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LGJ: Dawn at the Great Pyramid (Scheme)


Mark Methenitis contributes Law of the Game on Joystiq ("LGJ"), a column on legal issues as they relate to video games:

GDC 2010 has come and gone, but many of the discussions I had with various developers, publishers, attorneys and other great attendees have actually left me with some curious issues to explore with you here on LGJ. The first such issue is one that actually relates to the long-known (but always fuzzy) area of the law that deals with multi-level marketing systems, the more legitimate cousin of what are commonly known as "pyramid schemes." These are the slightly more legitimate looking cousin of the Ponzi scheme (most recently in the news because of Madoff), but nonetheless create a "business model" doomed to fail. Accordingly, there are statutes in nearly all 50 states and in many countries barring these types of arrangements.

But why is this relevant to gaming at all? The advent of the referral model picked up by many social and online games is the potential problem area, and while the model itself may not suffer the same faults as a traditional pyramid scheme, it could nonetheless violate the laws in that area. After all, those laws don't contemplate digital goods, which can suffer no scarcity and basically no cost to product.

This is yet another one of those areas where there are applicable laws at both the Federal level and the state level in the US, and so I'm once again forced to talk in general terms to avoid this article turning into a 10,000 word analysis. The other difficulty is that pyramid schemes and multi-level marketing concepts come in all shapes and sizes, so many that it would be difficult to discuss all of the possible permutations of this concept.

Think of how easy it would be to set up a system like this in a FarmVille context.

In short, both pyramid schemes and multi-level marketing rely on the idea of recruiting more people underneath you. In either, you make money based on the people below you and the people below those people. Legitimate systems may have you earning a small percentage of revenue on sales of those under you as part of your downline in addition to your own sales commissions. In the less legitimate systems and the schemes, there may be absurd restrictions on these sales or no sales at all, such that the majority of the profit is based on recruiting others rather than any actual sales.

Note these aren't the same as referral bonuses. The key difference is the amount of downstream activity. In most referral systems, the referring party gets something for each person they refer and that is where the system ends. If the person who entered on a referral refers someone else, they get the bonus and the original referrer gets nothing. In a pyramid system, the original referrer would get income as well. That can be a little confusing, so let's try an example.

Let's say Bowser starts a system, and he brings in Mario, Link and Samus. Mario then brings in Peach and Luigi, Link brings in Zelda and Ganon, and Samus brings in Kraid and Ridley. From there, Peach brings in Toad and Yoshi, Ganon brings in Tingle and Navi, and Ridley brings in Mother Brain and Dark Samus. In a basic referral scheme, Bowser would get three referral "bonuses," and Mario, Link, Samus, Peach, Gannon and Ridley would each get two "bonuses." In a pyramid structure, Bowser would be earning some upstream value from everyone else. Mario would be earning upstream value from Peach, Luigi, Toad and Yoshi, Link from Zelda, Ganon, Tingle, and Navi, and Samus from Kraid, Ridley, Mother Brain and Dark Samus. Peach would then be earning from Toad and Yoshi, etc.

From the outset, it should be obvious why this is unsustainable. Eventually there's no one left to be downstream, thus the system ceases to function. But what does this have to do with games?

Well, there's been a lot of activity on the referral system, especially in the social and online games space in the past few years. Think of how easy it would be to set up a system like this in a FarmVille context, where you earn based on what the people you referred earn and what those people earn is based on their play plus who they refer and so on.

The obvious argument at this point is "Well, good for them. They're amassing a virtual fortune worth absolutely nothing." The problem with this analysis is two fold: First, you can buy things in FarmVille with real money and second, you could in theory re-sell those things because there's a pretty straightforward means of transfer between players in so many of these games. So, all of a sudden, that virtual fortune is looking more like real money, especially to regulators or those looking for lawsuits.

Now, this may seem far fetched, and I'm sure many readers will think this is just a bunch of lawyers who see problems where there are none. However, plenty of people took the same train of thought with online gambling and virtual worlds until the Zynga Poker investigation broke. As the trend continues further into the microtransaction and social gaming model, it's entirely within the realm of possibility that investigations into these models will begin based on these statutes. It's just another potential roadblock that those creating these types of systems need to be aware of and be analyzing before they implement a new system that may cause more harm than good when looking at potential damages versus new players attracted.

Mark Methenitis is the Editor in Chief of the Law of the Game blog, which discusses legal issues in video games. Mr. Methenitis is also a licensed attorney in the state of Texas with The Vernon Law Group, PLLC and a member of the Texas Bar Assoc., American Bar Assoc., and the International Game Developers Assoc., where he is a board member of the Dallas chapter. Opinions expressed in this column are his own. Reach him at: lawofthegame [AAT] gmail [DAWT] com.

The content of this blog article is not legal advice. It only constitutes commentary on legal issues, and is for educational and informational purposes only. Reading this blog, replying to its posts, or any other interaction on this site does not create an attorney-client privilege between you and the author. The opinions expressed on this site are not the opinions of AOL LLC., Weblogs, Inc.,, or The Vernon Law Group, PLLC. As with any legal issue that may confront you in a particular situation, you should always consult a qualified attorney familiar with the laws in your state.

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