How Safe Is Your Virtual Space?

How Safe is Your Virtual Space?

Eminent Domain in Virtual Worlds

By: Daniel Levy

• The Story So Far

It’s approximately 1:00am eastern time, and Aaron Montdale is taking a stroll through his favorite neighborhood; well, at least it used to be his favorite neighborhood. A once bustling urban area recently turned to decay. Where family friendly retail stores and entertainment areas once stood lie houses of gambling, sex shops, and other areas of ill repute. The streets are swarming with low lives and hustlers. As Aaron Montdale further explores the area, he slowly shakes his head in disgust, remembering what this part of New Worth Island looked like during better times.

Sound like any city you know? Well, the above paragraph accurately describes countless decaying urban areas throughout the world, but New Worth Island is no city on earth. Rather, New Worth Island and Aaron Montdale “exist” only in a virtual world, and quite frankly, the description above not only describes decaying urban areas in the physical world, but also accurately describes many decaying areas in virtual worlds.

In the physical world, government bodies utilize various tools in order to turn decaying areas around. One of the most controversial tools in a municipality’s arsenal is the use of eminent domain; the forced taking of private property in exchange for fair compensation.

About two years ago, the Supreme Court decided the controversial case of Kelo v. City of New London[1], which directly addressed the use of eminent domain as part of urban renewal projects.

This note discusses several important issues. First, we explore whether it is even appropriate to analyze a private interest within a virtual world as “property” within the meaning of the Takings Clause[2]. Second, we propose some theories as to what qualifies as “just compensation” for the taking of virtual property. Third, we ask whether seizure of virtual property appropriately falls within the “public use” requirement of the Takings Clause. Lastly, we address whether the government can utilize a compulsory licensing scheme in order to achieve an eminent domain-like result.

Please note that there are several issues that this note ignores. This note does not discuss whether virtual property fits within modern notions of personal property. This is due to the fact that, as discussed below, property interests are very broadly construed under the Taking Clause. This note does not address specific state laws regarding eminent domain, instead assuming that the jurisdiction in question utilizes the Takings Clause to the maximum allowable limits of the Constitution. Further, this note does not discuss whether or not eminent domain is or is not a good idea for virtual worlds, as this is beyond the scope of the note.

• Eminent Domain? This Sounds Like Legal Mumbo Jumbo To Me!

Eminent domain is a concept directly addressed in our Nation’s Constitution, which states that “…private property [shall not] be taken for public use, without just compensation[3].” However, the roots of eminent domain spread much farther than the Constitution. Justice Heher artfully characterized eminent domain as “… a right founded in the law of necessity which is inherent in sovereignty and essential to the existence of all government, even in its most primitive forms, a right exercised by the Romans, whence came the term "eminent domain," in the construction of roads, aqueducts and similar public works[4].” Indeed, the power of eminent domain is essential to the life of the State, and requires no notice or opportunity to be heard[5].

The power of eminent domain is not proscribed by the Constitution, but rather the State and Federal Constitutions place certain limits on the power of eminent domain; specifically, the taking must be justly compensated[6]. In fact, the Takings Clause basically allows the government to appropriate as it pleases, so long as it pays the charge[7].

• Can “Stuff” in a Virtual World be Property? –Or– Hands Off My Virtual Stuff!

In our introductory hypothetical, the property interests in question were land rights in a virtual city center. Chances are, you are dumbfounded that pictures and animations within some sort of virtual reality could even be considered actual property. On the other hand, you may be particularly tech savvy and familiar with virtual worlds, in which case you probably consider a virtual store front just as deserving of the “property” characterization as any real world store front. However, we do not need to address this issue here. Rather, we need only determine whether our virtual city center is considered “property” within the meaning of the Constitution. As we pointed out above, if it is not “property” within the meaning of the Takings Clause, it does not fall within the constraints of our Nation’s notion of eminent domain[8].

As far as the Constitution is concerned, the term “property” encompasses any sort of vested right, including vested contractual rights[9]. Of course, not every restriction and regulations regarding private use is considered a taking. The question of whether a taking has occurred “requires an examination of whether the restriction on private property forces some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole[10].” In other words, if a person “owns” some right, of which the government dispossess the owner, that right is considered “property” and subject to Constitutional restrictions when the government should, in all fairness, compensate the owner for the value of the right.

This concept is easy to grasp if you are talking about a piece of real estate, for example. If John Doe owns a plot of land, and the government seizes the land, the government is obligated under the Constitution to justly compensate Mr. Doe. However, do things change much if the “land” in question exists only in a virtual world?

On the surface, it seems that this area is ripe for debate; however, the issue is largely already settled. Since the concepts of eminent domain address vested rights, not physical possession of tangible property, the government must still compensate Mr. Doe even if the seized land only exists in a virtual world. This is due to the fact that Mr. Doe owns a vested contractual right to possess the virtual real estate. Seizing the rights from a contract, on its face, is enough to invoke the restrictions of the Takings Clause, as the Supreme Court has affirmed in cases like Armstrong v. United States[11] (seizing property and dispossessing a party of the contractual rights to a lien on the property), United States v. General Motors Corp.[12] (dispossessing tenants of the rights to a lease), etc.

• How Do We Value “Virtual” Real Estate?

The Fifth Amendment requires that the United States pay "just compensation" – normally measured by fair market value – whenever it takes private property for public use[13]. Fair market value is generally defined as the price that a willing buyer would pay in cash to a willing seller[14]. Since the government seizes the property itself and the owner must vacate, the goal of quantifying the amount that the owner receives is to determine what the fair market value is of the bundle of rights that went along with the property[15].

Courts have traditionally used three methods of determining fair market value of property: (1) market data approach based on comparable sales; (2) income-capitalization approach; and (3) reproduction cost, less depreciation[16]. These methods are defined in the Dictionary of Real Estate Appraisal[17] as follows:

Comparable Sales: The preferred method of determining fair market value, determined by comparing the property to similar properties that have been sold recently and then applying units of comparison to adjust the sale price.

Income capitalization: Used for determining the fair market value of an income-producing property. This method calculates the present value of the future revenues for the useful life of the business, based on past performance.

Reproduction costs less depreciation: Estimates the current cost to construct a reproduction of (or replacement for) the existing property, deducting depreciation from the total cost, and adding the estimated land value.

When deciding which of these valuation methods the court will utilize, the court is charged with justly making the owner whole, yet the owner is entitled to no more[18]. To this end, it seems that the courts do not necessarily adopt the valuation method that amounts to the least or the most amount of money, but rather the valuation method that is the most just under the circumstances without obligating the government to overpay, resulting in an unjustified windfall for the owner.

In our hypothetical, a history of comparable sales within our virtual city center is strong evidence of the fair market value for the virtual real estate. If this were the case, then a court likely will have an easy time valuing the property, since courts generally will not allow for a complicated inquiry into the fair market value when the market value in readily discernable[19]. However, the market within the virtual city center may not be liquid. In fact, a single party may have purchased the whole area, developed it, and now leases out or sells tiny sections of the property while still maintaining control over the whole area.

In such a case, one may argue that the property is an income producing property and therefore subject to the income capitalization approach. Although this has never been litigated, it seems unlikely that a court will apply this methodology, since courts often restrict this methodology to cases where income is produced from the property itself (i.e. when the land is operated as a going concern, like a mine or stone quarry) rather than through leases[20].

In sum, a court will likely make an earnest effort to find the fair market value through evidence of comparable sales, and if necessary, look upon related evidence of fair valuation.

• Virtual Property and the “Public Use” Requirement

Notwithstanding the above issues, according to the Takings Clause the condemnation must satisfy the “public purpose” requirement. Even if fair compensation is paid, the government cannot simply take property from one party in order to confer a purely private benefit upon another private party[21]. Rather, the Takings Clause specifically proscribes that the taking must be for a public use.

At first blush, it seems that the words “public use” within the Takings Clause function as an onerous restraint on the government; however, when the Supreme Court started applying the Takings Clause to the states pursuant to the Fourteenth Amendment, the Court long ago abolished a strict requirement that the taking be for general public use, but rather that the taking simply satisfy the requirement that the taking was for a larger “public purpose[22].” Ever since the late 1800’s, the Supreme Court has consistently rejected the strict public use test[23].

The contemporary version of the test is almost surprisingly broad, allowing the government to seize property interests for almost any purpose that is rationally related to any conceivable public purpose[24]. Since the government’s purpose only needs to be rationally related to the public interest, the Supreme Court has grouped eminent domain powers with the rest of any government’s general police powers, allowing the government to seize property that is even conceivably within the public interest[25]. In fact, the courts generally will not even entertain the notion that the seizure was not in the public interest, “unless the use be palpably without reasonable foundation.[26]”

Given the above stated rule, it seems like a government body will have no problem seizing virtual real estate, unless the seizure is so clearly unreasonable and outside the public interest that a court would conclude that the seizure is unconstitutional. In other words, a court’s analysis pertaining to our opening hypothetical would probably go something like this: The legislature identifies the problems with the virtual city center and decides to undertake a broad redevelopment initiative; the government purchases what it can, and seizes whatever other real estate is left through eminent domain; the owners of the property sue the government and challenge the eminent domain validity; the court recognizes that the government served a public purpose in this case; the court does not second guess the government’s determinations regarding the redevelopment plan, declining to require the government to identify within a reasonable certainty whether the redevelopment plan would actually benefit the public.

Exactly how accurate this prediction is cannot be said for certain. However, this is exactly how the Supreme Court reasoned in the controversial case of Kelo v. City of New London[27] less than two years before the time of this writing. In Kelo, the city essentially seized a large portion of city space, adopting an urban redevelopment plan, and gave the land to certain private parties, who in turn agreed to construct hotels, stores, offices, etc. The owners argued that seizing their property and transferring it to private developers (who stood to make a hefty profit) could not possibly be a “public purpose”, yet the Supreme Court answered the owners by simply stating that, “promoting economic development is a traditional and long accepted function of government. There is, moreover, no principled way of distinguishing economic development from the other public purposes that the United States Supreme Court has recognized.[28]”

• Takings? Who Needs ‘Em!

There is one further angle to this inquiry that deserves further discussion. Previously, we tackled this topic from the point of view that the property interest in question is similar to traditional property interests that are from time to time seized by the government. However, let us not forget that the virtual city center from our hypothetical concerns a bundle of rights that are not transferred via deed, but rather granted in licenses to use computer facilities, audio/visual works, trademarks, etc. In two types of situations, the government or the courts may compel property owners to license their rights.

When a certain behavior impacts a federal body of law, congress from time to time compels the holder of rights to license those rights provided that certain criteria are met. This is familiar regarding copyrights[29], certification marks[30], and in rare occasions, patents[31]. Our opening hypothetical is a bit similar to these areas of law in the sense that users of virtual world services are granted licenses to use the services within certain constraints, just like parties are granted licenses to use copyrights, certification marks, and patents. Theoretically, Congress could establish a legal scheme that obligates virtual world operators to license their services to certain parties, in specific situations, for a certain price. This is almost a “middle path” approach, allowing government-endorsed parties to redevelop blighted virtual city centers at lower transaction costs and supplying administrative support for the transaction[32].

A second situation where rights holders may be subject to a compulsory license is when the courts identify problems, of which the public interest demands resolution, and the courts determine that a compulsory license is the best remedy[33]. An interesting contemporary example of judicially created compulsory licenses is the case of N.Y. Times Co. v. Tasini[34]. In Tasini, the authors of certain N.Y. Times articles attempted to stop the Times from publishing their works in electronic form. Although the court agreed that the electronic publications were infringing, the court commented that public policy does not necessarily demand an injunction. In fact, the Supreme Court held that the lower court could fashion whatever remedy was most just, and even implied that the lower court could compel the authors to license their works[35]. It is likely that the Supreme Court took this novel approach anticipating the dire consequences of possible “holes in history”[36] that may ensue if the articles were left out the electronic versions of the newspaper.

Although it seems rather unlikely at this point in time, there could eventually arise a situation whereby the virtual city center becomes so important to society that public policy demands that operators of virtual world license the use of their facilities to government bodies in order to create a proper presence.

• So Exactly How Safe Is My Virtual Space?

As shown above, the use of eminent domain is a right that is inherent to the nation state, and it is essentially only limited by the Takings Clause. Whether or not a virtual city center is “property” within traditional notions of property is of no consequence, since the Takings Clause takes a very expansive view of the term “property”, and simply the contractual rights related to the virtual property fall within the Takings Clause. Further, the Takings Clause takes such a broad view of the term “public use” that seizure of virtual property for almost any purpose probably satisfies the requirements. Lastly, if virtual property is seized, the court will generally derive a fair market value of the property based on past sales of similar property. However, Congress and perhaps even the courts may work around the Takings Clause and simply compel property owners to license virtual world services to the government for development.

As far as the law goes, it seems that virtual space is no safer than physical space, and perhaps even more vulnerable due to compulsory licensing. However, in today’s reality the government likely has no reason to seize virtual property, and only time will tell if the government ever has such a desire.

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[1] See Kelo v. City of New London, 545 U.S. 469 (2005)

[2] U.S. Const. Amend. 5, cl. 4

[3] Id.

[4] See State by McLean v. Lanza, 27 N.J. 516, 529 (1958).

[5] See Georgia v. Chattanooga, 264 U.S. 472, 480, 483 (1923).

[6] See generally Williamson County Regional Planning Comm'n v. Hamilton Bank of Johnson City, 473 U.S. 172, 194-97 (1985).

[7] See Eastern Enterprises v. Apfel, 524 U.S. 498, 545 (1998) (Kennedy, J., concurring in judgment and dissenting in part)

[8] Note that if the right to develop virtual real estate is not a concept that falls within the Takings Clause, the government can simply pass a law that requires the owner of the virtual space to allow the government to intervene.

[9] See e.g. Armstrong v. United States, 364 U.S. 40 (1960).

[10] See Armstrong at 49.

[11] Supra.

[12] United States v. General Motors Corp., 323 U.S. 373 (1945).

[13] United States v. 50 Acres of Land, 469 U.S. 24 (1984).

[14] United States v. Miller, 317 U.S. 369, 374 (1943).

[15] See generally United States v. General Motors Corp., supra.

[16] See 4 Nichols, The Law of Eminent Domain § 12.32[3] (3d ed. rev. 1981); B. Palmer, Palmer's Manual of Condemnation Law § 40 (1961).

[17] See The Dictionary of Real Estate Appraisal, 4th edition (Appraisal Institute 2002)

[18] See Olson v. United States, 292 U.S. 246, 255 (1935).

[19] See generally United States v. 564.54 Acres of Land, 441 U.S. 506 (1979).

[20] See e.g. State v. Bishop, 800 N.E.2d 918 (2003).

[21] See Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 245 (1984).

[22] See Fallbrook Irrigation Dist. v. Bradley, 164 U.S. 112, 158 (1896).

[23] See Kelo, supra at 480.

[24] See Hawaii Housing Authority, supra at 241 citing Berman v. Parker, 348 U.S. 26 (1954); Rindge Co. v. Los Angeles, 262 U.S. 700 (1923); Block v. Hirsh, 256 U.S. 135 (1921)

[25] Id. at 240.

[26] See United States v. Gettysburg Electric R. Co., 160 U.S. 668, 680 (1896).

[27] Supra.

[28] See Kelo, supra at 486.

[29] See e.g. 17 U.S.C. 111 (establishing compulsory licensing for cable operators and broadcast TV); 17 U.S.C. 114 (setting forth compulsory licensing scheme for the music industry).

[30] See e.g. Idaho Potato Comm’n v. G&T Terminal Packaging, Inc., 425 F.3d 708, 716 (9^th Cir. Ct. of App., 2005) (describing §1064 of the Lanham Act as an obligation to certify all who meet the standards of the certification).

[31] See e.g. Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 215 (1980), Besser Mfg. Co. v. United States, 343 U.S. 444 (1952) (describing compulsory licensing as a remedy for patent abuse).

[32] See Robert P. Merges, Contracting Into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 Calif. L. Rev. 1293 (1996).

[33] See e.g. United State v. National Lead Co., 332 U.S. 319 (1947) (court ordering patent abusers to license their patents to any party who wished to pay the set license fee).

[34] N.Y. Times Co. v. Tasini, 533 U.S. 483 (2001).

[35] See Id. at 504.

[36] Id.