocritically covering themselves in cases where the negative social effects of RMT, particularly on the welfare of youth, are brought into question. Judge Yoon concludes that doing away with bans on RMT can alleviate some of the problems which have been recognised in South Korea, by respecting the personal autonomy of players, allowing trade to occur in a more stable environment and making it easier to deal with fraudulent traders.

Margaret Jane Radin’s theory of partial inalienability as a model for evaluating interests in …

I am in the process of selecting a theoretical model on which to base my normative analysis. Below, I explain my preliminary attraction to Radin's construction of partial inalienability and the pragmatic method of resolving tensions between conflicting interests. As always, comments are greatly appreciated.

Thesis: in choosing whether to apply any law in a virtual context, we ought sometimes to put aside a general law rule in favour of internal norms.

The project of this research is to provide a mechanism to assist in identifying conflicting and hidden interests in virtual communities, and to develop a framework for reconciling those interests in law. The first goal is to be achieved through a critical examination of the expectations of actors in virtual communities – the participants, the platform provider, the broader public, and the state. The second goal, building a normative framework, will depend upon a solid pragmatic reconstruction of the conflicting interests.

There is no simple mechanical way for states to make a decision about which interests should prevail in any particular circumstance. These decisions are always political decisions. The aim of this model, then, is to provide a framework to make these decisions in full awareness of their consequences. The normative basis that will be used for preferring one interest over any other will be the overriding presumption that we ought to choose the path which most promotes “our best current understanding of the concept of human flourishing.”1)

After we have identified the internal norms of a virtual community, the biggest question is whether to uphold those norms which conflict with general law principles. In determining this question, we must consider which of these principles are modifiable and which are not – which basic entitlements are alienable and which entitlements may not be transferred. This analysis, however, leads us to a false dichotomy – it is more appropriate to consider these principles along a spectrum of alienability, where some entitlements may be given away or sold in certain circumstances but not others. Margaret Jane Radin's theory of partial market-inalienability provides a model of this spectrum, and provides some justifications for preferring a degree of alienability or inalienability based upon the interests of personhood.

A market-based analysis is appropriate because it addresses the concerns which are now emerging with large-scale virtual communities that are created as commercial ventures but which enable many aspects of personal life – including, but not limited to, personal relationships, personal identification, personal property, speech and communication. A key concern in these cases is what impact the commodification of these interests has on the personhood of the participants. A framework of partial inalienability provides the means for evaluating these tensions and partially protecting some personality interests from commodification, while recognising that the market is currently best positioned to provide the virtual communities upon which those personality interests depend.

The spectrum of market-alienability ranges from complete market-inalienability to complete commodification. Some examples of market-inalienable interests include freedom, body parts, and children – one is not allowed to sell any of these in any circumstances, although they are not strictly inalienable in that they can each be given away. On the other hand, goods which are wholly commodified are, in the eyes of the law, completely substitutable for one another and for their monetary value. In between these two extremes, we place limits on the alienation of interests which are only partly inalienable. For instance, labour is only partially commodified, as we place limits on the minimum wage and the ability of employers to terminate employment contracts.2) In another sense, we place limits on the mechanics of transfers – imposing, for example, a requirement that transfers of real property be in writing.

In addition, there are interests which are fully inalienable – for example, the law will not uphold a person's right to consent to grievous bodily harm or murder, whether for a fee or not (although, in the context of euthanasia, this becomes a partial inalienability, where we can envisage scenarios where it may be permitted to consent to what would otherwise be an unlawful killing).

The crucial insight, for our purposes, is that a spectrum of alienability allows us to place limits on the manner in which certain entitlements may be given away or sold which are appropriate to the circumstances. We have certain limits built in to the law as it currently stands – conceptions of consent, consideration, acquiescence, waiver, reasonableness – which act to restrain the alienation of entitlements. A model with a spectrum of inalienability allows us to know when these limiting concepts should be interpreted strictly, and when we should deal with them more summarily. For example, this means that when we are considering whether a participant has consented to potential harassment or assault, we may hold a much higher standard of consent than when we are considering whether a person has consented to the 'theft' of a piece of virtual property within the rules of a game. This model shows that more value we place on the importance of insulating the interest from commodification, the greater the limits we can justifiably place upon the alienation of that interest. In accordance with this model, the riskier we determine a transfer is, the more caution we should exercise before finding that the transfer has, in fact, occurred.

The model also provides a scheme for identifying where the protections given by existing law do not suffice. Various concepts of consent can be used to provide adequate limits in many civil matters – disputes centred in contract, tort, and many statutory entitlements can be resolved by determining whether the interest has been transferred according to the norms of the virtual community. Greater difficulty arises where we determine that a certain interest should be protected, to some extent, from commodification, but there is no direct mechanism in the existing law to effect that protection. For example, we may agree on the partial inalienability of interests of free speech or due process, but while these rights may be protected to some extent against the state, they are not inalienable against private actors. If we determine that our conception of human flourishing requires some recognition of constitutional rights against private actors, the model we develop can be used to identify where these interests are not sufficiently protected from commodification. Once identified, a gap between our conception of inalienability and the protection we afford the interest will justify a change in the law.

This model does not aim provide a comprehensive empirical framework; the evaluation of the degree to which any given interest should be protected from commodification is not one which can be arrived at in isolation from a broader social discourse. Rather, the goal of this project is to provide the tools to enable this social discourse. The resolution of conflicting interests must be a continuing process, a pragmatic evaluation of what is possible and what is the best method to proceed given the current state of society. By exposing hidden interests and proposing a method of resolution which is dependent on our social goals, this project aims to provide a conceptualisation of how we can progress, rather than an imperative on how we must.

Radin, Market Inalienability, 1851
Radin, Market Inalienability, 1919

Liability rules and property rules as a framework to view virtual world RMT

Calabresi and Melamed proposed a three-way taxonomy of entitlements – inalienable entitlements, which cannot be traded between willing sellers and willing purchasers; property rules, which are enforceable by injunction to prevent non-consensual takings; and liability rules, where objectively measured damages are the only remedy, leaving open the possibility and expectation that the benefit will be taken non-consensually by a person who values it more than the objective measure.

So, does any of this help us frame disputes about entitlements in virtual worlds?

slot machine - cobalt123

Image by cobalt123, CC NC-BY-SA

Imagine we have to determine what we should do about virtual property. Calabresi and Melamed tell us that there are five ways we can allocate the entitlement. Leaving aside an outright prohibition on the transfer of virtual property, we could grant a property right to the publisher, which would mean that the participant only acquires any interest in virtual property through a negotiated agreement with the publisher – i.e., the ToS. This is certainly how publishers currently see themselves (or would like to be seen). While it may be appropriate for Bartle-World, this model ceases to be appropriate where the interests of the player base are not so homogenous and the actions of the publisher give rise to expectations of legitimate participant interests in virtual property (see Bragg v Linden).

Alternatively, we could grant a property entitlement to the participant, which would prevent publishers from confiscating or devaluing virtual property. This is unlikely to be a workable system, because the publisher will not be able to make any changes to the platform without obtaining consent from each and every participant – although consent could be given in the EULA, which, assuming low transaction costs, would give us much the same situation as that above – in either scenario, participants or platform owners would pay for the rights to deal with the property as they want to. The problem here really becomes one of achieving this bargain with the entire population in advance, and then not being able to modify the bargain without the consent of all involved – a process which is vulnerable to large negotiation costs and strategic behaviour.

The third method would be to grant a liability entitlement to virtual property to the participant. The participant would be entitled to deal with their property as they see fit, but the publisher would be able to make changes to the platform as required, provided they compensate the participants for their loss. For example, this seems like a workable solution to the problem of 'property' and 'currency' in Second Life – where participants certainly feel that they are entitled to the value of the money they convert to Linden Dollars, and the items they then buy, but Linden Labs needs the ability to modify its rules (eg banning casinos) or enforce its rules (eg Bragg). In this situation, such a change to the value of a participant's virtual holdings may be compensable but not prohibited.

Alternatively, we could grant an entitlement to virtual property to the publisher, but support this only with a liability rule. This would mean, for example, that the publisher would not be able to prevent RMT – the participant could deal with the property he or she possesses at will, but would be under an obligation to compensate the publisher at an objectively determined rate. Would this be an attractive solution? In an appropriate situation it may be desirable to allow a participant to commodify their virtual property, to sell it on the open market, and then compensate the publisher for its loss. This approach prevents the platform owner from unilaterally prohibiting RMT, but also prevents the participant from appropriating the whole value of the virtual property by transferring it and retaining the proceeds. This may be useful in recognising that the value of virtual property is not created or determined by either party alone. In this scenario, the obligation to pay a share of the value to the platform owner without being prevented from dealing with the property may be attractive enough to all parties.

Are these models helpful? I think they provide an interesting framework for examining the allocation of entitlements and the protection those entitlements are given. In reality, the entitlements above need to be much more atomic, and the models much more complicated and mixed than the brief blurb I have provided. For example, in any one platform, the right to sell virtual property to a third party for real world cash may be a liability rule which belongs to the platform owner, the right not to have one's account terminated and virtual property confiscated may be a property entitlement of the participant, and the right not to have one's property interfered with by rule or design changes may be a liability entitlement of the participant. Our choice as to whom entitlements are initially allocated and how those entitlements will be protected still depends on our policy goals.