The 3-D virtual world of Second Life got a dose of legal reality as a federal judge ruled that its creator could not privately arbitrate a first-of-its-kind property rights dispute with a Pennsylvania attorney.

The terms of service (TOS) which users accept to participate in Second Life provide for binding arbitration of “any dispute or claim arising out of or in connection with this Agreement, or the performance, breach or termination thereof.”

Linden Labs, the San Francisco-based creator of Second Life, tried to enforce the clause against Marc S. Bragg, who sued the company last year for illegally seizing his “virtual real estate.” The West Chester, Pa., attorney claims that he had acquired full ownership rights to parcels of Second Life property.

But U.S. District Judge Eduardo C. Robreno denied Linden's motion to compel arbitration in a strongly-worded opinion that should make other virtual world operators take a close look at their terms of service.

“[T]he arbitration clause is not designed to provide Second Life participants an effective means of resolving disputes with Linden,” he said. “Rather, it is a one-sided means which tilts unfairly, in almost all situations, in Linden’s favor.”

Robreno also directed some pointed comments at Linden Labs founder Philip Rosedale. In holding that Rosedale's nationwide and “interactive” promotional efforts supported jurisdiction in Pennsylvania, he described him as

the hawker sitting outside Second Life’s circus tent, singing the marvels of what was contained inside to entice customers to enter.

One of those marvels was the ability of Second Life users to engage in virtual commerce conducted in “linden” dollars, which can be converted into U.S. dollars at online currency exchanges. Taking advantage of that opportunity, Bragg accumulated about U.S. $2,000 worth of virtual land, goods and currency.

But in May 2006, Linden canceled Bragg's account, claiming he had used an “exploit” in the game to hold an unauthorized auction of a property that was not yet for sale. Bragg alleges in his complaint that Linden is liable for conversion.

Robreno found the arbitration clause “both procedurally and substantively unconscionable” and that Linden “appears to be attempting to insulate itself contractually from any meaningful challenge to its alleged practices.”

According to one game designer, the decision has “some serious implications for how virtual worlds do business ... [T]he court is saying that some pretty common elements of TOS agreements may be considered unfair by law.”

By Matthew Heller
6/6/07