All Your Sale Are Belong to Us - Mitigating IP and Payments Risk in In-Game Economies

As in-game economies evolve, the complexity surrounding virtual goods and services, content creation, and payment structures deepens. As part of this ongoing series on in-game economies, this installment explores issues around in-game content created by users rather than by the game developer (often referred to as “user-generated content” or UGC), as well as the financial regulatory issues that arise when structuring in-game marketplaces through which UGC is bought and sold. From managing IP risks to navigating financial services regulations, game developers must implement policies and practices concerning UGC that balance fostering user engagement with ensuring compliance.

A. Creation, Ownership, and Use of UGC

In Part I, we discussed various issues relating to in-game virtual goods, with a focus on in-game virtual goods created by the game developer and provided to users through a license or sale transaction. We noted in Part I that there is an additional layer of complexity where the user contributes to the creation of the virtual goods or where the virtual goods embody content uploaded by the user, such as in various types of building games and virtual worlds. This democratization of content creation, while fostering innovation and diversity in virtual goods and services, introduces additional legal risks for both game developers and the users that create the virtual goods.

• Ownership of UGC. In Part I, we explained that game developers typically retain ownership of the IP rights in virtual goods and grant a license to users for in-game use, notwithstanding that users may be under the impression that they own the virtual goods similarly to how they own items of personal property in the real world. (As an aside, we note that a new California law, AB 2426, requires sellers of digital goods to make clear to purchasers that they are obtaining a license rather than outright ownership.) But the question of ownership is more nuanced when it comes to UGC. UGC may consist of content uploaded by the user, content created by the user using in-game tools and resources, or a combination of both. The ToS or EULA for the game should specify how ownership of IP rights in UGC are allocated. Users will typically retain ownership of the content that they upload and game developers will retain ownership of any in-game tools and resources used to create UGC, but the correct allocation of IP rights for UGC that users create in-game may vary depending on the circumstances. In most cases, it will make sense for the game developer to own UGC that can only be used within the relevant game by the user that created the UGC, as allowing the user to own such UGC would serve little purpose. On the other hand, where a user can export UGC to other platforms, or sell UGC to other players in-game or through third-party marketplaces, giving users some degree of ownership in their creations may be appropriate. There can also be hybrid arrangements where the game developer retains ownership of the relevant IP rights in UGC but grants the user who created the UGC broader license rights or the right to share in revenue generated by the UGC. In any event, game developers should consider the best approach for their particular game carefully to ensure that the ToS or EULA for the game contains appropriate assignments, licenses, retention of rights provisions, and other IP-related terms for UGC.
• Third-Party Risks. Users may, knowingly or unknowingly, upload or create UGC that could give rise to third-party claims against the game developer or result in reputational damage. For example, UGC may infringe third-party copyrights or trademarks, contain defamatory or fraudulent statements, constitute harassment or abuse, or disclose confidential, personal, or private information. To mitigate these risks, game developers should ensure that the ToS or EULA for the game contains appropriate representations, warranties, indemnification, and other risk allocation terms with respect to UGC; take necessary steps to take advantage of available statutory safe harbors (such as complying with the notice and takedown provisions under the Digital Millenium Copyright Act); establish clear content guidelines prohibiting infringing, illegal, or otherwise problematic UGC; and implement automated content review processes to screen for UGC that violates such guidelines. Equally important is educating users on the significance of creating original content and respecting third-party rights. This dual strategy not only helps protect game developers and users from costly litigation but also fosters a community of innovation and creativity.
• Quality Standards. In addition to mitigating legal risks as described above, content review processes are vital in maintaining a high-quality in-game economy. With varying levels of skill and creativity, users can produce virtual goods that may enhance or, conversely, detract from the overall user experience. Poorly designed or malfunctioning virtual goods can lead to negative user experiences, refund requests, and damage to the platform’s reputation. Accordingly, game developers should implement a moderation system that thoroughly vets content before it becomes available for sale or use. This may include objective quality standards, such as ensuring virtual goods and services function properly and align with the game’s aesthetic or technical specifications. Additionally, game developers should provide feedback mechanisms that allow users to report faulty content, enabling ongoing monitoring and enforcement of quality standards.
• AI Use. Another emerging issue is the growing use of artificial intelligence (AI) in content creation, which adds additional legal complexities. AI-generated content raises challenging questions around authorship and IP ownership, as the lines between human and machine creation blur. Furthermore, AI tools could inadvertently generate content that mimics existing copyrighted works or fails to meet applicable quality standards. While the legal issues related to AI are worth noting, a deep dive into these complexities is beyond the scope of this article.
• International Use. Finally, compliance with local and international laws becomes a challenge when users who create UGC hail from different jurisdictions, each with its own set of consumer protection laws, digital content regulations, and tax obligations. To manage this complexity, game developers should establish a comprehensive legal compliance framework that takes into account the jurisdictions in which the game operates and require that users agree to compliance terms that align with these obligations.

While it injects diversity and innovation into in-game economies and offers additional revenue stream opportunities, UGC also introduces a range of legal risks to the game developers. By adopting robust strategies, including legal education, quality control, and enforcement of the ToS or EULA, game developers can effectively safeguard their platforms while encouraging a compliant and creative environment.

B. Structuring Payments and Marketplace Models in the In-Game Economy

The terms and use cases related to in-game currencies can introduce a host of regulatory issues and these issues can become more complex where the purchase and sale of virtual goods and services involve third-party content creators, including UGC. Understanding the flow of funds between the parties, both in virtual and fiat currency, and the structure of the transactions is crucial to determining the regulatory impact of a given model.

Where a game developer is the seller of virtual goods and services, this represents a two-party (i.e., seller and buyer) transaction that is unlikely to be subject to financial regulation. However, as discussed in Part 1, companies that facilitate payments between third parties may be regulated under federal and state law as “money transmitters” if they accept funds or value from one party for the purpose of transferring the funds or value to another party. This would be the case regardless of whether the funds are in fiat currency or a “convertible virtual currency” (CVC) that has an equivalent value in fiat currency or acts as a substitute for fiat currency. Among other issues, understanding which party is the “seller” is an important aspect of determining the financial regulatory obligations of game developers.

Below, we discuss examples of in-game economy and payment models and the potential legal implications of each. The following models vary in complexity and the associated benefits and risks differ for a game developer from an operational and regulatory perspective.

• CVC Issuer. In this model, the game developer issues digital currency that can be purchased for fiat currency, exchanged among users, and redeemed for fiat currency. The game developer creates a virtual goods marketplace and facilitates purchases and sales between users and content creators. When a user makes a purchase from a content creator, the game developer transfers fiat or digital currency from the user’s wallet to the content creator’s wallet and permits the content creator to withdraw fiat or redeem digital currency to an external deposit account. In this funds flow, the game developer is likely engaged in money transmission by (i) issuing and redeeming CVC; (ii) providing fiat and CVC digital wallets; and/or (iii) transferring fiat or CVC between users, including content creators. Moreover, there is the potential for the Electronic Funds Transfer Act and Regulation E to apply to wallets that can be used to purchase virtual items from multiple players or for P2P.
• Seller-of-Record. Instead of the content creator selling UGC directly to the user, the game developer acts as the seller for all UGC transactions under the terms of the platform. The game developer may separately contract with the content creator to provide a revenue share, rewards program, or other compensation model. Under this model, there may be a reasonable argument that the game developer is not engaged in money transmission because the user’s purchase from the game developer and the game developer’s payment to the content creator represent two separate two-party transactions—not a single three-party money transmission transaction. The strength of this argument depends on the underlying facts of the arrangement, including the extent to which the two transactions are truly distinct and whether the game developer is making a bona fide sale to the user. While it may mitigate money transmission risk, this model may have other impacts on the game developer’s business, including accounting and tax implications and taking on liability for the UGC as the seller.
• Third-Party Payment Processor (TPPP). Here the game developer engages a TPPP that is authorized to facilitate payments, including money transmitter authorization. The TPPP issues any digital currency to be associated with the platform and any digital wallets and would facilitate any transfers of fiat or digital currency between users and content creators. Here, the game developer does not receive funds other than its own fee as part of the transactions. If the TPPP performs all regulated activities and the game developer is outside the funds flow, the game developer should not be engaged in money transmission. However, users and content creators will need to execute the TPPP’s terms, the game developer will need to share revenue with the TPPP, and the overall in-game economy will rely on the TPPP’s continued services.
• Agent Model. In the U.S., a “payment processor” or “agent of payee” (AOP) exemption is available under federal law and the laws of roughly half of U.S. states. Under federal law, a company is exempt from the definition of a money transmitter if it: (i) facilitates the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself); (ii) operates through clearance and settlement systems that admit only regulated financial institutions (e.g., banks); and (iii) provides the service pursuant to a formal agreement with the seller that provided the goods or services and receives the funds. Under this model, game developers would be able to preserve true marketplace interactions by acting as the agent of each content creator and facilitating the sale of the content creator’s game or digital content to users under appropriate terms of service. However, AOP exemptions are not available in all U.S. states and this exemption may not cover fiat-funded or digital currency-funded digital wallet activities.

Each of these marketplace models presents different benefits and risks, depending on the specific needs of the in-game economy and the regulatory framework game developers seek to comply with. By carefully selecting the right model and implementing proper safeguards, game developers can navigate the complex regulatory landscape of virtual goods sales while enabling dynamic and user-driven in-game economies.

C. Conclusion

As the gaming industry continues to expand its digital frontiers, in-game economies represent an exciting yet challenging terrain for Game Developers and content creators. By adopting thoughtful legal frameworks, enforcing robust ToS or EULA provisions, and selecting appropriate payment models, Game Developers can foster innovation, including by content creators, while ensuring compliance in an ever-evolving legal landscape.

The Interactive + Digital Media Group at MoFo is a multidisciplinary team practicing at the intersection of media and technology, with transactional, regulatory, and litigation capabilities in focus areas including video games, social media, augmented and virtual reality, digital media distribution, streaming platforms, user-generated content, and the metaverse. Please reach out to any of the authors if you have questions or would like more information.