• by Wendy Davis  @wendyndavis, September 15, 2009

Linden Research was sued on Tuesday for allegedly hosting a virtual Canal Street on Second Life.

Entrepreneur Kevin Alderman, who sells virtual erotic goods in Second Life, said in court papers that Linden Lab allows other virtual marketers to offer knock-offs of his "SexGen" beds and other products.

"Eros's virtual erotic SexGen products sold for use in Second Life have been counterfeited, cloned, and ripped off countless times by a multitude of Second Life residents," the lawsuit alleges. "The manner in which this has occurred is akin to the knockoff handbags and purses sold near Canal Street in New York City. Some of the bags are stolen, but actual brand-name handbags sold at deep discounts, while many others are knockoffs that merely use the brand-name makers' designs and trademarks."

Shannon Grei, who sells virtual clothing under the business name "Nomine," also joined in the lawsuit. She alleged that Linden Lab infringes her copyright by allowing other marketers to sell fake versions of her designs.

The entrepreneurs are seeking class-action status in the lawsuit, which was filed in U.S. District Court in the northern district of California.

Alderman has taken in more than $1 million for selling products like his virtual beds, which go for around $20 to $40, according to his lawyer, Michael Aschenbrener of KamberEdelson.

"We think there's a lot of money at issue here," Aschenbrener says, adding that virtual knock-offs appear to be widespread on Second Life. "Our view is this is happening to a lot of other people."

Alderman and Grei argue in their court papers that Linden Labs should be held responsible for the knock-offs because the site allegedly allows users to upload fakes and sell them for Linden currency, and facilitates the exchange of Linden dollars for U.S. currency.

"Linden Lab has created in Second Life a system in which it directly engages in piracy, actively allows its users to engage in piracy by providing the tools for it, and by which it profits from its own piracy and the piracy of its users," the lawsuit alleges. Alderman also alleges that some of the fakes are defective, which damages his goodwill.

Linden Lab declined to comment. The company has faced similar allegations in at least two prior lawsuits, but neither resulted in substantive court rulings.

The company might have a defense to the copyright claims under the Digital Millennium Copyright Act's safe harbor provisions, which generally provide that Web companies are immune from copyright liability provided they remove infringing material upon request. But the DMCA's safe harbors wouldn't apply to trademark infringement claims, such as Alderman's.

Still, Linden might have other defenses to those claims. Companies are only liable for trademark infringement when they use marks in commerce, and it's not clear here that Linden did so.

Eric Goldman, director of the High Tech Law Institute at Santa Clara University, said that courts are still figuring out the issues raised by this type of lawsuit. "It's not an easy case," he said. "This particular area of law is unsettled."